Arbitration is a staple of the insurance and reinsurance industries. For better or worse, arbitrators, not judges, often resolve disputes in this arena. But sometimes the brawling parties can’t even agree whether they are supposed to trade blows in court or in arbitration. What then? Who decides where the war will be waged? In other words, who decides arbitrability?
For nearly a quarter century, the United States Supreme Court has grappled with this question in cases like First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), and New Prime Inc. v. Oliveira, No. 17-340 (U.S. argued Oct. 3, 2018).
Federal appellate courts regularly see this issue as well. Wisconsin state courts, not as much, which is why the Wisconsin Supreme Court’s recent decision in Midwest Neurosciences Associates, LLC v. Great Lakes Neurosurgical Associates, LLC, 2018 WI 112, is so interesting. Wisconsin’s highest court gave those of us here in the Badger State guidance on how to address this issue under state law.
The Starting Point
The starting point for questions of arbitrability is deceptively simple: what did the parties agree? If the parties agreed, clearly and unmistakably, to submit arbitrability to an arbitrator, then the arbitrator decides. If not, the court decides. Totally straightforward, right?
But what if the parties had an original contract, with an arbitration clause, that was arguably superseded by a second contract without an arbitration clause? Where does the fight about the enforceability of that second contract occur? That was the situation in Midwest Neurosciences.
In 2005, several doctors had banded together to form Midwest Neurosciences Associates, LLC (Midwest). Their Operating Agreement had an arbitration clause. A decade later, the doctors wanted to split up and voted to dissolve Midwest. As part of the wind-down, they prepared a second contract, a Redemption Agreement, which did not have an arbitration clause. A dispute arose over whether the doctors had all agreed to the Redemption Agreement and a lawsuit followed. The defendant moved to compel arbitration under the Operating Agreement. The case ultimately landed in the state supreme court. On a 5-1 decision, the court held:
it is a court’s duty to determine whether a contract calls for arbitration and when a dispute exists as to whether a second contract without an arbitration clause supersedes a first contract with such a clause, the determination of arbitrability must be decided in the first instance by the circuit court rather than the arbitrator.
2018 WI 112, ¶ 89.
What We Can Learn
Though Midwest Neurosciences involved the medical field, the same principles apply to insurance. The take-away from the case seems to be that if there are any questions over whether the parties agreed to arbitrate, the courts are almost certain to take it upon themselves to resolve that question rather than leaving it up to the arbitrators.
So if you are drafting an agreement with a dispute resolution clause and you absolutely want to invoke arbitration, sweat the details. Make it as crystal-clear as you can. And, if there’s ever a related follow-on contract, be sure to include an arbitration clause in there too.
Good luck out there in 2019, everybody.