Facts of the Case

After the October 1987 stock market crash, First Options of Chicago, Inc., a firm that clears stock trades on the Philadelphia Stock Exchange, demanded that Manuel Kaplan, his wife, and his wholly owned investment company, MK Investments, Inc. (MKI) immediately pay the entire MKI debt. When First Options' demands for payment went unsatisfied, it sought arbitration by a panel of the Philadelphia Stock Exchange based on workout agreements, which governed the working out of debts owned by Kaplan, his wife, and MKI. MKI, which had signed the only workout document containing an arbitration agreement, submitted to arbitration, but the Kaplans, who had not signed that document, filed objections with the panel. The Kaplans argued that their disagreement with First Options not was arbitrable. After deciding that they had the power to rule on the dispute's merits, the arbitrators ruled in First Options' favor. Ultimately, the Court of Appeals reversed the award, finding that the dispute was not arbitrable. The appellate court concluded that courts should independently decide whether an arbitration panel has jurisdiction over a dispute, and that it would apply ordinary standards of review when considering the District Court's denial of a motion to vacate the arbitration award.

Question

Is the arbitrability of disputes subject to independent review by the courts? Should courts of appeals apply an "abuse of discretion" standard when reviewing district court upholding arbitration awards?

Conclusion

Yes and no. In a unanimous opinion delivered by Justice Stephen G. Breyer, the Court held that the arbitrability of the Kaplan/First Options dispute was subject to independent review by the courts and that, rather than a special abuse of discretion standard, courts of appeals should apply ordinary standards when reviewing district court decisions upholding arbitration awards. "We conclude that, because the Kaplans did not clearly agree to submit the question of arbitrability to arbitration, the Court of Appeals was correct in finding that the arbitrability of the Kaplan/First Options dispute was subject to independent review by the courts," wrote Justice Breyer for the Court.