Reprinted with permission from the January 2018 issue of Alternatives to the High Cost of Litigation, the newsletter of the International Institute for Conflict Prevention & Resolution. (Vol. 36, No. 1).
Arbitration may end sooner and more efficiently than litigation, but it is slower to begin. A courthouse is just sitting there waiting for a complaint to be filed. An arbitrator, by contrast, has to be appointed, and it can take time for the process to get going. And when a case does not present issues that must be resolved immediately, that may not be a problem.
But where a case has emergency features—the dissemination of trade secrets, the raiding of a party’s customers, the destruction of its facilities—arbitration can be particularly ill-suited. Parties who need relief now cannot tolerate being imprisoned in the cage of a drawn-out arbitrator-selection process.
For precisely this reason, the common law has long recognized an exception to the general rule in favor of enforcing the exclusive nature of arbitration clauses. Even when parties state that “any and all issues under this contract shall be resolved by arbitration,” courts have found that a party can seek injunctive relief to prevent irreparable injury, so long as the court is not deciding the core issue committed by the parties to arbitration. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Bradley, 756 F.2d 1048, 1053 (4th Cir. 1985)(“where a dispute is subject to mandatory arbitration under the Federal Arbitration Act, a district court has the discretion to grant a preliminary injunction to preserve the status quo pending the arbitration of the parties’ dispute if the enjoined conduct would render that process a ‘hollow formality.’”); Alliance Consulting Inc. v. Warrior Energy Res. LLC, No. 5:2017-cv-03541, 2017 BL 283376 (S.D. W. Va. Aug. 14, 2017)(addressing a preliminary injunction when the dispute resolution clause did not specifically provide a court with jurisdiction to hear such a dispute).
For that same reason, parties electing arbitration frequently insert into their clauses a provision allowing for temporary and emergent equitable relief, which makes clear to the court that arbitration is not the exclusive remedy in these situations. Such a provision may read “provided that, nothing in this clause shall bar a party from seeking injunctive relief in emergent circumstances, including but not limited to the dissemination of its intellectual property.”
But what happens when parties intending to preserve their right to seek emergency relief in court instead safeguard their right to seek all equitable relief? All emergency relief is, to be sure, equitable—but not all equitable relief is emergent. Consider the following clause:
Any controversy or claim arising out of or relating to this Agreement or the breach, termination, or validity thereof, except for temporary, preliminary, or permanent injunctive relief or any other form of equitable relief, shall be settled by binding arbitration … (Emphasis added.)
A strict textual reading of this arbitration clause reveals an inherent tension: on the one hand, the clause gives the arbitrator the power to hear “any controversy or claim arising out of or relating to this Agreement.”
Yet, at the same time, the clause pulls away from the arbitrator the power to hear claims for “temporary, preliminary, or permanent injunctive relief or any other form of equitable relief.” What did the parties intend? Should all non-emergent merits issues be arbitrated? Or just non-equitable issues?
This tension is exacerbated by the leading doctrinal underpinnings of arbitration law—namely, that (1) arbitration agreements are a creature of contract and should be enforced as written, (2) enforcing arbitration agreements promotes efficiency, and (3) contracts should generally be interpreted so as to promote arbitration.
This puts courts in a bind. Presented with a non-emergent equitable claim stemming from an agreement with an equitable carve-out like the provision above, a court may adopt a strictly textual approach and bar the arbitrator from considering the equitable claims.
This may especially be the case where a party either has second thoughts about arbitrating, or simply wants to slow down the case. The arbitration’s defendant—that is, the respondent—can file a motion before the arbitrator attempting to strip the tribunal from jurisdiction over the equitable claims.
If that party is a plaintiff (“claimant”), it can simply tack on a specific performance claim, which sounds in equity, to its core breach of contract claims. And presto! At least some of the claims are now in court. The “mandatory” arbitration clause is no longer exclusive, and instead has been defeated by a court interpreting literally the above equitable carve-out, notwithstanding the principles of efficiency and promoting arbitration.
This cannot be right. The exception should not swallow the rule. Parties should not be saddled with piecemeal procedures. Parties should be permitted to make emergent exceptions to their mandatory arbitration clauses, but that is all they should be permitted to do once they commit to arbitration.
Literal enforcement here is bad policy. Courts should be encouraged to favor the Federal Arbitration Act’s pro-arbitration policy, not to mention the mandate of Rule 1 of the Federal Rules of Civil Procedure that courts should seek “to secure the just, speedy, and inexpensive determination of every action and proceeding.”
It is a daunting thing to tell a commercial court not to follow clear contract language crafted by sophisticated parties. That flies in the face of basic contract law.
This article nevertheless takes the position that in this situation, that is precisely what courts should do. Courts should only enforce the equitable carve-outs to confer jurisdiction when there is an actual emergency requiring a quick decision or when a decision is otherwise necessary to preserve or in aid of the ultimate arbitration.
Any other result violates public policy, the Federal Arbitration Act, and can result in ridiculous and unintended outcomes in practice. The tension must be resolved in favor of efficiency and promoting arbitration.
Doctrinal Foundations
The inherent tension at the source of this article arises from three—and here, opposing—doctrinal foundations of arbitration.
Arbitration Agreements Should Be Enforced: The first of these core principles is that courts will generally enforce agreements to arbitrate as they are written. This is because the policy behind the FAA is not to enforce arbitration, but rather to enforce agreements to arbitrate. See Volt Info. Sciences Inc. v. Bd. of Trustees of Leland Stanford Junior University, 489 U.S. 468, 478 (1989) (“The FAA[’s] … passage was motivated, first and foremost, by a congressional desire to enforce agreements into which parties had entered.”)(internal citations and quotations omitted).
As a result, courts hold repeatedly that following the FAA’s liberal policy toward enforcing agreements to arbitrate, “a private agreement to arbitrate should be enforced according to its terms.” UHC Mgmt. Co. v. Computer Sciences Corp., 148 F.3d 992, 998 (8th Cir. 1998).
Following this policy and the FAA’s mandate, courts often view the matter simply and directly. Ninth Circuit courts, for example, ask just two questions: (1) Does a valid agreement to arbitrate exist? and (2) Does the arbitration agreement encompass the parties/present dispute? If the answer is “yes” to both, then the FAA requires that the court enforce the agreement according to its terms. Monster Energy Co. v. Wil Fischer Distrib. of Kan. LLC, No. 5:14-cv-02081-VAP(KKx), 2015 BL 490541 (C.D. Cal. Jan. 23, 2015); see Weyerhaeuser Co. v. W. Seas Shipping Co., 743 F.2d 635...
