US Sup Ct: Will the “Next Big Arbitration Issue” Be Whether Provisions of Arbitration Rules Constitute Clear and Unmistakable Evidence That the Disputing Parties Allocated “Who Decides” Authority to the Arbitrators?

By Mark Kantor

Kantor Photo (8-2012)

The U.S. Supreme Court heard oral argument in two arbitration-related cases on Monday, Henry Schein Inc. v. Archer & White Sales Inc. and Lamps Plus Inc. v. Varela.  The issue before the Court in Henry Schein was whether or not there is a “wholly groundless” exception to the general Federal Arbitration Act caselaw rule that, if the parties have “clearly and unmistakably” allocated the “who decides” question to the arbitrators, then issues of jurisdiction/arbitrability are for the arbitrator to decide in the first instance, not the courts.

The facts of the Henry Schein case involved the relatively commonplace occurrence of a commercial arbitration agreement referencing arbitration rules (here, AAA Commercial Arbitration Rule 7(a)) that grant the arbitrators the power to decide their own jurisdiction.  The lower courts in Henry Schein, like many other Federal courts before them, concluded that provision of the Rules constituted “clear and unmistakable evidence” (as called for by the Supreme Court in First Options of Chicago, Inc. v. Kaplan) allocating the “who decides” authority to the arbitrators, and then proceeded to consider whether or not an exception to that allocation exists if the claim of arbitrability is “wholly groundless”.

The 5th Circuit Court of Appeals ruled below in Henry Schein that such a “wholly groundless” exception does exist.  Further, said the Court of Appeals, that “wholly groundless” exception applied in the dispute such that the Federal courts could refuse to compel arbitration in the circumstances.  The disappointed claimant then sought, and obtained, U.S. Supreme Court review on the question of whether such a “wholly groundless” exception to the “clear and unmistakable evidence” allocation rule exists under Federal arbitration law.

However, Prof. George Bermann of Columbia Law School, known to many of us as inter alia the chief reporter of the ALI’s Restatement of the U.S. Law of International Commercial and Investor-State Arbitration, felt moved to submit an amicus brief in Henry Schein questioning, not the issue expressly before the Court, but instead the underlying principle that incorporation of arbitration rules granting jurisdiction/arbitrability power to the arbitrators satisfies the “clear and unmistakable evidence” test for allocating “who decides” authority to the arbitrators .

Although a majority of courts have found the incorporation of rules containing such a provision to satisfy First Options’ “clear and unmistakable” evidence test, the ALI’s Restatement of the U.S. Law of International Commercial and Investor-State Arbitration has concluded, after extended debate, that these cases were incorrectly decided because incorporation of such rules cannot be regarded as manifesting the “clear and unmistakable” intention that First Options requires.

https://www.supremecourt.gov/DocketPDF/17/17-1272/65270/20181001112810079_REPRINT%20Amicus-GAB.pdf .

Many of the Supreme Court Justices commented that this issue of “clear and unmistakable evidence … due to incorporation by reference” was not part of the Question Presented on which the Supreme Court granted certiorari in Henry Schein.  Based on those comments, it seems unlikely that the eventual decision of the Court in Henry Schein will resolve the issue posed by Prof. Bermann.  Nevertheless, Justices from across the judicial spectrum commented respectfully regarding Prof. Bermann’s amicus argument.  See comments and questions of Justice Ginsburg, Tr. 7:16-23; Justice Breyer, Tr. 49:15-23; Justice Gorsuch, Tr. 42:13-20; Justice Sotomayor, Tr. 38:4-7; Justice Alito, Tr. 35:7-36:4.

Counsel for the Petitioner did take substantive issue with Prof. Bermann’s argument, in addition to arguing that the issue was not within the Question Presented and thus in any event not before the Court.

What is going on in this case, if you look at the four corners of the delegation -of the arbitration agreement **** is that the arbitration agreement by its terms incorporates the rules of the American Arbitration Association and it does so very clearly. That is a quite common arrangement, particularly in commercial arbitrations like the one at issue here.

Then, if you take a look at the rules of the American Arbitration Association, those rules, and, in particular, Rule 7(a), clearly give the arbitrator the authority to decide arbitrability.  And under this Court’s decision in First Options, the relevant inquiry is whether or not the parties were willing to be bound by the arbitrator’s determination on the issue in question.

And so, with all due respect to Professor Bermann and his amicus brief, the position that he propounds has been rejected by every court of appeals to have considered this issue.  And if the Court has any interest in this issue, I would refer the Court to the very thoughtful opinion of the Tenth Circuit in the Belnap case, which discusses this issue in some detail.

Tr. 8:9-9:13.

The transcript of the oral argument in Henry Schein, available at https://www.supremecourt.gov/oral_arguments/argument_transcripts/2018/17-1272_bqmc.pdf, is very much worth reading in this regard.

The arguably positive comments by some Justices in reaction to Prof. Bermann’s amicus argument create the possibility that opportunistic counsel in other cases will see a signal that raising the principle to the Supreme Court in a future case might be worth the effort.  Consequently, I suggest that the “Next Big Arbitration Issue” to come to the U.S. Supreme Court may be whether or not an arbitration agreement incorporating arbitration rules that include within themselves a provision authorizing the arbitrators to rule on their own competence satisfies the “clear and unmistakable evidence” test in First Options for allocating “who decides” authority to the arbitrators in the first instance.

By the way, reading the tea leaves in the Henry Schein oral argument, at least some observers believe the comments/questions of the Supreme Court Justices indicate that the Court is not inclined to validate a “wholly groundless” exception to the allocation of “who decides” authority to the arbitrators.  See, e.g., http://www.scotusblog.com/2018/10/argument-analysis-justices-signal-opposition-to-vague-exceptions-that-would-limit-enforceability-of-arbitration-agreements/#more-276785.

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

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