Supreme Court Returns Schein To Its Docket, With a Focus on Arbitrability

By Russ Bleemer & Heather Cameron

Schein is back.

The U.S. Supreme Court this morning agreed to hear a new arbitration petition on an old case. 

The Court granted cert today on the issue of “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.”

The case, Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963, is expected to be scheduled in the Court’s 2020-2021 term beginning in October. The Court’s docket page is available at https://bit.ly/30L3gX4.

The issue will be on the delegation agreement in the arbitration contract in a case the Court saw and decided last year, Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw).

The new case, which comes at the request of New York-based health care supplier Schein, will likely center on whether the arbitration agreement’s exclusion of injunctive relief from an arbitrator decision in favor of a court overrides the agreement’s delegation to an arbitrator a decision on whether the matter should be arbitrated.

But that’s also only half the Court’s arbitration story today.  It also denied a cross petition in the case by Texas dental supply company Archer & White Sales on two more arbitration issues that still could still work their way into the decision or, at the least, are guaranteed to see more litigation in state and circuit courts. 

The cross-petition cert denied issues were

(1) Whether an arbitration agreement that identifies a set of arbitration rules to apply if there is arbitration clearly and unmistakably delegates to the arbitrator disputes about whether the parties agreed to arbitrate in the first place; and

(2) whether an arbitrator or a court decides whether a nonsignatory to an arbitration agreement can enforce the arbitration agreement through equitable estoppel.

A question related to the latter issue already appeared just this month in the Court’s decision in an international arbitration case, GE Energy Power Conversion France SAS Corp. v. Outokumpu Stainless USALLC, et al., No. 18-1048 (available at https://bit.ly/2XogerH) (see a CPR Speaks article and video analysis at https://bit.ly/2U1QrDs).

When the Court first decided Schein in January 2019, it reversed the Fifth Circuit and unanimously held that under the Federal Arbitration Act, an arbitrator, not the court, should determine the threshold question of arbitrability—whether an arbitration agreement applies to a particular dispute—when the parties have clearly and unmistakably delegated that question to an arbitrator via delegation agreement, even if the argument for arbitrability is “wholly groundless.” See Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. at 526 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw).

The case was remanded to the Fifth Circuit to determine whether the parties’ contract contained a delegation agreement, sending the determination of arbitrability to a tribunal rather than a court, and satisfied the Supreme Court’s “clear and unmistakable” intent standard established in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (available at https://www.oyez.org/cases/1994/94-560).

Rule 7(a) of the AAA Commercial Arbitration Rules, which the parties incorporated into their contract in the case, explicitly gives the arbitrator power to determine his or her own jurisdiction as well as the arbitrability of any claim or counterclaim. (available at https://www.adr.org/Rules).

Following circuit precedent, the Fifth Circuit noted that by incorporating the AAA’s rules, the parties had indeed entered into a delegation agreement for at least some disputes. But in its remand, the Fifth Circuit also found an explicit “carve-out” exception in the contract for disputes, like the one at hand, seeking injunctive relief.

The appeals court, therefore, affirmed the district court’s denial of Schein’s motion to compel arbitration. Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019) (available at http://bit.ly/33Cb78g).

Schein petitioned the Supreme Court again to challenge that decision. That’s the case and the issue the Court agreed to hear today, while Archer & White’s conditional cross-petition issues were not accepted.

For more on the case and an in-depth discussion of the issues involved, see Philip J. Loree Jr., CPR Speaks, “Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court” (Feb. 19, 2020) (available at http://bit.ly/3bQXQgl); Richard D. Faulkner & Philip J. Loree Jr., “Schein’s Remand Decision: Should Scotus Review the Provider Rule Incorporation-by-Reference Issue?” 38 Alternatives 70 (May 2020) (available at https://bit.ly/2C6Ksap), and Richard D. Faulkner & Philip J. Loree Jr., “Why the U.S. Supreme Court Should Review Whether Arbitrability May Be Incorporated by Reference,” 38 Alternatives 87 (June 2020) (available athttps://bit.ly/2YB0zVj).

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Bleemer edits Alternatives at altnewsletter.com for the CPR Institute.  Cameron, a second-year Fordham University School of Law student, is a CPR Institute 2020 Summer Intern.

Supreme Court Declines to Hear a California Supreme Court Case on Arbitration and Unconscionability

By Seorae Ko

Alternatives editor Russ Bleemer is joined once more by Richard Faulkner and Philip Loree Jr., this time talking about the Supreme Court recently declining to hear a California Supreme Court case on arbitration and unconscionability, OTO LLC v. Kho, discussed below

The U.S. Supreme Court this morning declined a certiorari petition ona California Supreme Court decision to render a wage arbitration agreement unenforceable as procedurally and substantively unconscionable.

While the issue of unconscionability overhangs the breadth of arbitration jurisprudence, the Supreme Court has used the Federal Arbitration Act to preempt such concerns in favor of arbitration’s predominance. AT&T Mobility LLC v. Concepcion, 563 U.S.333, 344, 348 (2011). Today’s cert denial can be seen as a divergence from the pattern.

On the other hand, today’s declined case, OTO LLC v. Kho, No. 19-875, reinforces the California’s top Court decision that, though it found in favor of the employee opposing arbitration, permitted an agreement to arbitrate wage disputes “so long as it provides an accessible and affordable process.” The California decision follows AT&T Mobility in that it states that the “FAA preempts a state-law rule that categorically prohibits an adhesive arbitration agreement from requiring an employee to waive access to a Berman hearing.”

The Berman hearing is a California administrative process designed to provide a quick, informal, and affordable method for resolving disputes over unpaid wages, according to a brief filed in the case by the state’s labor commissioner. (See below.)

The California Supreme Court OTO decision held that a court “faced with a petition to compel arbitration under these circumstances must grant the petition unless the party opposing the petition asserts a valid contract defense.”

In the case, the parties contested the enforceability of an arbitration agreement on wage disputes, which the employee, Ken Kho, challenged as unconscionable. OTO L.C. v. Ken Kho, 447 P.3d 680 (Cal. 2019) (available at https://casetext.com/case/oto-llc-v-kho-1).

The California Supreme Court first noted that general contract defenses such as unconscionability may be applied to invalidate arbitration agreements without contravening the FAA or state arbitration acts, citing Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 282 P.3d 1217, 1231 (Cal. 2012)).

The opinion then evaluated the agreement’s substantive and procedural unconscionability on a “sliding scale,” and stated that substantive fairness must be considered in the context of the agreement’s procedural unconscionability, citing Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669, 689 (Cal. 2000); Sanchez v. Valencia Holding Co., LLC, 353 P.3d 741(Cal. 2015)).

Ultimately, the California Supreme Court ruled that the arbitration agreement in question was unenforceable as unconscionable. It found that the agreement was made under such oppression and surprise as to produce a high degree of procedural unconscionability. In light of the substantial procedural unconscionability, the court also found substantive unconscionability in the agreement.

OTO filed a cert petition in January to have the decision reversed. Petitioner argued that the California Supreme Court’s decision violated U.S. Supreme Court precedent in two ways.

First, the petitioner argued that the decision went against precedent mandating that the FAA preempt state rules discriminating against arbitration. The California Supreme Court’s comparative approach to substantive unconscionability, unique to arbitration agreements, failed to place arbitration agreements on equal footing with other agreements. Brief for Petitioner at 4 (citing AT&T Mobility, 563 U.S. at 339-340 (2011)) (available at https://www.supremecourt.gov/DocketPDF/19/19-875/128316/20200113114622841_OTO%20cert%20petition.pdf).

The petitioner connected this approach to a broader trend in the California Supreme Court to adopt “sharply anti-arbitration rules, only to be reversed by this Court.” Brief by Petitioner at 13 (citing DIRECTV Inc. v. Imburgia, 136 S. Ct. 463, 468-471 (2015); AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339-340 (2011); Preston v. Ferrer, 552 U.S. 346, 353-354 (2008); Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987); Southland Corp. v. Keating, 465 U.S. 1, 16 n.11 (1984)).

