The U.S. Supreme Court this morning declined to hear a case that presented a persistent arbitration issue: whether the incorporation of a set of arbitration rules that state that an arbitrator decides whether a case goes to arbitration, instead of a court making the arbitrability decision, provides sufficient “clear and unmistakable evidence” that the parties agreed for the tribunal to make the decision.
It was the second time in eight months that the Court has rejected a significant case on the issue.
Piersing v. Domino’s Pizza Franchising LLC, No. 20-695, would have analyzed the clear-and-unmistakable evidence standard for delegation to arbitrability from the Court’s First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 944 (1995) (available at https://bit.ly/39fAwcR).
The question presented by the petitioner, a former employee of two Domino’s franchisers who had a claim against the parent company, was:
In the context of a form employment agreement, is providing that a particular set of rules will govern arbitration proceedings, without more, “clear and unmistakable evidence” of the parties’ intent to have the arbitrator decide questions of arbitrability?
Last June, the Court declined to hear the question on arbitrability in a cross-petition in Henry Schein Inc. v. Archer & White Sales Inc., No. 19-1080 (June 15, 2020), while accepting the case on the original cert petition on another, close issue involving the reach of carve-out provisions in arbitration agreements.
In its December arguments in Schein, which awaits decision, the discussion of incorporation by reference on arbitrability arose. See “Schein II: Argument in Review,” CPR Speaks (Dec. 9) (available at http://bit.ly/2VXfyIa). In its brief in Piersing, the petitioner “acknowledges that [the] Court recently denied certiorari of a cross-petition presenting a similar question,” citing Schein, adding, “however, the question is presented in this case cleanly and as a stand-alone question.”
In Piersing, the petitioner worked as a delivery driver for a franchisee of respondent Domino’s, and later got an employment offer from Carpe Diem, another Washington state Domino’s franchisee. While the petitioner intended to increase his hours and earnings, the first franchisee fired him based on a no-poach clause in his employment agreement.
He eventually brought a U.S. District Court class-action suit against Domino’s alleging that the hiring rules violated, among other things, antitrust laws.
Domino’s sought to compel arbitration of Piersing’s claims based on the arbitration agreement between the employee and Carpe Diem. Domino’s asked for arbitration, according to the Sixth Circuit opinion in the case that was the subject of the cert petition (see Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842 (6th Cir. 2020) (available at http://bit.ly/3sWDlrg)), “because the agreement’s reference to the AAA rules constituted a delegation clause in that the AAA rules supposedly provide for delegation.”
The district court held that equitable estoppel applies to permit franchiser Domino’s to enforce franchisee Carpe Diem’s agreement against Piersing and, according to the petitioner’s cert petition brief, “that the clause providing the AAA rules would govern any arbitration amounted to ‘clear and unmistakable’ evidence of Piersing’s and Carpe Diem’s intent to delegate questions of arbitrability to the arbitrator.”
Piersing appealed the district court’s decision. Relying on Rent-a-Center, West Inc. v. Jackson, 561 U.S. 63 (2010), and more, the Sixth Circuit held that the incorporation of arbitration rules that permit the arbitrator to resolve questions of arbitrability is sufficient to delegate those questions to the arbitrator.
Piersing’s Supreme Court cert petition brief analyzed the holdings in First Options,Rent-a-Center, West, and the first Henry Schein decision, Henry Schein Inc. v. Archer & White Sales Inc., 139 S. Ct. 524 (2019), which wrestled with the question of and the standard for who decides arbitrability, the tribunal or the court.
Based on these precedents, the petitioner argued that the existing circuit court analysis allowing for incorporation of rules that included arbitrators determining arbitrability wasn’t “clear and unmistakable evidence” of the parties’ intent to arbitrate. It emphasized that, particularly for consumers and employees, the cases weren’t sufficiently thorough in light of the First Options standard. The petitioner also noted that the Sixth Circuit’s decision conflicts with the holdings of several state high courts.
Domino’s countered that an agreement incorporating privately promulgated arbitral rules that assign questions of arbitrability to the arbitrator clearly and unmistakably show the parties’ agreement that an arbitrator, not the court, will resolve whether the case is suitable for arbitration.
Domino’s successfully argued for the nation’s top Court to reject the petition and thereby uphold the Sixth Circuit.
An amicus brief in support of the petitioner was filed by Columbia University Law School Prof. George Bermann, who described the issue in the appeal as “a central but unsettled issue of domestic and international arbitration.” Echoing the petitioner, the brief noted the importance of the issue in both Henry Schein Supreme Court cases, but stated that “the delegation question is presented front and center for review in this case.” It also cited the divergence between state and federal court views.
The amicus brief discussed the principle of “competence-competence” in international commercial law—the international equivalent of the arbitrability question under which the tribunal is presumed to be in a position to determine its jurisdiction, and which the Sixth Circuit invoked. Bermann’s brief discussed the concept under the “clear and unmistakable” agreement standard of parties to arbitrate.
The amicus noted that the competence-competence language does not constitute “clear and unmistakable” evidence. “[A]ll modern arbitral procedure rules contain a ‘competence-competence’ clause,” the brief argued, “so that treating such language as clear and unmistakable evidence of a delegation means that parties will almost invariably lose their right to a judicial determination of what this Court has multiple times referred to as the very cornerstone of arbitration, viz. consent to arbitrate.”
Noting the state-federal divide in the interpretation of whether the incorporation of rules satisfies First Options, the brief concluded, “Only this Court can definitively resolve that issue and ensure that parties do not forfeit their right to a judicial determination of arbitrability unless they manifest that intention clearly and unmistakably.”
For more information on the case and an in-depth discussion of the issues involved, see the Supreme Court’s docket page at http://bit.ly/39Zxed1.
* * *
Akande, who received a Master of Laws in Alternative Dispute Resolution last May at the University of Southern California Gould School of Law in Los Angeles, is volunteering with the CPR Institute through Spring 2021. Bleemer edits Alternatives for the CPR Institute.
Alternatives to the High Cost of Litigation Editor Russ Bleemer hosts analysis by Prof. Angela Downes, University of North Texas-Dallas College of Law, and arbitrator-advocate-amicus brief contributors Richard Faulkner, also of Dallas, and Philip J. Loree Jr. in New York.
Court’s Rejected Cert Request Is Argued Anyway
By Russ Bleemer
Was the U.S. Supreme Court having second thoughts about how it has approached Tuesday’s arbitration case?
Back for its second round of arguments at the Court after a decision just last year, Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963, returned to explore the issue, “Whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”
Schein’s attorney, Kannon K. Shanmugam, a partner in the Washington, D.C., office of Paul Weiss, Rifkind, Wharton & Garrison, argued that the Fifth U.S. Circuit Court of Appeals, in deciding not to compel arbitration in the case, misapplied the historical presumption of arbitrability.
He also emphasized that “clear and unmistakable” evidence that the parties delegated the matter to arbitration puts the initial question of arbitrability to an arbitrator, even with the carveout for injunctions.
