The Third Circuit Clarifies the Standard for Determining Whether Parties Have Agreed to Arbitrate

Aliments Krispy Kernels, Inc. v. Nichols Farms, 851 F.3d 283 (3d Cir. 2017).  The bottom line of this opinion by Judge Fuentes was the reversal of a judgment of the District Court vacating an arbitration award that had been issued in favor of plaintiff.  Plaintiff had moved to confirm that arbitration award and defendant had sought to have that award vacated.  Judge Fuentes concluded that “an issue of material facts exists as to whether the parties agreed to arbitrate.”  Thus, neither party’s application could properly have been granted.  The panel thus remanded the case for further proceedings.

That kind of ruling would not, by itself, have justified the issuance of this ruling as a precedential opinion.  But the panel addressed another issue: what is the standard for determining whether the parties have made an agreement to arbitrate?

The parties were in dispute about that issue.  In a 1980 case, the Third Circuit had stated that “[b]efore a party to a lawsuit can be ordered to arbitrate and thus be deprived of a day in court, there should be an express, unequivocal agreement to that effect.”  The Third Circuit reaffirmed that standard in Kaplan v. First Options, 19 F.3d 1503 (3d Cir. 1994).  But that case went on to the Supreme Court of the United States, which stated that “[w]hen deciding whether the parties agreed to arbitrate a certain matter…, courts generally … should apply ordinary state-law principles that govern the formation of contracts.”  514 U.S. 938, 944 (1995).

In 2009, the Third Circuit renounced the “express, unequivocal agreement” test, given the Supreme Court’s language in Kaplan.  Instead, the court said, “ordinary state-law principles of contract law” govern the inquiry as to whether parties made an agreement to arbitrate.  But the court “did not strike down the use of the express and unequivocal requirement to the extent that it requires that there not be a genuine issue of material fact as to an arbitration agreement’s existence before a district court may determine whether the agreement exists as a matter of law.”

Here, the District Court had “used the express and unequivocal standard to explain that it will decide the petition to confirm the arbitration award and motion to vacate as a matter of law only if there is no ‘genuine issue of fact concerning the formation of the contract.’  Therefore, to the extent that the District Court meant to impose no more stringent standard on the arbitration agreement than that permissible under state law, it did not err.”

But the parties’ confusion about the issue was understandable, and Judge Fuentes recommended that District Courts no longer use the “express and unequivocal” language.  “The legal standard is simply that we apply the relevant state contract law to questions of arbitrability, which may be decided as a matter of law only if there is no genuine issue of material fact when viewing the facts in the light most favorable to the nonmoving party.”

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