Ninth Circuit Says Severability Clause Doesn’t Negate Arbitrator’s Authority to Decide Validity

Quick Hits

• The Ninth Circuit reversed a lower court’s decision and found that a generic severability clause does not undermine a clear delegation of arbitrability to the arbitrator.
• The court found the inclusion of a leading arbitration provider’s rules that require arbitrators to decide the validity of an arbitration agreement is “clear and unmistakable” evidence of the parties’ intent.
• The court said federal law governs arbitrability delegation and rejected state law cases on the issue.

In Sandler v. Modernizing Medicine, Inc., the Ninth Circuit issued a unanimous decision, finding that a district court misapplied federal law. The lower court relied on California state court decisions. Those cases suggested that a severability clause could justify refusing to compel arbitration. That reliance was in error, the court said.

The Ninth Circuit rejected the employee’s argument. The severability clause mentioned “a court.” (Emphasis in original.) But that reference alone did not show the parties intended a court—rather than an arbitrator—to decide validity. Nor did it create ambiguity about who would resolve arbitrability questions.

Background

The employment contract at issue specified that employment disputes would be subject to binding arbitration under the Federal Arbitration Act (FAA). The contract stated that arbitration would be administered by a leading arbitration service provider. The provider’s rules require the arbitrator to resolve questions of whether the arbitration clause is valid and enforceable.

The employee later sued Modern Medicine, Inc., alleging age and disability discrimination under state and federal law. The employer moved to compel arbitration. The district court acknowledged that incorporating the arbitration provider’s rules delegated the validity question to the arbitrator. But the court relied on California state court decisions to hold that a separate severability clause in the employment agreement negated the delegation clause. The court said the clause created ambiguity about who would decide enforceability. It then found the arbitration agreement unconscionable and denied the motion to compel.

Key Holdings by the Ninth Circuit

• Clear and Unmistakable Delegation Through Arbitration Rules

The Ninth Circuit held that incorporating an arbitration provider’s rules was enough to evidence the parties’ intent. Those rules state that arbitrators will decide questions of validity. This inclusion met the “clear and unmistakable” evidence standard of an enforceable delegation. “The parties clearly and unmistakably agreed to have the arbitrator resolve any challenge to the validity of the arbitration agreement,” the court said. The incorporation of the provider’s rules “which delegate the question of the agreement’s validity to the arbitrator” … “evinces a ‘clear and unmistakable’ intent to delegate,” the court said.

• Severability Clause Does Not Negate a Delegation Clause

The Ninth Circuit held that a severability clause does not negate a delegation clause. Many contracts have severability clauses. These allow a court to sever unconscionable or unenforceable provisions. But such a clause “does not conflict with the clear and unmistakable delegation” nor does it “render the delegation ambiguous,” the court said.

Both can be true, the court said. Parties can agree to have disputes heard by an arbitrator, including disputes over validity. They can also agree on a “contingency” allowing a court to sever unenforceable terms. The court also noted that the severability clause did not refer exclusively to “a court.” The clause also referenced an “other body of competent jurisdiction.” That phrase could include an arbitral forum, the court noted.

• Federal Law Governs Questions of Arbitrability

The Ninth Circuit said the district court’s reliance on state court decisions was “legal error.” Those decisions disfavored arbitration. But the question of whether parties delegated arbitrability is “a question of federal law.” (Emphasis in original.) The court rejected any state-law rule treating a severability clause as negating a valid delegation. Such a rule would be preempted by the FAA. It “hinge[s] on the primary characteristic of an arbitration agreement” and thereby disfavors arbitration.

Key Takeaways

The Sandler decision is welcome news for employers. The decision holds that a generic severability clause in an arbitration agreement does not undermine a clear delegation of arbitrability. The decision also reinforces a key point: whether there has been a “clear and unmistakable” delegation is a question of federal law under the FAA. The decision suggests courts should not rely on state decisions that disfavor arbitration.

Employers may wish to review their arbitration agreements in light of this decision. Arbitration agreements can incorporate institutional rules. Standard severability clauses complement delegation provisions. They do not contradict them.

Ogletree Deakins’ California offices will continue to monitor developments and will provide updates on the Arbitration and Dispute Resolution and California blogs as additional information becomes available.

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