The appeals court had said that clear and unmistakable evidence that the parties wanted to arbitrate existed, but not to arbitrate the injunctive relief—a drafting issue that justified sending the case to the courts.
In his counterargument, respondent attorney Daniel L. Geyser, of Dallas’s Alexander Dubose & Jefferson, countered with, among other things, a focus on the delegation to arbitration by the parties.
That focus produced an usual argument. It wasn’t because many of the justices also focused on the particulars of the clause delegating the matter to arbitration. In fact, Geyser and Archer and White had cross-petitioned the Court to take on the issue of the delegation clause’s incorporation by reference of arbitration rules.
The Court granted certiorari on June 15 on Shanmugam and Henry Schein’s issue on the sweep of the injunction carveout. But the Court rejected the cross petition on delegation and incorporation of rules.
Yet at times, the rejected clause delegation issue was the argument’s primary focus.
“I want you to assume that we are not going to decide the question that you wanted us to decide in the cross-petition,” said Justice Samuel A. Alito Jr. during Geyser’s argument. “And if we make that assumption, I really don’t know how to answer the question that we granted review on because it does seem to turn on the degree of the delegation to the arbitrator of the power to decide whether the arbitrator can decide.”
Alito wasn’t the only one.
Archer and White had persisted with the question in its brief in the case even after the cert denial. More significantly, the failed cross-petition or the delegation clause itself was raised directly or in passing by nearly every one of the nine justices, who argued the case in an online broadcast, as has become the custom in the pandemic since May.
The cert grant, and simultaneous cert denial, made sense on paper. The Fifth Circuit had said the delegation was valid, putting the focus on the appellate court’s interpretation that the carveout for injunctions preceded the arbitrator’s work and had to be decided by a court.
But even Shanmugam’s argument on behalf of the petitioner anticipated the presence of his adversaries’ rejected issue. Before facing a single question, Shanmugam took on the cert denial himself, noting that 12 circuit courts agree that a delegation clause incorporating rules is sufficient.
The contract in the matter incorporated American Arbitration Association rules that give arbitrability decisions to the arbitrator.
Shanmugam opened his argument on behalf of petitioners Henry Schein stating that the Fifth Circuit review hierarchy was wrong for two reasons. “First, a delegation is simply an antecedent agreement that is subject to the rules governing arbitration agreements more generally,” he said, continuing, “Second, any doubts concerning the scope of arbitration agreements are resolved in favor of arbitration.”
If that arbitration presumption had been applied correctly, he argued, a carveout that doesn’t speak specifically to the delegation to an arbitrator cannot interfere with the overall delegation of a case to an arbitrator. “The Court should stick to the question it agreed to decide,” advised Shanmugam on behalf of Henry Schein, “and it should decide that question in petitioner’s favor.”
The argument highlights below are based on the audio feed of the case, available on the Supreme Court’s webpage at https://bit.ly/3m2RCxz, and the transcript, also on the Court’s site at https://bit.ly/3a6xDMv. For background on the case, including links to key documents and the 2019 Supreme Court decision in the same matter, see “Supreme Court Argument Preview: Looking Ahead to Round 2 on Schein and Arbitrability,” CPR Speaks blog (Dec. 3) (available at https://bit.ly/2VyD1z6) (The CPR Speaks link also contains information on the participants in the accompanying YouTube video discussion, conducted on Tuesday, Dec. 8.).
* * *
The Supreme Court generally seemed to agree with Kannon Shanmugam’s opening words, but still returned to the delegation and rules’ incorporation questions almost as much as the Fifth Circuit’s denial of arbitration.
“They don’t want arbitrators deciding this,” said Chief Justice John G. Roberts Jr. in opening the questioning, referring to the presence of the contract clause carveout sending injunctions to court, adding, “Why would they want arbitrators to decide who gets to decide it?”
Shanmugam said that the Fifth Circuit divided the responsibility of who decides between the court and the arbitrator, while the contract was a clear delegation of the case to arbitration. The result of the appeals court opinion was negating that arbitration intention because of the carveout sending the case to court instead.
He returned repeatedly to a need to assert the presumption of arbitrability in viewing the parties’ arbitration clause and the context for the carveout.
The contract clause states, “Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property . . .), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [the “AAA”].”
Justice Clarence Thomas focused on the delegation clause, asking Shanmugam to walk the Court through its use in the case. “I don’t see the word ‘delegation’ at all or a verb ‘delegate’ at all,” said Thomas.
Shanmugam replied that the Supreme Court “has never required magic words on the face of the agreement. Instead, all that the Court has said is that you have to have clear and unmistakable evidence. And under ordinary objective principles of contract formation, the incorporation of a document [referring to the arbitration agreement’s AAA rules referral] suffices in order to render that document part of the contract.”
Borrowing from labor law and referencing key Supreme Court precedents, Justice Stephen G. Breyer said that the presumption of arbitration still requires a deciding court to judge the scope of that arbitration. Shanmugam said that the delegation is “a kind of miniature contract formation,” that contemplates whether there was “a meeting of the minds that the arbitrator should decide questions concerning the scope of the arbitration agreement.”
The incorporation of the AAA rules, he said, was sufficient under ordinary contract formation principles.
Justice Samuel A. Alito Jr. asked Henry Schein’s attorney about the basis for the presumption for arbitration. Shanmugam replied it rested in the Federal Arbitration Act’s Section 2, as well as “flowing from the policy underlying the arbitration act as a whole.” He added, “if I were pressed, I would say it’s probably ultimately a matter of federal common law” as well as emanating from statute.
Justice Sonia Sotomayor returned immediately to the cross-petition on the delegation agreement’s incorporation of rules by reference, and said that the Henry Schein brief conceded that the Court could reach the issue to decide the case. She questioned whether the delegation to arbitration was clear for the injunction and all other issues.
Echoing the Fifth Circuit, Sotomayor agreed there was a clear delegation, but suggested she found ambiguity on the injunction’s decision maker. Shanmugam said that the appeals court incorrectly considered the presumption for arbitrability. Even with an unclear scope of arbitration, he explained, the Fifth Circuit should have applied a presumption that the case was to be arbitrated once it found that valid delegation.
Justice Elena Kagan was focused on the injunction carveout, posing a hypothetical change in the contract wording, and concluding, “if you have something which at least arguably seeks injunctive relief, the court should deal with the question of whether it does and then should go on to decide the issue.”
Justice Neil Gorsuch pressed Shanmugam on the point discussed with Alito on a statutory basis for the presumption for arbitration. The Henry Schein attorney stuck to FAA Section 2.
Justice Brett Kavanaugh retraced Shanmugam’s argument points with the attorney, and asked about “real world” contracting situations–“how people draft these contracts, what they expect, my understanding was that the question of who decides arbitrability, the who-decides question, is almost never divided between a court and an arbitrator because that would be almost nonsensical in the real world because you need one person to decide, and it’s either going to be the court or the arbitrator, not both the court and the arbitrator.”
