Third Circuit Rules on ‘Mind-Bending’ Arbitration Question

September 08, 2022

The US Court of Appeals for the Third Circuit recently issued a precedential decision on what it called “the mind-bending issue of arbitration about arbitration.” Relying on an arbitration agreement between the plaintiff and a third-party lender that delegated questions of arbitrability to an arbitrator, the court permitted the lender’s alleged assignee (i.e., the defendant) to compel the plaintiff to arbitration, regardless of whether the assignment was valid.

The Third Circuit’s ruling in Zirpoli v. Midland Funding, LLC affirms the significant effect that a broad delegation clause in an arbitration agreement can have when a litigant moves to compel arbitration. Under the court’s analysis, an alleged contractual assignee to an arbitration agreement can compel a signatory to arbitration, even if the assignment itself is legally invalid. The court determined that the legality of the assignment was an issue of “enforceability” or “arbitrability” delegated to the arbitrator under the arbitration agreement at issue, and not a threshold question of contract formation for the court. 


In Zirpoli, the plaintiff, Benjamin Zirpoli, filed a putative class action against Midland Funding LLC, alleging various consumer protection claims regarding Midland’s lending and debt collection practices. Zirpoli had previously taken out a loan with OneMain Financial Group. The loan documentation between Zirpoli and OneMain included an arbitration agreement with a delegation clause. That arbitration agreement covered “Claims” between Zirpoli, OneMain, or any of OneMain’s “past, present or future” assignees. Those “Claims” included, inter alia, any alleged violation of the loan documents or any alleged violation of state statutes, including usury laws. Under that agreement, Zirpoli, OneMain, or any of OneMain’s assignees, could demand arbitration of any Claim, including disputes related to the arbitrability of a Claim.

After Zirpoli defaulted on the loan, OneMain wrote off the loan and purported to sell it to Midland.  The sales documentation to Midland included an alleged assignment of OneMain’s contractual rights and obligations in its agreement with Zirpoli. 

When Zirpoli later sued Midland in the Middle District of Pennsylvania, Midland moved to compel arbitration as the assignee of OneMain’s contractual rights. In response, Zirpoli argued that Midland could not compel arbitration because the assignment from OneMain to Midland was illegal under Pennsylvania law. Midland did not hold a Pennsylvania license to service the type of loan at issue and the Pennsylvania secretary of banking had not approved the assignment, as allegedly required. Zirpoli argued that, without a valid assignment from OneMain to Midland, Zirpoli had no agreement or obligation to arbitrate his dispute with Midland.

After permitting limited discovery on whether Zirpoli’s claims were subject to a valid and enforceable arbitration agreement, the district court denied Midland’s motion to compel arbitration. Based upon the facts developed during that discovery period, the district court determined that the assignment from OneMain to Midland was invalid, and, therefore, it denied Midland’s motion to compel arbitration of Zirpoli’s claims.


On appeal, the Third Circuit vacated the district court’s order and instructed the lower court to refer the matter to arbitration. The court confirmed that Section 4 of the Federal Arbitration Act (FAA) provided the district court with jurisdiction to hear Midland’s request to compel arbitration.

The court then addressed threshold questions pertaining to contract formation and arbitrability.[1] Under well-established law, the court noted that it “can compel a party to arbitrate only if the party agreed to arbitration,” and a party agrees to arbitrate if “there is a valid agreement to arbitrate between the parties,” and “the merits-based dispute in question falls within the scope of that agreement.”

Where an arbitration agreement contains a delegation clause, however, the court’s analysis can become more complicated. In determining “who decides” questions of arbitrability in that context, the court noted that it examines whether there is a valid agreement between the parties to delegate questions of arbitrability to an arbitrator and whether the intent to delegate is clear and unmistakable.

As to the first step of that inquiry, the court found that “a valid agreement to delegate questions of arbitrability between the parties exists.” It reasoned that Zirpoli signed an agreement to arbitrate claims with OneMain and OneMain’s “past, present, or future” assignees. In turn, the court found that “Midland is an assignee” of OneMain, even if that assignment could be invalidated on legal grounds. As a result, the court concluded “there exists a valid agreement” and it was for the arbitrator to decide any challenges to the validity of the assignment to Midland.

Pursuant to the court’s reasoning, deciding the validity of the contractual assignment to Midland would usurp the function of the arbitrator and “deny[] effect to an arbitration provision in a contract” that could later be deemed enforceable. In addition, according to the court, determining the validity of the assignment to Midland on a motion to compel arbitration would make the “who decides” inquiry “pointless” because either (1) the court would decide the assignment was invalid and deny the motion, thereby thwarting the delegation clause in the underlying loan agreement, or (2) the court would decide that the assignment was valid and then send the arbitrability question to the arbitrator to address the very issue that the court just decided. 