Citing Sonic-Calabasas A Inc. v. Moreno, 247 P.3d 130 (2011) (Sonic I), the petitioner explained that the California Supreme Court’s substantive unconscionability analysis was a method devised to reach “effectively the same result” as its decision in Sonic I, which had been vacated by the Supreme Court for violating the equal treatment principle. Brief for Petitioner at 13. The Sonic I decision had been condemned because its class-arbitration rule uniquely addressed arbitration agreements; by the same reasoning, the petitioner suggested, the OTO decision could not stand.

Second, the petitioner, an auto dealership, argued that the decision went against precedent mandating the FAA to preempt even a general contract defense if it interferes with the “‘fundamental attributes of arbitration,’ including lower costs, greater efficiency and speed, and the ability to choose an expert adjudicator to resolve specialized disputes.”

Accordingly, a contract defense erecting “preliminary litigating hurdles” that destroy the “prospect of speedy resolution” is preempted by the FAA. Brief for Petitioner at 6 (citing AT&T Mobility, 563 U.S. at 344, 348). The petitioner argued that the California Supreme Court’s approach erected such a litigating hurdle because it required a prolonged fact-intensive inquiry. Brief for Petitioner at 17 (referring to American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013)).

A particularly salient point pursued by the petitioner focused on the California Supreme Court’s substantive unconscionability analysis. The petitioner suggested that the court condemned the arbitration agreement, which it claimed covered a wage dispute with the respondent, a service technician, as a time-consuming hurdle to litigation when the agreement consumed time because it “offered too many of the protections of civil litigation.” Brief for Petitioner at 12. (Emphasis is in the brief.) Such an approach evaluates an agreement to be substantively unconscionable for the reason that it tries too hard to avoid unfairness.

The petitioner also stressed that the case holds enormous significance in “safeguard[ing] the [FAA]’s commitment to the enforceability of arbitration agreements.” Brief for Petitioner at 19.

Petitioner OTO was not alone in its view. Five amicus briefs were filed in support of the objections. Cautioning against “judicial hostility towards arbitration” (Amicus Brief by Atlantic Legal Foundation at 2 (citing Nitro-Lift Techs., L.L.C. v. Howard, 133 S. Ct. 500, 503 (2012) (per curiam)) (available at https://www.supremecourt.gov/DocketPDF/19/19-875/133006/20200213191401278_19-875tsac%20Atlantic%20Legal%20Foundation%20%20-OTO%20v%20Kho%20FINAL.pdf)), they called out the decision below as “a thinly veiled effort to bar wage-dispute arbitration altogether.” Amicus Brief by Washington Legal Foundation at 8 (available at https://www.supremecourt.gov/DocketPDF/19/19-875/133008/20200214090311910_19-875%20tsac%20Washington%20Legal%20Foundation.pdf).

The petitioner’s reasoning on both the equal treatment principle and the litigating hurdle assessment found support in the amicus briefs.

On the other side, respondent Kho argued that the California Supreme Court’s decision was consistent with the Supreme Court’s arbitration precedents. Brief for Respondent California Labor Commissioner at 10 (available at https://www.supremecourt.gov/DocketPDF/19/19-875/142627/20200429130457818_No.%2019-875%20DOJ%20CA%20FINAL%20BIO.pdf). Pointing to the California courts’ tradition of comprehensive and contextual approach to unconscionability, the respondent emphasized that OTO had offered “no conflicting case remotely similar which creates a need to hear [the] case.” Brief for Respondent Ken Kho at 18 (available at https://www.supremecourt.gov/DocketPDF/19/19-875/142640/20200429135355866_OTO%20v.%20Kho%20Opposition%20to%20Petition%20for%20Writ%20of%20Certiorari%2019-875.pdf). The respondent further asserted that, instead of disfavoring arbitration, the California Supreme Court had promoted arbitration by “requir[ing] an arbitration procedure that has all of the ‘fundamental attributes of arbitration.’” Brief for Respondent Ken Kho at 25.

As a tangentially related matter, Kho also challenged the jurisdiction of the Supreme Court, arguing that petitioner had failed to establish either that the FAA applies or that the dispute effects commerce as per the commerce clause. Brief for Respondent Ken Kho at 27.

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The author, a second-year Harvard Law School student, is a 2020 CPR Institute Summer intern.

Holding There Is No Treaty-FAA Conflict, Supreme Court Permits Equitable Estoppel for International Arbitration Parties

By Russ Bleemer

Philip J. Loree and Richard D. Faulkner discuss the GE Energy v. Outokumpu Supreme Court decision with Alternatives editor, Russ Bleemer

Seeing no conflict between key international arbitration enforcement law implemented by the Federal Arbitration Act and state laws, the U.S. Supreme Court today permitted a company that was not a party to an arbitration contract to make its case in using the doctrine of equitable estoppel to enforce an arbitration agreement.

GE Energy Power Conversion France SAS Corp. v. Outokumpu Stainless USALLC, et al., No. 18-1048 (available at https://bit.ly/2XogerH), reverses and remands an Eleventh U.S. Circuit Court of Appeals decision that said that GE Energy, which provided motors to Outkumpu via a general contractor, could not use the contract between Outokumpu and the general contractor to take the case to arbitration.

A unanimous opinion written by Justice Clarence Thomas held that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (available at https://bit.ly/2ZVazuK), which is codified in United States in the FAA’s second chapter, does not conflict with domestic equitable estoppel doctrines that permit the enforcement of arbitration agreements by nonsignatories.

On remand, GE Energy will be able to use the equitable estoppel doctrine to invoke the arbitration contract between Outokumpu and the general contractor, and argue that the contract contemplates that nonparty suppliers to the general contractor may use arbitration to settle disputes.

Much of the opinion centered on the role of nonparties in invoking arbitration agreements under the international and national laws, deploying, in Thomas’s words, a “textual” analysis of the Convention and the FAA.

The predecessors and affiliates of Outokumpu, a Calvert, Ala., steel manufacturer, signed a contract for the construction of three mills. The contract contained an arbitration clause. The construction company subcontracted for nine motors to run the plants from petitioner GE Energy. When Outokumpu filed suit against GE Energy after it refused repairs on the motors, all of which failed, GE Energy asked a court to compel arbitration under the Outokumpu-general contractor agreement, also objecting to Outokumpu’s attempted federal-court joinder of foreign insurers.

GE Energy was not a party to the Outokumpu construction contract. Still, an Alabama federal district court granted GE Energy’s motion, and Outokumpu appealed to the Eleventh Circuit, which reversed and sent the case back to the trial court.

The Supreme Court today reversed again, remanding the case back for further proceedings, likely eventually to the district court, which had granted GE Energy’s motion to compel arbitration with Outokumpu and an insurer. But the lower court had granted the arbitration request because it said that, in its role as a subcontractor, GE Energy qualified as a party under the contract.

The Supreme Court today used the opinion to uphold the principle of equitable estoppel, which didn’t figure in the trial court’s decision.

The Eleventh Circuit had reversed the trial court, rejecting arbitration, because it said that the Convention required that the party actually sign an arbitration agreement, excluding nonparties’ ability to invoke the contract using a state law doctrine like equitable estoppel.

Thomas’s reasoning started with the FAA, which he wrote “permits courts to apply state-law doctrines related to the enforcement of arbitration agreements.” That would allow the application of states’ equitable estoppel doctrines. 

The opinion states, “Generally, in the arbitration context, ‘equitable estoppel allows a nonsignatory to a written agreement containing an arbitration clause to compel arbitration where a signatory to the written agreement must rely on the terms of that agreement in asserting its claims against the nonsignatory.’” 21 R. Lord, Williston on Contracts §57:19, p. 200 (2017).

