First Options of Chicago, Inc. v. Kaplan
514 U.S. 938 (1995)
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Rule of Law:
A court must independently decide the question of whether parties agreed to arbitrate a dispute, unless there is clear and unmistakable evidence that the parties agreed to submit the question of arbitrability itself to an arbitrator. Courts of appeals should review a district court's decision on an arbitration award using ordinary standards of review, not a special, deferential standard.
Facts:
- First Options of Chicago, Inc. (First Options) was a firm that cleared stock trades for MK Investments, Inc. (MKI), a company wholly owned by Manuel Kaplan.
- Following the 1987 stock market crash, MKI and the Kaplans (Manuel and his wife, Carol) incurred significant debts to First Options.
- The parties entered into a 'workout' agreement, detailed in four separate documents, to resolve these debts.
- Only one of the four documents contained an arbitration clause, and this document was signed by MKI, but not by the Kaplans in their personal capacity.
- After the agreement, MKI lost more money, and First Options demanded payment from both MKI and the Kaplans personally.
- When its demands were not met, First Options initiated arbitration against both MKI and the Kaplans.
- MKI consented to the arbitration.
- The Kaplans filed written objections with the arbitrators, denying that their personal dispute was arbitrable, but they proceeded to argue the issue of arbitrability before the arbitration panel.
Procedural Posture:
- First Options initiated an arbitration proceeding against MKI and the Kaplans with a panel of the Philadelphia Stock Exchange.
- The arbitration panel concluded it had the power to rule on the dispute and issued an award in favor of First Options.
- The Kaplans filed a petition in the U.S. District Court to vacate the arbitration award.
- First Options filed a cross-petition in the same court to confirm the award.
- The District Court confirmed the arbitration award against the Kaplans.
- The Kaplans, as appellants, appealed to the U.S. Court of Appeals for the Third Circuit, with First Options as the appellee.
- The Court of Appeals reversed the District Court's judgment, holding that the Kaplans' dispute was not arbitrable.
- The U.S. Supreme Court granted First Options' petition for a writ of certiorari to review the decision of the Court of Appeals.
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Issue:
Does a court review an arbitrator's decision that a dispute is arbitrable independently, unless there is clear and unmistakable evidence that the parties agreed to submit the issue of arbitrability itself to the arbitrator?
Opinions:
Majority - Justice Breyer
Yes. A court should decide the question of arbitrability independently unless there is clear and unmistakable evidence that the parties agreed to submit that particular question to arbitration. Arbitration is fundamentally a matter of contract, and a party cannot be required to submit to arbitration any dispute which they have not agreed so to submit. The question of who—the court or the arbitrator—has the primary power to decide arbitrability turns on what the parties agreed about that specific matter. The law treats silence or ambiguity on this 'who decides' question differently than it treats ambiguity about the scope of an arbitration clause; for the former, there is no presumption in favor of arbitration. Merely arguing the issue of arbitrability to an arbitrator after objecting does not constitute clear and unmistakable evidence of an agreement to arbitrate that issue. Additionally, courts of appeals should review district court decisions confirming or vacating arbitration awards using ordinary standards of review (de novo for legal questions, clearly erroneous for factual findings), not a special 'abuse of discretion' standard.
Analysis:
This decision establishes the key 'clear and unmistakable evidence' standard for delegating the gateway question of arbitrability to an arbitrator, creating a strong presumption that courts will decide this issue. It reinforces the principle that arbitration is a creature of contract and protects parties from being compelled to arbitrate matters they did not agree to, particularly the threshold question of whether an agreement to arbitrate exists at all. The holding distinguishes this standard from the pro-arbitration policy of resolving doubts about the scope of an existing arbitration clause in favor of arbitration. The case thus solidifies the judiciary's role in policing the boundaries of private arbitration agreements.
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