Authored By: Jennifer Cupples and Jennifer Grieco
Threshold issues of arbitrability are generally resolved by a court determining whether the parties agreed to arbitrate the dispute. However, with contracts evidencing a transaction involving commerce, the Federal Arbitration Act, Title 9, U.S. Code (“FAA”) allows parties to agree that the arbitrator determine questions of arbitrability – commonly referred to as a delegation clause. But are courts required to yield determinations of arbitrability under such a clause where a party asserts that the entire agreement to arbitrate is unenforceable? The Sixth Circuit Court of Appeals answered this question in the affirmative in the to-be-published opinion in Swiger v Rosette, et al, 2021 U.S. App. LEXIS 6317 (6th Cir., March 4, 2021).
In Swiger, the plaintiff alleged she fell victim to a loan scheme (involving an interest rate exceeding 350%) from an online lender, Plain Green LLC. The scheme’s alleged architect, Rees, organized Plain Green under tribal laws to purportedly enjoy the shield of tribal sovereign immunity. In the parties’ loan agreement, Swiger agreed that Plain Green was “immune from suit in any court,” and that the loan “shall be governed by the laws of the tribe,” not “the laws of your home state or any other state.” She also agreed that “any dispute . . . related to this agreement will be resolved through binding arbitration” under tribal law, including “any issue concerning the validity, enforceability, or scope of this Agreement or this Agreement to Arbitrate.”
Rather than proceed in arbitration, Swiger brought suit in federal court and sought a declaration that the entirety of the arbitration agreement unenforceable. She argued the provision was unconscionable and its effect illusory because any award rendered in arbitration pursuant to “tribal law” would be voided by defendants’ claim of “tribal immunity after the fact.” In response, Rees moved to stay the case, arguing that the delegation clause required arbitration of the threshold questions of arbitrability. Swiger again responded by asserting that the whole arbitration agreement was unenforceable, but did not specifically challenge the delegation clause. The District Court denied Rees’ motion to stay, finding that defendants were collaterally estopped from relitigating the enforceability of the arbitration agreement based on a prior ruling of the Second Circuit Court of Appeals. Rees then appealed, claiming error in failing to stay the case to enforce the delegation clause.
The Sixth Circuit agreed with Rees and reversed. The court first held that although the agreement provided for tribal law as the choice of law, the parties were still subject to the FAA because it is the FAA that authorized parties to choose different rules in the first place. Relying on the United States Supreme Court’s 2019 opinion in Henry Schein, Inc. v Archer & White Sales, Inc., the Court next held that the delegation clause was clear and precluded the District Court courts from resolving any threshold arbitrability disputes, even those that appear “wholly groundless.” But ultimately dispositive to the central issue on appeal was Swiger’s complete lack of argument specific to the delegation cause. Citing the United States Supreme Court’s 2010 opinion in Rent-A-Center, W., Inc. v Jackson, the Court reasoned that only a specific challenge to a delegation clause brings arbitrability issues within the court’s review. Challenging the entire arbitration agreement will not suffice. Because Swiger had never specifically challenged the delegation clause, the arbitrability issue was not for the court to review. The Court therefore concluded that Rees’ motion should have been granted, and the case was remanded with instructions to stay the case pending arbitration.
Swiger serves as a reminder to practitioners on at least two fronts. First, when drafting arbitration agreements in contracts subject to the FAA, consider delegating the determination of issues of arbitrability to the arbitrators. Doing so may save your client a costly and time-consuming legal battle in court. Second, be mindful of the presence (or absence) of a delegation clause when challenge the enforceability of an agreement to arbitrate. Where a delegation clause exists, only specific challenge to it will allow you or your opponent to remain in court.