The Convention, noted Thomas, focuses almost entirely on enforcement, and the short Article II on agreements “in writing,” which discusses the need for a signature, wasn’t in conflict with the FAA-backed equitable estoppel doctrines.

The opinion notes that the New York Convention is silent on the status of nonsignatories. “This silence is dispositive here,” wrote Justice Thomas, “because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”

The opinion analyzes the treaty’s “negotiating and drafting history,” and says that the Court found “Nothing in the drafting history [that] suggests that the Convention sought to prevent contracting states from applying domestic law that permits nonsignatories to enforce arbitration agreements in additional circumstances.”

The opinion also dodges the need to interpret the significance of the executive branch’s view of the treaty. The United States, which argued in the case in January, backing GE Energy, claimed that the Court should give deference and “great weight” to its amicus interpretation of the treaty, which it had  submitted in another unrelated D.C. Circuit Court of Appeals case. 

Outokumpu countered “that the Executive’s noncontemporaneous interpretation sheds no light on the meaning of the treaty, asserting that the Executive expressed the “opposite . . . view at the time of the Convention’s adoption.”

But Justice Thomas concluded,

We have never provided a full explanation of the basis for our practice of giving weight to the Executive’s interpretation of a treaty. Nor have we delineated the limitations of this practice, if any. But we need not resolve these issues today. Our textual analysis aligns with the Executive’s interpretation so there is no need to determine whether the Executive’s understanding is entitled to “weight” or “deference.”

The Court’s remand order addressed the big issue in the Eleventh Circuit about the New York Convention’s requirement that the agreement in writing needs to be signed by the parties.  Noting that the Convention provisions cited by the Eleventh Circuit address the recognition of arbitration agreements, not who is bound by the agreements, Thomas wrote, “Because the Court of Appeals concluded that the Convention prohibits enforcement by nonsignatories, the court did not determine whether GE Energy could enforce the arbitration clauses under principles of equitable estoppel or which body of law governs that determination. Those questions can be addressed on remand.”

The opinion concluded by limiting the holding to the issue of the Convention and domestic-law equitable estoppel doctrines, finding no conflict between the two.

Justice Sonia Sotomayor concurred separately, agreeing that the Convention “does not categorically prohibit the application of domestic doctrines. She noted, “however, that the application of such domestic doctrines is subject to an important limitation: Any applicable domestic doctrines must be rooted in the principle of consent to arbitrate.”

Sotomayor said that consent is foundational to arbitration practice.  “This limitation is part and parcel of the Federal Arbitration Act (FAA) itself,” she wrote.

For a discussion of the Jan. 21 oral arguments in the case, see David Chung and Russ Bleemer’s post on CPR Speaks, “Tuesday’s SCOTUS Argument: Can Non-Signatories Compel Arbitration in the United States Under the New York Convention?” (January 22) (available at https://bit.ly/2ZVqPfg). For an examination of the GE Energy parties’ and amicus’s briefs, see “The Friends Speak: Here’s What Scotus Will Decide In the GE Energy International Arbitration Case,” 38 Alternatives 2 (January 2020) (available at https://bit.ly/2TXmcO2).

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The author edits Alternatives for the CPR Institute.  CPR Institute Summer 2020 intern Heather Cameron, a second year law student at Fordham University School of Law in New York City, contributed research. 

Supreme Court Declines Arbitration Case that Would Have Preempted Public Injunction Relief

By Yixian Sun

The U.S. Supreme Court this morning let stand a Ninth U.S. Circuit Court of Appeals ruling that struck a consumer arbitration agreement because it waived litigation including “public injunctive relief,” California’s so-called McGill Rule.

            Specifically, today, the Court this morning declined to hear AT&T Mobility LLC v. McArdle, Docket No. 19-1078, and Comcast Corp. v. Tillage, Docket No. 19-1066, two companion cases that raised a prominent question on consumer arbitration agreements.

            Arbitration experts believed the Court would take the case as a sequel to Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1623 (2018), and AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), which, respectively, backed individual arbitrations in employment and consumer cases.

McArdle is a Ninth Circuit case concerning the enforceability of a consumer arbitration agreement.  The specific issue, according to AT&T’s petition for certiorari, is that: “[w]hether California’s public-policy rule conditioning the enforceability of arbitration agreements on acquiescence to public-injunction proceedings is preempted by the Federal Arbitration Act (FAA).” Brief for Petitioner at i, AT&T Mobility LLC v. McArdle, No. 19-1078 (available on the Supreme Court’s website at https://bit.ly/2TYos7M).

Under the McGill Rule, any provision that precludes consumers from seeking public injunctive relief–injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public–in arbitration or in other dispute resolution forums, is contrary to California public policy and thus is unenforceable in California. McGill v. Citibank, N.A., 393 P.3d 85, 86 (Cal. 2017).

In 2019, the Ninth Circuit issued similar holdings in three cases including McArdle; it held that the McGill Rule was not preempted by the FAA, which directed courts to treat arbitration agreements as “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” McArdle v. AT&T Mobility LLC, 772 Fed. Appx. 575, 575 (9th Cir. 2019) (unpublished) (available at https://bit.ly/3eQsmrx); see also Blair v. Rent-A-Ctr. Inc., 928 F.3d 819 (9th Cir. 2019) (articulating reasons for upholding the McGill Rule).

AT&T filed its cert petition in February, seeking to have the Ninth Circuit’s decision overruled. According to the petition, since public-injunction claims focus on third parties’ interests and frequently involve complicated proceedings, they are “fundamentally inconsistent with arbitration’s traditionally individualized and informal nature” protected by the FAA. Brief for Petitioner at 14–20.

Relying on Justice Clarence Thomas’s previous interpretation of the FAA’s saving clause, it added that the McGill Rule cannot be saved because it deals with the enforceability rather than the validity of arbitration clause. FAA Section 2, the source of the saving clause, states “an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S. Code § 2.

Many commentators believed that the petitioners should have had a compelling case if they were able to set foot into the Supreme Court, given the Court’s “35-year history of declaring numerous California laws preempted by the FAA,” and its “unabashedly pro-arbitration Justices” including the Chief Justice John G. Roberts Jr. and Justice Brett Kavanaugh. See, e.g., Mark J. Levin, Possible Supreme Court Review of California’s “McGill Rule” Moves One Step Closer as Ninth Circuit Stays Mandates in Blair Appeals, JDsupra (Jan. 31) (available at https://bit.ly/2XNsFfz); Richard E. Gottlieb & Brad W. Seiling, Arbitration: Will U.S. Supreme Court Step In to Solve California’s McGill Problem? Manatt (Feb. 5) (available at https://bit.ly/2XmEgn5).  See also Alan S. Kaplinsky & Mark J. Levin, “FAA Preemption Petitions Now Ripe for Scotus Conference,” Consumer Finance Monitor (Ballard Spahr) (May 12) (available at https://bit.ly/3eFpOwg).

In addition to AT&T Mobility LLC v. Concepcion, and Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018), last year the Supreme Court sought to preserve the enforceability and the individualized nature of bilateral arbitration in the context of consumer and employment disputes via Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019). A major argument made by the petitioners is that Concepcion governed, because granting public injunctive relief would interfere with the bilateral nature of arbitration just as class action does. Brief for Petitioner at 20–22.

Precedents at lower courts on public injunction suits and arbitration are split, however, as AT&T Mobility reported itself in the McArdle cert petition. Brief for Petitioner at 26 (citing McGovern v. U.S. Bank, N.A., 362 F. Supp. 3d 850, 862-64 (S.D. Cal. 2019)).

The petitioners believed that the stakes are high. AT&T Mobility warned that under the Ninth Circuit ruling, it would only take a public-injunctive request for parties to circumvent an arbitration provision, thereby forcing companies to abandon consumer arbitration altogether.

