Author: Aaron J. Crowell
| Jurisdiction: United States |
Topics: Arbitrability Court Decisions Jurisdiction and Powers of the Courts in Matters of Arbitration Generally |
This January the Supreme Court decided Henry Schein v. Archer & White Sales, Inc.[1]Taking up an issue that’s over thirty years in the pen, Schein broadly addressed when a court or an arbitrator should be charged with the task of making threshold determinations about a claim’s arbitrability. Upon this author’s review, Schein gives little practical guidance to lower courts in delineating the full extent of its previous precedents on arbitrability. Furthermore, Schein seems to limit the ability of circuit courts to adopt consistent and judicially administrable rules to determine beyond a case-by-case basis whether a particular arbitration agreement meets the “clear and unmistakable” standard parties have to demonstrate for an arbitrator’s review of arbitrability.[2]
In Schein, the parties, who were both distributors of dental equipment, entered into a contract providing for arbitration of any dispute arising under or related to the agreement, except for, among other things, actions seeking injunctive relief. After the relationship turned sour, the plaintiff brought an antitrust action seeking injunctive relief among other remedies. The defendants moved to compel arbitration pursuant to the contract and the plaintiff argued that the court should deny the motion to compel arbitration because, by the language of the arbitration agreement, the claim seeking injunctive relief was not arbitrable. The defendants countered that, by the terms provided, any questions about the arbitrability of the case or a specific claim was to be decided by the arbitrator.
The trial court’s magistrate judge found that the arbitration agreement’s delegation language, when combined with the language carving out claims for injunctive relief, could only be interpreted as meeting the clear and unmistakable standard and consequently granted the defendants’ motion to compel arbitration.[3] However, the District Court and the Fifth Circuit both disagreed with the magistrate judge’s interpretation and avoided any determination about the parties’ agreement meeting the clear and unmistakable evidence standard.[4]Those two courts instead found the defendant’s view that the parties’ agreement intended the arbitrator to handle the arbitrability of a carved-out claim was “wholly groundless” under Douglas v. Regions Bank.[5] Although its analysis was brief, the Fifth Circuit concluded the language of the parties’ arbitration agreement was clear and the court should determine the arbitrability of the entire litigation when it included a carve-out claim, such as injunctive relief.
The Supreme Court vacated the Fifth Circuit’s decision and rejected any application of the “wholly groundless” doctrine.[6] The Court held that the “wholly groundless” exception to arbitrability is inconsistent with the Federal Arbitration Act (FAA), and previous precedent, because under the FAA arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.[7] The court went on to say, “we must interpret the [FAA] as written, and the [FAA] in turn requires that we interpret the contract as written.” [8] The Court duly noted the FAA contains no exception to compel arbitration for “wholly groundless” claims and it forcefully stated “when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue. That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” [9]
In this author’s opinion, the Court regrettably gives short shrift to the way in which the “wholly groundless” exception was applied in the Fifth Circuit and overstates the precedential implication excluding its formulation and use. At the outset I want to be clear that I believe the Fifth Circuit’s implementation of the “wholly groundless” test from Qualcomm Inc. v. Nokia Corp. was against precedent when Qualcomm said , “even if the court finds that the parties’ intent was clear and unmistakable that they delegated arbitrability decisions to an arbitrator, the court may make a second more limited inquiry to determine whether a claim of arbitrability is ‘wholly groundless’” (and thereby prevent the dispute from going to an arbitrator).[10] If there is clear and unmistakable intent to send the dispute to the arbitrator, the inquiry ends there. However, discerning intent is rarely so easy. How often does the parties’ agreement ever clearly and unmistakably spell out what gets decided by an arbitrator and what gets decided by a court? The hard part about these kinds of cases isn’t knowing what law guides the arbitrability decision or why but accurately interpreting the parties’ true intent from limited information. With this difficulty in mind, Judge Smith’s consideration of the “wholly groundless” principle suggests an appropriate use, that being the principle’s capacity to give trial courts guidance on questions of arbitrability where the agreement in question is facially neutral about party intent, i.e. the parties’ arbitration agreement is unable to be said with certainty as showing clear and unmistakable evidence of the parties’ intention to have an arbitrator decide the threshold question of arbitrability. Per Judge Smith’s original language in Douglas,[11]
The law of this circuit does not require all claims to be sent to gateway arbitration merely because there is a delegation provision. In Agere Systems, Inc. v. Samsung Electronics Co. we sent a dispute to arbitration so the arbitrator could decide the gateway question of arbitrability because the agreement had a delegation provision. [12] But we did so only because there were plausible arguments that the dispute was covered by the agreement as well as plausible arguments that it was not: “We adopt no new standards of Fifth Circuit analysis of arbitration provisions today.”[13] “We simply conclude that there is a legitimate argument that this arbitration clause covers the present dispute, and, on the other hand, that it does not. The resolution of these plausible arguments is left for the arbitrator.”[14]
The Fifth Circuit’s reasoning in Douglas makes clear that the “wholly groundless” test as applied in Agere was not really an exception to making a determination on the arbitrability of the parties’ agreement as a matter of law under the clear and unmistakable evidence rule. Rather, the test applied in Agere amounts to a digestible rule that guides judges’ analysis on legal questions of arbitrability where extent factors before the adjudicator could not suggest anything resembling clear or unmistakable evidence about an agreement by the parties to submit the claim in question to an arbitrator. My reference to the “wholly groundless” test as a digestible rule is partly why I italicize the is in the quoted paragraph above. That verb could refer to either there being a delegation provision as a matter of law (i.e. a judge or jury found the facts in the dispute were sufficient to declare a clear and unmistakable intent to send the agreement’s arbitrability to an arbitrator) or it could refer to the mere presence of a provision in the agreement that one party maintains amounts to a delegation provision as a matter of law. In either case, the soundness of looking to the presence of any plausible of arguments suggesting the arbitration agreement covers the dispute in question would exclude a class of cases that could not possibly meet the clear and unmistakable standard of First Options.
