Ninth Circuit Reverses Denial of Motion to Compel Arbitration

An arbitration provision in an employment agreement clearly delegated the issue of validity to the arbitrator, not the court, the Ninth U.S. Circuit Court of Appeals recently determined, reversing the denial of an employer’s motion to compel arbitration.

Kara Sandler signed an employment agreement with Modernizing Medicine (ModMed) that specified any employment-related disputes “shall be subject to binding arbitration under the Federal Arbitration Act (FAA) in conformity with the procedures of the California Arbitration Act.”

The contract also stated that the arbitration shall be administered by JAMS, whose rules in turn say that an arbitrator must resolve the question of whether the contract itself (including the agreement to arbitrate) is valid and enforceable.

Sandler sued ModMed in federal court. She alleged a variety of state and federal law claims, accusing the employer of discriminating against her on the basis of age and disability.

Relying on the employment agreement, ModMed moved to compel arbitration.

Sandler opposed the motion, arguing that the arbitration agreement was unconscionable. The district court agreed with Sandler and denied ModMed’s motion.

While the district court acknowledged that the arbitration agreement delegated the question of its validity to an arbitrator, the court relied on state court decisions to rule that a contract with a severability clause permitted a court to excise an unconscionable provision, and the delegation clause did not constitute a clear and unmistakable delegation.

Sandler appealed, and the federal appellate panel reversed.

“Who gets to decide the arbitration agreement’s validity - an arbitrator or a court - depends on whether there is ‘clear and unmistakable’ evidence that the parties agreed to delegate the validity question to the arbitrator,” the court wrote. “If there is such evidence, then the arbitrator has the power to resolve that question of ‘arbitrability.’”

That standard was met, the court said.

“The parties clearly and unmistakably agreed to have the arbitrator resolve any challenge to the validity of the arbitration agreement,” the court explained. “The agreement incorporates the JAMS rules, which delegate the question of the agreement’s validity to the arbitrator. That incorporation, we have held, evinces a ‘clear and unmistakable’ intent to delegate.”

The presence of the severability clause did not negate the clear and unmistakable nature of the delegation, the court added.

“Many contracts, including this one, contain a generic severability clause that authorizes a court or other body of competent jurisdiction to sever provisions that are deemed unconscionable or otherwise unenforceable,” the court said. “Two things can be true at once: First, parties can agree that disputes (including disputes over the validity of the arbitration agreement) shall be heard by an arbitrator. Second, the parties can nevertheless agree on a contingency - if a court somehow reaches (as it did here) the enforceability of contractual provisions, the severability clause tries to ensure that any invalidation would be limited.”

Simply put, the severability clause and the delegation clause are not at odds, the court held, and both can be given effect.

This conclusion followed the cardinal principle of contract construction that clauses should be rendered consistent with each other.

The district court’s reliance on state court opinions purporting to apply state law to negate a delegation clause was a legal error, the court added, as whether the parties manifested a clear and unmistakable intent to delegate arbitrability to an arbitrator is a question of federal law.

To read the opinion in Sandler v. Modernizing Medicine, Inc., click .

Why it matters: The district court misapplied federal law and erroneously relied on state court decisions pointing to the existence of a severability clause to refuse to compel arbitration, the Ninth Circuit ruled, reversing and remanding to the district court with instructions to grant the motion to compel and to stay the case pending the completion of arbitration proceedings.