In March, the highest courts of Montana, Texas, and Wisconsin all held that, when parties have a valid arbitration agreement, the issue of whether an arbitration demand was timely is presumptively for the arbitrator to decide. That principle of law has been established under the FAA at least since the Howsam decision in 2002 (and confirmed in BG Group in 2014), but now seems to be firmly taking hold in state courts, even when those courts are interpreting state arbitration acts.
In the Montana case, Montana Public Employees Assoc. v. City of Bozeman, __ P.3d __, 2015 WL 895731 (Mont. March 3, 2015), the City of Bozeman fired a building inspector. The collective bargaining agreement had a four-step grievance procedure, with time limits, and stated that any grievance not filed within the time limits “shall be deemed permanently withdrawn.” The inspector only completed three and a half of those steps within the time limits provided in the CBA. Based on that, the City refused to arbitrate. The union sued to force the City to arbitrate, and the City asked the court to find the dispute was time-barred. The Montana Supreme Court noted that it has adopted the distinction between procedural and substantive arbitrability from Howsam (and John Wiley), and that the issue of whether the inspector’s claims were time-barred was a “classic question of procedural arbitrability that is for an arbitrator and not for a court to decide.”
In the Texas case, G.T. Leach Builders, LLC v. Sapphire V.P., __ S.W.3d __, 2015 WL 1288373 (Tex. March 20, 2015), a developer sued three insurance brokers who had allowed its builder’s risk insurance to expire just before a hurricane hit its condominiums (which were still under construction). Later, the developer added the general contractor and others as third parties. The general contractor moved to compel arbitration, and the developer responded that the demand was untimely, because the arbitration agreement incorporated a statute of limitation. The court of appeals ruled that the general contractor’s arbitration demand was untimely, but the Texas Supreme Court reversed. Citing to BG Group and Howsam, it held that “courts must defer to the arbitrators to determine the meaning and effect of the contractual deadline.”
Addressing the developer’s argument that the limitations question was actually one of substantive (not procedural) arbitrability, the Texas court clarified that it was not substantive because “the parties’ dispute over the meaning and effect of the contractual deadline does not touch upon the issue of whether an enforceable agreement to arbitrate [the developer’s] claims exists.” (The court conceded that timeliness could turn into a substantive issue of arbitrability if the challenger asserted that the contractual deadline made the agreement unconscionable.) Therefore, the Texas Court of Appeals erred by deciding whether the dispute was arbitrable.
Similarly, in the case First Weber Group, Inc. v. Synergy Real Estate Group, LLC, __ N.W.2d __, 2015 WL 1292570 (Wis. March 24, 2015), the Wisconsin Supreme Court also held that the timeliness of an arbitration demand was an issue for the arbitrator. First Weber involved a brokerage firm that filed an arbitration demand against another broker. The broker refused to arbitrate, and the firm moved a court to compel arbitration. The trial court found the firm’s demand for arbitration was untimely, because the governing agreement required arbitration to be demanded within 180 days after the transaction closed. Citing to Howsam, the Wisconsin Supreme Court held that the broker’s “timeliness and estoppel defenses against arbitration are to be determined in the arbitration proceedings, not by a court” under Wisconsin’s arbitration act. And more broadly, the court adopted the holdings of BG Group and Howsam, so that Wisconsin law now also requires that procedural arbitrability must be decided by an arbitrator, unless the parties agreed otherwise.
Just a few weeks after First Weber, the Seventh Circuit issued an opinion confirming how firmly entrenched this rule is under the FAA. In an opinion of barely three pages, the court rebuked a district court that ruled on the timeliness of a plaintiff’s arbitrable claims. Johnson v. Western & Southern Life Ins. Co., 2015 1637847 (7th Cir. Apr. 15, 2015). In that case, an employee asserted discrimination claims against her employer in federal court and the district court compelled arbitration. Based on language in the arbitration agreement stating that any arbitration must be commenced within six months of termination, the district court dismissed the claims with prejudice. The Seventh Circuit called that a “misstep,” because “the district court improperly ruled on a matter that is presumptively reserved for the arbitrator,” citing BG Groupand Howsam. The court wrote:
The Supreme Court has applied this rule consistently, making clear in more recent decisions that federal courts must presume that the parties intended arbitrators to decide whether a party has complied with time limits and other arbitrational prerequisites.
Therefore, the dismissal should have been without prejudice.
These cases should help increase awareness among parties and their counsel that courts can address very limited issues when the parties have a valid arbitration agreement. Essentially, if the arbitration agreement exists, covers the present dispute, is valid under state law and has not been waived by litigation conduct, every other potential dispositive issue is presumptively for the arbitrator to decide. (And, even some of those issues can be delegated to the arbitrator, see Rent-A-Center, West.)
By Liz Kramer