Arbitrator Boundaries: What are the Limits of Arbitrator Authority? Webinar Recorded on April 20, 2011 at 2:00 p.m. ET

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1 Arbitrator Boundaries: What are the Limits of Arbitrator Authority? Webinar Recorded on April 20, 2011 at 2:00 p.m. ET PROGRAM SUMMARY Speaker: Thomas J. Brewer, Esq. One of the most widely used grounds asserted for vacatur of an arbitration award is that of arbitrators exceeding their authority. Attorneys representing parties need to know exactly what the arbitrator hearing and deciding their cases is empowered to do. Who decides the issues of arbitrability and third-party discovery arbitrators or the courts? What constitutes manifest disregard of the law? What is the impact of the court case Hall Street on future exceeded powers arbitration cases? AGENDA 2:00 p.m. Welcome and Introduction of Speakers (5 minutes) 2:05 p.m. Goals for the Session (5 minutes) 2:10 p.m. Discuss of Common Grounds of Vacatur of an (65 minutes) Arbitration Award Manifest disregard of the law Awards for or against persons or entities not bound by the arbitration agreement Fee and costs awards differing from the parties agreement Failure to follow procedural rules or other stipulations agreed upon by the parties Awards ordering remedies not authorized by the parties agreement Authority of the Arbitrator Arbitrability Third-Party Discovery Impact of Hall Street case on future arbitrations 3:15 p.m. Conclusion and Questions (15 minutes) 3:30 p.m. Evaluation (5 minutes) 3:35 p.m. Adjourn Copyright 2011 American Arbitration Association Revised

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10 ARBITRATOR JURISDICTION: WHO DECIDES WHO DECIDES WHAT S ARBITRABLE? A Primer on Jurisdiction in Private Arbitration Matters By Mark E. Lassiter, Esq., 1 DAVIS MILES, PLLC As private arbitration practice has grown increasingly sophisticated in recent decades a tectonic fault line was created as the two forums for resolving disputes in American society one public (the courts) one private (arbitration) have periodically collided with one another. Geologists observe that tectonic fault lines are often hot spots for all manner of disruptive geologic and seismic activity from earthquakes (and their attendant tsunamis or tidal waves ) to volcanoes. Indeed, mountains are formed by volcanic activity from the friction caused when two tectonic plates collide. In modern jurisprudence another type of collision sometimes occurs that can cause serious friction in dispute resolution matters. This collision occurs when a decision needs to be made about whether a private arbitrator can hear and decide a particular type of claim or dispute (or whether the arbitrator can grant a particular type of remedy), or whether such a matter must be heard by a court (or the remedy sought granted only by a court). This article examines the basic notions of arbitral jurisdiction in binding private or commercial arbitration proceedings under the Federal Arbitration Act (Title 9, United States Code, 1 14 the FAA ), the Uniform Arbitration Act (the UAA, including the Arizona Arbitration Statute embodied in A.R.S , et seq. 2 ) or the Revised Uniform Arbitration Act (the RUAA 3, which the Arizona legislature enacted as HB2430 in 2010, and 1 Attorney Mark E. Lassiter is a partner in the Tempe (Phoenix area) Arizona law firm of DAVIS MILES, PLLC, where he practices in the areas of Alternative Dispute Resolution ( ADR ), business, real estate and construction law and heads the firm s Commercial Litigation and Dispute Resolution Department.. He is a member of the Business, Real Estate, Construction and ADR law Sections of the State Bar of Arizona. Since 1999 he has Chaired the annual State Bar of Arizona CLE program PRIVATE ARBITRATION UPDATE (and predecessor CLE programs) and from 2004 to the present has served (at various times) as a Co-Chairperson or member of the Legislative Affairs subcommittee of the ADR Section of the Arizona State Bar, which subcommittee worked to pass the Revised Uniform Arbitration Act in Arizona. Mr. Lassiter has served as an arbitrator on the American Arbitration Association s Commercial and Construction Industry Arbitration Panels since 1991, and on its Large and Complex Case panel since He writes and speaks frequently on arbitration law matters, and was a panelist on, and the principal author of, Arbitration Boot Camp, an Internet-based video continuing legal education program on handling arbitration cases before the American Arbitration Association. His address is mlassiter@davismiles.com and phone number is In 1962 Arizona substantially adopted, with little change, the Uniform Arbitration Act (the UAA ) approved by the National Conference of Commissioners on Uniform State Laws [ NCCUSL ]. 3 The RUAA was approved by NCCUSL in the summer of In Arizona, the RUAA has already passed the Arizona Senate three times and the House of Representatives twice, but not in the same legislative year. The most recent House Bill Summary for Senate Bill 1233 (which passed the House of Representatives in 2008), says that 13 states have adopted the revised version of the RUAA in order to update, modernize and provide uniformity in the laws state to state. Additionally, the legislation is presently being considered in 9 other states Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

11 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 2 of 26 which Gov. Jan Brewer signed into law on April 23, ), and seeks to answer the question Who decides who decides what is arbitrable in private arbitration proceedings? This article does not apply to so called non binding judicial, compulsory [court] arbitration, or court annexed arbitration, such as that required by the Arizona Rules of Civil Procedure 5. Although this article is primarily written from the perspective of Arizona arbitration practice and procedure, and mainly cites to Arizona state court cases, its discussion would likely be applicable in any other state or jurisdiction as well. One court amply stated the starting point of any analysis of this complex issue: [a] threshold issue is whether the court or the arbitrator may decide whether a dispute is arbitrable. According to the Supreme Court, who decides arbitrability is like any other contract interpretation question: it depends on what the parties agreed to. 6 Easily said, but let us place it into the context of a not so simple (but interesting and realistic) hypothetical. An Interesting Hypothetical. The potential for a serious collision in arbitral jurisdiction is illustrated in the following hypothetical: All of the shareholders of ACME Manufacturing Co, Inc. ( ACME ) agree to sell 100% of their shares in ACME to New Group Investors, Inc. ( NGI ). The parties Stock Purchase Agreement includes the following, common arbitration clause contained in many commercial contracts: Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration under the Federal Arbitration Act administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on 4 Unlike any other jurisdiction that has adopted the RUAA, Arizona now has the unique distinction of having two different, simultaneously operative arbitration statutes: one, Arizona s old UAA, for disputes involving employment, insurance companies, national banking interests and self-regulating securities organizations4; and a second, the RUAA, for all other disputes. This curious anomaly is the unique result of a Faustian compromise with the lobbyists for insurance companies, labor, national banks and national securities interests, who generally opposed passage of the RUAA in Arizona. After several years of unsuccessfully trying to pass the RUAA over these industries various objections, it was decided to simply carve them out of the effects of the RUAA and to provide that they would continue to be governed by Arizona s old UAA. Generally, all of these carved out industries disputes would be governed by the FAA anyway assuming the absence of a specific provision requiring Arizona s UAA to govern any of their agreements to arbitrate, which this author has never seen. Still, for this reason both Arizona arbitration statutes are discussed in this article. 5 See, e.g., Rules of the Arizona Rules of Civil Procedure governing Compulsory Arbitration in civil courts. 6 Wages v. Smith Barney Harris Upham & Co., 188 Ariz. 525, 937 P.2d 715 (Ariz.App. Div. 1, 1997) Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

12 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 3 of 26 the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 7 After the closing of the stock purchase, NGI claims that the ACME shareholders representations and warranties were false and that the ACME shareholders also violated their covenants not to compete (which the ACME shareholders claim are not enforceable). NGI files a lawsuit for damages for fraud, misrepresentation, securities fraud, unfair competition, breach of the Stock Purchase Agreement and the covenants not to compete included in them and also seeks declaratory relief and an injunction. The ACME shareholders promptly make a Demand for Arbitration of ALL of the claims raised in NGI s lawsuit, and filed with the court a Notice of Pending Private Arbitration and Motion to Stay Court Proceedings pending a determination of the arbitrability of the claims in the NGI lawsuit by the arbitrator. Quite intentionally, the ACME shareholders do NOT file a Motion to Compel Arbitration. NGI files its answering statement in the arbitration, which contests the jurisdiction of the arbitrator to hear any of its statutory, tort and equitable relief claims, including those for injunctive relief. The American Arbitration Association (the AAA ) appoints an arbitrator. Promptly thereafter, the ACME shareholders move the AAA arbitrator to rule that ALL of NGI s claims in its lawsuit are arbitrable in accordance with the AAA s Commercial Arbitration Rules (the AAA Rules ), Rule 7 of which provides: R 7. Jurisdiction (a) The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. The ACME shareholders also contend that NGI breached the arbitration clause in the parties Stock Purchase Agreement and ask the arbitrator to make an immediate, interim award of damages for that breach, which largely consist of the attorneys fees incurred by the ACME shareholders in trying to get NGI to arbitrate its disputes with them. NGI counters in its opposition that the arbitrator does NOT have the power or authority to determine the arbitrability of the parties disputes, because such powers are uniformly reserved to the courts under the Federal Arbitration Act, the Uniform Arbitration Act (including Arizona s Arbitration Statute) and even under the Revised Uniform Arbitration 7 Except for the bold language under the Federal Arbitration Act, this is the standard arbitration clause contained in the American Arbitration Association s Commercial Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Commercial Disputes) Amended and Effective September 1, Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

13 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 4 of 26 Act. NGI simultaneously files in court a Motion to Stay Arbitration Proceedings citing relevant provisions of Arizona s Arbitration Statute, which provide: A.R.S Proceedings to compel or stay arbitration B. On application, the court may stay an arbitration proceeding commenced or threatened on a showing that there is no agreement to arbitrate. Such an issue, when in substantial and bona fide dispute, shall be forthwith and summarily tried and the stay ordered if found for the moving party. If found for the opposing party, the court shall order the parties to proceed to arbitration. Thereafter, ON THE SAME DAY the arbitrator and the court both rule on the motions before them. The ARBITRATOR rules that ALL of NGI s claims are arbitrable (whether arising in contract, tort, statute or otherwise) and orders all such claims to arbitration. However, the state court JUDGE rules that only the breach of contract claims are arbitrable and orders all other claims to proceed to a jury trial in the court proceeding. Further, when the judge later learns that the arbitrator, the ACME shareholders and their counsel nonetheless proceeded to continue the arbitration proceeding as to ALL claims over the strenuous objections of NGI (citing the judge s ruling), the judge issues an order to show cause why they should not be held in contempt of court. What result? Note that the arbitration clause in the above hypothetical only states that it relates to Any controversy or claim arising out of or relating to this contract, or the breach thereof, and does not specifically mention anything about claims for business torts, statutory claims or claims for other kinds of equitable relief, like injunctions. While two Arizona court of appeals decisions are likely dispositive of the substantive legal issue in the Hypothetical, 8 the issue here is not which substantive decision was right the arbitrator s or the judge s, but rather, as between the arbitrator or the judge, who had the right or power to even 8 See, e.g., Rocz v. Drexel Burnham Lambert, Inc., 154 Ariz. 462, 743 P.2d 971, (Ariz.App. Div ), wherein the plaintiff was a party to a contract of adhesion with the following arbitration clause similar to the one in the hypothetical: Any controversy between [Drexel and Rocz] arising out of said account or relating to this contract or the breach thereof, shall be settled by arbitration, in accordance with the rules, then obtaining, of the American Arbitration Association, the New York Stock Exchange, Inc., the American Stock Exchange, Inc., or the National Association of Securities Dealers, Inc. as [Rocz] may elect. The plaintiff thereafter brought a lawsuit for claims for Federal Securities laws violations, fraud, breach of contract, negligent hiring and supervision, breach of fiduciary duty, violation of state securities laws, consumer fraud, and racketeering claims that included statutory and tort matters and the court nonetheless compelled arbitration of all of her claims. See also Smith v. Logan, 166 Ariz. 1, 799 P.2d 1378 (Ariz.App. Div. 2, May 24, 1990), wherein the court held: We agree that a claim of fraudulent inducement of the contract, not the arbitration clause, may be arbitrable if the language of the arbitration clause contained in the agreement is sufficiently broad to reflect the parties' intent. Language such as "claims or disputes arising out of, from or relating to this contract" is broad enough to encompass a fraudulent inducement claim. (Citations omitted.) Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

