We know now under Epic Systems that arbitration agreements with class action waivers can be enforced, but questions continue to emerge from specific arbitral agreements and instances where they are silent on certain issues, such as who determines whether a dispute is arbitrable in the first place.
In 2019, some may have thought that the certiorari-worthy issues in Henry Schein, Inc. v. Archer And White Sales, Inc. were resolved by the Supreme Court. The case arose from an antitrust action involving the manufacture and distribution of dental equipment. See the Supreme Court opinion at 139 S. Ct. 524, 529 (2019). We wrote about that unanimous January 8, 2019 opinion in our blog post of Jan. 15, 2019, noting that while that 2019 opinion “spelled the death knell for the ‘wholly groundless’ exception” as applied by the Fifth Circuit, “other issues lurk in the background.” Indeed, the court remanded the case for the Fifth Circuit to determine if the parties’ arbitration agreement “in fact delegated the arbitrability question to an arbitrator.” The Court of Appeals was also authorized to address “other arguments that Archer And White has properly preserved.” See 139 S. Ct. at 531.
On remand, the Fifth Circuit again affirmed the district court’s denial of the motions to compel arbitration. While conceding that the parties had clearly and unmistakably delegated some questions of arbitrability to the arbitrator, it found that a “carve-out” provision overcame the evidence of the parties’ intent to delegate arbitrability. See Opinion on remand, 935 F. 3d 274 (5th Cir. Aug. 14, 2019).
The arbitration clause that is the focal point of the court’s analysis provides, in relevant part:
“Disputes. . . . Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [the manufacturing company], shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)]. The place of arbitration shall be in Charlotte, North Carolina.”
The Fifth Circuit and subsequent briefs before the Supreme Court devoted much space to the impact of the carve-out for injunctive relief. In summary, the court of appeals reasoned that it had to interpret the scope of the agreements. “[T]he plain language incorporates the AAA rules – and therefore delegates arbitrability for all disputes except those under the carve-out.” But “the placement of the carve-out” prevented the court from concluding that the agreements “evince[d] a ‘clear and unmistakable’ intent to delegate arbitrability” of the carved-out claims.
Interestingly, while the Supreme Court granted certiorari on the impact of the carve-out provision, it denied certiorari on the cross-petition raising the related issue of whether the incorporation of the AAA rules actually amounted to a clear and unmistakable delegation of questions of arbitrability to the arbitrator. See Archer And White Sales, Inc. v. Henry Schein, Inc. No. 19-1080 (Cert. denied Jun. 15, 2020).
While questions asked during oral argument are rarely a reflection of a justice’s ultimate position, they do highlight analytical concerns and counters to arguments raised by other justices.
At the oral argument on December 8th, counsel for the petitioner asked that the Court “should once again vacate the court of appeals’ judgment” based on two principles. First, “a delegation is simply an antecedent agreement . . . subject to the rules governing arbitration agreements more generally. Second, doubts over “the scope of arbitration agreements are resolved in favor of arbitration.” And, based on that presumption, “a carve-out that does not speak to who should decide . . . arbitrability cannot restrict the parties’ delegation of those questions to the arbitrator.” (Transcript at 4).
The petitioner’s counsel also noted that the respondent’s brief spent considerable time on an issue not before the Court, whether the reference to arbitration rules, here the AAA rules, is a valid delegation of arbitrability questions to the arbitrator. So, according to the petitioner’s counsel, the Court “should stick to the question it agreed to decide” and do so in the petitioner’s favor.
Chief Justice Roberts asked the first question to Henry Schein’s counsel, apparently reflecting some analytical concerns surrounding the carve-out provision.
“When you look at the . . . clause at issue here[,] one thing that’s clear is that they do not want actions seeking injunctive relief to be arbitrated. * * * So they don’t want arbitrators dealing with actions seeking injunctive relief. [I]f that’s the case . . . wouldn’t the last thing . . . they would want is for an arbitrator to decide which disputes qualify?” (Transcript at 5).
The petitioner’s practical response was that “it is highly unlikely that the parties would ever want to divide up responsibility for arbitrability.”
Justice Kagan seemed to return to the allocation issue in some of her questions as well. “[O]nce you decide certain questions should be in the court . . . you’re not going to go to the arbitrator to decide whether suits plausibly seeking injunctive relief are, in fact that.” (Transcript at 22-23).
But the petitioners’ response seemed to put the issue in perspective. “Justice Kagan, you could say the same thing regardless of whether an arbitration agreement contains a carve out. * * * If you have a dispute about something that is, in fact, arising under the agreement . . . that should go to the arbitrator by virtue of the incorporation.” (Transcript at 23.)
Justice Sotomayor followed up in her questioning of the respondent’s counsel: “I don’t see any way to avoid that your position basically says . . . that every arbitrability issue has to be decided by the Court, because every single arbitration agreement has limitation.” (Transcript at 54).
As I admitted at the outset, we cannot reach conclusions based on questions raised during the argument, but the questions do highlight some issues that the Court will be considering.
There also are some key takeaways from the oral argument for companies and practitioners:
- If certain issues are to be delegated to an arbitrator, spell them out. While general arbitral rules are helpful (and accepted as delegation by 11 courts of appeals) they may not eliminate all doubt – this case is a good example.
- If certain claims are not to be addressed by the arbitrator, be specific and describe how and why they are to be resolved by the courts. For example, injunctive relief in court is available for both parties in support of arbitration, not as a substitute for it. Such injunctive relief may be used to preserve the status quo before or during the arbitral proceeding or to enforce a favorable award after it is issued.
While the ultimate opinion may resolve the delegation issues, oral argument in the latest Henry Schein, Inc. v. Archer And White Sales, Inc. case demonstrates that specificity in the arbitration agreements does matter.
Postscript: On January 25, 2021, the United States Supreme Court dismissed the writ of certiorari as improvidently granted. The Court’s one-line opinion did not explain why, as is typically the case in such rulings. We will have to await future Supreme Court cases for further guidance on whether a court or arbitrator interprets carve-outs from arbitration agreements.