Does the Arbitrator Decide Arbitrability?

On November 12, 2021, in an international commercial dispute, a federal court of appeals held that a contract provision stating that any arbitration will be conducted in accord with the California Code of Civil Procedure (CCCP) was clear and unmistakable evidence that the parties delegated questions of arbitrability to the arbitrator. Rohm Semiconductor USA, LLC v. Maxpower Semiconductor, Inc, 17 F.4th 1377 (Fed. Cir. 2021).

Background

ROHM Japan, a Japanese entity, and MaxPower Semiconductor (MaxPower), an American entity, entered into a technology leasing agreement (TLA) that granted ROHM Japan and its United States subsidiaries, including ROHM USA, use of certain MaxPower semiconductor technologies in return for the payment of royalties.

ROHM USA, a non-signatory to the TLA, filed suit seeking a declaratory judgment that it did not owe MaxPower any royalties. MaxPower moved to compel arbitration, arguing that ROHM USA was bound by the TLA’s arbitration clause, even though it was not a signatory, because the TLA stated that ROHM Japan’s subsidiaries would be bound by the TLA. MaxPower also argued that the arbitrator, not the court, was to decide questions of arbitrability. The district court denied ROHM USA’s request for a declaratory judgment and sent the case to arbitration. ROHM USA appealed.

Analysis

On appeal, the court first turned to what law applied. The TLA said that arbitration is to be conducted “in accordance with the provisions of the California Code of Civil Procedure.”

ROHM USA argued that incorporating the CCCP does not clearly delegate questions of arbitrability to the arbitrator because it is ambiguous due to seemingly contradictory arbitrability delegations. Specifically, CCCP section 1297.161 provides that an arbitrator “may rule on its own jurisdiction” in international commercial arbitration, but section 1281.2 provides that “the court shall order the petitioner and the respondent to arbitrate the controversy if [the court] determines that an agreement to arbitrate the controversy exists.” Id at 1380. The former provision delegates questions of arbitrability to the arbitrator but the later provision states that the court is to decide questions of arbitrability. As a result of this supposed contradiction, ROHM USA argued that the contract’s reference to the CCCP does not constitute clear and unmistakable evidence that the parties delegated questions of arbitrability to the arbitrator. ROHM USA then argued that section 1297.161 does not apply because this controversy is not an international dispute.

The court held that section1297.161 and section 1281.2 are not contradictory or ambiguous because CCCP section 1297.17 provides that section 1297.161 ‘‘supersedes Sections 1280 to 1284.2, inclusive, with respect to international commercial arbitration.” Id. The court also rejected ROHM USA’s argument that the case before it was not an international dispute. The court held that the case meets the CCCP’s definition of an international dispute, because the parties impliedly agreed that the subject matter of the arbitration is related to commercial interests in more than one country. That is, the dispute arises from obligations in the TLA that bind an American company and a Japanese entity and its subsidiaries, and the dispute concerns the sale of MaxPower’s licensed technology worldwide.

ROHM USA also argued that: (1) even if the dispute is international in nature, CCCP section 1297.161’s language, “may have the power,” only permits an arbitrator to “rule on its own jurisdiction” and thus cannot be a clear and unmistakable delegation of authority to the arbitrator; and (2) merely incorporating rules like CCCP, American Arbitration Association, or United Nations Commission on International Trade Law is not a sufficiently clear and unmistakable delegation to give the arbitrator authority to determine arbitrability.

Relying on precedent from the Ninth and other circuits, the court rejected these additional arguments. First, the court explained that the word “may” means the arbitrator can rule on his or her own jurisdiction if and when arbitrability is disputed. Second, the court noted that binding Ninth Circuit precedent already determined that “incorporation of arbitration rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability” when the rules so provide. Oracle Am., Inc. v. Myriad Grp. A.G., 724 F.3d 1069, 1073 (9th Cir. 2013), relying on First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

The court concluded by stating that the two sophisticated parties should be held to the provisions of the TLA which clearly and unmistakably delegates questions of arbitrability to the arbitrator, and that ROHM USA, as a subsidiary of ROHM Japan is required to arbitrate. It affirmed the lower court decision.