14 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 5 of 26 make the decision at all? (Those too impatient or disinterested to read the rest of this article can READ FOOTNOTE NUMBER NINE FOR THE QUICK ANSWER TO THE ABOVE QUESTION 9.) Any determination of the above conundrum requires parsing the complex array of Federal and State arbitration law as follows: I. The General, Statutory Rule Courts, Not Arbitrators, Decide Arbitrability Issues. On their face, the FAA, the UAA and the RUAA (each an Arbitration Statute ) all clearly and unambiguously provide the general, legal rule that the court must determine the existence of an enforceable arbitration agreement. A.R.S provides, in relevant part: Proceedings to compel or stay arbitration A. On application of a party showing an [arbitration] agreement described in section , and the opposing party's refusal to arbitrate, the court shall order the parties to proceed with arbitration, but if the opposing party denies the existence of the agreement to arbitrate, the court shall proceed summarily to the determination of the issue so raised and shall order arbitration if found for the moving party. Otherwise, the application shall be denied. (Emphasis added.) B. On application, the court may stay an arbitration proceeding commenced or threatened on a showing that there is no agreement to arbitrate. Such an issue, when in substantial and bona fide dispute, shall be forthwith and summarily tried and the stay ordered if found for the moving party. If found for the opposing party, the court shall order the parties to proceed to arbitration. (Emphasis added.) Likewise, the FAA provides, in relevant part: 9 The short answer to the question posed at the end of the Hypothetical is that neither a state nor a federal court judge has any jurisdiction to hear or determine the arbitrator s jurisdiction to decide what claims are subject to arbitration on the facts given in the Hypothetical, and the state court judge s supposed exercise of jurisdiction to do so amounted to an improper and unauthorized meddling by the court in the parties private arbitration proceeding. If the trial court judge denies a motion to reconsider the judge s ruling then the trial judge s presumptuous interference with the arbitration proceeding is a clear abuse of discretion (since no such discretion ever existed) and ought to be promptly reversed by the court of appeal (hopefully before the arbitrator spends too much time in jail). However, for the reasons given in this article, if you remove the phrase under the Federal Arbitration Act from the arbitration clause in the Hypothetical then the whole analysis dramatically changes and the answer to the above inquiry becomes uncertain under Arizona (and, probably, under most states ) arbitration law Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

15 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 6 of 26 Section 4. Failure to arbitrate under agreement; petition to United States court having jurisdiction for order to compel arbitration; notice and service thereof; hearing and determination A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court for an order directing that such arbitration proceed in the manner provided for in such agreement.... The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed. If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof... (Emphasis added.) Similarly, Arizona s RUAA provides, in relevant part: Motion to compel or stay arbitration A. On motion of a person showing an agreement to arbitrate and alleging another person's refusal to arbitrate pursuant to the agreement: 1. If the refusing party does not appear or does not oppose the motion, the court shall order the parties to arbitrate. 2. If the refusing party opposes the motion, the court shall proceed summarily to decide the issue and order the parties to arbitrate unless it finds that there is no enforceable agreement to arbitrate. B. On motion of a person alleging that an arbitration proceeding has been initiated or threatened but that there is no agreement to arbitrate, the court shall proceed summarily to decide the issue. If the court finds that there is an enforceable agreement to arbitrate, it shall order the parties to arbitrate. C. If the court finds that there is no enforceable agreement, it may not order the parties to arbitrate pursuant to subsection A or B of this section. D. The court may not refuse to order arbitration because the claim subject to arbitration lacks merit or grounds for the claim have not been established Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

16 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 7 of 26 E. If a proceeding involving a claim referable to arbitration under an alleged agreement to arbitrate is pending in court, a motion under this section must be made in that court. Otherwise, a motion under this section may be made in any court as provided in F. If a party makes a motion to the court to order arbitration, the court on just terms shall stay any judicial proceeding that involves a claim alleged to be subject to the arbitration until the court renders a final decision under this section. G. If the court orders arbitration, the court on just terms shall stay any judicial proceeding that involves a claim subject to the arbitration. If a claim subject to the arbitration is severable, the court may limit the stay to that claim. (Emphasis added.) However, these Arbitration Statutes have been interpreted in thousands of court cases. Further, because these Arbitration Statutes expressly anticipate and expect that the parties will enter into a written arbitration agreement, the parties are largely free to enter into arbitration agreements that vary or change some of the terms and provisions of the Arbitration Statutes. II. In Most Arbitration Organization Rules the Arbitrator Decides Arbitrability Issues. In practice, most arbitrations are governed by an arbitration organization s written rules of procedure, which are incorporated by reference into the parties arbitration agreement. 10 The RUAA accurately defines an arbitration organization as an association, agency, board, commission, or other entity that is neutral and initiates, sponsors, or administers an arbitration proceeding or is involved in the appointment of an arbitrator. Common examples of such arbitration organizations in the alternative dispute resolution ( ADR ) industry include the American Arbitration Association ( AAA ), the International Institute for Conflict Prevention & Resolution ( CPR ), the Judicial Arbitration & Mediation Service ( JAMS ), the National Arbitration Forum ( NAF ) and the Institute for Christian Conciliation ( ICC ), among others. Most arbitration organizations provide under their respective rules that the arbitration will be administered by the arbitration organization, although this is not always the case See, e.g., AAA Rule R-1(a), which provides that The parties shall be deemed to have made these rules a part of their arbitration agreement whenever they have provided for arbitration by the American Arbitration Association (hereinafter AAA) under its Commercial Arbitration Rules or for arbitration by the AAA of a domestic commercial dispute without specifying particular rules (Emphasis added.) 11 For example, the CPR and ICC arbitration rules provide for non-administered arbitration, effectively cutting out the [arbitration organization] middle man and its attendant administrative filing and management fees, which are often expensive especially in larger, complex arbitration cases Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

17 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 8 of 26 In any case, all of the above mentioned arbitration organizations rules of procedure include a rule like this one: The arbitrator shall have the power to determine the existence, scope and validity of the parties arbitration agreement (an Arbitrator Jurisdiction Rule ) 12. Such Arbitrator Jurisdiction Rules are directly contradictory to the language of the Arbitration Statutes, which all clearly state that the court is to decide such matters. If the FAA, the UAA and the RUAA all clearly proscribe that the court, and not the arbitrator, has the jurisdiction to decide the existence, scope and validity of an arbitration agreement, then why do all of these respected arbitration organizations have Arbitrator Jurisdiction Rules that effect just the opposite? Are they ignorant of the Arbitration Statutes? III. The Exception to the Rule in the Case of the Federal Arbitration Act. The apparent conflict between the above arbitration organizations Arbitrator Jurisdiction Rules and the Arbitration Statutes over jurisdiction to determine arbitral jurisdiction arises from the United States Supreme Court s decision in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S. Ct (1995) in which the Supreme Court, in interpreting the FAA, held that unless the parties clearly and unmistakably provide otherwise, the question of whether they agreed to arbitrate the particular dispute is to be decided by the court, not the arbitrator. However, in so holding, the court expressly (and quite deliberately) left open the prospect that the parties could forge an arbitration agreement between themselves that conferred the jurisdictional powers to decide such arbitral matters on the arbitrator to the exclusion of the courts (the First Options/FAA exception ). As the Arizona court of appeals noted in footnote #4 in Brake Masters Systems, 12 See, e.g., AAA Rule R-7(a), [ Jurisdiction. (a) The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. ], CPR Rule 8.1 [ Challenges To The Jurisdiction Of The Tribunal. 8.1 The Tribunal shall have the power to hear and determine challenges to its jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. ], JAMS Rule 8(c) [ Interpretation of Rules and Jurisdiction Challenges. (c) Jurisdictional and arbitrability disputes, including disputes over the existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter. ], NAF Rule 20(E) [ Authority of Arbitrators. E. An Arbitrator shall have the power to rule on all issues, Claims, defenses, questions of arbitrability, and objections relating to the existence, scope, and validity of the contract, transaction, or relationship of the Parties. ], and ICC Rule 34 A [ Arbitration Proceedings. B. The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. A party may object to the jurisdiction of the arbitrator or to the arbitrability of a claim. The arbitrator may rule on such objections as a preliminary matter or as a part of the final award. ] Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

18 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 9 of 26 Inc. v. Gabbay, 206 Ariz. 360, 78 P.3d 1081 (Ariz.App. Div. 2, 2003) (the seminal Arizona case on arbitrator jurisdiction matters): The revised AAA Rule 8(a) [since renumbered 7(a) in the AAA Rules] took effect January 1, 1999, and was specifically designed to address the Court's holding in First Options. AAA Revises Commercial Arbitration Rules, Disp. Resol. J., Nov. 1998, at 4, 4, 96. All of the above arbitration organizations Arbitrator Jurisdiction Rules are all intended to be the very kind of clear and unmistakable arbitration agreement contemplated in First Options. So then, the First Options/FAA Exception arises when (1) the FAA applies, and (2) the parties arbitration agreement clearly and unmistakably gives the arbitrator the power to determine the existence, scope and validity of the parties arbitration agreement, which any Arbitrator Jurisdiction Rule will do. However, First Options only interprets the FAA, and no individual state court, in construing its own state s Arbitration Statute (whether the UAA or the RUAA), is bound by the First Options/FAA Exception. Hence, First Options may have little or no compelling precedental value in a case solely governed by the UAA or the RUAA, including Arizona s own A.R.S (A), quoted above. Indeed, Arizona state court cases deciding the issue of jurisdiction to decide jurisdiction under Arizona s Arbitration Statute (i.e., the UAA) all likewise affirm the proposition that decisions of arbitrability should be made by an Arizona Superior Court Judge, unless the FAA applies 13. (However, many of the Arizona state court cases were decided before First Options, so their legal analysis is often dated (if not obsolete) and may be of questionable precedental value in light of First Options and its progeny.) Hence, if the First Options/FAA Exception applies, the arbitrator should determine the arbitrability of the claims and matters asserted in the arbitration proceeding to the exclusion of the courts. Alternatively, if the UAA or RUAA (and not the FAA) applies to the arbitration, and the state s Arbitration Statute has similarly been construed to allow an arbitrator to determine the arbitrator s own jurisdiction if the parties arbitration agreement clearly and unmistakably allows it, then the arbitrator should also do so. However, no reported Arizona court case has yet decided this specific issue. (While the issue of an arbitrator s ability to determine his own jurisdiction was at issue in the Brake Masters case, there the court assumed the applicability of the FAA in deciding that case [apparently because the parties did not brief the issue] and did not decide the issue based on Arizona s 13 See, e.g., Roeder v. Huish, 105 Ariz. 508, 467 P.2d 902 (1970); Allstate Ins. Co. v. Cook, 21 Ariz.App. 313, 519 P.2d 66 (Ariz.App. Div. 2, 1974); Foy v. Thorp, 186 Ariz. 151, 920 P.2d 31 (Ariz.App. Div. 1, 1996); Wages v. Smith Barney Harris Upham & Co., 188 Ariz. 525, 937 P.2d 715 (Ariz.App. Div. 1, 1997), and Brake Masters Systems, Inc. v. Gabbay, 206 Ariz. 360, 78 P.3d 1081 (Ariz.App. Div. 2, 2003) Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