Though the question initially ignored the existence of the injunction carveout, Shanmugam quickly agreed. “That’s correct. And I’m aware of no examples of such a division.” Kavanaugh responded, “Right. Nor am I.”
Then, Kavanaugh tackled the contract carveout in the case sending the injunction to the court, noting that every contract has them. “And so, if that alone means the Court decides what is arbitrable, then the Court will always decide arbitrability and really eradicate the idea that arbitrators can ever decide arbitrability,” he said.
Justice Amy Coney Barrett also restated Shanmugam’s argument, acknowledging the cross-petition issue’s denial and accepting the delegation to the AAA rules as sending arbitrability to the arbitrator. But echoing Shanmugam, she indicated that it would be nonsensical “to carve up arbitrability questions.” She continued, “If that’s true, why isn’t that reason to interpret this clause as not being a clear and unmistakable delegation of all questions of arbitrability?”
“As a matter of contract formation,” concluded Shanmugam, focusing on the presumption of arbitration, “there is an agreement to arbitrate arbitrability. At that point, Justice Barrett, everything else that we’re talking about is a question of interpretation. It’s a question of the scope of the delegation.”
Shanmugam summarized his argument for the Court, once again directing his attack on the delegation argument incorporating the AAA rules. He noted that the “[r]espondent is really asking the Court to decide this case based on a different question, the incorporation question. And that would be a bold strategy in any case, but I would submit it’s a particularly bold strategy here because Respondent asked the Court to decide that question at the cert stage, and the Court seemingly consciously made the decision not to add it.”
He again asked the Court to avoid the issue it already declined to hear, noting, “All that the Court need do in this case is to hold that the court of appeals’ actual reasoning is inconsistent with this Court’s decisions applying familiar Federal Arbitration Act principles.”
* * *
Respondent attorney Daniel Geyser immediately attacked the delegation and incorporation points on behalf of his client Archer and White in his opening statement. “It is simply not plausible that anyone would recognize this issue and choose to resolve it by relying on an oblique reference to the AAA rules rather than a simple, explicit sentence delegating the gateway issue,” he told the justices in his opening statement.
He added that the injunction falls within the carveout from arbitration, and therefore isn’t subject to arbitration under the American Arbitration Association rules. “It makes no difference what those rules say because the condition for activating them is unmet,” he said.
Using a hypothetical and invoking Justice Kavanaugh’s discussion, Chief Justice Roberts began questioning Daniel Geyser by asking why the carveout’s arbitrability should be treated differently than arbitrability issues in an arbitration contract with no express carveout.
“[N]ormally,” replied Geyser, “when parties include an express delegation provision, it’s unconditional and it’s categorical. It’s not like what you have here.”
Roberts asked Geyser to leave the AAA rules’ delegation out of his answer. “I think that’s what we tried to do when we denied cert on that question,” said the chief justice.
Geyser countered that the default is that the court decides the arbitrability issue. He said, “The only time an arbitrator decides whether a dispute falls within the scope of the agreement is if there is, in fact, a delegation provision.”
Geyser suggested the problem was drafting: “We absolutely concede that if the exception is limited solely to the scope of arbitration and there is a separate unconditional delegation provision, that the arbitrator gets to make that determination. “
He continued on the theme, telling Justice Thomas that phrasing matters, and the Court should focus on the delegation and the wording of exceptions. He said Archer and White would lose if there was a second sentence that said that arbitrator shall decide arbitrability—“an express unconditional delegation of the issue of arbitrability to the arbitrator.”
Geyser continued: “[U]nless there’s clear and unmistakable evidence that the parties wanted the arbitrator to decide arbitrability, then the default is with the court, and the court has to first identify a delegation agreement and identify any limits to that delegation agreement. “
Thomas was skeptical. He noted that Geyser’s construction limits an arbitrator’s authority on arbitrability after it had been granted by the contract. “I don’t know how you can have it both ways,” said Thomas, “You [can’t] say he has the authority, and in these limited circumstances, he doesn’t.”
Geyser countered that the Court has “never” issued a “binary rule.” He said, “Parties are perfectly free under the Federal Arbitration Act to delegate some issues to arbitration and to delegate some arbitrability issues to arbitration.”
Facing Justice Alito’s concerns about the posture of the case, Geyser said the Court, in the face of the question of whether there was a clear and unmistakable delegation to arbitration of arbitrability, “could dismiss the case as improvidently granted,” or request additional briefing, though he quickly added that he thought the case was fully briefed.
But he also explained to Alito that he believed even in the face of a clear delegation, a plain-text reading of the agreement shows that the carveout for injunctions removes the case from the arbitrator. “[It’s] the most straightforward way to affirm in this case,” he said.
Justice Sotomayor said that Geyser’s argument falls short because of a clear delegation to the AAA rule for arbitrability matters. Geyser countered that the delegation was limited by the injunction carveout.
In response to Justice Kagan’s questioning, Dan Geyser said that court decision for the gateway-to-arbitration issues is “traditionally what parties expect.” He continued, “It provides a critical judicial safeguard and it avoids the situation where the arbitrator is deciding the scope of his or her own jurisdiction.”
He added that the FAA backed delegating “certain issues but not others to the arbitrator.” He urged the Court to support the requirement that “unless parties clearly and unmistakably override the strong presumption in favor of courts acting as gatekeepers, that Congress imagined in the Federal Arbitration Act, in Sections 3 and 4, that, in fact, the courts keep that gateway role.”
Justice Kavanaugh returned to the purpose of contracting, saying he had a problem with Geyser’s conception that contracting parties divvy up arbitrable matters and court matters. “[T]hat’s just not how it works in the real world, nor could it [realistically] work that way in the real world,” he said.
Kavanaugh asked Geyser if the justice’s interpretation was wrong. “In the real world,” Geyser replied, “parties sometimes do limit a delegation. They might say that the court decides whether class arbitration is appropriate. And parties are perfectly free to do that.”
He told Cavanaugh, “I don’t see any way to read the actual text of this agreement to say that the carveout wouldn’t include a carveout to the AAA rules.”
Geyser conceded to Justice Barrett that his client would lose if the Court does not agree that there was no clear and unmistakable delegation to arbitration and declines “to get into the question that we denied cert on, [and instead] assume[s] that incorporating the AAA rules by reference is enough to constitute a clear and unmistakable delegation. . . .”
* * *
Dan Geyser began his summation on behalf of respondent Archer and White noting, “[W]e apologize for trying to get the Court back into an issue that maybe it doesn’t wish to address.” He warned against “a profoundly atextual construction of the plain text of this agreement,” and said, “I think it would be very difficult to construe this language in a sensible way without getting into the delegation.”
In his rebuttal, Henry Schein attorney Kannon Shanmugam urged the Court to reverse the Fifth Circuit, noting, “[I]t’s one thing to say that parties may want to divide up responsibility for different types of questions of arbitrability such as who is subject to the arbitration agreement or whether a class action waiver is valid, but as I’ve pointed out in my earlier colloquy with Justice Kavanaugh, we are not aware of any actual agreement in the real world that divides up responsibility for a particular question of arbitrability and in particular the paramount question of the scope of the arbitration agreement.”
