Commercial Arbitration in the Federal Courts: Cases That Matter

If you deal with commercial contracts in arbitration - not clickwrap provisions – you should know these cases

If you follow arbitration cases casually, you can be forgiven for thinking the field is all about consumer and employment disputes. Many of the Supreme Court’s most prominent decisions in the last decade arise from those contexts. This article is narrower. We will look at commercial arbitration in the traditional sense. That is, negotiated agreements between business entities, often with institutional rules and choice-of-law clauses negotiated between counsel.

There aren’t all that many Supreme Court decisions on commercial arbitration, but they provide the answers to many legal questions that can come up. And knowing of them will help you draft arbitration clauses that will avoid some of the legal issues that can delay or derail arbitrations while courts sort things out for the parties.

1. The FAA is a contract-enforcement statute – what did the parties agree to do?

Commercial arbitration rests on consent. The Supreme Court’s recurring theme is that the Federal Arbitration Act (FAA) did not invent or even control arbitration. Instead, it enforces what the parties agreed to. That’s essentially what the FAA says in Section 2, which says that a written provision for arbitration "in any maritime transaction or a contract evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” So, while the emphasis on agreement seems unremarkable, it becomes critical when it is time to decide (a) whether an arbitration clause is severable from the broader contract, or (b) whether a court can reshape procedures that seem unfair or unwise.

Separability: fraud in the inducement belongs to the arbitrator unless the arbitration clause is targeted

At one time, an arbitration respondent’s first move often was to try to avoid arbitration in favor of court. Don’t want arbitration? Claim the contract was induced by fraud.

Then along came Prima Paint, the case that established the separability doctrine. The rule is now, absent a specific challenge to the arbitration clause itself, attacks on the contract’s validity, including fraud in the inducement of the overall contract, are for the arbitrator, not the court [1]

This may seem counterintuitive. If the entire contract was induced by fraud and the arbitration clause is part of the contract, why would the arbitration clause be enforced? Still, after Prima Paint, it will be enforced unless the clause itself was induced by fraud. This means, in practice, that when you see a “this contract is void” argument, ask whether the challenge is to the arbitration agreement itself. If not, Prima Paint will usually direct you back to arbitration and away from court.

Courts decide unless the parties clearly and unmistakably delegated the question

First Options is the Court’s leading case on who decides arbitrability. The default rule is that courts decide “gateway” questions like whether the parties agreed to arbitrate the dispute. Only if the contract shows “clear and unmistakable” intent to send that gateway issue to the arbitrator will the decision be delegated to the arbitrator. [2] This approach “flow[s] inexorably from the fact that arbitration is simply a matter of contract between the parties,” said the Court.

But stay tuned. We will consider the effect of arbitral rules on the delegation issue in a minute.

2. Who decides what: delegation, procedural questions, and the end of “wholly groundless”

Procedural conditions precedent are generally for the arbitrator

Howsam [3] makes it clear that “procedural” arbitrability questions (time limits, notice, laches-type issues, compliance with pre-arbitration steps) are presumptively for the arbitrator, not the court.

If there is a delegation, courts must respect it—even if the argument for arbitration seems weak

Henry Schein’s instruction to courts is direct. If the parties delegated arbitrability to the arbitrator, federal courts must not refuse to compel arbitration on the ground that the pro-arbitration argument is “wholly groundless.” [4] The court cannot override the parties’ agreement to let the arbitrator decide that issue. This is starting to sound familiar, right? The question is what the parties agreed to.

The circuits’ rule: incorporating institutional rules often constitutes clear delegation

In commercial contracts, delegation is often accomplished indirectly by incorporating rules that empower arbitrators to decide their own jurisdiction. Multiple circuits treat incorporation of AAA or similar rules as “clear and unmistakable”evidence of delegation in sophisticated-party settings. The Fifth Circuit’s Petrofac decision is the classic commercial example. [5]

Most circuits follow this principal and do not limit it to AAA rules. [6]

Because many if not most arbitration clauses incorporate the rules of an arbitral organization, this rule provides a significant counterweight to the assumption that courts decide arbitrability.

