Alternatives to the High Cost of Litigation Editor Russ Bleemer hosts analysis by Prof. Angela Downes, University of North Texas-Dallas College of Law, and arbitrator-advocate-amicus brief contributors Richard Faulkner, also of Dallas, and Philip J. Loree Jr. in New York.
Court’s Rejected Cert Request Is Argued Anyway
By Russ Bleemer
Was the U.S. Supreme Court having second thoughts about how it has approached Tuesday’s arbitration case?
Back for its second round of arguments at the Court after a decision just last year, Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963, returned to explore the issue, “Whether 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.”
Schein’s attorney, Kannon K. Shanmugam, a partner in the Washington, D.C., office of Paul Weiss, Rifkind, Wharton & Garrison, argued that the Fifth U.S. Circuit Court of Appeals, in deciding not to compel arbitration in the case, misapplied the historical presumption of arbitrability.
He also emphasized that “clear and unmistakable” evidence that the parties delegated the matter to arbitration puts the initial question of arbitrability to an arbitrator, even with the carveout for injunctions.
The appeals court had said that clear and unmistakable evidence that the parties wanted to arbitrate existed, but not to arbitrate the injunctive relief—a drafting issue that justified sending the case to the courts.
In his counterargument, respondent attorney Daniel L. Geyser, of Dallas’s Alexander Dubose & Jefferson, countered with, among other things, a focus on the delegation to arbitration by the parties.
That focus produced an usual argument. It wasn’t because many of the justices also focused on the particulars of the clause delegating the matter to arbitration. In fact, Geyser and Archer and White had cross-petitioned the Court to take on the issue of the delegation clause’s incorporation by reference of arbitration rules.
The Court granted certiorari on June 15 on Shanmugam and Henry Schein’s issue on the sweep of the injunction carveout. But the Court rejected the cross petition on delegation and incorporation of rules.
Yet at times, the rejected clause delegation issue was the argument’s primary focus.
“I want you to assume that we are not going to decide the question that you wanted us to decide in the cross-petition,” said Justice Samuel A. Alito Jr. during Geyser’s argument. “And if we make that assumption, I really don’t know how to answer the question that we granted review on because it does seem to turn on the degree of the delegation to the arbitrator of the power to decide whether the arbitrator can decide.”
Alito wasn’t the only one.
Archer and White had persisted with the question in its brief in the case even after the cert denial. More significantly, the failed cross-petition or the delegation clause itself was raised directly or in passing by nearly every one of the nine justices, who argued the case in an online broadcast, as has become the custom in the pandemic since May.
The cert grant, and simultaneous cert denial, made sense on paper. The Fifth Circuit had said the delegation was valid, putting the focus on the appellate court’s interpretation that the carveout for injunctions preceded the arbitrator’s work and had to be decided by a court.
But even Shanmugam’s argument on behalf of the petitioner anticipated the presence of his adversaries’ rejected issue. Before facing a single question, Shanmugam took on the cert denial himself, noting that 12 circuit courts agree that a delegation clause incorporating rules is sufficient.
The contract in the matter incorporated American Arbitration Association rules that give arbitrability decisions to the arbitrator.
Shanmugam opened his argument on behalf of petitioners Henry Schein stating that the Fifth Circuit review hierarchy was wrong for two reasons. “First, a delegation is simply an antecedent agreement that is subject to the rules governing arbitration agreements more generally,” he said, continuing, “Second, any doubts concerning the scope of arbitration agreements are resolved in favor of arbitration.”
If that arbitration presumption had been applied correctly, he argued, a carveout that doesn’t speak specifically to the delegation to an arbitrator cannot interfere with the overall delegation of a case to an arbitrator. “The Court should stick to the question it agreed to decide,” advised Shanmugam on behalf of Henry Schein, “and it should decide that question in petitioner’s favor.”
The argument highlights below are based on the audio feed of the case, available on the Supreme Court’s webpage at https://bit.ly/3m2RCxz, and the transcript, also on the Court’s site at https://bit.ly/3a6xDMv. For background on the case, including links to key documents and the 2019 Supreme Court decision in the same matter, see “Supreme Court Argument Preview: Looking Ahead to Round 2 on Schein and Arbitrability,” CPR Speaks blog (Dec. 3) (available at https://bit.ly/2VyD1z6) (The CPR Speaks link also contains information on the participants in the accompanying YouTube video discussion, conducted on Tuesday, Dec. 8.).
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The Supreme Court generally seemed to agree with Kannon Shanmugam’s opening words, but still returned to the delegation and rules’ incorporation questions almost as much as the Fifth Circuit’s denial of arbitration.
“They don’t want arbitrators deciding this,” said Chief Justice John G. Roberts Jr. in opening the questioning, referring to the presence of the contract clause carveout sending injunctions to court, adding, “Why would they want arbitrators to decide who gets to decide it?”
Shanmugam said that the Fifth Circuit divided the responsibility of who decides between the court and the arbitrator, while the contract was a clear delegation of the case to arbitration. The result of the appeals court opinion was negating that arbitration intention because of the carveout sending the case to court instead.
