Fifth Circuit Rules Arbitrability Question is for Arbitrator to Decide Where Parties Clearly Intended So

The Fifth Circuit has held that the question of arbitrability is for an arbitrator to decide where an arbitration agreement exists between the parties and they clearly intended for the issue to be arbitrated based on the wording of the arbitration provision.

In Allen v. Regions Bank, No. 09-60705, (5^th Cir., August 11, 2010), plaintiffs (the Allens) obtained a home equity loan from First American National Bank in October 1999. The bank withheld funds from the loan proceeds in order to purchase credit life and disability insurance. Two months later, AmSouth Bank succeeded First American National Bank as the loan holder. In 2004, the Allens attempted to file a claim on the disability policy but were told by AmSouth Bank that no such policy existed. Regions Bank subsequently acquired the loan from AmSouth via merger. In October 2007, Regions Bank mailed an explanation of its merger with AmSouth Bank to the Allens. A lengthy “Consumer Disclosure Booklet” (booklet) which purported to constitute a new agreement relative to deposit accounts was also included. The booklet stated that a “dispute regarding whether a particular controversy is subject to arbitration, including any claim of unconscionability and any dispute over the scope or validity of this agreement to arbitrate disputes or of this entire Agreement, shall be decided by the arbitrator(s).” Additionally, the booklet stated the arbitration provision shall “also apply to any account, contract, loan, transaction, business, contact, interaction or relationship you may have” with the bank.

In 2008, the Allens again sought to make a claim under the policy. Both Regions Bank and Union Security Life Insurance Company denied the existence of an insurance policy. The Allens filed suit alleging breach of trust, breach of insurance agreement, fraud and misrepresentation, and bad faith. Regions Bank responded by filing a motion to compel arbitration pursuant to a document the Allens signed in 2001 in order to open a demand deposit account with AmSouth Bank. Regions Bank invoked that document’s requirement that the parties arbitrate any dispute that might arise between them. The District Court denied the bank’s motion to compel arbitration because the booklet mailed to the Allens in 2007 did not unambiguously modify the underlying loan agreement. The court held that although an enforceable arbitration clause existed as to deposit accounts, the arbitration clause in the booklet was not applicable to a loan agreement. Regions Bank appealed.

Both parties agreed that the Federal Arbitration Act (FAA) applied to the case. Citing Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772 (2010), the Fifth Circuit stated that two types of validity disputes arise under the FAA: “One type challenges specifically the validity of the agreement to arbitrate,” and “[t]he other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.” (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006)).

Because Section 2 of the FAA allows arbitration if the “written provision” that mandates the arbitration is not subject to revocation under the usual grounds in law and equity, a court may still require arbitration of a dispute where the arbitration provision itself is not challenged. Additionally, the Fifth Circuit cited the severability rule from Buckeye, stating, “a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.” Meanwhile, where an entire agreement is simply for arbitration, the Fifth Circuit stated a challenge must be to the validity of the specific provision in the arbitration agreement for a court to hear it.

The Allens failed to address the validity of the contract and, “the agreement itself, as far as it reached, was never found to be invalid nor was it even challenged as being invalid.” Also, the Allens did not allege the agreement to arbitrate was invalid due to unconscionability or other such defects. Instead, they argued that the way the agreements were written did not lead clearly to the application of the arbitration provision to the consumer loan dispute. According to the Court, their challenge merely addressed the applicability, not the validity of the agreement.

Because there was no question that an arbitration agreement existed between the parties, the Fifth Circuit addressed whether the question of arbitrability was for an arbitrator or for a Court to decide. Despite the general rule that a court decides whether there is an agreement to arbitrate a dispute, the issue of arbitrability is for an arbitrator when the evidence clearly demonstrates that was the parties’ agreement. The Fifth Circuit concluded that the parties had clearly intended for the issue of arbitrability to be arbitrated based on the wording of the arbitration provision contained within the booklet mailed by Regions Bank. The Court also concluded that the Allens had accepted the arbitration language contained in the booklet because they continued to use their deposit account and signed signature cards.

The Fifth Circuit Court vacated and remanded the lower court’s denial of Regions Bank’s motion to compel arbitration.

“Disputing” has been covering the debate: “Who decides arbitrability: courts or arbitrators?” for several years:

• Last month, we discussed an article written by Allan Dinkoff from Weil Gotshal & Manges LLP which addressed the effect of Rent-A-Center, West, Inc. v. Jackson (case discussed here) on the writing of arbitration clauses here.

• In June, we discussed the U.S. Supreme decision in Granite Rock v. Teamsters, here.

• Guest blogger James M. Gaitis discussed Rent-A-Center, West, here, and Professor Alan Scott Rau wrote on the case here.

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