Business interests strongly backed AT&T Mobility’s claim.  In order to support AT&T Mobility and Comcast’s position, more than half dozen pro-business groups, including the U.S. Chamber of Commerce, filed amicus curiae briefs, reasoning that the McGill rule’s deterrence effect against traditional bilateral arbitration will leave both businesses and consumers worse off. See., e.g., Brief amici curiae of The Chamber of Commerce of the United States of America at 7–11.

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The author, a second-year Harvard Law School student, is a 2020 CPR Institute Summer Intern in Cambridge, Mass.

Supreme Court Declines To Hear Arbitration Case on ‘Equal Footing’

The U.S. Supreme Court this morning declined to hear an appeal in an Oklahoma arbitration case on the so-called equal-footing principle—the idea that the Federal Arbitration Act prevents courts and legislatures from targeting rulings and laws to arbitration agreements, and instead requires  them to place arbitration on an equal footing with other contracts.

The Court denied cert on Tamko Building Products, Inc. v. Williams, Daniel, et al., No. 19-959 (case documents including party briefs available on Scotusblog at https://bit.ly/3dcPrn7).

The Oklahoma Supreme Court case declined to enforce an arbitration agreement between homeowners and shingle manufacturers where the arbitration agreement was “printed on shingle wrapping viewed only by contractors and then discarded.”

Tamko, a Galena, Kansas, building supply company, contended that the Oklahoma court’s decision violated the principle in the Supreme Court case of Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017) (available at https://bit.ly/2YvMji9), which held that the FAA couldn’t be held to higher standards than other contracts.

Tamko, according to its reply brief filed last month with the Court, contended that the Oklahoma Supreme Court “found an agency relationship that empowered contractors buying shingles to bind homeowners to the terms of sale concerning matters such as price and delivery, but not arbitration—because of the importance of the jury-trial right.”

But, it continued, “That decision blatantly violates the FAA’s equal-footing principle.”

As a result of the cert denial, the Oklahoma Supreme Court’s decision that the homeowners “never had an opportunity to make a knowing waiver of access to the courts,” stands, along with its reversal of a trial court order remanding the case for trial.

Supreme Court Rejects NFL’s Rams Bid to Arbitrate

By Russ Bleemer

The U.S. Supreme Court this morning declined to hear Rams Football Co., et al. v. St. Louis Regional Convention & Sports Complex Auth., No. 19-672, a case involving a prominent question in the arbitration field.

Rams Football is a Missouri state appeals court case on arbitrability and the so-called delegation clause—the arcane lawyers’ law on who gets to decide whether a case is decided by arbitrators or the courts.

The case had been listed for Friday Court conferences, according to Scotusblog, at least eight times this before the Court turned it down at Friday’s conference, and noted the denial in this morning’s order list.

The CPR Speaks blog discussed Rams Football at length in David Chung, “Under Consideration: The Supreme Court May Be Ready to Tackle Arbitrability–Again” (March 23) (available at https://bit.ly/2wx0Nmf).

The Supreme Court set out the law on delegation clauses in First Options v. Kaplan, 514 U.S. 938 (1995) (available at http://bit.ly/2WEXGnF)—a case argued and won by Chief Justice John G. Roberts Jr. when he was a Washington, D.C., partner in Hogan & Hartson—which held that courts should review arbitrability and should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.

And the standard has been elusive ever since.

Problems with arbitrability may be growing.  In addition to the Rams Football case, last year’s Supreme Court decision on the subject,  Henry Schein, Inc., et al. v. Archer and White Sales, Inc., 139 S.Ct. 524 (2019) (available at http://bit.ly/2YLDkWQ), was remanded, reheard, decided, and is back before the Court on basically the same issue.

In last year’s decision, the Court held unanimously that parties to a contract have the ultimate say in whether to have an arbitrator or a court resolve disputes on questions of arbitrability.  Schein’s main holding was that a court couldn’t refuse to enforce arbitration because it believed the claims for arbitration were “wholly groundless”; it sent the case back on remand to the Fifth U.S. Circuit Court of Appeals, and the remand decision about the delegation clause is back before the Court for cert consideration.

So far as it is known, the new Schein has not yet made it to the Court’s conference table.  For more on Schein, see Philip J. Loree Jr., “Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court,” CPR Speaks (Feb. 19) (available at http://bit.ly/3bQXQgl).

See also, Philip J. Loree Jr., “Schein’s Remand Decision Goes Back to the Supreme Court. What’s Next?” 38 Alternatives 54 (April 2020) (available https://bit.ly/3aYy7Sg), and  Richard D. Faulkner & Philip J. Loree Jr., “Schein’s Remand Decision: Should Scotus Review the Provider Rule Incorporation-by-Reference Issue?” 38 Alternatives 70 (May 2020) (available at http://altnewsletter.com/ on May 1).

Late last month, an appellate court in Florida in a split decision trashed the concept of incorporating by a reference to American Arbitration Association rules as “clear and convincing evidence” of parties agreeing to an Internet app clickthrough contract as sending the arbitrability decision to an arbitrator. Doe and Doe v. Natt and Airbnb Inc., Case No. 2D19-1383 (Fla. 2d DCA March 25) (available at https://bit.ly/3byW6r6).

The Rams issue, according to the team’s cert request petition was

Whether the Federal Arbitration Act permits a court to refuse to enforce the terms of an arbitration agreement assigning questions of arbitrability to the arbitrator if those terms would be enforceable under ordinary state-law contract principles in a non-arbitration context.

For now, the Missouri Court of Appeals decision affirming a trial court’s decision denying arbitration and sending the case to trial stands, and the case is remanded to trial.

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Scotusblog’s case page, available at https://bit.ly/2QANwjk, contains the Rams’ cert petition, the respondent’s brief in opposition, and the Rams’ reply.

Russ Bleemer is the editor of Alternatives

Under Consideration: The Supreme Court May Be Ready to Tackle Arbitrability–Again

By David Chung

A Fifth Circuit case on whether a matter was correctly sent to arbitration was distributed for conference at the U.S. Supreme Court for the fifth time over the past two months on Friday, March 20, so the Court could consider hearing it.

The case didn’t appear on this morning’s order list, but that fact alone may be indicative of a lot more arbitration at the nation’s top court.

Any arbitration case before the Court would gain notice on its own in the ADR world.  But the new petition for certiorari is even more noteworthy because the Court had appeared to have decided the issue just a little more than a year ago in its previous term.  Henry Schein, Inc., et al. v. Archer and White Sales, Inc., 139 S.Ct. 524 (2019) (available at http://bit.ly/2YLDkWQ), the Court held unanimously that parties to a contract have the ultimate say in whether to have an arbitrator or a court resolve disputes on questions of arbitrability.

But Schein’s main holding was that a court couldn’t refuse to enforce arbitration because it believed the claims for arbitration were “wholly groundless,” and the nation’s top court sent the case back on remand to the Fifth U.S. Circuit Court of Appeals.

The remand order was a step before actual arbitration, however.  The Court asked the Fifth Circuit to decide whether the contract’s delegation clause really pointed to an arbitrator deciding arbitrability.

The appeals panel looked at the contract again and said it didn’t, and found the decision was for the courts, again.

And the defense petitioned the Supreme Court to hear Schein, an appeal that was filed at the end of January and has not yet made it to a Court conference.  See Philip J. Loree Jr., “Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court,” (Feb. 19) (available at https://bit.ly/2U8ZumI); see also, Philip J. Loree Jr., “Schein’s Remand Decision Goes Back to the Supreme Court. What’s Next?” 38 Alternatives 54 (April 2020) (available next week at altnewsletter.com and on Lexis & Westlaw; CPR Institute membership access after logging in at www.cpradr.org/news-publications/alternatives).

But while Schein was being relitigated, at the same time and on the same issue about the extent of the reach of the clause that delegates arbitration decision making, The Rams Football Co. LLC v. St. Louis Regional Convention & Sports Complex Auth., No. 19-672, already was in front of the Court for consideration on whether it should be heard.