He returned repeatedly to a need to assert the presumption of arbitrability in viewing the parties’ arbitration clause and the context for the carveout.
The contract clause states, “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 . . .), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [the “AAA”].”
Justice Clarence Thomas focused on the delegation clause, asking Shanmugam to walk the Court through its use in the case. “I don’t see the word ‘delegation’ at all or a verb ‘delegate’ at all,” said Thomas.
Shanmugam replied that the Supreme Court “has never required magic words on the face of the agreement. Instead, all that the Court has said is that you have to have clear and unmistakable evidence. And under ordinary objective principles of contract formation, the incorporation of a document [referring to the arbitration agreement’s AAA rules referral] suffices in order to render that document part of the contract.”
Borrowing from labor law and referencing key Supreme Court precedents, Justice Stephen G. Breyer said that the presumption of arbitration still requires a deciding court to judge the scope of that arbitration. Shanmugam said that the delegation is “a kind of miniature contract formation,” that contemplates whether there was “a meeting of the minds that the arbitrator should decide questions concerning the scope of the arbitration agreement.”
The incorporation of the AAA rules, he said, was sufficient under ordinary contract formation principles.
Justice Samuel A. Alito Jr. asked Henry Schein’s attorney about the basis for the presumption for arbitration. Shanmugam replied it rested in the Federal Arbitration Act’s Section 2, as well as “flowing from the policy underlying the arbitration act as a whole.” He added, “if I were pressed, I would say it’s probably ultimately a matter of federal common law” as well as emanating from statute.
Justice Sonia Sotomayor returned immediately to the cross-petition on the delegation agreement’s incorporation of rules by reference, and said that the Henry Schein brief conceded that the Court could reach the issue to decide the case. She questioned whether the delegation to arbitration was clear for the injunction and all other issues.
Echoing the Fifth Circuit, Sotomayor agreed there was a clear delegation, but suggested she found ambiguity on the injunction’s decision maker. Shanmugam said that the appeals court incorrectly considered the presumption for arbitrability. Even with an unclear scope of arbitration, he explained, the Fifth Circuit should have applied a presumption that the case was to be arbitrated once it found that valid delegation.
Justice Elena Kagan was focused on the injunction carveout, posing a hypothetical change in the contract wording, and concluding, “if you have something which at least arguably seeks injunctive relief, the court should deal with the question of whether it does and then should go on to decide the issue.”
Justice Neil Gorsuch pressed Shanmugam on the point discussed with Alito on a statutory basis for the presumption for arbitration. The Henry Schein attorney stuck to FAA Section 2.
Justice Brett Kavanaugh retraced Shanmugam’s argument points with the attorney, and asked about “real world” contracting situations–“how people draft these contracts, what they expect, my understanding was that the question of who decides arbitrability, the who-decides question, is almost never divided between a court and an arbitrator because that would be almost nonsensical in the real world because you need one person to decide, and it’s either going to be the court or the arbitrator, not both the court and the arbitrator.”
Though the question initially ignored the existence of the injunction carveout, Shanmugam quickly agreed. “That’s correct. And I’m aware of no examples of such a division.” Kavanaugh responded, “Right. Nor am I.”
Then, Kavanaugh tackled the contract carveout in the case sending the injunction to the court, noting that every contract has them. “And so, if that alone means the Court decides what is arbitrable, then the Court will always decide arbitrability and really eradicate the idea that arbitrators can ever decide arbitrability,” he said.
Justice Amy Coney Barrett also restated Shanmugam’s argument, acknowledging the cross-petition issue’s denial and accepting the delegation to the AAA rules as sending arbitrability to the arbitrator. But echoing Shanmugam, she indicated that it would be nonsensical “to carve up arbitrability questions.” She continued, “If that’s true, why isn’t that reason to interpret this clause as not being a clear and unmistakable delegation of all questions of arbitrability?”
“As a matter of contract formation,” concluded Shanmugam, focusing on the presumption of arbitration, “there is an agreement to arbitrate arbitrability. At that point, Justice Barrett, everything else that we’re talking about is a question of interpretation. It’s a question of the scope of the delegation.”
Shanmugam summarized his argument for the Court, once again directing his attack on the delegation argument incorporating the AAA rules. He noted that the “[r]espondent is really asking the Court to decide this case based on a different question, the incorporation question. And that would be a bold strategy in any case, but I would submit it’s a particularly bold strategy here because Respondent asked the Court to decide that question at the cert stage, and the Court seemingly consciously made the decision not to add it.”
He again asked the Court to avoid the issue it already declined to hear, noting, “All that the Court need do in this case is to hold that the court of appeals’ actual reasoning is inconsistent with this Court’s decisions applying familiar Federal Arbitration Act principles.”
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Respondent attorney Daniel Geyser immediately attacked the delegation and incorporation points on behalf of his client Archer and White in his opening statement. “It is simply not plausible that anyone would recognize this issue and choose to resolve it by relying on an oblique reference to the AAA rules rather than a simple, explicit sentence delegating the gateway issue,” he told the justices in his opening statement.