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).
* * *
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.
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.
* * *
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.
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. LLCv. 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
* * *
The author is a CPR Institute Spring 2020 intern. Alternatives’ editor Russ Bleemer assisted with the research.
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.
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.
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:
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”].”
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.
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.
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.
Part I of this post discussed how the Second and Fifth Circuits, in Metropolitan Life Ins. Co. v. Bucsek, ___ F.3d ___, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), and 20/20 Comms. Inc. v. Lennox Crawford, ___ F.3d ___, No. 18-10260 (5th Cir. July 22, 2019), suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability (a/k/a the “Clear and Unmistakable Rule”).
Under this Clear and Unmistakable Outcome Exception to the Clear and Unmistakable Rule, courts consider the merits of an underlying arbitrability issue as part of their analysis of whether the parties clearly and unmistakably agreed to arbitrate arbitrability issues.
But the Clear and Unmistakable Outcome Exception runs directly counter to the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ___, 139 S. Ct. 524 (January 8, 2019), and thus contravenes the Federal Arbitration Act as interpreted by Schein. 139 S. Ct. at 527-28, 529-31.
This Part II analyzes and discusses how Met Life and 20/20 Comm. effectively made an end run around Schein and considers what might have motivated those Courts to rule as they did.
Making an End Run Around Schein?
When, prior to 20/20 Comm. we wrote about Met Life, we said it “an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.” (See here. )
But after the Fifth Circuit decided 20/20 Comm. this July, in comments we made to Russ Bleemer, Editor of Alternatives, the Newsletter of the International Institute for Conflict Prevention & Resolution (“CPR”)—which were reproduced with our consent in Mr. Zhan Tze’s CPR Speaks blog article about 20/20 Comm. (here)—we expressed the belief that the Fifth Circuit was (whether intentionally or unintentionally) making an end run around Schein, effectively creating an exception to the Clear and Unmistakable Rule.
After analyzing 20/20 Comm. and comparing it to the Second Circuit’s Met Life decision, we concluded that the Second Circuit’s decision also ran counter to Schein.
Schein’s Abrogation of the “Wholly Groundless Exception” to the Clear and Unmistakable Rule
In Schein the U.S. Supreme Court abrogated the so-called “wholly groundless exception” to the Clear and Unmistakable Rule. Prior to Schein certain courts, including the Fifth Circuit, held that even when parties clearly and unmistakably agreed to arbitrate arbitrability questions, courts could effectively circumvent the parties’ agreement and decide for itself arbitrability challenges that it determined were “wholly groundless.”
The rationale Schein used to jettison the “wholly groundless exception” to the Clear and Unmistakable Rule is incompatible with the rationales the Second and Fifth Circuit used to support their decisions in Met Life and 20/20 Comm.
Under FAA Section 2, the Schein Court explained, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein, 139 S. Ct. at 529 (citation omitted). When those contracts delegate arbitrability questions to an arbitrator, “a court may not override the contract[,]” and has “no power to decide the arbitrability issue.” 139 S. Ct. at 529. That is so even where a Court “thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 139 S. Ct. at 529.
Schein explained that its conclusion was supported not only by the FAA’s text, but also by U.S. Supreme Court precedent. Citing and quoting cases decided under Section 301 of the Labor Management and Relations Act, the Court explained that courts may not “‘rule on the potential merits of the underlying’ claim that is assigned by contract to an arbitrator, ‘even if it appears to the court to be frivolous[,]’” and that “[a] court has “‘no business weighing the merits of the grievance’” because the “‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’” 139 S. Ct. at 529 (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649–650 (1986) and Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960)).
This “principle,” said the Schein Court, “applies with equal force to the threshold issue of arbitrability”—for “[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator.” 139 S. Ct. at 530.
Exception to Clear and Unmistakable Rule? Why the Second and Fifth Circuit Decisions Conflict with Schein
Both the Second Circuit and Fifth Circuit decided that the parties before them did not clearly and unmistakably agree to arbitrate arbitrability because each Court believed that there was not even a barely colorable basis for a court or an arbitrator to find that the underlying dispute should be submitted to arbitration. In other words, both courts focused on contractual provisions governing the merits of the arbitrability dispute rather than confining their analysis to the terms of the contract dealing directly with whether the parties clearly and unmistakably agreed to arbitrate arbitrability.
In Met Life the Court decided the merits of the underlying arbitrability issue before analyzing whether the provisions of the contract directly pertinent to the arbitration of arbitrability did or did not clearly and unmistakably delegate arbitrability to the arbitrators. The Court quite correctly found it implausible that the parties agreed to arbitrate a dispute that arose years after one of the parties had left the NASD and was not a member of FINRA.
But that was a conclusion about the merits of the arbitrability dispute, not about whether the parties clearly and unmistakably agreed to arbitrate arbitrability disputes. The Clear and Unmistakable Rule turns solely on whether the parties clearly and unmistakably delegated arbitrability questions to the arbitrator, irrespective of what the merits of those arbitrability questions may be.
In 20/20 Comm. the Court’s focus was on the parties’ broad class arbitration waiver. Class arbitration waivers are ordinarily dispositive of the merits of whether the parties consented to class arbitration, but the class arbitration waiver in 20/20 Comm., like most or all others we’ve seen, says nothing about who decides whether or not the parties consented to class arbitration.
Had the Fifth Circuit not focused on the class arbitration waiver, and instead on the three provisions directly relating to arbitrability, then it could have easily found that the parties clearly and unmistakably delegated class arbitration consent issues to the arbitrator.
The so-called “exception language” in those provisions (see Part I, here) was quite beside the point. There is nothing “inconsistent” with an arbitrator, rather than a court, deciding the effect of the class arbitration waiver, no matter how clear it may be that the outcome will, or at least should, be an arbitral determination that the parties did not consent to class arbitration.
Exception to Clear and Unmistakable Rule?Second Circuit Attempted to Distinguish Schein, but Fifth Circuit did not
The Second Circuit articulated the reasons it believed that Schein did not foreclose its examination of the merits of the arbitrability issue before it, but the Fifth Circuit did not address Schein.
The Second Circuit said “[t]he point of the [Schein] opinion was that, where the parties have agreed to submit arbitrability to arbitration, courts may not nullify that agreement on the basis that the claim of arbitrability is groundless.” Met Life, slip op. at 24 (emphasis in original). The Court said it “reject[s] [A’s] claim for arbitration of arbitrability not because” it considers the “claim of arbitrability” to be “groundless[,]” but “because, upon consideration of all evidence of the intentions of the arbitration agreement, including the groundlessness of [A’s] claim of arbitrability, the agreement does not clearly and unambiguously provide for arbitration of the question of arbitrability.” Met Life, slip op. at 25. That “reasoning is based on the parties’ contract, and not based on any exception to what the parties have contracted for.” Met Life, slip op. at 25.