Closely mirroring Schein, the Rams issue, according to the team’s cert request petition is

Whether the Federal Arbitration Act permits a court to refuse to enforce the terms of an arbitration agreement assigning questions of arbitrability to the arbitrator if those terms would be enforceable under ordinary state-law contract principles in a non-arbitration context.

The case has made it to conference stage, repeatedly, without a denial or a “cert granted” or, indeed, any procedure other than rescheduling. The cert petition is dated Nov. 21, 2019, and the counsel of record is Paul Clement, a Washington, D.C., partner in Kirkland & Ellis who is a frequent participant in Supreme Court cases who, according to the Above the Law blog, argued his 101st case at the Court early this month.  See “Neil Gorsuch’s Frustration With Kirkland & Ellis Partner Paul Clement On Full Display,” Above the Law (March 4) (available at https://bit.ly/39dZS7A).

The Court had denied a stay in the case in October without comment.

Despite a government shutdown, including much of the judicial branch, the Court, after canceling oral arguments indefinitely, has continued its normal business of opinion writing and conferences, out of which come its orders, including cases it agrees to hear, and cases it denies. The Court’s Friday conference resulted in an order list earlier today, but Rams was not mentioned and should be back for consideration in the next conference, scheduled for Friday, March 27, with the latest version of Schein waiting to be listed.

The case is about a dispute between the NFL’s Rams, and three Missouri government entities, the St. Louis Regional Convention and Sports Complex Authority, the City of St. Louis, and the County of St. Louis.

The dispute is over an agreement on the Rams’ use of the former Edward Jones Dome stadium in St. Louis.  The team departed for Anaheim, Calif., after the 2015 season amidst a storm of controversy over owner E. Stanley Kroenke’s remarks about St. Louis’s viability as an NFL-hosting city. The Rams sought arbitration over whether it should pay damages in the wake of the team’s move to become the Los Angeles Rams for the second time in the team’s existence.

The agreement included an arbitration clause that incorporated terms by reference, stating that all disputes would be conducted “in accordance with the most applicable then existing rules of the American Arbitration Association.”  Those rules send the question of who decides whether a case should be arbitrated to an arbitrator, not a court.

The petitioner, the Rams, asserts that the key Missouri appellate court decision in a series of cases that include rulings by the state supreme court, should have simply “‘respect[ed] the parties’ decision as embodied in the contract’ by recognizing that it has ‘no power to decide the arbitrability issue.’” Petition for Writ of Certiorari citing Henry Schein, 139 S. Ct. at 528 (brief available at https://bit.ly/2U85jAG).

The Rams’ petition claims the “clear and unmistakable” test of whether the parties intended for an arbitrator, rather than a court, to decide whether an arbitration agreement should be arbitrated was too strict.  It contends the standard applied by the appellate court violated “an application of equal-footing principles,” which the Supreme Court requires under the Federal Arbitration Act—that is, that arbitration contracts are treated the same as other contracts.

While the Rams contend the parties clearly and unmistakably agreed to arbitrate under the then-existing AAA rule, the petition argues that the incorporation of the rule sending the arbitrability question to the arbitrator should have been recognized by state court to keep the arbitration contract on an equal footing with other contract principles.

The state respondents strongly dispute that the Missouri appellate court ignored the Court’s equal-footing principle.  It also asserted the parties could have never unequivocally agreed to arbitrate the issue because the AAA rule did not have the arbitrability provision when they signed the contract.

While conceding the applicable version of AAA rule confers power to the arbitrators to decide arbitrability, the respondents claim the incorporation principle is irrelevant to the case.  Instead, they argue that “[p]ursuant to fundamental Missouri contract law, the parties must agree to all essential terms of an agreement at the time of contracting.”  (Respondent’s Brief in Opposition to Petition for Writ of Certiorari (available at https://bit.ly/2U8ZumI).

Thus, “there must be an actual agreement to delegate at the time of contracting.” Id.

Despite the respondents’ denial of a division among federal and state courts on the applicable standard, the Rams’ petition claims that some state courts, including Missouri, are requiring an extraordinary degree of clarity for the “clear and unmistakable” test, which the petition says is contrary to how every federal court addresses the issue.

The petitioner urges that the Court provide guidance regarding the clear and unmistakable test, which it says is critical since the respondents’ position not only defies the FAA’s equal footing principle but also has been the subject of repeated requests for Court clarification, citing four cases the Court declined to hear between 2014 and 2018. The petition also notes that the situation has seen “every federal court resisting special rules disfavoring arbitration and only state courts on the anti-arbitration side of the dispute.”

Scotusblog’s case page, available at https://bit.ly/2QANwjk, contains the Rams’ cert petition, the respondent’s brief in opposition, and the Rams’ reply

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The author is a CPR Institute Spring 2020 intern.  Alternatives’ editor Russ Bleemer assisted with the research.

 

Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court

By Philip J. Loree Jr.

A party fighting to arbitrate under its contract has sought U.S. Supreme Court review of a Fifth U.S. Circuit Court of Appeals case holding that an injunctive action carve-out clause effectively negates the parties’ arbitration contract delegating the decision whether the case should be arbitrated to an arbitrator, not the courts.

If the Court agrees to accept the case, which is the subject of the Jan. 30 petition, it would be the second time in about two years that the nation’s top Court has heard the case.

The decision challenged in the cert petition, Archer and White Sales Inc. v. Henry Schein Inc., et al., No. 16‐41674 (5th Cir. Aug. 14, 2019) (available at http://bit.ly/33Cb78g) (“Schein II”), was a remand of the U.S. Supreme Court’s opinion of a year ago, Henry Schein Inc. v. Archer & White Sales Inc., 139 S. Ct. 524 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw) (Schein I).

There were several important 2019 cases concerning the application and effect of what are commonly referred to as “Delegation Clauses,” “Delegation Provisions,” or “Delegation Agreements.” These clear and unmistakable undertakings by parties to submit arbitrability issues to arbitration usually are expressly set forth in an arbitration agreement. Other times they are contained in arbitration rules that the parties incorporate by reference into their agreement.

Much of the controversy in the Delegation Agreement cases centers on whether the terms of the arbitration agreement should define or circumscribe the scope of a Delegation Agreement–or even effectively negate it.

These cases have conflated the question of who gets to decide whether an issue is arbitrable with the separate question of what the outcome of the arbitrability dispute should be, irrespective of who decides it.

The most important of the recent cases is Henry Schein Inc. v. Archer & White Sales, Inc., which for discussion purposes is conveniently bifurcated into its two most prominent components, Schein I and Schein II.

Schein I

In Schein I, the Supreme Court, in a 9-0 decision, held that where parties have clearly and unmistakably agreed to arbitrate arbitrability disputes, courts must compel the process even if the argument in favor of arbitrability is “wholly groundless.” Schein I, 139 S.Ct. at 528-531.

The Schein I Court vacated an order and judgment of the Fifth Circuit, which held that, even assuming the parties entered into a Delegation Agreement, the arbitration proponent was not required to submit to arbitration the question whether a dispute concerning injunctive relief was arbitrable because that arbitrability dispute was, according to the Fifth Circuit, wholly groundless.

The Schein I Court remanded to the Fifth Circuit the question whether the parties entered into a Delegation Agreement, an issue that the Fifth Circuit had left open, but which had to be addressed in light of the U.S. Supreme Court’s decision abrogating the so-called “wholly groundless exception.”

And that remand case is Schein II.

Schein II

In Schein II, the Fifth Circuit set out to determine whether the parties had clearly and unmistakably agreed to submit arbitrability disputes to arbitration. The essential facts pertinent to this question can be distilled down to these:

  1. Party A’s and Party B’s contract contained an arbitration agreement, which featured a “carve-out” for certain claims, including “actions seeking injunctive relief”: “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 Party B), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [the “AAA”].”
  2. Party A commenced an action against Party B that sought, among other things, injunctive relief, which A said was outside the scope of the arbitration agreement.
  3. Party B said that A’s arbitrability argument had to be submitted to arbitration because the parties clearly and unmistakably delegated arbitrability questions to the arbitrator by incorporating AAA Commercial Arbitration Rules into their contract, including Rule 7 of those rules.
  4. Rule 7(a) of the AAA Commercial Arbitration Rules provided:

(a) The 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.