19 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 10 of 26 Arbitration Statute.) The author believes that, if presented with the issue, an Arizona court would likely follow the United States Supreme Court s holding in First Options, since Arizona courts have tended to follow the United States Supreme Court s interpretations of the FAA when construing Arizona s Arbitration Act. 14 But the notable First Options/FAA Exception to the general, statutory rule that the courts should decide an arbitrator s jurisdiction still begs the next, inevitable question So, who decides when a case is governed by the FAA? This issue is complex, partly because the parties written arbitration agreements often do not indicate what substantive Arbitration Statute (i.e., the FAA, UAA or RUAA) specifically controls their arbitration agreement. Ideally, a well drafted arbitration agreement would clearly specify which Arbitration Statute governs its provisions, but many do not. Thus, substantive arbitration law matters, including a determination of which Arbitration Statute governs the parties arbitration agreement, will inevitably come into play in determining who should decide the issue of arbitrability. Although a thorough discussion of the applicability of the FAA to an arbitration agreement is beyond the scope of this discussion on arbitral jurisdiction, a brief discussion is helpful. IV. When the Federal Arbitration Act Applies A. The FAA applies if the Parties Arbitration Agreement Says it Does. The question of when the FAA applies is easily decided if the parties arbitration agreement expressly provides that it is governed by the FAA. (See, e.g., the arbitration clause in the Hypothetical.) However, many arbitration agreements do not expressly state whether the FAA applies to their arbitration agreement. (Note that the mere inclusion of an Arbitrator Jurisdiction Rule in an arbitration organization s arbitration rules strongly implies the applicability of the FAA to the parties arbitration agreement because an Arbitrator Jurisdiction Rule solely exists to incorporate the First Options/FAA Exception into the parties arbitration agreement, but why bother unless the parties already intended to be bound by the FAA in the first place?) B. Common Choice of Law Contract Provisions May Not be Dispositive about Whether the FAA Applies. So, what of the language normally included in most written contracts to the effect that This Agreement shall be interpreted and construed in accordance with the laws of the State of 14 See, e.g., Flower World of America, Inc. v. Wenzel, 122 Ariz. 319, 594 P.2d 1015 (Ariz.App. Div ) and U.S. Insulation, Inc. v. Hilro Const. Co., Inc. 146 Ariz. 250, 705 P.2d 490 (Ariz.App. Div ) both adopting the rationale of Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L.Ed.2d 1270 (1967) in applying the separability doctrine to Arizona arbitration agreements Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

20 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 11 of 26 Arizona, without regard to conflict of law principles? Doesn t that choice of law provision solve the problem of identifying the applicable arbitration law in a given case? Well, maybe not. This introduces the legal notion of separability, which is the judicial fiction by which the courts will consider the parties arbitration clause to be an agreement that is independent and separate from the principal contract of which it is a part. In short, an arbitration clause (like the one in the Hypothetical) is its own kind of agreement within an agreement. The seminal case in this area is Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L.Ed.2d 1270 (1967), in which the United States Supreme Court explained the doctrine as follows:... except where the parties otherwise intend arbitration clauses as a matter of federal law are separable from the contracts in which they are embedded, and... where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud. 388 U.S. at 402, 87 S. Ct. at Although Prima Paint interpreted federal law, Arizona courts have specifically adopted its rationale in interpreting Arizona s Arbitration Statute. 15 The notion of separability is also expressly stated in many arbitration organizations arbitration rules, including the AAA Rules 16. But even where this notion of separability is not expressly stated in those arbitration rules, it is often subtly implied and embedded elsewhere in them. For example, if one reads the AAA Rules closely one notices that they refer to both the parties contract and to the parties agreement terms of art that are NOT used interchangeably 17. Contract in the AAA Rules refers to the overall, substantive contractual 15 See, e.g., Flower World of America, Inc. v. Wenzel, 122 Ariz. 319, 594 P.2d 1015 (Ariz.App. Div ) and U.S. Insulation, Inc. v. Hilro Const. Co., Inc. 146 Ariz. 250, 705 P.2d 490 (Ariz.App. Div ). 16 See, e.g., AAA Rule 7(a), which provides: The arbitrator shall have the power to determine the existence, scope or validity of a contract of which an arbitration clause forms a part. Such an arbitration clause shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitrator that the contract is null and void shall not for that reason alone render invalid the arbitration clause. (Emphasis added.) 17 In addition to AAA Rule 7(a) and (b), see also, e.g., the preamble to the AAA Rules, which provides, in part: The parties can provide for arbitration of future disputes by inserting the following clause into their contracts: Any controversy or claim arising out of or relating to this contract, or the breach thereof, and If the parties want to adopt mediation as a part of their contractual dispute settlement procedure, they can insert the following mediation clause into their contract See also AAA Rules R-1 ( Agreement of Parties. (a) The parties shall be deemed to have made these rules a part of their arbitration agreement whenever they have provided for arbitration by the (AAA) ); R-4 ( Initiation under an Arbitration Provision in a Contract. (a) Arbitration under an arbitration provision in a contract shall be initiated in the following manner: (i) The initiating party (the "claimant") shall, within the time period, if any, specified in the contract(s), give to the other party (the "respondent") written notice of its intention to arbitrate (the "demand"), (ii) The claimant shall file at any office of the AAA two copies of the demand and two copies of the arbitration provisions of Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

21 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 12 of 26 arrangement of the parties (e.g., their lease, purchase contract, business buy sell agreement, etc.), while the term arbitration clause or agreement only refers to the parties written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties within the meaning of A.R.S Hence, the choice of law provision in many contracts may not help a court or arbitrator in interpreting whether the FAA applies to the parties arbitration agreement in their contract, since choice of law provisions, while useful in interpreting the parties contract, may not be dispositive of how their arbitration agreement should be construed. For this reason the best practice is to clearly identify in the arbitration clause or agreement itself the precise substantive Arbitration Statute (e.g., the FAA or UAA) that will govern the interpretation of the arbitration clause. The main reason that most knowledgeable practitioners designate the FAA as the substantive law governing the arbitration of any disputes between the parties is that when the FAA is designated in conjunction with arbitration rules that include an Arbitrator Jurisdiction Rule like the ones mentioned above, it confers upon the arbitrator (who is often more familiar with such matters than a judge) the power to determine which matters are arbitrable to the exclusion of the state and federal courts. C. The FAA applies to any Contract Evidencing a Transaction Involving Commerce. The following discussion of the FAA by ASU Law Professor Bruce Meyerson (an experienced commercial arbitrator, past president of the American Bar Association s Alternative Dispute Resolution Section and former Arizona court of appeals judge) sheds some useful light on the applicability of the FAA. Although Prof. Meyerson s discussion was the contract, together with the appropriate filing fee... ); R-12 ( Direct Appointment by a Party. (a) If the agreement of the parties names an arbitrator or specifies a method of appointing an arbitrator, that designation or method shall be followed. ); R-15 ( Number of Arbitrators. If the arbitration agreement does not specify the number of arbitrators, the dispute shall be heard and determined by one arbitrator,... ); R-36 ( Reopening of Hearing. The hearing may be reopened on the arbitrator's initiative, or upon application of a party, at any time before the award is made. If reopening the hearing would prevent the making of the award within the specific time agreed on by the parties in the contract(s) out of which the controversy has arisen, the matter may not be reopened unless the parties agree on an extension of time. When no specific date is fixed in the contract, the arbitrator may reopen the hearing and shall have 30 days from the closing of the reopened hearing within which to make an award. ); R-40 ( Majority Decision. When the panel consists of more than one arbitrator, unless required by law or by the arbitration agreement, a majority of the arbitrators must make all decisions. ); R-43 ( Scope of Award. (a) The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract; (d) The award of the arbitrator(s) may include:...; (ii) an award of attorneys' fees if all parties have requested such an award or it is authorized by law or their arbitration agreement.) (Emphasis added.) Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

22 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 13 of 26 written in the context of a critique of the Arizona Supreme Court s decision in North Valley Emergency Specialists, 208 Ariz. 301, 93 P.3d 501 (2004), an employment arbitration case, his observations still apply in any other context. The FAA applies to any contract evidencing a transaction involving commerce which under interpretations of the United States Supreme Court, makes the FAA applicable to virtually every employment relationship. So, what is a transaction involving commerce? It is to that question we now turn. A Transaction Involving Commerce Because the FAA preempts state laws that target the enforceability of arbitration agreements, the Arizona Supreme Court decision in North Valley Emergency Specialists, 208 Ariz. 301, 93 P.3d 501 (2004) will impact employment agreements only to the extent the ruling is not preempted by the FAA. As the FAA applies to all contracts evidencing a transaction involving commerce, to ascertain the impact of North Valley Emergency Specialists one must determine the scope and breadth of the FAA s preemptive power. The United States Supreme Court has considered this question in two recent cases. In the first case, Allied Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265 (1995), the Court considered whether commerce should be viewed broadly, extending the FAA to the limits of Congress s Commerce Clause power, or narrowly limiting the coverage of the FAA to cases where interstate commerce is contemplated by the parties. In finding the expansive interpretation correct, the Court first observed that the words involving commerce are broader than the more commonly used words in commerce, therefore concluding that the words cover more than simply persons or activities within the flow of interstate commerce. Thus, the Court held that the term involving commerce as used in the FAA signals an intent to exercise Congress s commerce power to the full. Id. at 277. The Court also examined whether the words evidencing a transaction involving commerce meant that the transaction must turn out to have involved interstate commerce. Even if the parties did not contemplate involvement with interstate commerce, the FAA will apply so long as the parties agreement does, in fact, involve interstate commerce. The Court was not called upon to address the obvious next question must the contract at issue itself involve commerce, or is it the type of contract in general that involves commerce. The Supreme Court answered that question last year [i.e., in 2003]. In Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003), the Court was asked to decide whether the parties debt restructuring agreement was a contact evidencing a transaction involving commerce within the meaning of the FAA. In that case, an Alabama lending Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