The Fifth Circuit might have made the same or a similar argument, but said nothing about whether it thought its decision was consistent with Schein.
While the Second Circuit’s reasoning was theoretically sound, it doesn’t hold up in practice. Apart from questions concerning the existence of the contract, the merits of most, if not all, arbitrability questions turn in large part on the language of the parties’ contract. That was certainly the case in both Met Life and 20/20 Comm.
Under the reasoning of those cases, however, the language directly relating to the question whether the parties clearly and unmistakably agreed to arbitrate arbitrability must be viewed in conjunction with the language of the contract bearing on the merits of the arbitrability dispute. If the language pertinent to the merits of the arbitrability issue suggests that the parties did not agree to arbitrate the dispute (or did not consent to class arbitration), then under the Second and Fifth Circuits’ reasoning, that conclusion weakens (or eliminates) the inference that the parties clearly and unmistakably agreed to arbitrate arbitrability.
Met Life and 20/20 Comm. Contravene the U.S. Supreme Court’s Decision in Schein
The Met Life/20-20 Comm. analytical regime effectively revives—and potentially might even expand the scope of—the “wholly groundless exception” that the U.S. Supreme Court laid to rest in Schein. Remember that disputes about arbitrability of arbitrability can be analytically broken down into at least four separate questions: (a) what the dispute on the merits is; (b) does that dispute raise a question of arbitrability, which is ordinarily decided by the court; (c) if so, did the parties clearly and unmistakably agree to arbitrate arbitrability disputes (i.e, does the Clear and Unmistakable Rule apply); and (d) what is the outcome of the dispute on the merits that the proper decisionmaker should reach once he or she decides it?
The Clear and Unmistakable Rule is concerned only with question (c), above, that is, did the parties clearly and unmistakably agree to arbitrate arbitrability disputes? The “wholly groundless exception” to the Clear and Unmistakable Rule—and the analytical regime imposed by the Second and Fifth Circuits—focuses not only on question (c), above, but simultaneously considers question (d), that is, what is the outcome on the dispute on the merits that the proper decisionmaker should reach?
Assuming the dispute on the merits is a question of arbitrability (as was the case in Schein, Met Life, and 20/20 Comm.), if the provisions of the parties’ agreement suggest that there is only one proper outcome that a decisionmaker should reach on the merits of the arbitrability dispute—the subject of question (d), above— then a Court following Met Life and 20/20 Comm. would be more chary about concluding the parties clearly and unmistakably agreed to arbitrate arbitrability—the subject of question (c), above.
Schein forecloses any consideration of the merits of the arbitrability issue (question (d), above), limiting the scope of the Court’s analysis to whether the parties’ clearly and unmistakably agreed to arbitrate arbitrability (question (c), above).
Schein explains that, if the parties clearly and unmistakably agree to arbitrate arbitrability disputes, then courts should direct the parties to arbitrate the arbitrability issue. Just as it is with any other arbitrable issue, judicial review is postponed until the final award stage, and is limited to the grounds enumerated by Section 10 of the FAA, including manifest disregard of the agreement under Section 10(a)(4), and, in Circuits which recognize it (such as the Second—but not the Fifth—Circuit) manifest disregard of the law.
In Schein the proponent of the “wholly groundless exception” argued that the “back-end judicial review” available if an arbitrator “exceeds his or her powers” impliedly authorizes courts to determine that an arbitrability question is “wholly groundless” and obviates the need to submit the arbitrability question to arbitration. Schein, 139 S. Ct. at 530. But the Supreme Court said “[t]he dispositive answer to [the “wholly groundless exception” proponent’s] §10 argument is that Congress designed the Act in a specific way, and it is not our proper role to redesign the statute.” Schein, 139 S. Ct. at 530.
The Schein Court further explained that acceptance of the “wholly groundless exception” proponent’s “argument would mean. . . that courts presumably also should decide frivolous merits questions that have been delegated to an arbitrator.” But, said the Supreme Court, “[we] have already rejected that argument: When the parties’ contract assigns a matter to arbitration, a court may not resolve the merits of the dispute even if the court thinks that a party’s claim on the merits is frivolous. So, too, with arbitrability.” 139 S. Ct. at 530 (citation omitted).
Under Schein the proper course for the Second and Fifth Circuits was to determine whether the parties clearly and unmistakably delegated arbitrability issues to the arbitrators without determining or analyzing the merits of those underlying arbitrability issues. If the answer was “yes,” then the Courts should have directed the arbitrators to decide those arbitrability questions.
If the arbitrators, after having decided those underlying arbitration issues, decided that the issues were arbitrable, then the arbitration opponents could challenge them as being in manifest disregard of the contract (and, in the Second Circuit, perhaps also in manifest disregard of the law).
But rather than let the arbitration and post-award review process run its course, the Second and Fifth Circuit took it upon themselves to decide arbitrability issues that the parties clearly and unmistakably agreed to submit to arbitration. Met Life and 20/20 Comm. cannot be meaningfully squared with Schein.
What Might have Motivated Met Life and 20/20 Comm. Courts to Rule the way they did?
While we respectfully believe that Met Life and 20/20 Comm. are inconsistent with Schein, it would be unfair not to acknowledge that the very able and experienced judges who decided those cases were faced with unusual circumstances that would presumably be of concern to many or most other fair-minded jurists. In Met Life a FINRA arbitration claim was made against an entity that had never been a member of FINRA, and had not been a member of the NASD, FINRA’s predecessor, for several years. The claim itself arose out of conduct that took place after the entity had left the NASD.
The Second Circuit concluded the dispute was not arbitrable because FINRA had no regulatory interest in the dispute, but apparently there were no FINRA rules, or terms in the parties’ agreement, which addressed directly the unusual arbitrability question the case presented. And prior Second Circuit precedent suggested that, under the Clear and Unmistakable Rule, the breadth of the parties’ arbitration agreement, together with a provision of the applicable arbitration rules, constituted clear and unmistakable evidence of an intent to arbitrate arbitrability.
The Second Circuit might have been legitimately concerned about whether a FINRA arbitrator would necessarily reach the same conclusion as the Court did, and if so, whether the award could be vacated if the arbitrator got it wrong. That would mean that the arbitration opponent might have been forced to arbitrate not only the underlying arbitrability issue, but also the entire dispute on the merits, before there was any opportunity for FAA Section 10 review.
If the award was ultimately vacated, the parties would be forced to incur a great deal of time and expense vindicating their rights. But if the award was not, and could not be, vacated, and the arbitration opponent lost on the merits, then the arbitration opponent would effectively have been forced to arbitrate a dispute that the Second Circuit strongly believed the parties never agreed to arbitrate.
“Hard cases,” the adage goes, “make bad law.”
The Fifth Circuit might have had similar reservations about the case before it, although the stakes were probably not as high as they were in Met Life. The contract’s incorporation of AAA employment arbitration rules, which brought into play the AAA Supplementary Rules for Class Arbitration, meant that the arbitrator would have been empowered to make a “Clause Construction Award,” which the parties are deemed to agree is a final award subject to judicial review under Section 10.
There was no reason to think that the briefing, argument, and decision of the Clause Construction issue, and the rendering of the Clause Construction Award, would take a great deal of time, given how narrow the issue was, and given the clear class arbitration waiver. And FAA Section 10 review would have been available once the Clause Construction Award was made.
Thus, had the Fifth Circuit compelled arbitration of the class arbitration consent issue, and had the arbitrator made a ruling in favor of class arbitration consent by ignoring the class arbitration waiver (or at least by not even arguably interpreting it), FAA Section 10 review would be available in relative short order, and certainly long before the parties were forced to engage in a class arbitration that could drag on for several years before Section 10 review could take place.
But the Fifth Circuit might nevertheless have been very concerned that a class arbitration opponent who had taken the time to include a broad class arbitration waiver in its contract, the enforceability of which is not really open to legitimate question in light of the many U.S. Supreme Court decisions that have closed state- and federal-law enforcement loopholes, should be forced to engage in the several months of arbitration and litigation necessary to vindicate its legitimate, bargained-for right to arbitrate on a bilateral basis only. Even apart from the extra costs imposed on the class arbitration opponent, compelling arbitration would have virtually guaranteed that within a relatively short period, the district court and, possibly also the Fifth Circuit, would again have to devote substantial time and effort into matters that were the subject of the consolidated appeal in 20/20 Comm.
Those concerns about economic inefficiency and judicial economy are unquestionably legitimate. But Schein, as we’ve seen, has already said that the courts do not, in the name of public policy or judicial economy, have the power to amend or alter the post-award-review-only procedures mandated by the FAA.
And the class arbitration opponent, a sophisticated business entity, could have drafted its contract more precisely, providing that notwithstanding anything to the contrary, disputes about class arbitration consent, including the application and interpretation of the class arbitration waiver, must be decided by courts, not arbitrators. In fact, other class arbitration opponents would be well advised to consider carefully whether they might find themselves in a situation where they are forced to arbitrate and litigate in the district court (and perhaps in an appellate court) for several months or more court, and if so, to take appropriate steps to mitigate this risk by more precisely drafting their contracts’ class arbitration waivers.
Arbitration law is replete with presumptions and other rules that favor one outcome or another depending on whether one thing or another is or is not clear and unmistakable. Put differently, outcomes often turn on the presence or absence of contractual ambiguity.
There are three presumptions that relate specifically to questions arbitrability, that is, whether or not an arbitrator or a court gets to decide a particular issue or dispute:
The Moses Cone Presumption of Arbitrability: Ambiguities in the scope of the arbitration agreement itself must be resolved in favor of arbitration. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Rebutting this presumption requires clear and unmistakable evidence of an intent to exclude from arbitration disputes that are otherwise arguably within the scope of the agreement.
The First Options Reverse Presumption of Arbitrability: Parties are presumed not to have agreed to arbitrate questions of arbitrability unless the parties clearly and unmistakably agree to submit arbitrability questions to arbitration. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995)
The Howsam/John Wiley Presumption of Arbitrability of Procedural Matters: “‘[P]rocedural’ questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)) (internal quotation marks omitted). To rebut this presumption, the parties must clearly and unmistakably exclude the procedural issue in question from arbitration.
These presumptions usually turn solely on what the contract has to say about the arbitrability of a dispute, not on what the outcome an arbitrator or court would—or at least should—reach on the merits of the dispute.
Some U.S. Circuit Courts of Appeal, including the Fifth Circuit, recognized an exception to the First Options Reverse Presumption of Arbitrability called the “wholly groundless exception.” Under that “wholly groundless exception,” courts could decide “wholly groundless” challenges to arbitrability even though the parties have clearly and unmistakably delegated arbitrability issues to the arbitrators. The apparent point of that exception was to avoid the additional time and expense associated with parties being required to arbitrate even wholly groundless arbitrability disputes, but the cost of the exception was a judicial override of the clear and unmistakable terms of the parties’ agreement to arbitrate.
Earlier this year the U.S. Supreme Court in Schein v. Archer & White Sales, Inc., 586 U.S. ___, slip op. at *1 (January 8, 2019) abrogated the “wholly groundless” exception. Schein, slip op. at *2, 5, & 8. “When,” explained the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Schein, slip op. at 2, 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Schein,slip op. at 8.
But since Schein both the Second and Fifth Circuits have decided First Options Reverse Presumption of Arbitrability cases by effectively conflating the question of who gets to decide an arbitrability issue with the separate question of who should prevail on the merits of that arbitrability issue. The Courts in both cases determined whether the parties clearly and unmistakably agreed to arbitrate arbitrability questions by considering, as part of the clear and unmistakable calculus, the merits of the arbitrability question.
These two cases suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First OptionsReverse Presumption of Arbitrability. But the problem with that trend is that it runs directly counter to the Supreme Court’s decision in Schein, and thus contravenes the Federal Arbitration Act as interpreted by Schein.
In Part I of this post we discuss the Second Circuit and Fifth Circuit decisions. In Part II we analyze and discuss how— and perhaps why — those courts effectively made an end run around Schein.
Clear and Unmistakable Rule: The Second Circuit’s Met Life Decision
We first wrote about the Second Circuit decision, Metropolitan Life Ins. Co. v. Bucsek, ___ F.3d ___, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), in an April 3, 2019 post. In Met Life the Second Circuit was faced with an unusual situation where party A sought to arbitrate against party B, a former member of the Financial Industry Regulatory Authority (“FINRA”)’s predecessor, the National Association of Securities Dealers (“NASD”), a dispute arising out of events that occurred years after party B severed its ties with the NASD.
The district court rejected A’s arguments, ruling that: (a) this particular arbitrability question was for the Court to decide; and (b) the dispute was not arbitrable because it arose years after B left the NASD, and was based on events that occurred subsequent to B’s departure. The Second Circuit affirmed the district court’s judgment.
After the district court decision, but prior to the Second Circuit’s decision, the U.S. Supreme Court decided Schein, which—as we explained earlier—held that even so-called “wholly-groundless” arbitrability questions must be submitted to arbitration if the parties clearly and unmistakably delegate arbitrability questions to arbitration. Schein, slip op. at *2, 5, & 8.
The Second Circuit was faced a situation where a party sought to arbitrate a dispute which clearly was not arbitrable, but in circumstances under which prior precedent suggested that the parties clearly and unmistakably agreed to arbitrate arbitrability.
To give effect to the parties’ probable intent not to arbitrate before the NASD (or its successor, FINRA) arbitrability questions that arose after B left the NASD, the Second Circuit apparently believed it had no choice but to distinguish and qualify its prior precedent, and to attempt to do so without falling afoul of the Supreme Court’s recent pronouncement in Schein.
That required the Second Circuit to modify, to at least some extent, the contractual interpretation analysis in which courts within the Second Circuit are supposed to engage to ascertain whether parties “clearly and unmistakably” agreed to arbitrate arbitrability in circumstance where they have not specifically agreed to arbitrate such issues.