On remand, the Fifth Circuit observed that under circuit precedent, incorporating arbitrator provider rules that clearly and unmistakably require arbitration of arbitrability constitute clear and unmistakable evidence of an intent to arbitrate arbitrability. The Court therefore recognized that the parties had entered into a Delegation Agreement.

But here, stated the Fifth Circuit, the “placement of the [injunctive action] carve-out . . . is dispositive[,]” and “[w]e cannot rewrite the words of the contract.”

“The most natural reading of the arbitration clause,” said the Court, is “that any dispute, except actions seeking injunctive relief, shall be resolved in arbitration in accordance with the AAA rules.”

The agreement “incorporates the AAA rules” and therefore delegates arbitrability “for all disputes except those under the carve-out.” (Emphasis is the Fifth Circuit’s.) Because of “that carve out,” wrote Fifth Circuit Judge Patrick E. Higginbotham for the unanimous three-judge panel, “we cannot say that the Dealer Agreement evinces a ‘clear and unmistakable’ intent to delegate arbitrability.”

Accordingly, the Fifth Circuit held that the parties did not clearly and unmistakably agree to delegate the arbitrability decision and affirmed the district court’s denial of the arbitration proponents’ motions to compel arbitration.

On Aug. 28, 2019, the arbitration proponent moved for rehearing en banc. On Dec. 6, the Fifth Circuit denied the motion for rehearing.  That’s when the proponent became the petitioner at the U.S. Supreme Court. Henry Schein Inc., a Melville, N.Y.-based dental equipment distributor, on Jan. 24 obtained from the Supreme Court a stay of litigation pending its petition for certiorari, which it filed on Jan. 30.

You can download a copy of the petition  here. A response from Archer & White Sales, a Plano, Texas, distributor, seller, and servicer of dental equipment, is due March 2.

Schein II was Wrongly Decided

This author believes Schein II was wrongly decided. In “Back to SCOTUS’s Schein: A Separability Analysis that Resolves the Problem with the Fifth Circuit Remand,” 37 Alternatives 131(October 2019), this author argued that Schein II can be reasonably interpreted to mean either:

(a) the parties did not clearly and unambiguously agree to arbitrate any arbitrability issues; or

(b) the parties’ agreed to arbitrate only arbitrability disputes about matters that fall within the scope of the arbitration agreement.

The first interpretation would negate the parties’ incorporation of AAA Commercial Rule 7. The second interpretation would mean that the parties clearly and unmistakably agreed to arbitrate only questions that ask whether a matter that is at least arguably within the scope of the arbitration agreement, but clearly outside the scope of the carve-out, is arbitrable.

Because the presumption in favor of arbitrability deems such matters to be arbitrable as a matter of law, the second interpretation would mean that the parties agreed to arbitrate only arbitrability questions that were not only relatively rare, but also legally uncontroversial.

That makes little sense and would mean the parties’ incorporation of AAA Commercial Rule 7 was of little or no practical significance or effect.

The article proposes a solution to the interpretative problem that a Schein II-Type analysis creates, and under which courts interpret arbitration-agreement terms as overriding or defining the scope of Delegation Agreements that are made part of those arbitration agreements.

It argues that courts instead should use the analytical framework of the separability doctrine—first espoused in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), and applied to Delegation Agreements in Rent-a-Center West Inc. v. Jackson, 561 U.S. 63 (2010)—to interpret Delegation Agreements as being independent from the arbitration agreements in which they are contained, and not graft upon those Delegation Agreements scope limitations that are based on the terms of the arbitration agreement containing the Delegation Agreement.

It explains in detail why using a separability-based analytical model has a number of advantages over the Schein II approach in that it gives full effect to the terms of the separate arbitration and Delegation Agreements, gives effect to the separate but related purposes that each of those agreements serves, and otherwise helps ensure that the parties’ legitimate contractual expectations are met.

The author hopes that the Supreme Court will grant certiorari, reverse, and clarify how the lower courts should address cases where parties agree to a broad arbitration agreement, incorporate by reference into that agreement a broad, unqualified, Delegation Agreement, but except from the scope of their arbitration agreement certain types of disputes.

There are many other reasons why the author believes SCOTUS should hear and reverse Schein II, but a thorough discussion of them must await another article or post.

The whole point of Schein I was that the merits of an arbitrability question has no bearing on the question of who gets to decide that question. Schein II does not comport with Schein I and should be reversed.

* * *

Philip J. Loree Jr. is a co-founder and partner at the New York law firm, Loree & Loree. The opinions expressed in this post are his own, and not those of the blog publisher, the CPR Institute.

 

 

 

Tuesday’s SCOTUS Argument: Can Non-Signatories Compel Arbitration in the United States Under the New York Convention?

By Doo-Won ‘David’ Chung and Russ Bleemer

When a party files for arbitration under a contract but it is not a signatory to the contract, sparks can fly.

On Tuesday, the U.S. Supreme Court heard from both sides that non-parties can compel arbitration under the Federal Arbitration Act in oral arguments for this term’s sole arbitration case, GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC, No. 18-1048.

But the arbitration falls under the international Convention on the Recognition and Enforcement of Foreign Arbitral Awards, best known as the New York Convention, adopted and implemented as the FAA’s Chapter 2 in the United States.

And on its surface, it appears the treatment may be different.  The Eleventh U.S. Circuit Court of Appeals rejected nonparty GE Energy’s motion to compel arbitration, focusing on the first of four treaty requirements for compelling arbitration— “there is an agreement in writing within the meaning of the Convention.” Outokumpu Stainless U.S. LLC v. Converteam SAS, 902 F.3d 1316, 1325 (11th Cir. 2018) (available at http://bit.ly/2E1eSc0).

The Supreme Court agreed to hear the case last year on whether the New York Convention allows a non-signatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel. See “The Friends Speak: Here’s What Scotus Will Decide in the GE Energy International Arbitration Case,” 38 Alternatives 2 (January 2020) (available at http://bit.ly/2v2pJ3Z).

The Court’s strong historical preference for arbitration appeared to be a tipoff that it took the case to reverse.  But early in the opening argument by GE Energy’s attorney, Shay Dvoretzky, a Washington, D.C. partner in Jones Day, Chief Justice John G. Roberts Jr. showed a concern he focused on repeatedly, that being able to force arbitration against a party who never consented would be inconsistent with “one of the central propositions of our arbitration precedents that arbitration is based on agreements.”

Dvoretzky had urged the Court to permit the use of the equitable estoppel doctrine as part of a group of methods by which nonparties can invoke an arbitration agreement under the New York Convention. Respondent Outokumpu contended that the Convention requires a signed arbitration contract by the party invoking arbitration.

Roberts seemed to share reservations about nonparties.  Responding to his own hypothetical for Dvoretzky, the chief justice said, “here somebody who never agreed to arbitration is being forced into arbitration, even though he has a clear right to take his dispute to court.”

While admitting that arbitration is a matter of consent, Dvoretzky argued that the consent by the respondent was exhibited by the contract’s existence with its arbitration provision, even if it didn’t name the party.  The scope of that agreement, at least in the context of FAA Chapter 1, had been determined Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630–31 (2009) (available at http://bit.ly/3442FxB), which extends the agreement’s use to nonparties under a variety of doctrines, without restriction to signatories.

The case arose out of a dispute between respondent Outokumpu, a Calvert, Ala., steel manufacturer, and a subcontractor, GE Energy, which agreed to supply nine motors to run three steel mills which failed.

