Incorporation of AAA Rules Evinces Intent for Arbitrator to Decide Arbitrability: Ninth Circuit | Practical Law

Incorporation of AAA Rules Evinces Intent for Arbitrator to Decide Arbitrability: Ninth Circuit | Practical Law

In Brennan v. Opus Bank, the US Court of Appeals for Ninth Circuit applied federal law to hold that incorporation of American Arbitration Association (AAA) rules in an arbitration agreement constitutes clear and unmistakable evidence of an intention to delegate the question of arbitrability to an arbitrator. In addition, where there are multiple severable arbitration agreements, a claimant must assert the unconscionability of the one that is at issue to defeat arbitrability.

Incorporation of AAA Rules Evinces Intent for Arbitrator to Decide Arbitrability: Ninth Circuit

by Practical Law Litigation
Law stated as of 14 Aug 2015 • USA (National/Federal)
In Brennan v. Opus Bank, the US Court of Appeals for Ninth Circuit applied federal law to hold that incorporation of American Arbitration Association (AAA) rules in an arbitration agreement constitutes clear and unmistakable evidence of an intention to delegate the question of arbitrability to an arbitrator. In addition, where there are multiple severable arbitration agreements, a claimant must assert the unconscionability of the one that is at issue to defeat arbitrability.
On August 11, 2015, in Brennan v. Opus Bank, the US Court of Appeals for Ninth Circuit applied federal law to hold that incorporation of AAA rules into an arbitration agreement constitutes clear and unmistakable evidence of intention to delegate the question of arbitrability to an arbitrator. In addition, where there are multiple severable arbitration agreements, a claimant must assert the unconscionability of the one that is at issue to defeat arbitrability. (No. 13-35580, (9th Cir. Aug. 11, 2015).)
The defendant, Opus Bank, hired Brennan as executive vice president and director for strategy and corporate development in December 2010, when he signed an employment agreement with the bank. By late 2011, Brennan alleged that he was being excluded from activities he had been hired to perform and that his involvement in important business transactions had steadily diminished. Brennan resigned, invoking his employment agreement, which allowed resignation for “good reason,” including material change to the scope and function of his role. Subsequently, Opus Bank adopted the conclusion of outside counsel that Brennan did not have “good reason” to terminate his employment and therefore his resignation was voluntary and he was not entitled to severance or other termination benefits.
Brennan sued Opus Bank alleging breach of his employment agreement, wrongful termination and unlawful withholding of wages. Brennan’s complaint acknowledged that there was a mandatory arbitration provision in the employment agreement, but he argued that his claims should be resolved by litigation because the arbitration provision was procedurally and substantively unconscionable.
Opus Bank responded with a motion to strike Brennan’s complaint and to compel arbitration, under the employment agreement’s arbitration provision and the Federal Arbitration Act (FAA). Opus Bank argued that an arbitrator had to decide the employment dispute and the issue of unconscionability because the employment agreement incorporated the AAA rules, which provide for an arbitrator to rule on jurisdiction and objections to the agreement’s validity. The bank contended that this constituted clear and unmistakable evidence that the parties intended to have an arbitrator decide the unconscionability question.
The district court agreed with Opus Bank, and, applying federal arbitrability law dismissed the action in favor of arbitration. Brennan appealed, arguing that the district court erred in applying federal law and that, even if federal law applied, the AAA rules do not constitute evidence that the parties intended to delegate the arbitrability question to an arbitrator.
The Ninth Circuit affirmed the district court’s dismissal in favor of arbitration. The Ninth Circuit held that:
  • The FAA governed the employment agreement and, as a result, the federal substantive law of arbitrability applied, absent clear and unmistakable evidence to the contrary. Here, although the agreement did provide for California’s procedural rules to govern during the arbitration, it was silent as to whether certain disputes should be submitted to arbitration in the first place. In light of this ambiguity, federal arbitrability law would apply.
  • Incorporation of the AAA rules in an arbitration provision constitutes clear and unmistakable evidence of an intention to delegate the question of arbitrability to an arbitrator. This ruling followed other circuits to have reached the issue.
  • Where there are multiple severable arbitration agreements, only one of which is “at issue” a claimant must assert the unconscionability of the “at issue” agreement to defeat arbitrability (see Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010)). Here, there were multiple relevant agreements: Brennan’s employment agreement, its arbitration clause and its delegation provision (that is, the incorporation of the AAA rules delegating enforceability questions to the arbitrator). The court reasoned that because Brennan failed to assert the unconscionability of the delegation provision, but instead asserted the unconscionability of the arbitration clause as a whole, it did not need to consider this claim; rather it was for the arbitrator to decide.
Practitioners should note that while this case involved sophisticated parties, the Ninth Circuit did not preclude application of the holding to unsophisticated parties or to consumer contracts.