Arbitrability Determination Delegated to Arbitrators Under FAA: Sixth Circuit's Ruling in SmileDirectClub, LLC v. Johnson

Introduction

The case of DR. JOSEPH CICCIO; DR. VISHU RAJ; DR. ARTHUR KAPIT; DENA NIGOHOSIAN; DANA JOHNSON v. SMILEDIRECTCLUB, LLC, decided by the United States Court of Appeals for the Sixth Circuit on June 25, 2021, addresses pivotal questions regarding the enforcement and interpretation of arbitration agreements under the Federal Arbitration Act (FAA). This commentary delves into the case's background, key legal issues, the court's decision, and its broader implications for arbitration law.

Summary of the Judgment

In this case, plaintiffs filed claims against SmileDirectClub (SmileDirect) alleging false advertising and other statutory and common-law violations. Initially dismissed in court, the plaintiffs sought arbitration under an existing arbitration agreement that stipulated disputes be resolved via the American Arbitration Association (AAA). However, complications arose when the AAA administrator invoked policies requiring post-dispute arbitration agreements for healthcare-related claims, leading to the plaintiffs returning to court. The district court ruled that the arbitration agreement did not cover the present dispute, but the Sixth Circuit reversed this decision. The appellate court held that the arbitrability determination should be handled by an arbitrator, not an AAA administrator, as per the FAA and the clear terms of the arbitration agreement. Consequently, the court remanded the case to compel arbitration.

Analysis

Precedents Cited

The court extensively referenced several key precedents to support its decision:

Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63 (2010): Established that determining whether an arbitration agreement covers a dispute is a "gateway question" of arbitrability.
Blanton v. Domino's Pizza Franchising LLC, 962 F.3d 842 (6th Cir. 2020): Affirmed that parties can delegate arbitrability questions to an arbitrator, provided there is clear and unmistakable evidence of such an intention.
Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019): Emphasized that gateway questions regarding arbitrability should generally be resolved through arbitration if the parties have delegated that authority.
Stolt-Nielsen S.A. v. Animalfeeds Int'l Corp., 559 U.S. 662 (2010): Clarified that arbitrators should not make public policy decisions but focus on enforcing the contractual arbitration agreement.

Legal Reasoning

The court's reasoning centered on the interpretation of the FAA, which favors the enforcement of arbitration agreements as written. Key aspects of the legal reasoning include:

Delegation of Arbitrability Questions: The arbitration agreement explicitly incorporated AAA rules, signaling an intention to delegate arbitrability determinations to an arbitrator rather than a court or administrator.
Role of AAA Administrator vs. Arbitrator: The court distinguished between administrative functions (handled by AAA administrators) and substantive arbitration tasks (handled by arbitrators). It found that arbitrators, not administrators, have the authority to decide on matters of arbitrability.
FAA's Enforcement Mandate: Under the FAA, arbitration agreements are to be enforced according to their terms. The court held that the administrator's refusal to arbitrate certain disputes based on AAA policies overstepped their role.
Contractual Intent: Emphasized that the parties' clear and unmistakable intent to have an arbitrator handle all disputes, including arbitrability questions, must be respected and enforced.

Impact

This judgment has significant implications for the arbitration landscape:

Strengthening Arbitration Agreements: Reinforces the binding nature of arbitration agreements and the role of arbitrators in resolving key issues related to arbitrability.
Limit on Administrative Oversight: Limits the ability of arbitration administrators like AAA to unilaterally impose policies that may override contractual agreements between parties.
Guidance for Future Agreements: Provides clearer guidance for drafting arbitration clauses, particularly concerning the delegation of arbitrability questions to arbitrators.
Judicial Deference: Affirms courts' limited role in arbitration matters when parties have expressly delegated authority to arbitrators, aligning with the FAA's pro-arbitration stance.

Overall, the decision underscores the judiciary's role in upholding the integrity and intentions of arbitration agreements, ensuring that parties' contractual choices are respected and enforced.

Complex Concepts Simplified

Arbitration Agreement

An arbitration agreement is a contract wherein parties agree to resolve disputes outside of court, typically through arbitration. This process is generally faster and less formal than traditional litigation.

Gateway Question of Arbitrability

A "gateway question" refers to the initial determination of whether a particular dispute is subject to arbitration under the terms of the arbitration agreement. These questions decide the path a dispute will take—arbitration or litigation.

Federal Arbitration Act (FAA)

The FAA is a federal law that provides for the enforcement of arbitration agreements and sets the legal framework supporting arbitration as a viable alternative to court litigation for resolving disputes.

Delegation Provision

A delegation provision in an arbitration agreement allows the parties to assign specific responsibilities, such as deciding arbitrability, to the arbitrator rather than deferring to a court.

American Arbitration Association (AAA) Administrator vs. Arbitrator

An AAA administrator handles the logistical aspects of arbitration, like appointing an arbitrator and managing fees. In contrast, the arbitrator is the neutral party who makes binding decisions on the merits of the dispute.

Conclusion

The Sixth Circuit's decision in SmileDirectClub, LLC v. Johnson reinforces the sanctity and enforceability of arbitration agreements under the FAA. By affirming that arbitrability determinations are to be managed by arbitrators, not administrators or courts, the ruling upholds the parties' contractual intentions and the integrity of the arbitration process. This judgment serves as a pivotal reference for future cases involving arbitration agreements, ensuring that the delegation of key determinations to arbitrators is respected and that administrative overreach is curtailed. Consequently, parties drafting arbitration clauses should meticulously consider delegation provisions to ensure that their arbitration agreements function as intended within the framework established by this and similar rulings.