Arbitration frequently comes in two stages. Before an arbitrator decides the merits of the case, there is often a dispute about whether the arbitrator has jurisdiction in the first place. Because of the logic that the arbitrator does not “exist” if there is no valid arbitration clause in place, the default U.S. rule is that disputes about the arbitrator’s jurisdiction (known as “arbitrability”) must be resolved in court, and not in the arbitration. But, because arbitration is a creature of contract, the courts permit parties to except themselves from the default rule and agree that the arbitrator will make the arbitrability decision. These are called “delegation” clauses, meaning that arbitrability is delegated to the arbitrator.
On January 8, 2019, the Supreme Court made delegation easier and free of uncertainty. In Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 (U.S. Jan. 8, 2019), the Court rejected a lower-court-crafted rule used in multiple federal circuits that allowed those courts to circumvent agreements to have an arbitrator determine his or her own jurisdiction if, in the court’s view, an application for arbitration was “wholly groundless.” In so holding, the Supreme Court made clear that agreements to delegate arbitrability questions to an arbitrator must be respected in the same manner as agreements to arbitrate in the first place.
The Law of Arbitrability
Under section 2 of the Federal Arbitration Act (FAA), arbitration agreements are presumptively “valid, irrevocable and enforceable,” and must be enforced by courts according to their terms. Left alone, the FAA provides courts with the authority to determine whether an agreement to arbitrate exists and, if so, whether a particular dispute is subject to arbitration. Thus, on an motion to compel arbitration (or stay judicial proceedings), courts determine whether the dispute is arbitrable.
Nonetheless, to avoid prolonged court proceedings that interfere with arbitration’s professed goal of efficiency, the parties may agree to delegate threshold questions of arbitrability to an arbitrator. See Rent-a-Center, W., