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.

 

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

****

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.