Ninth Circuit: Incorporation of the AAA’s Rules Is Agreement to “Arbitrate Arbitrability”

The Ninth Circuit’s recent decision in Brennan v. Opus Bank, ­­­­­­­­­­­­­­­­­­­Nos. 13-35580 & 13-35598 (9th Cir. 8/25/15) is not a construction case.  However, the court’s decision might be pertinent to parties seeking to compel arbitration of construction disputes, particularly disputes arising from contracts that incorporate the American Arbitration Association’s (“AAA”) Construction Industry Arbitration Rules and Mediation Procedures (“AAA Construction Rules”).  That is because the Ninth Circuit held in Brennan that an employment agreement’s express incorporation of the AAA’s Rules in the agreement’s arbitration provision constituted clear and unmistakable evidence that the parties agreed that the arbitrator would determine whether claims were subject to arbitration.  In other words, the parties agreed to “arbitrate arbitrability”. 

The case arose from an employment dispute under an employment agreement that provided that the employer and employee would resolve claims arising from the agreement under the AAA’s Rules.  The plaintiff employee, however, claimed that his dispute should be resolved in litigation because the arbitration clause was procedurally and substantively unconscionable and, therefore, unenforceable.  The issue the Ninth Circuit faced on appeal was “who-an arbitrator or a judge-should decide whether the arbitration clause is unconscionable”.

The court first addressed the issue of applicable law.  The employee plaintiff argued that state law applied to the issue of arbitrability.  The Ninth Circuit disagreed, holding that federal law governed the issue of arbitrability because the Federal Arbitration Act (“FAA”) governs the agreement.

Applying federal arbitration law, the court held that the arbitrator should decide arbitrability because the employment agreement expressly incorporated the AAA’s Rules, which includes a rule that the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the ¼validity of the arbitration agreement.”  Particularly, the court held that “incorporation of the AAA rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.”  The court did not address the issue of whether the “delegation provision” that delegates arbitrability issues to arbitrator determination is itself unconscionable because the plaintiff had not urged that the delegation provision itself was unconscionable.

Because Rule 9 of the AAA’s Construction Rules also grants the arbitrator the power to rule on his or her jurisdiction and the existence, scope, or validity of the arbitration agreement, parties could argue that, based on the Ninth Circuit’s decision in Brennan, parties to construction contracts that incorporate the AAA’s Construction Rules have agreed to “arbitrate arbitrability”.

For your reference, linked here is a copy of the opinion.