January 8, 2019

January 8, 2019:

Supreme Court resolves a split in the circuits, holding that courts must give effect to parties' agreement that an arbitrator, and not a court, should decide gateway questions of arbitrabililty.  Henry Schein, Inc. v. Archer & White Sales, Inc.139 S. Ct. 524 (2019).

Archer & White agreed with a predecessor of Henry Schein to distribute his dental equipment.  The agreement contained an arbitration clause that adopted the arbitration rules of the AAA, which in turn provide that arbitrators have the power to resolve arbitrability questions.  The relationship soured.  Archer & White sued Schein in the Eastern District of Texas, seeking, among other things, an injunction.  Schein moved to compel arbitration.  Archer & White contended that the dispute was not arbitrable because the arbitration clause provided that it did not apply to "actions seeking injunctive relief."  Schein responded that, pursuant to the AAA rules, an arbitrator, and not the court, should decide the gateway issue of arbitrability.  According to Fifth Circuit precedent, even when parties agreed that an arbitrator has the power to decide arbitrability, a court could deny a motion to compel arbitration when the claim of arbitrability was "wholly groundless."  Finding that Schein's argument for arbitrability was "wholly groundless," the district court denied the motion to compel arbitration.  The Fifth Circuit affirmed.  The Supreme Court reversed.          

In his first opinion for the Supreme Court in an argued case, Justice Kavanaugh wrote for a unanimous Court.  His analysis was straightforward.  Under the Federal Arbitration Act, "arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms."  139 S. Ct. at 529.  The Court had previously held that "parties may agree to have an arbitrator decide not only the merits of a particular dispute but also '"gateway" questions of arbitrability,' such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy."  Id. (quoting Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-69 (2010).  The FAA contained no "wholly groundless" exception.  A court's disregarding an agreement of the parties about who decides arbitrability in order to reject a claim for arbitrability that it deemed "wholly groundless" was inconsistent both with the express language of the FAA and with the Court's precedent.  "To be sure, before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists.  . . .  But if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue."  Id. at 530.            

The Schein Court left an important question undecided.  The standard for whether parties have effectively agreed to delegate the issue of arbitrability to an arbitrator (rather than having a court determine that issue) is whether such a delegation agreement is established by "clear and unmistakable evidence."  Many lower courts have held that incorporation in the parties' arbitration clause of the AAA rules or other rules that grant the power to decide arbitrability to an arbitrator meets the "clear and unmistakable evidence" standard.  The Schein Court did not resolve this question, but instead remanded to the court of appeals for it to decide that question in the first instance.



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