Met Life modified that analysis to mean that in cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.
Effectively articulating a new interpretative rule necessitated by the unusual case before it, the Court said “what the arbitration agreement says about whether a category of dispute is arbitrable can have an important bearing on whether it was the intention of the agreement to confer authority over arbitrability on the arbitrators.” Slip op. at 13-14.
To that end, said the Court, “broad language expressing an intention to arbitrate all aspects of all disputes supports the inference of an intention to arbitrate arbitrability, and the clearer it is from the agreement that the parties intended to arbitrate the particular dispute presented, the more logical and likely the inference that they intended to arbitrate” arbitrability questions. Slip op. at 12-13 (citations and quotations omitted).
The contrapositive, the court explained, was also true (at least conditionally): “the clearer it is that the terms of an arbitration agreement reject arbitration of the dispute, the less likely it is that the parties intended to be bound to arbitrate the question of arbitrability, unless they included clear language so providing . . . .” Slip op. at 13. But, added the Court, “vague provisions as to whether the dispute is arbitrable are unlikely to provide the needed clear and unmistakable inference of intent to arbitrate arbitrability.” Slip op. at 13.
What the Court appears to be saying is that where the parties have not expressly, clearly and unmistakably expressed their intent to arbitrate arbitrability questions, the strength of the inference of clear and unmistakable intent to arbitrate arbitrability is inversely proportional to how clear it is that the terms of the agreement reject arbitration of the dispute.
In other words, if the terms of the agreement strongly suggest that a court, rather than an arbitrator, should resolve the dispute on its merits, then the strength of the inference of clear and unmistakable intent to arbitrate the arbitrability of the dispute will be weaker. But, all else equal, if the terms of the agreement suggest that an arbitrator rather than a court should resolve the dispute on its merits, then the inference of clear and unmistakable intent to arbitrate arbitrability of the dispute will be stronger.
The Fifth Circuit’s 20/20 Comm. Decision
A few months after Met Life was decided, on July 22, 2019, the United States Court of Appeals for the Fifth Circuit decided 20/20 Comms. Inc. v. Lennox Crawford, ___ F.3d ___, No. 18-10260 (5th Cir. July 22, 2019). Although 20/20 Comms did not cite Met Life, it engaged in what might be roughly described as a simplified version of the Second Circuit’s reasoning in that case.
Mr. Zhan Tze’s excellent article discusses the case and quotes some commentary I provided by email to Russ about the case, as both Russ and I were quite intrigued by the decision. You can read that article in the CPR Speaks Blog here.
Zhan Tze’s article thoroughly discusses the background of the case, its reasoning, and holding. (See here.) The case involved consent to class arbitration.
There were two questions before the Court: (a) whether class arbitration consent was a question of arbitrability for the Court; and (b) if so, whether the parties, under the First Options Reverse Presumption of Arbitrability, had clearly and unmistakably agreed to submit class arbitration consent questions to the arbitrator.
As respects the second issue—whether the parties clearly and unmistakably agreed to arbitrate class-arbitration consent issues— the Court held that the parties did not clearly and unmistakably so agree.
The parties’ contract contained three provisions pertinent to arbitrability questions:
1. “If Employer and Employee disagree over issues concerning the formation or meaning of this Agreement, the arbitrator will hear and resolve these arbitrability issues.”
2. “The arbitrator selected by the parties will administer the arbitration according to the National Rules for the Resolution of Employment Disputes (or successor rules) of the American Arbitration Association (‘AAA’) except where such rules are inconsistent with this Agreement, in which case the terms of this Agreement will govern.” (emphasis added)
3. “Except as provided below, Employee and Employer, on behalf of their affiliates, successors, heirs, and assigns, both agree that all disputes and claims between them . . . shall be determined exclusively by final and binding arbitration.” (emphasis added)
But the parties’ contract also contained a broad class arbitration waiver, which provided:
[T]he parties agree that this Agreement prohibits the arbitrator from consolidating the claims of others into one proceeding, to the maximum extent permitted by law. This means that an arbitrator will hear only individual claims and does not have the authority to fashion a proceeding as a class or collective action or to award relief to a group of employees in one proceeding, to the maximum extent permitted by law.
The Court said that the first three provisions, “[d]ivorced from other provisions of the arbitration (most notably, the class arbitration bar). . . could arguably be construed to authorize arbitrators to decide gateway issues of arbitrability, such as class arbitration.” Slip op. at 8. As respects the second of the three, the incorporation by reference of the National Rules for the Resolution of Employment Disputes (or successor rules) of the AAA, the Court noted that “Rule 3 of the AAA Supplementary Rules for Class Arbitration provides that the arbitrator is empowered to determine class arbitrability.” Slip op. at 8. And, according to the Court, “the third provision states in broad terms that ‘all disputes and claims between them’ shall be determined by the arbitrator, language arguably capacious enough under this court’s previous rulings to include disputes over class arbitrability.” Slip op. at 8.
But the Court did not decide whether those “provisions, standing alone, clearly and unmistakably” required arbitration of the class arbitration consent issue, because the Court held that the class arbitration waiver foreclosed such a finding. Slip op. at 8, 6-7.
The court said “that this class arbitration bar operates not only to bar class arbitrations to the maximum extent permitted by law, but also to foreclose any suggestion that the parties meant to disrupt the presumption that questions of class arbitration are decided by courts rather than arbitrators.” Slip op. at 6-7. “[I]t is[,]” observed the Court, “difficult for us to imagine why parties would categorically prohibit class arbitrations to the maximum extent permitted by law, only to then take the time and effort to vest the arbitrator with the authority to decide whether class arbitrations shall be available.” Slip op. at 7. “Having closed the door to class arbitrations to the fullest extent possible,” queried the Court rhetorically, “why would the parties then re-open the door to the possibility of class arbitrations, by announcing specific procedures to govern how such determinations shall be made?” Slip op. at 7.
Comparing the first three provisions “with the class arbitration bar at issue in this case, we conclude that none of them state with the requisite clear and unmistakable language that arbitrators, rather than courts, shall decide questions of class arbitrability.” Slip op. at 8.
Two of the provisions, said the Court, “include express exception clauses. . . , which “expressly negate any effect these provisions might have in the event they conflict with any other provision of the arbitration agreement—as they plainly do here in light of the class arbitration bar.” Slip op. at 9.
Even apart from “the exception clauses,” none of the three provisions “speak with any specificity to the particular matter of class arbitration.” Slip op. at 9. “[B]]y contrast[,]” said the Court, [t]he class arbitration bar. . . specifically prohibits arbitrators from arbitrating disputes as a class action, and permits the arbitration of individual claims only.” Slip op. at 9 (citations and quotations omitted).
Those three provisions “[a]ccordingly. . . do not clearly and unmistakably overcome the legal presumption—reinforced as it is here by the class arbitration bar—that courts, not arbitrators, must decide the issue of class arbitration.” Slip op. at 9.