23 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 14 of 26 institution sought to compel arbitration in a dispute with an Alabama corporation. The Supreme Court held that the agreement between only Alabama businesses nevertheless involved commerce. Noting that Alafabco did business outside of Alabama, and that its security for the debt included inventory outside Alabama, the Court went on to explain its dispositive reason. The Court said that the proper focus of the inquiry is not upon the individual transaction, but upon consideration of the general practice those transactions represent. Id. at 58. The Court further stated that the broad impact of commercial lending on the national economy was certainly subject to Congress s power to regulate that activity pursuant to the Commerce Clause. Thus, the proper focus to determine whether the FAA applies to a particular agreement is to look beyond the individual agreement to ask whether in the aggregate such agreements would fall within the purview of the Commerce Clause. One federal district court put it this way: [I]f the aggregation of the impact of performing a certain discrete activity has a substantial affect on interstate commerce, then an individual s performance of the activity may be regulated by Congress, even if the individual s acts are local in nature. University of Alabama Foundation v. Walley, 2001 WL (M.D. Ala. 2001). And in a case not involving the FAA but one examining the scope of Congress s Commerce Clause power, the United State Supreme Court has made clear that [e]ven activity that is purely intrastate in character may be regulated by Congress, where the activity, combined with like conduct by others similarly situated, affects commerce among the States. Fry v. United States, 421 U.S. 542, 547 (1975). 18 Hence, it is practically difficult to determine a fact pattern where the FAA would not apply since almost any contract appears to effect a transaction involving commerce and when [e]ven activity that is purely intrastate in character may be regulated by Congress, where the activity, combined with like conduct by others similarly situated, affects commerce among the States. So, who decides when a case is governed by the FAA? Although the author is unaware of any reported Arizona cases dealing with this specific issue, given that the Arbitrator Jurisdiction Rules of virtually all of the arbitration organizations effectively provide that 18 See Bruce Meyerson, ARIZONA SUPREME COURT HOLDS STATE ARBITRATION ACT EXCLUDES EMPLOYMENT DISPUTES: DOES IT MATTER? 2007 Private Arbitration CLE Materials published by the State Bar of Arizona Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

24 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 15 of 26 [t]he arbitrator shall have the power to determine the existence, scope and validity of the arbitration agreement, and since an arbitrator can not make such a determination without deciding whether the FAA applies to the case before the arbitrator, it would seem that the arbitrator must ultimately decide when a case is governed by the FAA. V. Another Exception to the Rule if Parties Plead and Present Evidence of Non Arbitrable Claims in Arbitration. Completely aside from the First Options/FAA Exception to the statutory rule that courts determine arbitral jurisdiction, another, independent exception occurs when a party pleads a claim in arbitration and/or presents evidence on a claim at an arbitration hearing, which claim is NOT, in fact, subject to arbitration under the parties arbitration agreement. When parties do so (often inadvertently!) they yield or acquiesce such claims to the jurisdiction of the arbitrator and are thereafter estopped to assert that the arbitrator had no jurisdiction to determine those claims. Two Arizona cases are particularly helpful in understanding this principle. In Migneault v. United Services Auto. Ass'n, 21 Ariz.App. 397, 519 P.2d 1162 (Ariz.App. Div. 2, 1974) the court noted The sole question presented in this appeal is whether a party's introduction of evidence upon an issue in an arbitration hearing will result in a waiver of the right to later question the arbitrability of that issue in a court of law. In deciding the issue affirmatively, the Migneault court held that by participating in the arbitration of an insurance coverage issue without objection the motorist waived the right to later question the arbitrability of the insurance coverage issue in a court of law. In so doing, the court offered this compelling rationale. Thus, confirmation of an arbitration award is allowed as to a controversy despite the fact that there has been no agreement to arbitrate said controversy if the party opposing confirmation has participated in arbitration of the controversy without objection. In Verdex Steel and Const. Co. v. Board of Supervisors, 19 Ariz.App. 547, 550, 509 P.2d 240, 243 (1973), Division One of this court construed the above quoted statutory language as follows:... (O)ne who is not bound by contract to arbitrate and who voluntarily participates in an arbitration proceeding, without making a clear record of nonparticipation in the binding effects of the arbitration, is bound by the award to the same extent and under the same conditions as a party to a written agreement to arbitrate. Since it is undisputed that the insured participated in arbitration of the coverage issue without objection (i.e., he introduced evidence bearing upon the issue), the trial court was Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

25 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 16 of 26 within its statutory power in confirming the arbitrator's decision as to coverage even though there was no written agreement to arbitrate the coverage issue. The legislative recognition that a party to arbitration proceedings waives any objection to the arbitrator's jurisdiction over an issue when he participates without objection in the arbitration of that issue is well reasoned. It would be a tremendous waste of resources for a party to participate in arbitration of a controversy and, after it is resolved against him, to allow him to challenge in a judicial proceeding the arbitrator's power to decide the matter. Fairness demands that parties be bound by the arbitrator's decision on all issues which they willingly and without objection arbitrate although the issues transcend the formal arbitration agreement. Although we base our decision upon the provisions of the Uniform Arbitration Act adopted by this jurisdiction, general case law on the subject is also instructive. The annotation at 33 A.L.R.3d 1242 (1970) sets forth most of the cases dealing with waiver of arbitrability. The author summarizes them as follows (33 A.L.R.3d at 1244): As a general rule, participation in an arbitration hearing on the merits of a dispute will result in waiver of the right to raise the issue of arbitrability after the arbitrators have made their decision. (Footnote omitted) Another succinct statement of the principal is found in the following statement from [citations omitted]: Where parties to an arbitration proceeding voluntarily submit and litigate therein on the merits matters not embraced within the expressed description of arbitrable disputes or matters as set forth in the written arbitration agreement, the submission and litigation amount to a waiver of the limitations of the arbitration agreement and give the arbitrator jurisdiction to determine the particular matter; and the parties will be bound by the award of the arbitrator thereon. (Citations omitted) 19 The Verdex Steel case cited in Migneault is particularly revealing. In Verdex Steel an architect appeared as a witness at an arbitration hearing to give testimony in a construction dispute. The architect witness was neither a party to the arbitration nor a signatory to the parties arbitration agreement. In upholding an arbitration award for damages rendered against the architect witness, the court noted: Ariz.App , 519 P.2d Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

26 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 17 of 26 There was no writing by which (the architect) expressly consented to arbitrate. His attorney was interested in the use of the arbitration proceedings as a discovery device in relation to the pending civil suits filed by the three (Plaintiff s) employees. The arbitration proceeding consumed two days. (The architect s) participation was extensive. At no time in the arbitration proceedings did he disavow that he was an active participant willing to be bound by the arbitrators' award. The court then went on to hold: There is clearly, at a minimum, a debatable issue as to whether (the architect) participated in the arbitration proceedings to the extent that he is bound by the award of the arbitrators. Under A.R.S , subsec. A, par. 5, one who is not bound by contract to arbitrate and who voluntarily participates in an arbitration proceeding, without making a clear record of non participation in the binding effects of the arbitration, is bound by the award to the same extent and under the same conditions as a party to a written agreement to arbitrate. 20 Incidentally, because of the court s holding in Verdex Steel, it is a good practice to prepare your non party witness clients for an arbitration hearing by sending them to the hearing with a letter in hand in substantially the following form (to be presented to the arbitration administrator and/or to the arbitrator(s)): I am appearing at this arbitration hearing as a percipient witness only. I do not expect or intend by my appearance at this arbitration hearing as a percipient witness (pursuant to any Subpoena or Subpoena Duces Tecum served on me) to confer, yield or acquiesce to the jurisdiction of this arbitration tribunal over my company or me in any matter. I am not a party to the arbitration agreement that is the subject of this dispute, and I oppose and contest any assertion of jurisdiction by the arbitrator(s) over me for the purpose of making or rendering any award against my company or me. See, e.g., Verdex Steel & Const. Co. v. Board of Sup'rs, Maricopa County, 19 Ariz. App. 547, 509 P.2d 240 (Ariz. App. Div. 1, 1973). In any case, persons should beware that their careless conduct at an arbitration hearing could confer, yield or acquiesce to the arbitrator jurisdiction to enter an arbitration award against them even where the express terms of an arbitration agreement did not otherwise permit it or where they were not even parties to the arbitration agreement or proceeding at all Ariz.App. 550, 509 P.2d Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

27 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 18 of 26 VI. The Exception to the First Options/FAA Exception When Parties Ask a Court to Determine the Arbitrability of a Claim that the Parties Arbitration Agreement Requires the Arbitrator to Decide. While the author is unaware of any reported Arizona court case on point, the inescapable converse to the compelling rationales of the Migneault and Verdex Steel decisions discussed above would logically seem to apply where parties (possibly inadvertently!) ask the court to decide what matters are subject to arbitration when, in fact, the parties arbitration agreement already confers such powers on the arbitrator and not the court. If the parties do so then it would logically seem that they have conferred, yielded or acquiesced to the jurisdiction of the court on such matters and are thereafter estopped to assert that the court had no jurisdiction to determine them. This has practical implications that most lawyers overlook. If the parties arbitration agreement incorporates an arbitration organization s rules that include an Arbitrator Jurisdiction Rule then A PARTY DEMANDING ARBITRATION SHOULD NOT FILE A MOTION TO COMPEL ARBITRATION if the opposing party (the disputing party ) refuses to arbitrate. Filing a motion to compel (as most lawyers mindlessly and reflexively do when the other side refuses to arbitrate after a demand for the same) will merely confer, yield or acquiesce to the jurisdiction of the court what the parties have already contractually conferred upon the arbitrator namely, the right to decide what issues are subject to arbitration! Rather, the better practice for a party wanting to arbitrate a claim when the disputing party refuses to do so is to just file the party s arbitration demand and proceed to prosecute the arbitration on the claims asserted without regard to what the disputing party does or doesn t do. Virtually all of the arbitration organizations rules permit an arbitration to proceed in the absence of the disputing party s participation (although default arbitration awards are not allowed an arbitration hearing will still be required to demonstrate adequate service of the arbitration demand on the opposing side and to present evidence sufficient to establish the claims asserted in the arbitration demand). A lawyer should only file a motion to compel arbitration when there is a written arbitration agreement that fails to incorporate an arbitration organization s rules or is otherwise so poorly drafted that it provides no effectual procedures for starting or prosecuting the arbitration (a very rare circumstance under modern arbitration practice). Filing your client s arbitration demand and proceeding to prosecute the arbitration in the absence of the party opposing arbitration (the disputing party ) will put the burden on the disputing party to incur the burden of proof, time, trouble and expense to go into court to try to stop the arbitration. And, if the disputing party tries to, you can usually Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

