Arbitrability—or who decides what claims are subject to arbitration—is returning to the Supreme Court next week for the second time in as many years. The first time the matter reached the Court, the Supreme Court unanimously held that, where a contract clearly and unmistakably delegates questions of arbitrability to an arbitrator, a court cannot decide the issue in the first instance, even if the court thinks the argument for arbitration is “wholly groundless.” Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).
The issue has now returned to the Supreme Court following remand and a new decision by the Fifth Circuit. Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019). On December 8, 2020, the Court will hear the case again, this time to decide “[w]hether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”
This whirlwind of litigation justifying two trips to the Supreme Court all stems from the following language in the governing contract:
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 relating 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.
Henry Schein, Inc., 139 S. Ct. at 528 (alterations in original).
Courts do not interpret such arbitration clauses on a blank slate. The Supreme Court has explained that, when confronted with an arbitration provision and a motion to compel arbitration, a court generally must consider two threshold issues: (1) is there a valid agreement to arbitrate and (2) is the dispute encompassed within the arbitration provision? Yet, these questions are not always for a court to decide. Parties can delegate these threshold issues to the arbitrator, as long as the parties “clearly and unmistakably” indicate their intent to do so. AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 649 (1986).
In determining whether the parties to an arbitration agreement have “clearly and unmistakably” indicated an intent to have the arbitrator decide arbitrability, courts have generally held that it is sufficient that the arbitration clause incorporates commercial rules that allow the arbitrator to decide threshold questions of arbitrability. For example, the arbitration clause in the Henry Schein case states that the arbitration shall be governed by the AAA rules. And the AAA rules provide that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” AAA Commercial Arbitration R. 7(a). Based on this language, “[v]irtually every circuit to have considered the issue has determined that incorporation of the American Arbitration Association’s (AAA) arbitration rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.” Oracle Am., Inc. v. Myriad Grp. A.G., 724 F.3d 1069, 1074 (9th Cir. 2013); see also Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 846 (6th Cir. 2020) (collecting cases). Accordingly, courts have generally recognized that an arbitration clause referencing commercial arbitration rules, like the one here, requires an arbitrator to decide arbitrability.
The wrinkle here, however, is the carve out. Archer & White argues that referencing the AAA rules in the arbitration provision does not equate to delegating arbitrability to the arbitrator, let alone “clear and unmistakable” evidence of the intent to do so. Moreover, even if reference to the AAA rules was sufficient, Archer & White contends that the carve-out applies to decide whether the arbitrability of a claim is delegated to an arbitrator, not to the scope of the arbitration. Archer & White reads the arbitration provision and the associated carve-out to include two separate carve-outs: (1) “Except for actions seeking injunctive relief, the parties agree to resolve any dispute by binding arbitration”; and (2) “Except for actions seeking injunctive relief, the parties agree to arbitrate arbitrability.” (Brief for Respondent, at 27.) Thus, in Archer & White’s view, the clear and unmistakable intent of the parties was to exempt claims for injunctive relief from arbitration in total, with an arbitrator having no role at all.
Henry Schein disagrees. It argues that a carve-out provision, like the one in its contract with Archer & White, only operates to exempt claims for injunctive relief from arbitration and does not affect the scope of an otherwise valid delegation of questions of arbitrability to an arbitrator. Henry Schein notes that the contract in this case clearly and unmistakably delegates arbitrability to the arbitrator, at least as to most categories of disputes. Thus, what is at issue is not whether arbitrability was delegated but the scope of that delegation. But to answer that question, in Henry Schein’s view, would require a court to examine the substance of the claims and decide whether those claims are subject to arbitration—which is exactly what a court is not supposed to do if arbitrability is for an arbitrator to decide. In other words, allowing a court to decide the scope of an arbitrability delegation conflates arbitrability with whether a claim is arbitrable, even though those two questions are supposed to be separate.
On remand following the Supreme Court’s first decision, the Fifth Circuit agreed with Archer & White and again held that a court, rather than the arbitrator, could decide if Archer & White’s lawsuit was subject to arbitration. Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019). This time, however, the Fifth Circuit relied on Archer & White’s analysis of the carve out for injunctive relief. Id. Although noting that the contract’s incorporation of the AAA rules is sufficient to delegate questions of arbitrability to an arbitrator for some categories of cases, the court held that the specific placement of the carve-out for cases seeking injunctive relief left the question of who decides arbitrability ambiguous. Id. at 280. The court explained that “[t]he most natural reading of the arbitration clause at issue here states that any dispute, except actions seeking injunctive relief, shall be resolved in arbitration in accordance with the AAA rules. The plain language incorporates the AAA rules—and therefore delegates arbitrability—for all disputes except those under the carve-out.” Id. In other words, the carve-out of injunctions from the arbitration provision also operated to carve out application of the AAA rules to that category of claims. Without the AAA rules, the court concluded the parties’ intent for arbitrators to decide threshold questions of arbitrability was not clear and unmistakable.
Before the Supreme Court next week is the question “[w]hether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.” We’ll report again after the argument December 8.