Lost businessman in the fog with various circle signs pointing in opposite directions

As we noted in our Dec. 19, 2018, blog article, there were three arbitration cases involving the Federal Arbitration Act (FAA), all argued in October 2018, pending on the Court’s docket. Now, in a unanimous opinion written by Justice Brett Kavanaugh, Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 (Jan. 8, 2019), has been decided. And as we sensed based on the oral argument, there was not much sympathy for the “wholly groundless” exception to the contractual delegation of arbitrability questions to an arbitrator.

Indeed, in a straightforward analysis, the opinion rejected the wholly groundless exception as “inconsistent with the statutory text” of the FAA and Court precedent. Moreover, the Fifth Circuit decision confused the “question of who decides arbitrability” with the related but distinct question of “who prevails on arbitrability.” Finally, when the parties’ agreement “delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in that contract.” Slip op. at 8. (Emphasis added.) Even though this decision arose from an antitrust dispute, it applies equally to employment law.

The case below

The Henry Schein case began when Archer & White Sales Inc. (Archer & White), a company distributing dental equipment, entered into a contract with a dental equipment manufacturer. When the relationship foundered, Archer & White sued in Federal District Court in Texas for antitrust violations, seeking both monetary and injunctive relief. The relevant dispute resolution provision of the agreement declared that disputes other than those seeking injunctive relief would be resolved by binding arbitration under American Arbitration Association (AAA) rules.

Disputes. This Agreement shall be governed by the laws of the State of North Carolina. 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 [Schein]) 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.”

Schein moved the District Court to send the antitrust dispute to arbitration premised on the FAA. Archer & White objected, maintaining that the dispute was not arbitrable because it sought, in part, injunctive relief and the contract foreclosed arbitration of a dispute when any injunction was sought.

The dispositive question then moved to “who decides whether the anti-trust dispute is subject to arbitration?” The rules of the AAA give arbitrators the power to decide arbitrability questions. So, Schein argued that the agreement’s incorporation of the AAA rules dictated that an arbitrator, not the court, should decide whether the arbitration agreement covered a specific controversy. But Archer & White countered that where the argument for arbitration is wholly groundless – as was the argument there – the District Court itself could decide the threshold question of arbitrability. Based on Fifth Circuit authority, Archer & White ultimately won the argument. The trial court found Schein’s argument was wholly groundless and denied the motion to compel.

Following Fifth Circuit precedent, specifically Douglas v. Regions Bank, 757 F.3d 460, 463-64 (5th Cir. 2014), the appellate court affirmed finding the “gateway” issue could be decided by the District Court. See 878 F. 3d 488 (2017). Certiorari was granted because of a circuit split on this issue.

In its brief and at oral argument, Archer & White asserted that it would be less expensive to implement the wholly groundless exception. Yet the Court remained “dubious,” commenting that the exception “would inevitably spark collateral litigation (with briefing, argument and opinion writing) over whether a seemingly unmeritorious argument for arbitration is wholly groundless, as opposed to groundless.” Slip op. at 7. (Emphasis in original). This pushback could certainly be based on the fact that the litigation had consumed seven years, when arbitration was presumably selected because it would be a more expeditious means to resolve any dispute between the parties.

The substantive opinion concluded with the admonition that “[w]hen the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.”

This left only one future issue in the case – how to determine whether the contract did delegate the issue to an arbitrator. This is far from a trivial issue in the arbitral context. Indeed, the Court reminded the Fifth Circuit that courts “should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.” (Slip op. at 8, quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 [1995]). (Emphasis added.) The remand is significant because the arbitration agreement at issue itself did not contain an express delegation of arbitrability decisions to the arbitrator. Rather, it provided only that “any dispute arising under or related to this Agreement . . . shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.” Those rules in turn delegate arbitrability decisions to the arbitrator.

A number of courts have concluded that a contract’s incorporation of the AAA’s rules constitutes “clear and unmistakable evidence” that the parties delegated arbitrability decisions to the arbitrator. For example, several Fifth Circuit decisions have already held that the incorporation of arbitral rules, such as those of the AAA or Judicial Arbitration Services (JAMS), indicates a clear and unmistakable intent to delegate questions of arbitrability to an arbitrator. See Cooper v. WestEnd Capital Mgmt., L.L.C., et al., 832 F.3d 534, 546 (5th Cir. 2016) (JAMS Rules); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012) (AAA Rules). See also Belnap v. Iasis Healthcare, 844 F.3d 1272, 1284 (10th Cir. 2017) (AAA Rules).

But, in other contexts such as the authorization of class, collective or aggregate arbitration and who decides, courts have questioned whether merely incorporating certain rules, like AAA, truly indicates unmistakable evidence that the parties intended to authorize multi-party arbitration or delegated the decision to an arbitrator.  See Catamaran Corp. v. Towncrest Pharmacy, 864 F.3d 966, 973 (8th Cir. 2017) (reference to the AAA Rules is insufficient evidence that the parties intended for an arbitrator to decide the question of class arbitration);  Chesapeake Appalachia, LLC v. Scout Petroleum, LLC 809 F.3d 746, 762 (3d Cir.) (mention of the AAA Supplementary Rules was not sufficient to conclude that the Leases clearly and unmistakably delegated the question of class arbitrability to the arbitrators), cert. denied, 137 S. Ct. 40 (2016);  Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013) (while the parties agreed to arbitrate under the AAA rules, the arbitration clause “does not clearly and unmistakably assign to an arbitrator the question whether the agreement permits classwide arbitration.”  See also Lamp Plus Inc. v. Vareda, No. 17-988 argued on October 29, 2018 and Sprint Airlines v. Maizes, 899 F.3d 1230 (11th Cir. 2018) Pet. for Cert. No. 18-617 (Nov. 13, 2018).  One would certainly think the requirements of “clear and unmistakable evidence” should be uniform regardless of context.

Given the magnitude of the issues, parties should not rely on arbitral rules alone to authorize or forbid conduct they do not condone. Spell it out. Either specifically authorize an arbitrator to resolve gateway issues or do not. And as to aggregate arbitration, expressly forbid it in the agreement rather than let a court or arbitrator decide.

Bottom line

The Henry Schein opinion spelled the death knell for the wholly groundless exception based on Justice Kavanaugh’s first opinion. But other issues lurk in the background.