28 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 19 of 26 demonstrate to the court the under the First Options/FAA Exception that the court can not even entertain, let alone rule upon, the opposing side s motion to stay the arbitration proceedings because the authority to even rule on such jurisdictional matters is exclusively reserved to the arbitrator. This strategy is acknowledged in the seminal Brake Masters case, which also provides a useful discussion of this issue. The Brake Masters court first observed that there is no requirement that the non disputing party must bring a motion compel arbitration under A.R.S (A) before proceeding to arbitration. In so doing, the court noted that if a disputing party contests the existence, validity or enforceability of an arbitration agreement then: (1) the non disputing party may (but is not required to) move the court to compel arbitration under A.R.S (A) [in which case, under Ruesga v. Kindred Nursing Centers, L.L.C., 215 Ariz. 589, 161 P.3d 1253 (Ariz. App. Div. 2, 2007), the burden of requesting an evidentiary hearing falls on the disputing party on pain of waiving its right to such a hearing]; or (2) the non disputing party can simply proceed to arbitration without moving to compel arbitration under A.R.S (A) [in which case the disputing party can object to the arbitration proceeding (by either participating in it or not participating in it) based on the grounds that no valid or enforceable arbitration agreement exists, wait until an arbitration award is rendered, and then oppose its confirmation on similar grounds (a risky strategy indeed!)]; or (3) the disputing party can move the court under A.R.S (B) to stay the arbitration proceeding. It is usually better for a party demanding arbitration against a disputing party to simply avoid the courthouse altogether and put the burden of trying to stop the arbitration in court on the disputing party. What if (as in the Hypothetical) the disputing party by passes arbitration altogether and just files a lawsuit (thereby breaching the parties arbitration agreement)? Should the party desiring arbitration then move to compel arbitration and stay the lawsuit under A.R.S (B)? The answer is both No and Yes. Asking the court to compel arbitration in such circumstances means that you are conferring or acquiescing to the jurisdiction of the court what the parties have already contractually conferred upon the arbitrator, so don t ask the court to compel arbitration in this circumstance. Rather, just notify the court of the pending arbitration proceeding and ask the court to stay the lawsuit while the arbitrator decides what s arbitrable and what s not (and make sure to add an arbitration claim for the other side s breach of the arbitration agreement by filing a lawsuit instead of making an arbitration demand). This is why the Hypothetical expressly states that Quite intentionally, the ACME shareholders do NOT file a Motion to Compel Arbitration. (Emphasis in original.) If the ACME shareholders had done so then they would have been bound by the trial judge s (mistaken) ruling. If the court receives such a Notice of Pending Private Arbitration and Motion to Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

29 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 20 of 26 Stay Court Proceedings then it ought to abstain from deciding any arbitrability issues and leave the same to the arbitrator, as the parties bargained for in their arbitration agreement. Finally, whether a party seeking to compel arbitration is the moving party in a motion to compel arbitration, or the opposing party in a motion to stay arbitration, the party desiring arbitration should always remember to attach the applicable arbitration organization s arbitration rules to its court briefs, as such rules (including any Arbitrator Jurisdiction Rule contained therein) is a vital part of the parties arbitration agreement and will be important to include in the record on appeal (if any) if the Superior Court Judge improperly presumes to decide the arbitrability matters in a way that frustrates or disrupts the arbitration proceeding. VII. Cases. Arbitrators Decide Timeliness Issues, Including Repudiation, in FAA Governed Interesting jurisdictional issues sometimes arise with respect to timeliness issues, which are particularly relevant in construction contracts where the right to assert certain claims may be barred under the construction contract if not timely asserted. The seminal Arizona case on arbitral jurisdiction in timeliness cases is City of Cottonwood v. James L. Fann Contracting, Inc., 179 Ariz. 185, 189, 877 P.2d 284, 288 (Ariz.App. Div. 1, 1994), wherein the court noted: The issue of timeliness is complicated. An untimely demand could constitute repudiation/waiver of the arbitration clause, failure of a procedural condition, or failure of a condition precedent to activation of the clause. Untimeliness may constitute repudiation of the arbitration agreement if the repudiating party has acted so inconsistently with the arbitration agreement as to waive its right to proceed under the agreement. Repudiation is a voluntary relinquishment of a known right that usually entails prejudice to the other party. Because repudiation calls into question the existence of the arbitration agreement, repudiation is an issue for the court. On the other hand, whether a procedural condition has been met does not call into question the existence of the agreement but, instead, affects how that agreement will be interpreted and, as discussed below, is therefore an issue for the arbitrator Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

30 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 21 of 26 Because of the policy favoring arbitration and this state s adoption of the Uniform Arbitration Act, we hold timeliness to be an issue for the arbitrator. 21 (Emphasis added.) While the court s City of Cottonwood decision is still good law in the rare case governed by Arizona s Arbitration Statute (but not the FAA), the court s statement that [b]ecause repudiation calls into question the existence of the arbitration agreement, repudiation is an issue for the court is no longer accurate in the normal case (such as the very one presented in City of Cottonwood) where the parties arbitration agreement is governed by the FAA and an arbitration organization s rules. Why? Because City of Cottonwood was decided in 1994 the year before First Options was decided, and years before most arbitration organizations adopted the now ubiquitous Arbitrator Jurisdiction Rules. Now that modern arbitration practice is almost uniformly subject to Arbitrator Jurisdiction Rules, even the issue of repudiation ought to be decided by the arbitrator where the parties arbitration agreement is governed by the First Options/FAA exception. VIII. Who Decides if Non Signatories to an Arbitration Agreement Must Arbitrate? A fascinating issue arises when a party to a written arbitration agreement tries to compel a non signatory to it to arbitrate a dispute. Who should decide that issue as between the arbitrator and the court? The normal rule is that only parties to a written arbitration agreement can be compelled to arbitrate a dispute, since private arbitration is a creature of contract. Hence, A.R.S provides: Validity of arbitration agreement. A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract. (Emphasis added.) While it might appear that a written arbitration agreement is required to compel arbitration, it is not. There is a substantial body of growing case law that now serves as a basis to compel persons who have not signed a written agreement to arbitrate to nonetheless arbitrate a dispute based on such legal theories as (i) Alter Ego; (ii) Equitable Estoppel; (iii) Agency; (iv) Third Party Beneficiary; (v) Incorporation by Reference; and (vi) Assumption by Conduct Id. at 179 Ariz , 877 P.2d See, e.g., Jeanes v. Arrow Ins. Co., 16 Ariz.App. 589, 494 P.2d 1334 (Ariz.App. Div. 1, 1972) and Matter of Noel R. Shahan Irrevocable and Inter Vivos Trust, 188 Ariz. 74, 932 P.2d 1345, 236 Ariz. Adv. Rep. 38 (Ariz.App. Div. 2, 1996) both allowing non signatory third party beneficiary of contract to arbitrate disputed claims arising from Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

31 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 22 of 26 In the case of a non signatory to a written arbitration agreement, an arbitrator can and should decide such jurisdictional matters in cases where the proposed joinder is based on Third Party Beneficiary and Incorporation by Reference theories (because both are based on the parties contract, which the arbitrator is charged to interpret), or where the proposed joinder is based on an Assumption by Conduct theory (see, e.g., discussion at V, above). However, in all other cases perhaps no area better warrants an arbitrator s abstention from deciding jurisdictional matters than when non signatories might be compelled to arbitrate disputes for which they did not expressly sign a written arbitration agreement. It is the author s opinion that, absent compelling or obvious facts 23, where the issue is whether a nonsignatory to an arbitration agreement should be joined to an arbitration based on such theories as Alter Ego, Equitable Estoppel or Agency this is a classic case where the courts should exercise jurisdiction to determine such matters, since the they often arise out of equitable claims and legal principles established by the courts (e.g., estoppel, implied at law contracts, etc.). IX. The Impact of an Arbitrator s Jurisdiction to Decide Jurisdiction on Award Contests. All of the Arbitration Statutes provide for the confirmation of arbitration awards, except that the ability to do so under the FAA is conditional, not absolute, as is otherwise the case under the UAA and RUAA. The first sentence of FAA 9 states: Award of arbitrators; confirmation; jurisdiction; procedure. If the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration, and shall specify the court, then at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award,... (Emphasis added.) Perhaps you ve noticed the following phrase in an arbitration clause like the one in the Hypothetical: and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. This phrase is included because of the above FAA it); Weatherguard Roofing Co., Inc. v. D.R. Ward Const. Co., Inc., 214 Ariz. 344, 152 P.3d 1227 (Ariz.App. Div. 1, 2007) compelling arbitration between non signatory subcontractor and general contractor where general contractor s subcontract with subcontractor incorporated by reference the terms of the general contractor s prime construction contract with the owner, which included an arbitration agreement; and Western Agr. Ins. Co. v. Chrysler Corp., 198 Ariz. 64, 6 P.3d 768 Ariz.App. Div. 1, 2000) where indemnitor is party to a written arbitration agreement and agrees to indemnify non signatory indemnitee then the claims against the indemnitee are also subject to arbitration. See, also, Bruce Meyerson, BUT I DIDN T SIGN AN ARBITRATION AGREEMENT! in the 2007 Private Arbitration Update CLE Materials published by the State Bar of Arizona and John W. Townsend, NON SIGNATORIES AND ARBITRATION, in September 1998 edition of ADR Currents (an AAA publication). 23 An example of such compelling and obvious facts might be a determination of alter ego in the findings of fact and conclusions of law of an administrative law judge in ancillary administrative proceedings, or in a criminal court plea, where their collateral estoppel effect might be noted by the arbitrator Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

32 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 23 of 26 provision. It is also yet another reason why its inclusion in an arbitration clause or agreement strongly implies that such a clause or agreement is supposed to be governed by the FAA as such a phrase is utterly superfluous and unnecessary under Arizona s Arbitration Statute, which already provides: Confirmation of an award. A party seeking confirmation of an award shall file and serve an application therefor... Upon the expiration of twenty days from service of the application the court shall enter judgment upon the award... (Emphasis added.) See also AAA Rule R 48 (c), which provides: (c) Parties to an arbitration under these rules shall be deemed to have consented that judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof. (Emphasis added.) This is yet another reason why the standard AAA arbitration clause should be understood by implication to designate the FAA as its controlling substantive arbitration law. If an arbitration award is confirmed then it becomes a judgment in a court of law. There are limited grounds to oppose the confirmation of an arbitration award, but a party may successfully oppose confirmation of an arbitration award, or have the same vacated, under any of the Arbitration Statutes. Under the FAA and the UAA a party may do so (among other reasons) Where the arbitrators exceeded their powers... (See FAA 10(a)(4) and UAA (A)(3).) A party may do so under the RUAA where (among other reasons) an arbitrator exceeded the arbitrator s powers. (See RUAA 23(a)(4).) However, the ability to vacate or oppose confirmation of an arbitration award [w]here the arbitrators exceeded their powers raises an interesting issue: What if the parties expressly agreed in their written arbitration agreement that The arbitrator shall have the power to determine the existence, scope and validity of the arbitration agreement? as is surely the case in any arbitration clause or agreement that incorporates any of the Arbitrator Jurisdiction Rules listed in footnote #12. The inescapable answer, of course, is that if the parties have by their arbitration agreement granted the arbitrator the sole and exclusive power to determine the existence, scope and validity of their arbitration agreement then they have WAIVED their right to vacate or oppose confirmation of the arbitration award by claiming that the arbitrator exceeded the arbitrator s powers! Why? Because having already conferred such jurisdiction on the arbitrator (to the exclusion of the courts) the objecting party can not be later heard to say that the arbitrator did not have the powers that the arbitrator determined he or she had. Remarkably, most practitioners don t even think to raise this argument in opposing a nonprevailing party s motion to vacate or oppose confirmation of their client s arbitration award under any of the applicable Arbitration Statutes. One can only wonder how many judges, unfamiliar with arbitration law, have naively presumed to exercise jurisdiction to vacate (or refuse to confirm) an arbitration award by finding that the arbitrators exceeded the Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