He added that the injunction falls within the carveout from arbitration, and therefore isn’t subject to arbitration under the American Arbitration Association rules. “It makes no difference what those rules say because the condition for activating them is unmet,” he said.
Using a hypothetical and invoking Justice Kavanaugh’s discussion, Chief Justice Roberts began questioning Daniel Geyser by asking why the carveout’s arbitrability should be treated differently than arbitrability issues in an arbitration contract with no express carveout.
“[N]ormally,” replied Geyser, “when parties include an express delegation provision, it’s unconditional and it’s categorical. It’s not like what you have here.”
Roberts asked Geyser to leave the AAA rules’ delegation out of his answer. “I think that’s what we tried to do when we denied cert on that question,” said the chief justice.
Geyser countered that the default is that the court decides the arbitrability issue. He said, “The only time an arbitrator decides whether a dispute falls within the scope of the agreement is if there is, in fact, a delegation provision.”
Geyser suggested the problem was drafting: “We absolutely concede that if the exception is limited solely to the scope of arbitration and there is a separate unconditional delegation provision, that the arbitrator gets to make that determination. “
He continued on the theme, telling Justice Thomas that phrasing matters, and the Court should focus on the delegation and the wording of exceptions. He said Archer and White would lose if there was a second sentence that said that arbitrator shall decide arbitrability—“an express unconditional delegation of the issue of arbitrability to the arbitrator.”
Geyser continued: “[U]nless there’s clear and unmistakable evidence that the parties wanted the arbitrator to decide arbitrability, then the default is with the court, and the court has to first identify a delegation agreement and identify any limits to that delegation agreement. “
Thomas was skeptical. He noted that Geyser’s construction limits an arbitrator’s authority on arbitrability after it had been granted by the contract. “I don’t know how you can have it both ways,” said Thomas, “You [can’t] say he has the authority, and in these limited circumstances, he doesn’t.”
Geyser countered that the Court has “never” issued a “binary rule.” He said, “Parties are perfectly free under the Federal Arbitration Act to delegate some issues to arbitration and to delegate some arbitrability issues to arbitration.”
Facing Justice Alito’s concerns about the posture of the case, Geyser said the Court, in the face of the question of whether there was a clear and unmistakable delegation to arbitration of arbitrability, “could dismiss the case as improvidently granted,” or request additional briefing, though he quickly added that he thought the case was fully briefed.
But he also explained to Alito that he believed even in the face of a clear delegation, a plain-text reading of the agreement shows that the carveout for injunctions removes the case from the arbitrator. “[It’s] the most straightforward way to affirm in this case,” he said.
Justice Sotomayor said that Geyser’s argument falls short because of a clear delegation to the AAA rule for arbitrability matters. Geyser countered that the delegation was limited by the injunction carveout.
In response to Justice Kagan’s questioning, Dan Geyser said that court decision for the gateway-to-arbitration issues is “traditionally what parties expect.” He continued, “It provides a critical judicial safeguard and it avoids the situation where the arbitrator is deciding the scope of his or her own jurisdiction.”
He added that the FAA backed delegating “certain issues but not others to the arbitrator.” He urged the Court to support the requirement that “unless parties clearly and unmistakably override the strong presumption in favor of courts acting as gatekeepers, that Congress imagined in the Federal Arbitration Act, in Sections 3 and 4, that, in fact, the courts keep that gateway role.”
Justice Kavanaugh returned to the purpose of contracting, saying he had a problem with Geyser’s conception that contracting parties divvy up arbitrable matters and court matters. “[T]hat’s just not how it works in the real world, nor could it [realistically] work that way in the real world,” he said.
Kavanaugh asked Geyser if the justice’s interpretation was wrong. “In the real world,” Geyser replied, “parties sometimes do limit a delegation. They might say that the court decides whether class arbitration is appropriate. And parties are perfectly free to do that.”
He told Cavanaugh, “I don’t see any way to read the actual text of this agreement to say that the carveout wouldn’t include a carveout to the AAA rules.”
Geyser conceded to Justice Barrett that his client would lose if the Court does not agree that there was no clear and unmistakable delegation to arbitration and declines “to get into the question that we denied cert on, [and instead] assume[s] that incorporating the AAA rules by reference is enough to constitute a clear and unmistakable delegation. . . .”
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Dan Geyser began his summation on behalf of respondent Archer and White noting, “[W]e apologize for trying to get the Court back into an issue that maybe it doesn’t wish to address.” He warned against “a profoundly atextual construction of the plain text of this agreement,” and said, “I think it would be very difficult to construe this language in a sensible way without getting into the delegation.”
In his rebuttal, Henry Schein attorney Kannon Shanmugam urged the Court to reverse the Fifth Circuit, noting, “[I]t’s one thing to say that parties may want to divide up responsibility for different types of questions of arbitrability such as who is subject to the arbitration agreement or whether a class action waiver is valid, but as I’ve pointed out in my earlier colloquy with Justice Kavanaugh, we are not aware of any actual agreement in the real world that divides up responsibility for a particular question of arbitrability and in particular the paramount question of the scope of the arbitration agreement.”
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The author edits Alternatives to the High Cost of Litigation for the CPR Institute.