Choice-of-law clauses can matter in arbitration—if the parties made them matter

Volt is the Court’s leading commercial decision about honoring party choice. There, the parties’ choice-of-law clause brought in California rules that permitted a stay of arbitration pending related litigation. The Court enforced that choice as part of enforcing the contract, even though it did not maximize arbitration’s speed. It reasoned that the“ FAA does not confer an absolute right to compel arbitration, but only a right to obtain an order directing that “arbitration proceed in the manner provided for in [the parties'] agreement." [7]

Don’t assume arbitration means no punitive damages

Mastrobuono is worth reviewing when a party argues that a choice-of-law clause silently strips the arbitrator of remedial power. The Court read the contract to avoid that result, holding that the clause did not clearly eliminate the arbitrator’s ability to award punitive damages. [8] So, if contracting parties agree to arbitrate punitive damages issues, the FAA ensures that their agreement will be enforced according to its terms even if a rule of state law would otherwise exclude such claims from arbitration. Again, the question gets back to enforcing the parties’ agreement.

Class or collective procedures: silence is not consent

Even for commercial tribunals, Stolt-Nielsen remains important. The Court held that class arbitration cannot be imposed on parties whose agreement is “silent” on that issue. There must be a contractual basis to conclude the parties agreed to class procedures. [9]

Oxford Health Plans shows the other side of that coin: If the parties submit the class-arbitration question to the arbitrator, and the arbitrator construes the contract to permit class arbitration, judicial review is limited. That’s true even if the reviewing court thinks the arbitrator got it badly wrong. [10]

3. Award Review: Hall Street and the possible circuit differences on “Manifest Disregard”

Hall Street held that the FAA’s vacatur/modification grounds are exclusive for FAA review

Hall Street is the Supreme Court’s central commercial arbitration decision on judicial review. The Court held that the FAA’s enumerated grounds for vacatur and modification are exclusive for parties seeking judicial review under the FAA, rejecting contractual expansion of those grounds. [11] These grounds, set out in Section 10 of the FAA, are quite limited. They are: (1) corruption, fraud, or undue means; (2) evident partiality or corruption by an arbitrator; (3) arbitrator misconduct that prejudices a party’s rights; or (4) where the arbitrators exceeded their powers or so imperfectly executed them that no mutual, final, and definite award was made. Mistakes of fact or law are not mentioned.

Before Hall Street, courts used to refer to “manifest disregard of the law” as a ground for vacatur. That required proving that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. For example, in New York Tel., the arbitrator expressly rejected controlling Second Circuit precedent and applied out-of-circuit authority instead, which the court held was manifest disregard of the law. [12] But that is mostly history after Hall Street.

Still, even after Hall Street, circuits have taken different paths. For example, the Fifth Circuit in Citigroup Global Markets v. Bacon treated ‘manifest disregard’ as an impermissible extra-statutory vacatur ground. [13]

But the Second Circuit in T.Co Metals, described ‘manifest disregard’ as a judicial gloss on the statutory grounds, rather than an independent add-on. [14] That didn’t do the appellant much good, though. Even if it were considered a valid means of attack, the standard wasn’t met.

So, even if the court entertains the ground for vacating an award, proving that the arbitrator understood the law and deliberately disregarded it will be difficult if not impossible in most cases. But you’ll need to check the law in the applicable circuit to see exactly how it treats manifest disregard.

4. Parties, affiliates, and non-signatories: commercial reality meets contract doctrine

Arthur Andersen: non-signatories can invoke the FAA when state contract law allows it

Commercial disputes frequently involve affiliates, parent companies, successor entities, or third-party consultants. Arthur Andersen holds that traditional state-law doctrines (e.g., equitable estoppel) can allow non-signatories to compel arbitration or obtain a stay under the FAA; the FAA does not forbid those doctrines. [15] But application of these doctrines is very fact specific and will depend on applicable state law.