33 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 24 of 26 arbitrator s powers when in fact it was the judge, not the arbitrator, who utterly lacked the jurisdiction to make such a determination. X. Arbitrator Jurisdiction Where the Action is Today. Consolidation and joinder of separate arbitration proceedings are currently the hot, unresolved issues in contemporary arbitration practice in Arizona and elsewhere particularly in multi party construction defect cases. There are no reported Arizona cases discussing arbitral jurisdiction over the consolidation and/or joinder of separate arbitration proceedings between separately contracting parties under the same arbitration clause. Arizona s original Arbitration Act (A.R.S , et seq.) does not currently permit or allow such consolidation. Arizona s Revised Uniform Arbitration Act, when applicable, provides (in relevant part): Consolidation of separate arbitration proceedings A. Except as otherwise provided in subsection C, on motion of a party to an agreement to arbitrate or to an arbitration proceeding, the court may order consolidation of separate arbitration proceedings as to all or some of the claims if all of the following apply: (Emphasis added.) Hence, in Arizona a court may order consolidation. However, it appears that the parties can agree to waive a court determination of consolidation under Arizona s RUAA and allow an arbitrator to determine consolidation, 24 as some Arbitration Organization Rules provide. 25 Likely to influence any court decision on whether an arbitrator may order consolidation or joinder are the recent cases of Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003)[wherein the United States Supreme Court held that in arbitration proceedings governed by the FAA, where an arbitration agreement is silent on the issue of whether classwide relief is available, an arbitrator, not a court, should resolve the class arbitration issue] and Yuen v Superior Court of Los Angeles County, 121 Cal. App. 4th 1133 (2004) [wherein the California Court of Appeal held that the arbitrator should likewise decide whether the parties arbitration agreement permits consolidation of arbitration proceedings]. Again, whether or not the parties arbitration clause or agreement is governed by the First 24 While A.R.S prevents certain pre-dispute waivers of certain Arizona RUAA Sections, A.R.S is not among the sections for which a pre-dispute waiver is prohibited. 25 See, e.g., Rule 7 of the AAA s Construction Industry Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Construction Disputes) Rules Amended and Effective October 1, 2009 Fee Schedule Amended and Effective June 1, 2010, which allows for the appointment of an arbitrator to determine consolidation Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

34 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 25 of 26 Options/FAA Exception is likely to be dispositive of the consolidation jurisdictional decisions to come in Arizona and elsewhere. and joinder XI. Conclusion Some Helpful Guidelines for Who Determines Arbitrability. From the above discussion one can distill the following, general legal principles to answer the question Who Decides Who Decides What s Arbitrable? (REMEMBER: in the principles summarized below, an arbitration agreement includes any arbitration organization s rules, including any Arbitrator Jurisdiction Rule, incorporated therein): 1. If the parties arbitration agreement is expressly governed by the FAA, and it DOES NOT clearly and unmistakably provide that an arbitrator should decide the arbitrator s jurisdiction, then THE COURT DECIDES the arbitrator s jurisdiction. 2. If the parties arbitration agreement is expressly governed by the UAA or RUAA, and it DOES NOT clearly and unmistakably provide that an arbitrator should decide the arbitrator s jurisdiction, then THE COURT DECIDES the arbitrator s jurisdiction. 3. If the parties arbitration agreement is expressly governed by the FAA, and it clearly and unmistakably provides that an arbitrator should decide the issue, then THE ARBITRATOR DECIDES the arbitrator s jurisdiction. 4. If the parties arbitration agreement is expressly governed by the UAA or RUAA, and it clearly and unmistakably provides that an arbitrator should decide the issue, then THE ISSUE HAS NOT YET BEEN DECIDED BY THE ARIZONA COURTS AND THE COURT SHOULD DECIDE the arbitrator s jurisdiction (unless the parties want the arbitrator s award to become the test case to see if the Arizona courts will construe Arizona s Arbitration Statute to include a First Options type exception to it). 5. If the parties arbitration agreement is NOT expressly governed by any specific Arbitration Statute, but it clearly and unmistakably provides that the arbitrator should decide the arbitrator s jurisdiction, then THE ARBITRATOR SHOULD DECIDE IF THE CASE IS SUBJECT TO THE FAA and: a. If the parties case is subject to the FAA then THE ARBITRATOR SHOULD DECIDE the arbitrator s jurisdiction; but b. If the parties case is NOT subject to the FAA then THE ARBITRATOR SHOULD NOT DECIDE but should abstain from asserting such jurisdiction and ask the parties to have THE COURT DECIDE the arbitrator s jurisdiction (unless the parties want the Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

35 Mark Lassiter Article ARBITRATOR JURISDICTION: Who Decides Who Decides What s Arbitrable? Page 26 of 26 arbitrator s award to become the test case to see if the Arizona courts will construe Arizona s Arbitration Statute to include a First Options type exception to it). 6. If the parties arbitration agreement is ambiguous on the issue of an arbitrator s jurisdiction to determine jurisdiction, and a party yields or acquiesces to the jurisdiction of an arbitrator (as by expressly making any claims or defenses in the arbitration proceeding or presenting evidence on particular claims or defenses at an arbitration hearing) then unless any other party properly and timely objects to the arbitrator s exercise of jurisdiction over such claims or defenses the parties have waived their right to have a court decide the issue of arbitrability and THE ARBITRATOR SHOULD DECIDE the issues presented; 7. If the parties arbitration agreement is expressly governed by the FAA, and it clearly and unmistakably provides that an arbitrator should decide the issue, but a party yields or acquiesces to the jurisdiction of a state court (as by filing a motion to compel or a motion to stay arbitration proceedings under A.R.S (A) or (B)), then that party has waived its right to have an arbitrator decide the arbitrability issues and THE COURT SHOULD DECIDE the arbitrator s jurisdiction; 8. If there is no written agreement to arbitrate, signed by the party to be charged with the duty to arbitrate, then the ARBITRATOR SHOULD DECIDE arbitral jurisdiction based on Third Party Beneficiary, Incorporation by Reference and Assumption by Conduct theories and, absent other compelling or obvious facts, but the COURT SHOULD DECIDE arbitral jurisdiction based on such theories as Alter Ego, Equitable Estoppel or Agency; and 9. In all other cases, where the matter is uncertain, THE COURT SHOULD DECIDE the arbitrator s jurisdiction, and not the arbitrator. END Mark E. Lassiter, Esq. All rights reserved. Used with permission by the State Bar of Arizona.

36 Case: Document: Page: 1 Date Filed: 08/11/2010 IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit F I L E D August 11, 2010 No Lyle W. Cayce Clerk KENNETH ALLEN; MINNIE ALLEN, v. Plaintiffs - Appellees REGIONS BANK, a successor of First American National Bank, operating as Deposit Guaranty National Bank; UNION SECURITY LIFE INSURANCE CO, a foreign corporation, Defendants - Appellants Appeal from the United States District Court for the Southern District of Mississippi USDC No. 2:09-CV-70 Before DENNIS, OWEN, and SOUTHWICK, Circuit Judges. PER CURIAM: * A bank and insurance company appeal a district court s decision to deny their motions to compel arbitration. They argue the arbitrator and not the district court was to determine the gateway issue of arbitrability. In light of United States Supreme Court authority handed down after the district court s judgment, we REVERSE and REMAND. * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R

37 Case: Document: Page: 2 Date Filed: 08/11/2010 No I. FACTS Kenneth Allen and Minnie Allen obtained a home equity loan from First American National Bank in October The loan was secured by a deed of trust on the Allen s property in Jayess, Mississippi. The bank withheld funds from the loan to purchase credit life and disability insurance. AmSouth Bank became the successor to First American in December In 2004, Mr. Allen contacted AmSouth to make a claim under the disability insurance. AmSouth denied that there was any disability insurance policy. In 2008, Mr. Allen was diagnosed with cancer, and he made a new claim. By then, Regions Bank was AmSouth s successor. Regions and Union Security Life Insurance Company now were the ones to deny there was an insurance policy. In April 2009, the Allens filed suit in the United States District Court for the Southern District of Mississippi. Regions and Union Security were named as defendants. The Allens alleged breach of trust, fraud and misrepresentation, breach of the insurance agreement, and bad faith. Regions s response was to file a motion to compel arbitration. There was no arbitration provision in the agreements executed for the 1999 home equity loan. In 2001, though, the Allens opened what AmSouth called a Demand Deposit Account. At that time, they signed a document binding them to the terms of the AmSouth Customer Agreement. The agreement contained a clause requiring arbitration of any dispute between them. Regions became the legal successor to AmSouth in November A transition for a changeover of accounts proceeded in subsequent months. In October 2007, Regions mailed the Allens an explanation of the effects of the merger. A lengthy Consumer Disclosure Booklet was included, stating that it constituted the new agreement covering deposit accounts. We will refer to the booklet as the Regions Agreement. After a bold-font reference to Binding Arbitration, the booklet said the arbitration provision shall also apply to any account, contract, loan, 2

38 Case: Document: Page: 3 Date Filed: 08/11/2010 No transaction, business, contact, interaction or relationship you may have with the bank. The manner in which customers would be bound by the new terms was set out, and it is not contested that the Allens accepted the terms. This is part of the arbitration provision: ARBITRATION AND WAIVER OF JURY TRIAL. Except as expressly provided below, you and we agree that either party may elect to resolve by BINDING ARBITRATION any controversy, claim, counterclaim, dispute, or disagreement between you and us, whether arising before or after the effective date of this Agreement (any Claim ). This includes, but is not limited to, any controversy, claim, counterclaim, dispute or disagreement arising out of, in connection with or relating to any one or more of the following: (1) the interpretation, execution, administration, amendment or modification of the Agreement; (2) any account; (3) any charge or cost incurred pursuant to the Agreement; (4) the collection of any amounts due under the Agreement or any account; (5) any alleged contract or tort arising out of or relating in any way to the Agreement, any account, any transaction, any advertisement or solicitation, or your business interaction, or relationship with us; (6) any breach of any provision of the Agreement; (7) any statements or representations made to you with respect to the Agreement, any account, any transaction, any advertisement or solicitation, or your business, interaction, or relationship with us; or (8) any of the foregoing arising out of, in connection with or relating to any agreement which relates to the Agreement, any account, any transaction or your business, interaction or relationship with us. The provision also stated that a dispute regarding whether a particular controversy is subject to arbitration, including any claim of unconscionability and any dispute over the scope or validity of this agreement to arbitrate disputes or of this entire Agreement, shall be decided by the arbitrator(s). The motion to compel arbitration was denied by the district court. The court held that the Regions Agreement did not unambiguously modify the loan agreement. There was an enforceable arbitration clause as to deposit accounts, but that clause did not apply to the loan agreement. This appeal followed. 3

39 Case: Document: Page: 4 Date Filed: 08/11/2010 No II. DISCUSSION A. Arbitration of Arbitrability Dispute The parties agree that the Federal Arbitration Act ( FAA ) applies. 9 U.S.C Section 4 of the FAA allows a party to petition for an order compelling arbitration when there has been a failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration. Id. 4. A court shall order arbitration in accordance with the terms of the agreement provided it is satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue.... Id. The district court denied Regions s motion to compel arbitration because the making of the agreement for arbitration was in issue. There is, though, no dispute that an arbitration agreement between the parties exists. Its reach is the question. In this appeal, we are not deciding whether this dispute is covered by the arbitration clause. Instead, we are deciding whether the district court properly held that it should decide that issue. The general rule is that the issue of whether there is an agreement to arbitrate a particular dispute is for a court to decide. AT&T Techs., Inc. v. Commc ns Workers of Am., 475 U.S. 643, 649 (1986). However, the issue of arbitrability is for an arbitrator when the evidence clearly demonstrates that was the parties agreement. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, (1995). The district court, relying on First Options, said that the issue of arbitrability must have been clearly and unmistakably given to the arbitrator. The court then cited caselaw that when the issue is whether an arbitration agreement even exists, the courts must decide. E.g., Will-Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 218 (5th Cir. 2003). In that precedent, the party seeking to avoid arbitration alleged the contract with the arbitration provision never came into effect because all the necessary signatures were never acquired. 4