While the contract between Outokumpu and its construction general contractor included an arbitration agreement, subcontractor GE Energy was not yet selected, according to Dvoretzky, and not a signatory.  When Outokumpu filed suit against GE Energy in a state court, the subcontractor removed to federal court and moved to dismiss and compel arbitration under the contract.

Alabama’s Southern District federal court granted GE Energy’s motion to compel arbitration and dismissed the action, but on appeal, the Eleventh Circuit reversed.

The appeals court acknowledged that, for domestic arbitration agreements, equitable estoppel allows the non-signatory to enforce the arbitration clause under Arthur Andersen.  But the circuit court distinguished international arbitration agreements, and held “to compel arbitration, the [New York Convention] requires that the arbitration agreement be signed by the parties before the Court or their privities.”

Shay Dvoretzky opened his argument on GE Energy’s behalf by noting that the New York Convention is silent about enforcement by non-signatories.  “That silence is consistent with the Convention’s design, which sets a floor, not a ceiling, for enforcing arbitration agreements and awards,” he explained.

According to Dvoretzky, since the Convention doesn’t say states can’t do more than what the Convention requires, the rest is left to the states’ domestic arbitration laws. Dvoretzky further contended, “Other contracting states are close to unanimous that the Convention does not preempt domestic law allowing non-signatory enforcement.”

Justice Elena Kagan told Dvoretzky, “It seems odd that Congress would have passed the implementing legislation on the view that another contracting state could compel arbitration without any consent whatsoever.”

“I think this goes to the core question of what the Convention is trying to do,” countered Dvoretzky, adding, “The Convention is trying to set forth minimum standards by which other countries will recognize and enforce arbitration agreements.”

After Justice Neil Gorsuch seemed satisfied by Dvoretzky’s response that there was nothing in the New York Convention preventing the use of the equitable estoppel doctrine in matters under the treaty, Kagan jumped back into the discussion, saying she agreed with the chief justice:

If you’re talking about an alter ego or something like that, or a successor in interest, maybe that person counts as a party, even though it is not the signatory but there is some limit.  . . .

[S]o if it’s a matter of voluntary consent, and everybody thinks that that’s what arbitration is, shouldn’t we read the parties to be, you know, the parties? Nobody else.

Dvoretzky responded with a return to Arthur Andersen. “Certainly under domestic law it is understood to be a matter of voluntary consent,” he said, “but the Court saw no issue with the possibility after an equitable estoppel theory that would allow a nonparty to enforce.”

Jonathan Y. Ellis, Assistant to the Solicitor General whose amicus argument supported GE Energy, explained that the New York Convention’s role is to assist courts in the recognition of international arbitration agreements, but it doesn’t provide a comprehensive set of arbitration rules. He argued that the Convention presumes validity of arbitration agreements, and doesn’t speak to agreements’ scope.

Justice Sonia Sotomayor leaned toward GE Energy’s case during Ellis’s argument, but pushed for a rule. She appeared to agree that there are bases for the argument that contracting states can pick who the parties are, but she also said that there should be limits.  “What’s the limiting principle of equitable estoppel?” she asked, adding, “It can’t be every single type of equitable estoppel is okay.”

She added that if GE is contemplated by the contract as a supplier, the matter “seems like a fairly straightforward case to me.”

Ellis responded that the New York Convention has standards on whether an arbitration agreement was reached between the parties, and signatory states’ limits on recognizing “other types of arbitration agreements” needs to be satisfied.  But, he said he didn’t think the Convention “can be read to impose those limits.”

Jonathan D. Hacker, a partner in Washington D.C.’s O’Melveny & Myers LLP, disagreed with GE Energy’s Convention interpretation in his argument on behalf of the steelmaker Outokumpu. Instead, Hacker asserted that the Convention makes it a ceiling—declaring that a written agreement by the parties is necessary to enforce international arbitration agreements.

After a hypothetical by Justice Stephen G. Breyer that allowed a successor party to arbitrate a contract via domestic law, Hacker contended that allowing domestic law to decide who gets to enforce arbitration “creates a huge problem under the Convention because then the states can begin subjecting parties to arbitration” even without consent, which he said is against the Convention’s requirements.

In closing, Hacker argued that “extension of an arbitration agreement to non-parties” is “supposed to be the exception that you almost never see,” and if GE Energy’s interpretation is adopted, “essentially all subcontractors would suddenly be able to arbitrate, even absent a written agreement.”

The Supreme Court’s decision, expected by the end of the term in June, may be crucial not just for arbitration practitioners, but also for parties engaged in cross-border transactions that involve performance by non-signatories.  If the Court affirms the circuit court’s decision, it may create the need for more detailed participation of potential parties, as signatories, for contracting.

* * *

Tuesday’s GE Energy arguments were the second of two for Chief Justice Roberts who, after the case concluded, walked across the street to the U.S. Capitol from the Court to begin his new second job presiding over the U.S. Senate impeachment trial of President Trump.

* * *

This post is based on the transcript of the arguments, posted Tuesday afternoon, and is available on the Court’s website at http://bit.ly/2RD1JMG.

Chung, a law student at Benjamin N. Cardozo School of Law at New York’s Yeshiva University, is a 2020 spring semester CPR Intern; Bleemer edits Alternatives for the CPR Institute at altnewsletter.com.

Henry Schein Redux – The Appeals Court Decides “The Placement of the Carve-Out is Dispositive”

By Mark Kantor

Kantor Photo (8-2012)You may recall that the US Supreme Court last term in Henry Schein, Inc. v. Archer and White Sales, Inc. rejected a “wholly groundless” exception to its general principles allocating arbitrability issues between court and arbitrator (the First Options rule that “Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.”).  The Supreme Court then sent the case back to the US Court of Appeals for the Fifth Circuit for reconsideration in light of the Supreme Court’s ruling.

Yesterday, the Fifth Circuit issued its new opinion in that case (Archer and White Sales, Inc. v. Henry Schein, Inc., No. 16-41674, Aug. 14, 2019, available on TDM at https://www.transnational-dispute-management.com/legal-and-regulatory-detail.asp?key=22906, subscription required).  In that opinion, the Appeals Court concluded that the arbitration clause in question did not clearly and unmistakably allocate the relevant question to the arbitrators.  The Court then held that, based on the exclusion for “actions seeking injunctive relief” from arbitration under the relevant clause, the dispute in question was not arbitrable.  As explained more fully below, the appeals court relied on contract interpretation principles to reach this result.  The court thereby emphasized the importance of precise drafting of the arbitration clause and any exceptions – “the placement of the carve-out here is dispositive.”

The underlying court proceeding brought by Archer and White Sales, Inc. is an antitrust complaint against Henry Schein, Inc. and others relating to alleged anticompetitive agreements entered into among the defendants with respect to sales of dental equipment.  Complainant Archer and White Sales “alleges violations of federal and Texas antitrust law and seeks money damages and injunctive relief.”  The defendants argued that an exclusion in the relevant arbitration clause of “actions seeking injunctive relief” operated to prevent arbitrability of the dispute.

The arbitration clause in the underlying contract reads as follows (emphasis added):

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 Pelton & Crane), 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.

Under AAA Commercial Arbitration  Rule 7(a), “[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.”  However, the Fifth Circuit interpreted this arbitration clause in the agreement to exclude actions seeking injunctive relief from arbitration.  By doing so, the parties, said the appeals court, had placed the relevant dispute entirely outside the AAA arbitration rules.  Thus, Rule 7(a) did not come into play, and the parties had not clearly and unmistakably delegated the issue of arbitrability of an action seeking injunctive relief to the arbitrator.

Finding that the exclusion in the arbitration clause was itself clear, the Court of Appeals itself then determined that the dispute was not arbitrable because the court claims sought injunctive relief in addition to damages.