The exclusion of that class of cases from arbitrability determination by simple rule would be good judicial policy because arbitrators and courts would always come to the same conclusion after a more searching review anyhow: namely, where no plausible argument for arbitrability exists the agreement in question failed to meet the clear and unmistakable evidence standard. Indeed, viewed in this way, the “wholly groundless” test in the vein of plausibility is actually more likely to send questionable arbitrability claims to an arbitrator than the clear and unmistakable evidence standard because the latter is a judgment call—a standard—while the former only bars claims where no evidence whatsoever could suggest any intent for an arbitrator to decide arbitrability—a standard-like rule.
This point seems to have been lost on the Fifth Circuit in Schein.[15] The magistrate judge found clear and unmistakable evidence.[16] The district court judge disagreed and the Fifth Circuit didn’t opine on whether there was clear and unmistakable evidence, only saying “here, the interaction between the AAA Rules and the carve-out is at best ambiguous.”[17] At that point, three reasonable adjudicators disagreed about what intent the parties clause showed. Because, as the appellate court itself said, the evidence was ambiguous (and how could it not be if three people came to different conclusions under de novo review) the Fifth Circuit should have sent the question to an arbitrator under the “plausibility” test formulated in Agere and refined in Douglas rather than trying to apply the “escape valve” “wholly groundless” test.[18]
Failing to see the full extent of the policy discussed by Judge Smith in Douglas, the Supreme Court’s rejection of the “wholly groundless” jurisprudence is regrettable. Rather than keep the language in Agere saying that plausibility is the test which smokes out arbitration clauses that could never meet the clear and unmistakable standard, while also concomitantly narrowly overrule Qualcomm in whole and the part of Douglas suggesting anything beyond clear and unmistakable is relevant to a determination of who decides arbitrability, the court overrules the “wholly groundless” jurisprudence wholesale. The result thereby throws out the good with the bad, and reverts back to a determination of clear and unmistakable evidence on a case-by-case basis through reference to party intent.[19] Confusion is sure to stick around, and litigation will abound in an area that eschewed an extended discussion about the proper application and use for rules to help adjudicators make consistent decisions about what shows intent to decide questions of arbitrability. This author hopes the Court’s decision in Schein does not discourage judges and lawyers from formulating sensible standards that can be consistently applied in this ever growing and important area of law.
[1] Henry Schein v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).
[2] See, First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944-945, (1995).
[3] Archer & White Sales, Inc. v. Henry Schein, Inc., No. 2:12-CV-572-JRG-RSP, 2013 WL 12155243, at *2 (E.D. Tex. May 28, 2013) (citing to Petrofac, Inc. v. DynMcDermott Petrol Operations, Co., 687 F.3d 671, 675 (5th Cir. 2012))
[4] Archer & White Sales, Inc. v. Henry Schein, Inc, No. 2:12-CV-572-JRG, 2016 WL 7157421 (E.D. Tex. Dec. 7, 2016), aff’d, 878 F.3d 488 (5th Cir. 2017).
[5] Douglas v. Regions Bank, 757 F.3d 460 at 463 (5th Cir. 2014) (reasoning that where no plausible arguments exist that the parties’ arbitration agreement covers the claim or claims presently at issue before the court, there can be no “clear and unmistakable” evidence of parties’ intent to have an arbitrator decide threshold issues of arbitrability)
[6] 139 S. Ct. 524 at 529-31.
[7] See, Rent–A–Center, West, Inc. v. Jackson, 561 U.S. 63, 67 (2010).
[8] 139 S. Ct. 524 at 529-31.
[9] Id. at 529.
[10] Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1371 (Fed.Cir.2006)
[11] Douglas v. Regions Bank, 757 F.3d 460 at 463.
[12] Agere Systems, Inc. v. Samsung Electronics Co., 560 F.3d 337 (5th Cir.2009),
[13] Id.
[14] Id.
[15] Archer & White Sales, Inc., 878 F.3d 488.
[16] Archer & White Sales, Inc., No. 2:12-CV-572-JRG-RSP, 2013 WL 12155243.
[17] Archer & White Sales, Inc., No. 2:12-CV-572-JRG, 2016 WL 7157421 Also See, 878 F.3d 488, 494–95
[18] 878 F.3d 488 at 496.
[19] See, 139 S. Ct. 524 at 529. Also See, Rent–A–Center, 561 U.S. 63.