GE Energy: the New York Convention does not block domestic doctrines allowing non-signatory enforcement

GE Energy is the international-commercial companion to Arthur Andersen. The Court held that the New York Convention does not conflict with domestic equitable estoppel doctrines that permit enforcement of arbitration agreements by non-signatories. [16]

5. Federal court Mechanics that shape commercial arbitrations

Automatic stays pending arbitration appeals: Coinbase v. Bielski

Coinbase v. Bielski resolved a procedural split with practical implications for commercial cases in federal court. When a party appeals the denial of a motion to compel arbitration under FAA Section 16(a), district court proceedings must be stayed during the appeal. [17]

Competing contracts and forum provisions: Coinbase v. Suski

Coinbase v. Suski arose from a consumer dispute. But if contains a commercial drafting lesson. When parties execute multiple agreements with inconsistent dispute resolution provisions, a court - not an arbitrator - generally decides which contract controls before any delegation clause can apply. [18]

International discovery in aid of arbitration: ZF Automotive limits Section 1782

For cross-border commercial arbitrations seated outside the U.S., ZF Automotive is now the starting point for Section 1782 discovery. At one time, parties sought to use this provision to provide U.S.-like discovery in foreign arbitrations, where discovery is typically very limited. The Court held that Section 1782’s reference to a ‘foreign or international tribunal’ does not include private international commercial arbitral tribunals and likewise excludes certain ad hoc investor-state panels. [19] Only a governmental or intergovernmental adjudicative body constitutes a “foreign or international tribunal” under Section 1782.

6. A Short checklist for commercial arbitrations

These issues matters won’t come up in all arbitrations. But you still might find this checklist useful:

1) Read the arbitration clause as if it was negotiated. In commercial cases it usually was. Then determine what they agree to.

2) Separate formation/validity issues. If the attack is on the arbitration clause itself, the court will usually decide it. If the attack is on the contract generally, that will normally be the arbitrator’s call.

3) Decide who decides what early. Take a look at First Options, Howsam, and Schein for guidance.

4) Treat procedure as a contract. Choice-of-law, rules, and remedial limits are all questions of what the parties the parties agreed to.

5) When the issue is vacating an award, start with Hall Street and then identify the controlling circuit’s approach to any “manifest disregard” argument. (This isn’t something in which arbitrators will typically be involved with because it all happens after the award is issued.) And remember manifest disregard doesn’t mean just that the arbitrator got it wrong. The moving party will have to show the arbitrator knew the law and ignored it.

6) In affiliate-heavy disputes, analyze non-signatory theories under the governing state law, consistent with Arthur Andersen and GE Energy.

7) When an appeal from an order denying a motion to compel arbitration is filed, plan for a stay under Coinbase v. Bielski.

8) Where it issue is which contract applies and only one has a provision delegating arbitrability to the arbitrator, it’s off to court for a decision.

8) In international matters, Section 1782 no longer provides a means to more robust discovery unless the forum is a governmental or intergovernmental adjudicative body

Notes

1. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).

2. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938 (1995).

3. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002).

4. Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. ___, 139 S. Ct. 524 (2019).

5. Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012).

6. See, e.g., Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005); Fallo v. High-Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009).Oracle Am., Inc. v. Myriad Grp. A.G., 724 F.3d 1069, 1074–75 (9th Cir. 2013: Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015); Belnap v. Iasis Healthcare, 844 F.3d 1272, 1284 (10th Cir. 2017) (JAMS rules). Terminix Int’l Co. v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327, 1332 (11th Cir. 2005); Apollo Comput., Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989) (ICC rules; arbitrability to arbitrator).

7. Volt Information Sciences, Inc. v. Board of Trustees of Stanford University, 489 U.S. 468 (1989).

8. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995).

9. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).

10. Oxford Health Plans LLC v. Sutter, 569 U.S. 564 (2013).

11. Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).

12. Citigroup Glob. Mkts., Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009).

13. New York Tel. Co. v. Commc’ns Workers of Am., Local 1100, 256 F.3d 89 (2d Cir. 2001).

14. T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329 (2d Cir. 2010).

15. Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009).

16. GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, 590 U.S. 432 (2020).

17. Coinbase, Inc. v. Bielski, 599 U.S. 736 (2023).

18. Coinbase, Inc. v. Suski, 602 U.S. 143 (2024) (May 23, 2024).

19. ZF Auto. US, Inc. v. Luxshare, Ltd., 596 U.S. 619 (2022).