In our next post we’ll analyze and discuss how Met Life and 20/20 Comm. effectively make an end run around Schein and what might have motivated those courts to rule as they did.
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.”
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.
The Fifth U.S. Circuit Court of Appeals recently held that class arbitrability is to be determined by the Court instead of the arbitrators in a class arbitration case. 20/20 Comms. Inc. v. Lennox Crawford, No. 18-10260 (5th Cir. July 22, 2019). The case appears to add a level of inquiry in the subject matter that may run counter to a U.S. Supreme Case earlier this year.
Several employees of 20/20 Communications, a marketing firm based in Fort Worth, Texas, filed individual arbitration claims against the employer. The arbitrator commenced a class arbitration despite an arbitration agreement contract clause prohibiting the consolidation of individual claims, “on the theory that the parties’ class arbitration bar is prohibited by federal law.”
Following the views of the Fourth, Sixth, Seventh, Eighth, Ninth and Eleventh Circuits, the Fifth Circuit held that where class arbitration is an issue, a legal presumption arises that the Court will determine the availability of class arbitration unless the arbitration agreement contained clear and unmistakable language to the contrary.
The Fifth Circuit, in a unanimous opinion written by Circuit Judge James C. Ho, reversed the decisions of two district courts. In one case, the district court held that the arbitration agreement authorized the arbitrator to determine class arbitrability instead of the court. See 20/20 Comms. Inc. v. Randall Blevins, No. 4:16-cv-00810-Y (N.D. Tex.) (Means, J.). In the other case, the district court held that the class arbitration bar was unenforceable under the National Labor Relations Act. See 20/20 Comms. Inc. v. Lennox Crawford, No. 4:17-cv-929-A (N.D. Tex.) (McBryde, J.).
The Fifth Circuit determined that class arbitrability is a gateway issue for the court. It rejected the employee’s arguments that the delegation provisions in the arbitration agreement clearly and unmistakably delegated the determination of class arbitrability to the arbitrator.
The circuit court said class arbitrability falls under the category of a gateway issue which would presumptively be determined by the courts because (i) the increased size and complexity of the dispute, (ii) the due process concerns that are raised and (iii) the privacy and confidentiality of the parties may be compromised.
While these factors point toward class arbitrability being a gateway issue, the appeals court stops short of elaborating on why arbitrators are not well-equipped to handle these concerns. An arbitrator could undertake these considerations and determine not to consolidate the individual claims.
Regardless, it means that the court could be involved despite the parties’ attempt to resolve the dispute via arbitration. Additionally, to the extent the employee can bargain, the individual may not reach an agreement with the employer to use the “clear and unmistakable” language sought by the courts to override the legal presumption that the court is to decide class arbitrability.
Having raised the legal presumption that class arbitrability is to be determined by the court, not the arbitrator, the court’s next task, according to the Fifth Circuit, would be to assess whether the arbitration agreement contained delegation provisions in clear and unmistakable language that would override the legal presumption. The circuits courts are currently split on whether traditional delegation provisions are sufficient to override this legal presumption.
The Arbitration Nation blog points out that in the Second, Tenth and Eleventh Circuits, traditional delegation provisions which submits any dispute to the arbitrator were held to be sufficient to overcome the presumption, citing Wells Fargo Advisors LLC v. Sappington, 884 F. 3d 392 (2nd Cir. 2018) and Spirit Airlines, Inc. v. Maizes, 899 F. 3d 1230 (11th Cir. 2018). See Henry Allen Blair, “The Fifth Circuit Weighs in About Who Decides Class Arbitrability,” Arbitration Nation (July 28) (available at http://bit.ly/2KqcIFu). It is noted that the Tenth Circuit held similarly in Dish Network L.L.C. v. Matthew Ray, 900 F.3d 1240 (10th Cir. 2018).
On the other hand, Blair’s Arbitration Nation post notes that the Third, Fourth, Sixth and Eighth Circuits concluded that notwithstanding traditional delegation provisions or provisions incorporating institutional rules which delegates the decision of class arbitrability to the arbitrator, the decision of class arbitrability still lies with the Court. See Opalinski v. Robert Half Intern Inc., 761 F. 3d 326 (3rd Cir. 2014); Dell Web Communities Inc. v. Carlson, 817 F.3d 867 (4th Cir. 2016); Reed Elsevier Inc. v. Crockett, 734 F. 3d 594 (6th Cir. 2013), and Catamaran Corp. v. Towncrest Pharmacy, 864 F. 3d 966 (8th Cir. 2017), among others.
In the Fifth Circuit Crawford opinion, typical delegation provisions were included in the arbitration provision. Interestingly, after a brief discussion of the delegation provisions at issue, the court stated that it ultimately need not make a conclusion on “[w]hether these provisions, standing alone, clearly and unmistakably empower the arbitrator to decide questions of class arbitrability.” Instead, the Court considered it sufficient to compare the class arbitration bar at issue with the delegation provisions to reach the conclusion that none of the provisions “state with the requisite clear and unmistakable language that arbitrators, rather than courts, shall decide questions of class arbitrability.”
The Fifth Circuit’s conclusion raises an important question: What language used in the arbitration agreement would be clear and unmistakable enough to overcome the legal presumption that it is the courts that will decide class arbitrability instead of the arbitrators when there is a contractual clause barring class arbitration?
“[T]here is tension in this decision,” notes Philip J. Loree Jr., of New York’s Loree & Loree, who closely watches class arbitration cases, “and I think the culprit is the Court’s ruling that the clarity of the class arbitration waiver should be considered as evidence that the parties did not clearly and unmistakably intend arbitrators to decide arbitrability.”
Loree notes in an email, “Whether or not the class arbitration waiver is clear and unmistakable says nothing about who is supposed to interpret and apply the waiver. This, he notes, gives the impression that the Fifth Circuit is —perhaps unintentionally— making an end around this year’s U.S. Supreme Court rejection of the “wholly groundless” exception to the clear and unmistakable rule set out in Henry Schein, Inc. v. Archer And White Sales, Inc., 139 S.Ct. 524 (2019) (available at http://bit.ly/2YLDkWQ) (see Mark Kantor, “Implications of Henry Schein and New Prime US Supreme Court Decisions,” CPR Speaks (Jan. 22) (available at http://bit.ly/33d5nSo).
Loree notes that where an arbitrator ignores the parties’ clear and unmistakable class arbitration waiver, the award would presumably be vacated under Federal Arbitration Act Section 10(a)(4), following the Supreme Court’s decisions in Stolt-Nielsen S.A v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010) and Oxford Health Plans LLC v. John Ivan Sutter, 133 S.Ct. 2064 (2013).
“But rather than allow that scenario to play itself out,” he continues, “the Fifth Circuit has effectively conflated the clarity of the contract on the merits issue (class arbitration consent) with the clarity of the contract on the issue of who gets to decide class arbitration consent.”
This, according to Loree, runs counter to the Supreme Court’s Schein decision.