40 Case: Document: Page: 5 Date Filed: 08/11/2010 No Id. at 212. Contract formation is not involved here, though, as the Allens agree there is a valid contract with the arbitration provision. The district court also employed the analysis of a Mississippi Supreme Court decision addressing an AmSouth agreement with its customers. See AmSouth Bank v. Quimby, 963 So. 2d 1145 (Miss. 2007). The Quimby court held that amendments to the agreements the customers initially entered with the bank did not have sufficiently clear language to apply retroactively. Id. at Only the later agreements had the First Options clause, which required arbitration of issues of arbitrability. Id. at The state court also found that the applicability of the arbitration provision to accounts with the bank did not with sufficient clarity reach the line of credit that Quimby had with the bank and for which he had a credit disability policy. Id. at The Quimby court upheld the trial court s denial of a motion to compel arbitration. Id. at The district court acknowledged that the Regions Agreement used broad language to state that the arbitration provisions applied to all relations with its customers. The court also found, though, that the cover letter which referred to deposit accounts created an implication that the lengthy enclosure only applied to accounts. From that language, ambiguity fatal to Regions resulted. To the extent the validity of the agreement is an issue, we note the Allens do not allege arbitration to be invalid due to unconscionability or other such defect. There are two kinds of validity disputes that arise under of the FAA: One type challenges specifically the validity of the agreement to arbitrate, and [t]he other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract s provisions renders the whole contract invalid. Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2778 (2010) (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006)). 5

41 Case: Document: Page: 6 Date Filed: 08/11/2010 No The importance of these categories is due to Section 2 of the FAA. Section 2 allows arbitration if the written provision that mandates the arbitration is not subject to revocation under the usual grounds in law and equity. Id. (citing 9 U.S.C. 2). If it is another provision of the contract, or the contract as a whole, that is contested, the court may still require arbitration of that dispute because the arbitration provision itself is not challenged. Id. Under the severability rule, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator. Buckeye, 546 U.S. at 449. The first type of challenge, the validity of the arbitration provision being asserted, might raise fraud in the inducement. Id. at (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, (1967)). The Allens do not argue that the arbitration provision is invalid for such reasons, only that it is inapplicable for interpretative reasons arising largely under state law. The second type of validity challenge, which here would be to the loan agreement or another contract between the Allens and Regions of which arbitration is just a part, has not been made. Regardless, a challenge of this second type would not avoid arbitration. See Rent-A-Center, 130 S. Ct. at Rent-A-Center added to these principles by resolving a case in which the entire agreement was one simply for arbitration. The arbitration clause was not contained in an employment or loan or other agreement. The Court held that in such a circumstance, the type of challenge that a court could hear must be to the validity of the specific provision in the arbitration agreement. Id. at In Rent-A-Center, the specific provision being contested was the one that clearly and unmistakably gave to the arbitrator the right to resolve issues of arbitrability. Id. The plaintiff challenged the entire arbitration agreement as unconscionable and not the delegation provision, the latter being the written provision compelling arbitration. Id. Consequently, because the delegation 6

42 Case: Document: Page: 7 Date Filed: 08/11/2010 No provision was not challenged as unconscionable, the possible invalidity of the entire contract was for the arbitrator to decide. Id. at Turning to our case, the Allens have always argued that the manner in which the different agreements were written did not lead clearly to the application of the arbitration provision to the consumer loan dispute. That is not a challenge to the validity of the agreement but to its applicability. The district court decided that the arbitration agreement that arose from the transactions involving the Allens and their succession of banks did not validly reach the dispute over disability insurance that was to be acquired at the time of a 1999 home equity loan. It was found to be of limited reach in light of Quimby. It is certainly common use of language to say that arbitration does not validly apply to the dispute, but the agreement itself, as far as it reached, was never found to be invalid nor was it even challenged as being invalid. When we asked for submissions from each party after Rent-A-Center was released, the Allens alleged that they never concluded an arbitration agreement with Regions Bank. This appears to be an attempt to claim this dispute fits within the category that the Supreme Court has said is for the courts, that the agreement was not concluded because the contract was never signed, or the signatory did not have authority to bind or had insufficient mental capacity. Rent-A-Center, 130 S. Ct. at 2778 n.2 (citing Buckeye, 546 U.S. at 444 n.1). An examination of the arguments in the district court and in the appellate briefing reveal that there has never been an issue made of whether the contract was concluded. There also has not been an argument that the arbitration agreement itself or the delegation language was invalid, that it was unconscionable, or otherwise unenforceable. It is too late to raise such issues now. Id. at 2781 (plaintiff s new argument of unconscionability was too late and was not considered). 7

43 Case: Document: Page: 8 Date Filed: 08/11/2010 No All of this analysis about the nature of the claim of invalidity should not cause us to lose sight of an important caveat. The parties must have clearly intended for issues of arbitrability to be arbitrated. Id. at 2778 n.1. Otherwise, the scope of the arbitration agreement is for the court to decide just as the district court did here. First Options, 514 U.S. at As quoted already, the Regions Agreement was clear: Any dispute regarding whether a particular controversy is subject to arbitration... shall be decided by the arbitrator(s). The Allens accepted this agreement by continuing to use their deposit accounts with Regions and by signing signature cards. This was sufficient clarity to demand arbitration of arbitrability. Any ambiguities regarding the scope of an arbitration clause are resolved in favor of coverage. Volt Info. Sciences, Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, (1989). The arbitration agreement unmistakably commands that disputes as to its applicability are for the arbitrator. We conclude that the motion to compel arbitration should have been granted. The question the district court answered is for the arbitrator. B. Arbitration of Dispute Involving Union Security, a Non-signatory A separate issue is raised of whether the insurance company that allegedly improperly refused to pay the claim may also compel arbitration. That company, Union Security, was a non-signatory to the Regions Agreement. The district court did not need to address the separate issues involving Union Security. Once the district court held that Regions could not compel arbitration, it followed that Union Security could not either. Arguments that were presented but not resolved in district court should be considered first by that court. KSLA-TV, Inc. v. Radio Corp. of Am., 693 F.2d 544, 546 (5th Cir. 1982). We return this question to the district court. 8

44 Case: Document: Page: 9 Date Filed: 08/11/2010 No C. Stay of Proceedings Union Security argues that this proceeding should be stayed regardless of whether the Allens are compelled to arbitrate their claims against them. The Allens do not address the assertion. Section 3 of the FAA provides for a stay of litigation when the issues are referable to arbitration under an agreement in writing U.S.C. 3. The court shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement. Id. A set of considerations exist for making the decision. See Waste Mgmt., Inc. v. Residuos Industriales Multiquim, S.A. de C.V., 372 F.3d 339, 343 (5th Cir. 2004). We leave it to the district court to decide the question of a stay. We REVERSE and REMAND for proceedings consistent with this opinion. 9

45 Filed 8/31/09 CERTIFIED FOR PUBLICATION IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION SIX ROGER BURLAGE et al., v. Petitioners, THE SUPERIOR COURT OF VENTURA COUNTY, 2d Civil No.B (Super. Ct. No. SC045480) (Ventura County) OPINION AND ORDER DENYING PETITION FOR WRIT OF MANDATE Respondent; MARTHA MARTINEZ SPENCER, Real Party in Interest. It is not often that a trial court vacates an arbitration award and an appellate court affirms the order. We shall explain why that happened here, but first: Uncertainty and a Little History We look to legal precedent in deciding cases. We believe the law is predictable and provides litigants and counsel a reasonable degree of certainty. True, but not always. In 1991, we wrote what we thought was a routine arbitration opinion. (Moncharsh v. Heily & Blase (Apr. 2, 1991, B048936) [nonpub. opn.].) We relied on decades of precedent in our unpublished decision to affirm the arbitration award because no error appeared on the face of the award. In dicta, we noted that had the error appeared on the face of the award and created substantial prejudice, we would have reversed.

46 To our surprise, our Supreme Court granted review. Our holding was affirmed, but our dicta "reversed." (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1.) Oh well, nobody's perfect. Moncharsh held that judicial review of an arbitrator's decision regarding questions of fact or law is extremely limited. Thus, even though an error of law appears on the face of an arbitration award and causes substantial injustice, it is not subject to judicial review in the absence of a limiting clause or as provided by statute. (Id. at p. 25.) For the next decade, courts have wrestled with the question of when and under what circumstances judicial review of an arbitration award is proper. Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334 (Cable Connection) gives us some answers, but unfortunately not the answer to the question here. Our conclusion that arbitrators have a great deal of power, but not absolute power, provides the key to our answer. Petitioners Roger and Cheryl Burlage, trustees of the Burlage Family Trust, purchased a house from real party Martha Martinez Spencer. The parties arbitrated a dispute over the sale of the house. The arbitrator awarded the Burlages approximately $1.5 million in damages and costs. On motion from Spencer, the trial court vacated the award. The Burlages filed a petition for writ of mandate, challenging the trial court's order. We conclude the arbitrator excluded material evidence that substantially prejudiced Spencer pursuant to Code of Civil Procedure section We deny the petition and affirm the trial court's order vacating the arbitration award. Facts and Procedural History The Burlages purchased a house from Spencer in a gated community next to a country club. After escrow closed, they learned, among other things, that the swimming pool and a wrought iron fence on the property encroached upon land owned by the country club. The Burlages claim Spencer knew of these encroachments at the 1 All statutory references are to the Code of Civil Procedure. 2

47 time of sale, but "intentionally and fraudulently failed to disclose" this information to them. The parties chose a retired judge associated with Judicial Arbitration and Mediation Services, Inc. (JAMS) to arbitrate their dispute and they agreed to be bound by the JAMS arbitration rules. Two years after the purchase, but before the arbitration was held, the title company paid the country club $10,950 in exchange for a lot-line adjustment that gave the Burlages title to the encroaching land. Nevertheless, the Burlages sought damages for the diminution in value of their property and for the cost of moving the pool and fence that were on the encroaching land they now owned. The Burlages moved in limine to exclude evidence of the lot-line adjustment. They argued that damages must be measured from the date escrow closed. Under this theory, Spencer could not introduce evidence of the lot-line adjustment to show the Burlages were not damaged. Spencer argued that later circumstances can and should be considered in measuring damages. The arbitrator granted the motion and excluded evidence concerning the financial effect the lot-line adjustment had on the Burlages' damages. After 12 days of testimony, the arbitrator found: Spencer knew the pool and fence encroached on the country club's land; she did not disclose this to the Burlages; and the encroachment materially affected the property's value. He awarded the Burlages $552,750 in compensatory damages, $250,000 in punitive damages, and $732,570 in attorney's fees and costs. The Burlages moved to confirm the award. Thereafter, Spencer moved to vacate the award. Her motion rested upon section , subdivision (a)(5), which requires vacation of an arbitration award when a party's rights are "substantially prejudiced" by the arbitrator's refusal to hear "evidence material to the controversy." The trial court ruled that the arbitrator's refusal to admit evidence of the lot-line adjustment substantially prejudiced Spencer's "ability to dispute the amount of damage suffered by" the Burlages. It vacated the arbitration award. 3

