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Delegation: Who decides which claims go to arbitration?

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    A dispute between X Corp. (the successor to popular social messaging platform Twitter) and the Wachtell Lipton Rosen & Katz law firm that advised Twitter during its successful effort to force mega-entrepreneur Elon Musk to buy Twitter has recently been ordered to arbitration.  

    X alleges that the $90 million now billed to X by Wachtell as a “success fee” for Twitter’s sale is excessive and constitutes unjust enrichment.

    The retention agreement between Twitter and the Wachtell firm includes an arbitration provision and Wachtell filed a motion to compel arbitration of the fee dispute.  A California trial court recently granted that motion and the Court’s order teaches some lessons about arbitration agreement drafting for those alert enough to notice.

    First, some general background.  Parties who enter into arbitration agreements may want to exclude some specific types of claims from arbitration and allow those claims to be decided in court.

    The Twitter-Wachtell arbitration agreement provides:

    [E]xcept with respect to enforcing claims for injunctive or equitable relief, any dispute, claim, or controversy arising out of or relating in any way to this Agreement or the interpretation, application, enforcement, breach, termination or validity thereof (including any claim of inducement of this Agreement by fraud and including determination of the scope or applicability of this agreement to arbitrate) or its subject matter (collectively “Disputes”) shall be determined by binding arbitration before one arbitrator … Notwithstanding the above, each party shall have recourse to any court of competent jurisdiction to enforce claims for injunctive and other equitable relief.

    This language determines the “scope” of the arbitration agreement, which in this case covers all claims except for claims “to enforce claims for injunctive and other equitable relief.”  

    The language also answers the “delegation” question, which asks, once a dispute with various potential claims arises, does a judge or an arbitrator get to decide which claims can be arbitrated and which claims must go to court?  The answer here is that the “scope or applicability of this agreement to arbitrate … shall be determined by binding arbitration before one arbitrator….”

    Previous case law defines the judge’s task here as determining if the parties “clearly and unmistakably” delegated the issue of arbitrability to the arbitrator.  Arbitrability questions go to the court unless the parties clearly and unmistakably delegate them to the arbitrator in their arbitration agreement.

    Another wrinkle is that arbitration rules invoked in the arbitration agreement may include a rule granting the arbitrator authority to decide arbitrability questions.  The Twitter-Wachtell arbitration agreement invoked JAMS rules that call for arbitrability disputes to be ruled on by the arbitrator.  Both Forum and AAA rules have similar provisions.

    The Court cited the 9th Circuit’s opinion in Oracle America, Inc. v. Myriad Group A.G., 724 F.3d 1069, where the parties’ arbitration agreement carved out intellectual property disputes to be decided in court and but invoked UNCITRAL arbitration rules delegating the arbitrability question to the arbitrator.

    Oracle argued that the existence of the carve out itself meant that the parties intended for the court to decide which claims were arbitrable.  However, the court decided that scope and delegation are different and independent questions.  Scope defines which claims fall inside or outside of any carve-out language.  Delegation simply defines who makes the decision on the scope question, an arbitrator or a judge.

    The Oracle opinion reinforces the authority of arbitrators in general to not only decide substantive disputes between parties, but also to define the parameters of their own jurisdiction as defined by the arbitration agreement, when the arbitrator is delegated this power by the arbitration agreement.

    The arbitration agreement in the Twitter case was quite clear that “determination of the scope or applicability of this agreement to arbitrated … shall be determined by binding arbitration before one arbitrator.”  And so the Court compelled arbitration.

    X had attempted to point to another 9th Circuit case where the arbitration agreement specifically granted power to the court and not an arbitrator to determine whether class or collective action claims were permitted.  However, the judge in the Twitter matter pointed out that there was no language dividing up the authority to decide arbitrability in the Twitter-Wachtell agreement.

    After reviewing this Order in the Twitter case and the Oracle opinion, what is clear is that it is all about the drafting.  

    To avoid procedural delays, you may want to delegate all arbitrability questions to the arbitrator to avoid going back and forth from arbitration to court.  

    If instead there are bet-the-company issues or complex multi-party procedures implicated in the agreement, you may be more comfortable both assigning those issues to the court as well as the authority to make the call as to whether those issues go to the court.

    The way to avoid unnecessary complications is to clearly and unmistakably record your preferences–for both the scope and delegation questions–in your arbitration agreement.