Sheen-Lorre Arbitration Skirmish Tests SCOTUS Rhetoric

Skirmishing this morning in Hollywood by actor Charlie Sheen against producer Chuck Lorre and the Warner Brothers studio will determine whether their larger legal battle airs in a public courtroom, as Sheen wants, or behind closed doors in private arbitration, as his adversaries prefer.

The skirmish exposes a tension in the applicable law. The Supreme Court repeatedly proclaims that the route to resolve disputes by arbitration is solely a matter of contract, which would help Sheen, because he has no contract with Lorre.

Despite rhetoric, the Court routinely applies what it sees as a national policy so strongly favoring arbitration that the merest flicker of willingness to arbitrate one claim against one person is taken to mean a commitment to arbitrate any dispute with anyone, even those with whom you have made no contract.

The upshot: though Sheen has no contract with Lorre, the fact that he agreed with Warner to resolve disputes between them using arbitration would be seen to bind him likewise to arbitrate disputes with Lorre. If the dispute reached the Supreme Court, it would even defend that holding by stressing freedom of contract—that Sheen is not being coerced to arbitrate with Lorre since; after all, he contracted to arbitrate with Warner.

As I’ve indicated before and earlier, I have written an article documenting and criticizing this gap between what the Court says and does in arbitration jurisprudence: proclaiming freedom of contract but forging coercive national policy.  I presented the paper at the Federalist Society meeting in San Francisco in January; for a recent faculty workshop at Florida State University ; and at an ILEP Conference.   It is posted on SSRN. The first point to appreciate is that the question of whether the dispute is to be resolved by trial or arbitration is governed by the Federal Arbitration Act and U.S. Supreme Court precedents applying it. That’s because in 1995 the Court construed that 1925 statute to apply to the vast majority of contracts made in the United States.   Since 1983, moreover, those precedents construe the ancient statute to express a “liberal national policy favoring arbitration.”

At least rhetorically, the Court says the question is a matter of contract and contract law. But that national policy puts a heavy thumb on the scale in favor of arbitration, rather than in favor of contract and contract law. In particular, in two-dozen cases over the past score-and-a-half, the Court insinuates that, once a person indicates willingness to arbitrate a dispute, even ambiguously, they broadly consent to arbitration. Those rulings expand to encompass implied agreements to arbitrate against people with whom there is no actual agreement.

A stunning example is 2009’s Arthur Andersen LLP v. Carlisle Business clients sued professional advisors after a tax shelter the advisors fashioned was held illegal. Contracts between the clients and a management firm had arbitration clauses, but the firm was bankrupt so it and its contracts were out of the case.  Still, the advisors invoked those contracts, to which they were not parties, to seek a stay, and the Court agreed, in an opinion by Justice Scalia.

It began with incantations it always trots out in arbitration cases: arbitration agreements are contracts that federal law puts on equal footing with others and state law governing contracts generally applies to determine what contracts are enforceable. It added that the Federal Arbitration Act directs courts to stay litigation in the face of arbitration clauses found binding under state law.

The Court declared that strangers to contracts can get stays under arbitration clauses because, it said, state law allows “a contract to be enforced by or against nonparties to the contract through . . . third-party beneficiary theories. . . . ”  How in the world the advisers could be third-party beneficiaries of the client-management firm contract the Court did not explore or explain.  

There was no evidence that the clients intended for the advisers to have rights under their contracts with the management firm. Contract law on third party beneficaries requires, at minimum, that a third party must prove that the contract parties intended them to have rights.  The Court’s assertions that arbitration is a matter of contractual consent, not coercion, fall flat.

But that precedent strongly favors Warner Brothers and Chuck Lorre in their skirmish with Charlie Sheen.  It does not matter that Sheen signed no contract whatsoever with Lorre, under precedents such as Arthur Andersen.  He is not free to sue him.  That’s so despite the Supreme Court’s incantations that arbitration is “a matter of consent, not coercion.”

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