48 We issued an alternative writ of mandate. Better to have issued an order to show cause. But after further review of the record and consideration of the arguments in the briefs and at oral argument, two of us now conclude the trial court did not err in vacating the award. Discussion The Burlages contend that a private arbitration award may not be reviewed for errors in law. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 33.) They argue the trial court therefore exceeded its authority when it vacated the award for what it believed to be the arbitrator's error in awarding damages. Judicial review of a contract arbitration award is extremely limited. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at pp ; see Cable Connection, supra, 44 Cal.4th at pp ) The court may not review the merits of the underlying controversy or the arbitrator's reasoning, even when an error of law is apparent on the face of the award and causes substantial injustice. (Cable Connection, at p. 1334; Moncharsh, at pp. 11, 28.) We review the trial court's order de novo but apply the substantial evidence standard to the extent the trial court's ruling rests upon a determination of disputed factual issues. (Malek v. Blue Cross of California (2004) 121 Cal.App.4th 44, 55-56; Reed v. Mutual Service Corp. (2003) 106 Cal.App.4th 1359, ) A contractual arbitration agreement gives the arbitrator the power to decide all questions of contract interpretation, historical fact or general law necessary, in the arbitrator's view, to reach a decision. (Cable Connection, supra, 44 Cal.4th at p. 1360; Moncharsh, supra, 3 Cal.4th at p. 28.) "Inherent in that power is the possibility the arbitrator may err in deciding some aspect of the case. Arbitrators do not ordinarily exceed their contractually created powers simply by reaching an erroneous conclusion on a contested issue of law or fact," and awards may not be vacated due to such error because "'"[t]he arbitrator's resolution of these issues is what the parties bargained for...."'" (Gueyffierv. Ann Summers, Ltd. (2008) 43 Cal.4th 1179, 1184; see Cable Connection, at pp ) "When parties opt for the forum of arbitration they agree 4

49 to be bound by the decision of that forum knowing that arbitrators, like judges, are fallible." (That Way Production Co. v. Directors Guild of America, Inc. (1979) 96 Cal.App.3d 960, 965.) But tolerance for fallibility has its limits. Section , subdivision (a)(5) provides that a court "shall" vacate an award when a party's rights "were substantially prejudiced... by the refusal of the arbitrator[] to hear evidence material to the controversy...." This section has been interpreted as "a safety valve in private arbitration that permits a court to intercede when an arbitrator has prevented a party from fairly presenting its case." (Hall v. Superior Court (1993) 18 Cal.App.4th 427, 439.) This is what happened here. The arbitrator excluded evidence that the title company paid the cost of the lot-line adjustment and purchase of the encroachment. The arbitrator did not state his reasons for the evidentiary ruling, but likely it stemmed from his earlier ruling that damages are fixed at the date escrow closed. The question whether the arbitrator was right or wrong about the proper date from which to measure damages arguably is not subject to judicial review. But it is self-evident that his ruling disallowing evidence that the title company solved the problem through a modest payment to the country club was more than a mere erroneous evidentiary ruling. The ruling substantially prejudiced Spencer and undermined the fundamental principle embodied in section , subdivision (a)(5) that an arbitrator must consider material evidence. Evidence of an Absolute Defense - The Problem is Fixed What could be more material than evidence that the problem was "fixed" and there are no damages? Yet, the Burlages presented expert testimony about the effect of what had become a nonexistent encroachment. Their experts testified about the cost to move a pool and fence, neither of which had to be moved. Spencer was not even permitted to refute the Burlages' expert who opined that the encroachment reduced the value of the property $100,000. Spencer could not show that the title company solved the encroachment issue through a payment of approximately one-tenth that amount. 5

50 Without this crucial evidence, the arbitration assumed the nature of a default hearing in which the Burlages were awarded $1.5 million in compensatory and punitive damages they may not have suffered. An arbitrator must consider this evidence to make an informed decision. We agree with the trial court's acknowledgment that not every evidentiary ruling by an arbitrator "can or should be reviewed by a court." We also agree with its comment, "[T]hat's not the same as saying no evidentiary ruling can or should be reviewed by a court.... [I]t would have the effect of... deleting subsection 5 from the statute [section , subdivision (a)(5)]." This answers the dissent's concern that our opinion makes suspect every arbitration ruling disallowing evidence. In our view, should the award be affirmed, arbitration itself would be suspect. Even the JAMS Comprehensive Arbitration Rules and Procedures (2005) rule 22(d) states that the arbitrator may exclude immaterial or unduly repetitive evidence, but must afford all parties "the opportunity to present material and relevant evidence." (See also Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2008) 5:391.1, p ) The parties to an arbitration have bargained for a final and binding decision. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 10.) But without the opportunity to present material evidence, Spencer did not receive the benefit of that bargain. We deny the petition for writ of mandate. We affirm the trial court's order vacating the arbitration award. Spencer shall recover costs. CERTIFIED FOR PUBLICATION. I concur: GILBERT, P.J. YEGAN, J. 6

51 PERREN, J. - DISSENTING I respectfully dissent. As my colleagues aptly note, judicial review of a contract arbitration award is extremely limited and is not to be vacated based on the arbitrator's error of law in making it. "Further, the existence of an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review." (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 33; see Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, ) Here, irrespective of what course this case may take and irrespective of whom shall prevail, a substantial injustice as well as an economic hardship is certain to ensue. This regrettable situation is a direct result of the arbitrator's ruling that Spencer would not be permitted to offer evidence of the post sale lot line adjustment because "the prevailing law does not support the Respondent's [Spencer's] Motion." The consequence of this ruling was the exclusion of evidence of mitigation of damages as irrelevant. Both the trial judge and my colleagues have characterized this as directly affecting Spencer's ability to dispute the amount of damage suffered by the Burlages resulting in "the refusal of the arbitrator[] to hear evidence material to the controversy." (Code Civ. Proc., , subd. (a)(5).) 2 The arbitrator's ruling unquestionably precluded the admission of evidence of mitigation of damage. The exclusion, however, was the product of the arbitrator's determination that the law does not permit consideration of evidence of mitigation in a land fraud case following the close of escrow. Right or wrong, it was a legal ruling which, under both Moncharsh and Cable Connection, precludes judicial review. This is not a surprise. Virtually every ruling on a "legal issue" at trial results in limiting the admissibility of evidence. For example, the determination that a contract is an integrated agreement bars consideration of the terms of "any prior agreement." ( 1856, subd. (a) [parol evidence].) If the arbitrator wrongly concludes that the agreement is integrated, 2 All further statutory references are to the Code of Civil Procedure unless otherwise stated. 1

52 admissible evidence is excluded. The determination that a statement to a physician, an attorney, a spouse or clergy, was made in confidence is privileged and bars admission of the statement. (Evid. Code, 900 et seq.) An erroneous finding on the question of privilege would exclude admissible evidence. The determination that a mother was not present at the scene of an injury to her child precludes recovery of damages for the negligent infliction of emotional distress. An erroneous application of the law under Dillon v. Legg (1968) 68 Cal.2d 728, bars recovery. Virtually every ruling sustaining a hearsay objection precludes evidence of what was said by the declarant. Erroneously concluding that a statement, no matter how crucial, is hearsay, results in evidence exclusion. The evidence does not come in. In each example the proponent's case is adversely affected. Section does not, in my opinion, afford relief. The majority tells us that "whether the arbitrator was right or wrong about the proper date from which to measure damages arguably is not subject to judicial review." The majority is correct. In an effort to evade this consequence, however, the majority recasts the evidentiary ruling as more than merely erroneous. Rather, citing section , subdivision (a)(5), the majority declares that the ruling excluding evidence of the "modest payment to the country club" "substantially prejudiced Spencer and undermined the fundamental principle... that an arbitrator must consider material evidence." Thus, the award is subject to judicial review. This conclusion is in direct conflict with Hall v. Superior Court (1993) 18 Cal.App.4th 427, 439. In Hall, the trial court vacated an arbitration award under former subdivision (e) of section [now subd. (a)(5)], finding among other things that the party seeking vacation (Trompas) had been substantially prejudiced by the arbitrator's refusal to reopen the case to allow the presentation of additional evidence. The arbitrator denied the motion on the ground that the party's defense, even with the proffered evidence, lacked merit. The Court of Appeal reversed, reasoning as follows: "To vacate an award, section , subdivision (e), requires that the trial court find that a party has been 'substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or 2

53 by other conduct of the arbitrators contrary to the provisions of this title.'" (Italics added.) Where, as here, a party complains of excluded material evidence, the reviewing court should generally focus first on prejudice, not materiality. To find substantial prejudice the court must accept, for purposes of analysis, the arbitrator's legal theory and conclude that the arbitrator might well have made a different award had the evidence been allowed." (Id. at p. 439, italics added.) The court continued: "Applied in this manner, subdivision (e) of section does not cover the arbitrator's actions here. Trompas failed to show substantial prejudice. The arbitrator received an informal offer of proof, determined that even if presented the evidence would not persuade him against the Halls, and denied Trompas the opportunity to replace his offer of proof with actual testimony. The arbitrator did not prevent Trompas from fairly presenting his defense. Instead, the arbitrator concluded that Trompas's defense, even with the proffered evidence, lacked merit. The superior court erred in applying section , subdivision (e), to vacate the arbitrator's award." (Id. at p. 439.) The same result should follow here. Having heard repeated motions in limine specifying the evidence to be offered and showing the economic damage resulting from the sale both at the close of escrow and following the lot line adjustment, the arbitrator ruled the evidence was irrelevant. Based on this premise the arbitrator was arguably correct. But, correct or not, the arbitrator had ruled both at the time the motions in limine were made and in his "Amended Final Award," that damages would be computed at the time of the close of escrow. This was his legal conclusion. As such it is not subject to judicial review. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 33.) Whether the arbitrator was right or wrong, affirming the order of the trial court cuts the heart out of Moncharsh. I suggest that great mischief can and will result from the majority's holding. In effect, every ruling resulting in witness preclusion attributable to a legal or evidentiary ruling will be rendered suspect and subject to challenge. The "'strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution'" achieved "'... without necessity for any 3

54 contact with the courts,'" will be rendered illusory and chimerical. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 9.) I would grant the writ of mandate and direct confirmation of the award. CERTIFIED FOR PUBLICATION. PERREN, J. 4

55 William Q. Liebmann, Judge Superior Court County of Ventura Hoefflin & Associates, ALC, Richard M. Hoefflin, Jason M. Burrows; Lascher & Lascher, Wendy Cole Lascher for Petitioners. No appearance for Respondent. Horvitz & Levy, Lisa Perrochet, John A. Taylor, Jr.; Lang, Hanigan & Carvalho, LLP, John D. Lang; Smith Law Firm, Craig R. Smith for Real Party in Interest. Greines, Martin, Stein & Richland, LLP, Robert A. Olson for Association of Southern California Defense Counsel as Amicus Curiae on behalf of Real Party in Interest.

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