April 17, 2014

Who Arbitrates Arbitrability?

Addressing for the first time the question of whether the court or the arbitrator decides arbitrability, a panel of the U.S. Court of Appeals for the Ninth Circuit reversed the denial of a motion to compel arbitration and concluded that incorporation of the UNCITRAL (United Nations Commission on International Trade Law) arbitration rules into a commercial contract constitutes clear and unmistakable evidence that the parties intended to delegate questions of arbitrability to the arbitrator.  Oracle America v. Myriad Group AG, Case No. 11-17186 (9th Cir., July 26, 2013) (Christen, J.).  This holding represents is an exception to the general rule that the question of arbitrability is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise. 

Myriad claimed the right to use Java technology for free, based on Oracle’s Source License.  After Oracle sued Myriad for breach of contract, copyright and trademark violations, and unfair competition, Myriad submitted an arbitration demand and moved (in district court) to compel arbitration based on an arbitration clause in the Source License.  The district court granted arbitration with respect to the breach of contract claim, but denied arbitration with respect to the intellectual property claims.  The district court also enjoined Myriad from proceeding with arbitration of its non-contract claims.  The district court reasoned that because the arbitration provision contains a carve out to the effect that the court’s jurisdiction is “exclusive” with respect to a party’s intellectual property claims or claims arising out of the license, the parties intended for the court to decide questions of arbitrability.  (Oracle argued that the carve-out was intended to carve out issues relating to its “crown jewel” intellectual property rights to have those issues decided by judges and not arbitrators).  Myriad appealed.

The 9th Circuit, reviewing the issue de novo, affirmed, reasoning that Oracle conflated the scope of the intellectual property carve out with the issue of who decides arbitrability.  The 9th Circuit concluded that the question of who decides whether Myriad’s failure to pay a royalty for its use of the Java programming language is an issue “arising out of or relating to” the intellectual property rights carve out provision and is a question subject to the arbitration clause.  The 9th Circuit explained that the adoption of UNCITRAL rules into commercial contracts (the court expressed no opinion on consumer contracts) evidences that the parties “clearly and unmistakably delegate questions of arbitrability to an arbitrator,” a conclusion consistent with the U.S. Courts of Appeals for the Second Circuit and D.C. Circuit.   The 9th Circuit noted that “virtually every circuit to have considered the issue has determined that incorporation of the American Arbitration Association’s (AAA) arbitration rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability” and that the AAA rules contain a jurisdictional provision similar to Article 21(1) Article 23(1) of the 1976 and 2010 UNCITRAL rules, respectively. 

Practice Note:  When drafting carve-out clauses in arbitration provisions in commercial contracts, do not assume that claims relating to the carve-out will be heard in court.  If the drafter’s intent is to have claims, particularly claims arising out of important assets such as intellectual property, adjudicated in court rather than by an arbitrator, the arbitration provision should explicitly state that the issue of arbitrability is to be decided by a court.  

© 2014 McDermott Will & Emery

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