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ARTICLE

Antecedent Delegation Agreement Concerning a Non-Signatory to an Arbitration Agreement

Gilbert A Samberg

Summary

  • SCOTUS did not take up several issues concerning the antecedent delegation agreement, including who decides whether there is an agreement to delegate arbitrability issues.
  • The Sixth Circuit held in the Piersing case that Piersing had agreed to arbitrate issues of arbitrability but did not address whether Domino's could enforce the agreement.
  • The Henry Schein case involved a similar issue, with Archer & White seeking to compel arbitration based on an arbitration agreement between itself and another party. 
  • These cases raise questions about how to address the issue of non-signatories enforcing antecedent delegation agreements.
Antecedent Delegation Agreement Concerning a Non-Signatory to an Arbitration Agreement
Grant Faint via Getty Images

The U.S. Supreme Court (SCOTUS) recently denied certiorari in Piersing v. Domino’s Pizza Franchising LLC, 20-695 (Jan. 25 2021) and dismissed its own writ of certiorari as “improvidently granted” in Henry Schein, Inc. v. Archer & White Sales, Inc., 592 U.S. ___ (Jan. 25 2021). Both cases concerned a non-signatory of an arbitration agreement seeking to enforce the terms of that agreement against a signatory, including terms that arguably concerned whether arbitrability issues in that context were delegated to an arbitrator for adjudication in the first instance. And both arguably offered true threshold questions in that regard—e.g., who decides the delegation issue itself. 

We can only speculate about why SCOTUS passed on these cases. True, they were not ideal vehicles for presenting several of the issues that might have been addressed. However, here were opportunities to wrestle with the perplexing Russian (nesting) doll problem, and we might lament the opportunities missed.

SCOTUS has held that parties may agree to delegate the adjudication of arbitrability issues in the first instance to an arbitrator rather than a court (the presumptive adjudicator of such issues), and that a court must enforce that “antecedent agreement” to delegate, see Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 529, 2019 U.S. LEXIS 566 (Jan. 8, 2019), when there is a clear and unmistakable manifestation of consent to it, see Rent-Center v. Jackson, 561 U.S. 63, 69 (2010); First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

Regarding the Piersing case, SCOTUS did not take up a circuit court decision that incorporation by reference of American Arbitration Association (AAA) arbitration rules, which authorize an arbitrator to adjudicate his or her own jurisdiction, amounted to a clear and unmistakable manifestation of an intention by the parties to an arbitration agreement to delegate threshold arbitrability questions to an arbitrator in the first instance, and that a non-signatory to the agreement in question could enforce the antecedent delegation agreement in the pertinent arbitration clause against a resisting signatory of that agreement. As to Henry Schein, SCOTUS did not take up a court of appeals decision that incorporation by reference of AAA arbitration rules did not clearly and unmistakably evidence such consent to delegate as regards certain types of claims when those types of claims are the subject of a carve out in the relevant arbitration clause. The courts of appeals seem consistently to consider the unambiguous incorporation of “competence-competence” arbitration rules in an arbitration clause as a sufficient manifestation of consent by contracting parties to delegation of arbitrability issues. Unless SCOTUS wants to teach otherwise, it has little reason to grant certiorari on that issue.

However, SCOTUS has not squarely addressed several issues concerning the antecedent delegation agreement—e.g., (1) who in the first instance should decide whether there is an antecedent agreement to delegate arbitrability issues, (2) who should do so when one of the parties litigating the delegation issue is not a signatory to the relevant arbitration agreement, and indeed (3) whether (and on what bases) a non-signatory to an arbitration agreement can enforce a purported antecedent delegation agreement between other parties.

In the Piersing case, Piersing (and Blanton) had commenced a class action suit against Domino’s, contending that its franchise agreement, which required franchisees not to solicit or hire employees from other franchisees without the prior consent of the earlier franchisee-employer, violated federal anti-trust and state employment laws. See Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 2020 U.S. App LEXIS 18975 (6th Cir. June 17. 2020). Piersing had been employed simultaneously by two Domino’s franchisees, and he had signed an agreement with a least one of them that required him to arbitrate issues related to his employment by that employer. Any such arbitration was to be conducted under the National Rules for the Resolution of Employment Disputes of the AAA, id. at *2–*3, which authorize the arbitrator to determine his or her jurisdiction. Domino’s was not a signatory of the relevant arbitration agreement, but nonetheless moved to compel arbitration under the Federal Arbitration Act (FAA). The district court granted that motion. See Blanton v. Domino’s Pizza Franchising LLC, 2019 U.S. Dist. LEXIS 184817 (E.D. Mich. Oct. 25, 2019).

