In its 2010 decision Rent-a-Center v. Jackson, the Supreme Court gave its blessing to the use of broad delegation clauses within arbitration agreements, whereby the parties agree to submit or delegate arbitrability questions to the arbitrator, such as whether the agreement covers the dispute at hand or whether the arbitration agreement is enforceable. Such delegation clauses can be a kiss of death for parties trying to avoid arbitration. However, a recent Fifth Circuit split decision reveals a possible way to avoid the effect of a delegation clause.
In Douglas v. Regions Bank, No. 12-60877 (5th Cir. July 7, 2014) (click here for a copy of the decision), a majority of a Fifth Circuit panel held that only “plausible” arbitrability questions could be sent to the arbitrator pursuant to a delegation clause, as opposed to “wholly groundless” arbitrability questions, which a court can address and quickly reject. (Does anyone see the ghost of Twiqbal (Twombly and Iqbal) lurking here with this “plausibility” standard?)
The case involved a plaintiff who signed an arbitration agreement with a bank in connection with an account that was closed long ago. Years after the bank account was closed, the plaintiff settled a completely unrelated $500,000 personal injury claim with the assistance of one lawyer, and a second lawyer helped obtain approval of the settlement in a bankruptcy court. The second lawyer then allegedly embezzled the settlement proceeds, and the plaintiff sued the bank where the second lawyer maintained accounts, alleging that the bank negligently failed to prevent the embezzlement. The defendant bank in the embezzlement lawsuit, by pure chance, happened to be the successor to the bank where the plaintiff had opened and closed an account years earlier.
The Fifth Circuit found that the bank’s arbitrability argument (i.e., that the plaintiff’s embezzlement claim falls within the scope of the arbitration clause) was wholly groundless and not plausible because the personal injury settlement and embezzlement were completely unrelated to her opening and closing of a bank account at a predecessor bank years ago. The court reasoned it would be senseless to send such a groundless arbitrability argument to the arbitrator because an arbitrator would find the clause did not cover the embezzlement dispute. It would be a waste of time to compel arbitration where the arbitrator would simply re-direct the parties back to litigation since the arbitration clause did not cover the embezzlement claims. Arbitration is a matter of contract, and the Fifth Circuit majority believed that parties do not intend to arbitrate groundless arguments.
A dissenting Fifth Circuit judge, however, wanted to send the arbitrability question to the arbitrator. The dissenting opinion found that the majority improperly reached the merits of a dispute (the arbitrability or scope of clause issue) that was supposed to be resolved by the arbitrator.
After recent Supreme Court decisions like American Express (severely limiting the effective vindication doctrine) and Rent-A-Center (approving of delegation clauses), courts have played a less important gate-keeping role in connection with compelling arbitration. Courts, in other words, have been inching closer to a model of judicial rubber-stamping of orders compelling arbitration. The Fifth Circuit’s recent Douglas case, however, seems to open the door, to a limited degree, for increased judicial oversight of arbitration. Although the Douglas case involves a delegation clause, it seems that future parties can try to rely on Douglas for a broader principle that parties generally do not intend to arbitrate claims unless they are “plausible.” Plausibility, in the wake of Twiqbal and in the context of federal pleading standards, has created uncertainty in the federal courts. If a plausibility standard is broadly introduced into the field of arbitration gateway issues, judges could have greater discretion in deciding whether arbitration will occur.