The decision of the Fifth Circuit avoids reconsidering the issue raised by amicus and discussed by Justice Ginsburg in her separate Supreme Court opinion – do provisions in arbitration rules such AAA Rule 7(a) in fact constitute a clear and unmistakable delegation of arbitrability decisions to the arbitrator.  As the Fifth Circuit Court of Appeals noted in footnote 11, “While both parties read the tea leaves in the questions asked by the Justices at oral argument, attempting to shepherd them to support their own positions, the Court declined to decide whether this agreement in fact delegated the arbitrability question.”

In the Fifth Circuit, precedent holds that an arbitration rule such as AAA Rule 7(a) satisfies the First Options test; “As we held in [Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012)], an arbitration agreement that incorporates the AAA Rules “presents clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.””  That issue, as to which the ALI Restatement of The U.S. Law of International Commercial and Investor-State Arbitration takes the contrary position, therefore remains the subject of a circuit split among Circuit Courts of Appeals in the US to be resolved in the future by the US Supreme Court.

The manner in which the Fifth Circuit judges reached this conclusion is particularly relevant to patent licensing disputes, where the parties to a patent license agreement or similar IP agreement often provide for arbitration but contractually exclude patent validity, infringement and similar disputes from arbitration.

The Circuit Court of Appeals (Judge Patrick Higginbotham writing for a unanimous court) began its analysis in the customary two-step fashion, asking first if there is any arbitration agreement at all and thereafter considering whether “this claim is covered by the arbitration agreement” (footnotes omitted here and elsewhere).

We review a ruling on a motion to compel arbitration de novo.  Our inquiry proceeds in two steps.  The first is a matter of contract formation—“whether the parties entered into any arbitration agreement at all.”  Next we turn to the question of contract interpretation and ask whether “this claim is covered by the arbitration agreement.”

Judge Higginbotham then restated the well-known First Options “clearly and unmistakably” formulation for allocating the second question between court and arbitrator.

While ordinarily both steps are questions for the court, the parties can enter into an arbitration agreement that delegates to the arbitrator the power to decide whether a particular claim is arbitrable. The Supreme Court has repeatedly made clear that “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.”

When considering whether there was a valid delegation, “the court’s analysis is limited.” As always, we ask if the parties entered into a valid agreement. If they did, we turn to the delegation clause and ask “whether the purported delegation clause is in fact a delegation clause—that is, if it evinces an intent to have the arbitrator decide whether a given claim must be arbitrated.”  When determining that intent, “[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clear and unmistakable’ evidence that they did so.” If there is a valid delegation, the court must grant the motion to compel.

Here, the disputing parties had agreed that a valid arbitration agreement existed, leaving only the second step for consideration – was the particular claim covered by that agreement.  Archer and White argued that decision was for the courts to make.

Archer asserts that the AAA rules (and resulting delegation) only apply to disputes that fall outside of the arbitration clause’s carve-out for actions seeking injunctive relief. Under their reading, if a case falls within the carve-out, the agreement does not incorporate the AAA rules and the gateway arbitrability question is not delegated to an arbitrator.

Henry Schein argued in response that, by operation of AAA Commercial Arbitration Rule 7(a), the parties had expressly delegated that issue to the arbitrator.

[D]efendants argue that the agreement’s incorporation of the AAA rules ends the inquiry.  They maintain that the carve-out for actions seeking injunctive relief does not trump the parties’ delegation.  Defendants warn that to read the contract as Archer suggests would require the court to make a merits determination about the scope of the carve-out—whether this is indeed an action seeing injunctive relief—to answer the delegation question, precisely the category of inquiries a court is precluded from making in answering the delegation question.

The Fifth Circuit agreed with claimant Archer and White, holding that the “plain language” of the arbitration clause did not incorporate the AAA rules for disputes “under the carve-out”.

that is precisely the point—the placement of the carve-out here is dispositive. We cannot re-write the words of the contract. The 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.  Given that carve-out, we cannot say that the Dealer Agreement evinces a “clear and unmistakable” intent to delegate arbitrability.

The appellate court then considered whether the “backdrop of a strong presumption in favor of arbitration” would result in referring the dispute to arbitration.  But the language of the exclusion in the arbitration clause, said the judges, was clear.  Moreover, the court noted that the clause excluded “actions seeking injunctive relief,” not “actions seeking only injunctive relief.”  The appellate court therefore refused to compel arbitration, even of only the claim for damages.

We note first that the arbitration clause creates a carve-out for “actions seeking injunctive relief.” It does not limit the exclusion to “actions seeking only injunctive relief,” nor “actions for injunction in aid of an arbitrator’s award.” Nor does it limit the carve-out to claims for injunctive relief. Such readings find no footing within the four corners of the contract. Under North Carolina law, “[w]hen the language of a contract is clear and unambiguous, effect must be given to its terms, and the court, under the guise of construction, cannot reject what the parties inserted or insert what the parties elected to omit.” The mere fact that the arbitration clause permits Archer to avoid arbitration by adding a claim for injunctive relief does not change the clause’s plain meaning. “While ambiguities in the language of the agreement should be resolved in favor of arbitration, we do not override the clear intent of the parties, or reach a result inconsistent with the plain text of the contract, simply because the policy favoring arbitration is implicated.” Fundamentally, defendants ask us to rewrite the unambiguous arbitration clause. We cannot.

It is noteworthy that the appeals court did not consider severing Archer and White’s remedial request for injunctive relief from its remedial request for damages, which might have resulted in sending the latter to arbitration but keeping the former in court.

The appellate panel’s decision in Henry Schein is of particular importance to intellectual property practitioners.  It is common in the marketplace for patent licensing and similar agreements to contain arbitration clauses.  However, those clauses often expressly exclude from arbitration a dispute for example, “concerning the validity, scope, infringement and essentiality of a patent or a patent claim.”  Moreover, it is extremely common in all sorts of contracts for an arbitration clause to include as well an express authorization for a disputing party to seek injunctive relief from the courts.

Thus, the Fifth Circuit has previously compelled arbitration of the scope question in another precedent, Crawford Professional Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 256 (5th Cir. 2014), under  an arbitration clause stating inter alia “nothing in the arbitration provision “shall prevent either party from seeking injunctive relief for breach of th[e Agreement.”

In the Ninth Circuit, though, the appeals court there has concluded that the scope of arbitrability was for the arbitrator to decide under an arbitration clause providing that “all” disputes arising out of or relating to the subject license agreement were to be arbitrated, and then containing a carve-out for certain IP and licensing claims.

The Ninth Circuit considered a similar agreement in Oracle Am., Inc. v. Myriad Group A.G.  The arbitration clause adopted arbitration rules delegating arbitrability issues to the arbitrator and contained a carve-out for certain intellectual property and licensing claims.  Because the claims carved-out by that agreement “ar[ose] out of or relat[ed] to” the Source License, and the agreement explicitly provided that any claim arising out of the Source License was subject to arbitration, the Ninth Circuit held that Oracle’s carve-out argument “conflate[ed] the scope of the arbitration clause . . . with the question of who decides arbitrability.30

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30.  ****  The court noted that the issue with Oracle’s carve-out argument was that the two categories of exempted claims by definition were claims arising out of or relating to the Source License, which were explicitly subject to arbitration. Id. at 1076.  No such circularity exists in the contract at issue here.

Where, though, the meaning of a carve-out clause is ambiguous, the Second Circuit Court of Appeals has previously allocated to the courts the scope question in NASDAQ OMX Grp., Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d Cir. 2014).

the parties in NASDAQ had not clearly and unmistakably delegated arbitrability “where a broad arbitration clause is subject to a qualifying provision that at least arguably covers the present dispute.”  Because there was ambiguity as to whether the parties intended to have arbitrability questions decided by an arbitrator—because the dispute arguably fell within the carve-out—the court held the arbitrability question was for the court to decide.

These varying precedents emphasize the point made by the Fifth Circuit in Henry Schein that the parties must take care in the drafting of their exclusionary clauses; “But that is precisely the point—the placement of the carve-out here is dispositive.  We cannot re-write the words of the contract.”

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Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.