On appeal, the underlying dispute was whether non-signatory Domino’s “has any right to enforce the arbitration agreement as a whole.” 2020 U.S. App. LEXIS 18975 at *6n.1. The first subsidiary issue was whether the arbitrability question had been delegated to an arbitrator in the first instance. That included the question of whether the incorporation by reference of the AAA Rules in the pertinent arbitration agreement was a clear and unmistakable manifestation of Piersing’s agreement to arbitrate “arbitrability”. 2020 U.S. App. LEXIS 18975 at *5. Unsurprisingly, the Sixth Circuit held that it was. The court of appeals’ holding was based on the following: (1) the AAA rules in question “clearly empower an arbitrator to decide questions of ‘arbitrability’”; (2) parties can incorporate outside documents into their contract by agreement; (3) SCOTUS has nearly (but not quite) held that incorporation by reference of AAA arbitration rules or the like, which authorize an arbitrator to adjudicate his or her own jurisdiction, is indeed a clear and unmistakable manifestation of an intent to delegate questions of arbitrability to an arbitrator in the first instance; (4) Sixth Circuit precedent supports its holding; and (5) “every one of our sister circuits to address the question . . . has found that incorporation of the AAA Rules . . . provides ‘clear and unmistakable’ evidence that the parties agreed to arbitrate ‘arbitrability.’” See 2020 U.S. App. LEXIS 18975 at *5-*7. Thus, the Sixth Circuit held that Piersing had agreed to arbitrate issues of arbitrability.

But the court of appeals admittedly did not address another relevant issue. It pointed out that while the litigants apparently viewed the primary issue to be whether Piersing agreed to arbitrate the question of arbitrability, there was an antecedent issue—"namely, whether Domino’s [a non-signatory] has any right to enforce the specific provision of the agreement in which Piersing purportedly agreed to arbitrate ‘arbitrability.’” 2020 U.S. App. LEXIS 18975 at *6n.1. Assuming arguendo that Piersing had made a delegation agreement (in the pertinent arbitration agreement) with his franchisee counterparty, he clearly had not made one with Domino’s. So, did Domino’s have legal grounds to enforce against Piersing an antecedent delegation agreement that Piersing had not made, nor intended nor contemplated making, with Domino’s? The court expressed no view on that distinct issue because it had not been placed before it. Nor did it consider the question of who decides that gateway issue in the first instance.

Both the Piersing and Schein cases involved a non-signatory seeking to enforce an alleged delegation agreement against a signatory of the arbitration agreement in question. (In the Henry Schein case, Archer & White (A&W) brought suit against Henry Schein, asserting an anti-trust claim and seeking among other things injunctive relief. Henry Schein petitioned a federal court in Texas to compel arbitration, but on the basis of an arbitration agreement between A&W and another party. (That arbitration agreement incorporated “the arbitration rules of the American Arbitration Association.”) Hence, Henry Schein asserted equitable estoppel as the basis to compel A&W to arbitrate under an agreement to which Henry Schein was not a party.) Neither neatly teed up the question of whether a non-signatory to an alleged antecedent delegation agreement could enforce such terms against a resisting signatory of the arbitration agreement in question. Nor did either tee up the logical preceding question of who decides that issue. But these questions will reach SCOTUS in manageable form eventually.

How to address them? A non-signatory may enforce or be bound by an arbitration agreement by reason of (a) deemed consent or (b) other applicable law. See Restatement of U.S. Law of International Commercial and Investor-State Arbitration (Restatement) (ALI 2019), § 2.3(b). A purported delegation agreement would be an antecedent arbitration agreement within a broader arbitration agreement within a broader contract. In the case of a non-signatory seeking to compel a contract signatory to arbitrate arbitrability, the making of the antecedent delegation agreement is arguably in issue from the first. Must or should a court take this up as a contract formation question? If a court retains the principal authority, under FAA §4, to decide questions regarding “whether the parties mutually assented to a contract containing or incorporating a delegation provision,” MZM Construction Co. v. New Jersey Building Laborers Statewide Benefit Funds, 974 F.3d 386 (3d Cir. 2020), then it may have to determine from an independent source—i.e., outside the agreement whose formation or existence is in dispute—whether the contesting parties (a signatory and a non-signatory of a written contract) agreed or should be deemed to have agreed to arbitrate the antecedent agreement concerning delegation.

