Companies whose agreements with consumers contain an arbitration clause that delegates certain decisions to an arbitrator to resolve should be mindful of a recent Fourth Circuit decision clarifying what disputes may be resolved by a court and what disputes may be resolved by an arbitrator.
In Modern Perfection, LLC v. Bank of America, N.A., — F. 4th –, 2025 WL 77181 (4th Cir. 2025), plaintiffs entered into two contracts with a financial institution: a deposit agreement that contained an arbitration provision, and a promissory note related to a loan program that did not. Plaintiffs filed a lawsuit against the financial institution, and the institution sought to enforce its arbitration provision.
In affirming the district court’s decision to enforce the arbitration agreement, the Fourth Circuit explained the four categories of disputes about arbitrability that were laid out in Coinbase, Inc. v. Suski, 602 U.S. 143 (2024). A “first-order disagreement” is a “contest over the merits of the dispute.” 602 U.S. at 148. A “second-order dispute” involves whether the parties “agreed to arbitrate the merits” of the underlying dispute. Id. A “third-order dispute” asks “who should have the primary power to decide” the second-order dispute, i.e., the court or the arbitrator. Id. at 149. Finally, a “fourth-order disagreement” arises when the parties “have multiple agreements that conflict as to the third-order question of who decides arbitrability,” which the Supreme Court determined should be decided by a court using traditional contracts principles. Id. at 149, 152. The Fourth Circuit concluded that plaintiffs failed to properly raise any “fourth-order issues” because they never argued in the district court that the choice-of-law provisions in the promissory notes superseded or narrowed the arbitration provisions in the deposit agreements. Modern Perfection, 2025 WL 77181, at *3.
The Fourth Circuit found no error in the district court’s holding that the deposit agreements’ arbitration provisions contained a valid and enforceable delegation clause that required the parties to address threshold issues of arbitrability before the arbitrator. The Court rejected plaintiffs’ arguments that they never agreed to arbitrate claims arising out of the promissory notes, because those challenged the scope of the arbitration provision, and the delegation clause was sufficiently clear to delegate such arbitrability questions to the arbitrator.
This decision serves as a reminder of the continued importance of delegation clauses to ensure an arbitrator will resolve second-order disputes.