Ironically, however, the court proceeded to do just that. After concluding that the validity of the assignment to Midland was a question of arbitrability for the arbitrator to decide, the court answered that question anyway, stating that “the assignment was valid.”  It reasoned that the loan at issue was a “charged-off” loan outside the purview of Pennsylvania’s Consumer Discount Company Act. Thus, the court found the loan assignment from OneMain to Midland was legitimate because Midland did not have to obtain state approval or a state license.

The court also addressed the issue of severability. Under that doctrine, where an arbitration agreement contains a delegation clause, the challenge to arbitrability must be “directed at the delegation clause specifically to invoke the court’s power to intervene.”  That is not true, however, when the challenge is to the very formation of the arbitration agreement itself, because courts adjudicate formation challenges “unless the parties have clearly and unmistakably referred formation issues to arbitration in a written contract whose formation is not in issue.”    

In rejecting Zirpoli’s argument that his challenge was to the formation of an arbitration agreement with Midland (and therefore posed a question for the court to decide), the court simply concluded that “determining whether Midland is a valid assignee goes directly to whether it can enforce arbitration as the agreement [between Zirpoli and OneMain’s assignees] provides, not whether the agreement exists.” To conclude otherwise “would render delegation clauses that explicitly extend to assignees meaningless; a party trying to avoid arbitrating the question of arbitrability could simply call into question the validity of the assignment.” The court found that a contrary ruling would foster precisely the kind of judicial interference the FAA seeks to prevent.

Finally, having concluded that a valid arbitration agreement existed, the court noted that “the parties” to the loan “clearly and unmistakably” expressed an agreement to arbitrate the issue of arbitrability, as the agreement provided “any Claim” shall be resolved in binding arbitration, and such “Claims” broadly covered the arbitrability of disputes pertaining to the loan, defenses to enforcement, and alleged violations of state laws. Accordingly, the court found for Midland and directed the district court to order the matter to arbitration.


Notably, not all three panel members agreed on the court’s analysis and findings. Judge Bibas concurred that the court had jurisdiction under Section 4 of the FAA but dissented with respect to the remainder of the court’s analysis. Specifically, Judge Bibas determined that “Midland had no valid agreement to arbitrate with Zirpoli” and, therefore, he would have affirmed the district court’s ruling. 

The dissenting opinion explains that, to decide whether a contractual party must arbitrate, the court first considers “whether there is a valid agreement to arbitrate between the parties.”  The question is not whether there is an agreement to arbitrate “with just anyone.” The relevant question before the court was “whether there was an agreement between the party seeking to compel arbitration [here, Midland] and the party opposing it [here, Zirpoli].”

Judge Bibas criticized the majority for relying upon the existence of an arbitration agreement between Zirpoli and OneMain and then characterizing Zirpoli’s challenge to arbitration as one about enforceability under that agreement. 

According to the dissent, that analysis missed the point. Zirpoli never disputed the existence or enforceability of the OneMain contract. Rather, Zirpoli insisted he never had a valid agreement with Midland, and it was Midland that sought to compel arbitration. 

Given this posture, Judge Bibas concluded that Zirpoli was correct. Absent a valid assignment from OneMain to Midland, Zirpoli never agreed to arbitrate his dispute with Midland. In other words, the validity of the assignment was central to determining whether there was a valid agreement between Zirpoli and Midland. Going further, Judge Bibas concluded the assignment was invalid, because Midland did not obtain the necessary license to hold this type of loan and the secretary of banking never approved of the assignment. Thus, according to the dissent, Midland had no arbitration agreement with Zirpoli and no right to force him out of court.

Judge Bibas squarely faulted the majority’s holding for “confus[ing] how we analyze the formation of arbitration agreements.” The dissent concluded: “Courts cannot start by asking ‘Was an agreement formed?’  Rather, they must ask, ‘Was an agreement formed between these parties?’” 

Finding that the majority did not ask the correct question, Judge Bibas dissented in part.


The Zirpoli decision highlights the significant effect that a broad delegation clause can have on the court’s analysis of a motion to compel arbitration. It also underscores that judges still disagree on fundamental process and scope questions that arise on a motion to compel arbitration, including what constitutes a question of “arbitrability” as opposed to a question of contract formation. 

In a litigation environment where consumer-facing businesses increasingly confront mass arbitration filings and engage in a variety of promotional and other activities involving third parties, the Zirpoli decision is a good reminder for companies with arbitration agreements to regularly assess whether questions of arbitrability should be contractually delegated to the court or the arbitral forum and whether the company’s arbitration agreements clearly cover the parties and claims intended for arbitration. 


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:


[1] The panel consisted of Judges McKee, Restrepo, and Bibas.  Judge McKee authored the majority opinion, joined by Judge Restrepo.  Judge Bibas wrote separately concurring in part and dissenting in part.