From another perspective, is the equitable estoppel doctrine the answer? It rests on equity rather than consent. The Restatement describes the role of equity doctrines in resolving such issues. It states, “While most theories [concerning non-signatory arbitration] focus on determining the intent of the parties, some doctrines, like estoppel . . ., are based on more equitable considerations that, rather than posit consent, seek to avoid irrational or unfair application of the arbitration clause.” Restatement §2.3, Reporter’s Note a. Hence, for example, a non-signatory may enforce an agreement to arbitrate against a signatory based on an equitable estoppel theory. See, e.g., cf. GE Energy Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020) (regarding arbitration clause subject to New York Convention and FAA ch.2). But is it a viable basis for a non-signatory to enforce a purported delegation agreement against a resisting signatory?

The choice of law issue concerning the applicability of the equitable estoppel doctrine is itself interesting and ultimately unresolved. The principal question in that regard is whether state law or federal common law applies. The authorities are divided. Arguably, in connection with a motion under FAA chapter 1 to compel arbitration or to stay litigation, when a federal court has subject matter jurisdiction pursuant to a federal statute—e.g., 28 U.S.C. §1331 (federal question jurisdiction) or FAA §203 (9 U.S.C. §203)—then federal common law governs the application of equity doctrines like equitable estoppel concerning the relationship of a non-signatory to an arbitration agreement. See, Setty v. Shrinivas Sugandhalaya LLP, 2021 WL 192820 (9th Cir. Jan. 20, 2021); Sarhank Group v. Oracle Corp., 404 F.2d 657 (2d Cir. 2005).

The alternative view is that just as state law should govern contract formation issues, state law should govern issues concerning estoppel, which amounts to an equitable substitute for contract formation. For example, SCOTUS has indicated that a non-signatory of a domestic arbitration agreement may enforce it (or be bound by it) under FAA chapter 1 where “traditional principles of state law allow a contract to be enforced by or against non-parties to the contract through ‘assumption, piercing the corporate veil, alter-ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel.’” Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630, 631 (2009).

In any case, generally, the equitable estoppel doctrine may suffice to compel arbitration between a signatory and a non-signatory of an arbitration agreement mainly in two circumstances: (1) “when a non-signatory must rely on the terms of the written agreement containing an arbitration clause in asserting its claim against the signatory”; or (2) “when a signatory alleges interdependent and concerted conduct by both the non-signatory and one or more of the signatories to the agreement containing an arbitration clause.” Restatement § 2.3, Reporter’s Note a.

If the claimant is a signatory, as in both Henry Schein and Piersing, then a non-signatory seeking to arbitrate may successfully argue for estoppel if, for example, (1) the signatory-claimant relies on the terms of the written agreement containing the arbitration clause in asserting its claim against a non-signatory (see, e.g., Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757 (11th Cir. 1993)) or (2) the issues that the non-signatory seeks to arbitrate are “intertwined with” the agreement that the signatory-claimant signed. Alternatively, a non-signatory could show (1) that the signatory’s claim arises under the agreement in question and (2) that the non-signatory has a close relationship to a signatory of the agreement, provided that that relationship was known to the signatory at the time of contracting. E.g., Doe v. Trump Corp., 453 F. Supp.3d 634, 641 (S.D.N.Y. Apr. 8, 2020).

The unanswered question, however, is whether such estoppel is also a viable basis to enable a non-signatory to enforce an antecedent delegation agreement against a signatory of the agreement. Are the legal principles the same or similar? And who decides that?

(Superficially, the equitable estoppel argument might have appeal concerning the delegation issue in the Piersing case, but one wonders about its ultimate viability there or in the Henry Schein case, both of which concerned substantive claims by a signatory against a non-signatory for violations of antitrust and other codified laws, not for breaches of the contracts containing the arbitration clauses. See also, Setty v. Shrinivas Sugandhalaya LLP, No. 18-35573 (9th Cir. Jan. 20, 2021). At most, the contracts were relevant as evidence.)

Questions, questions. SCOTUS will have work to do when the time comes to address them.

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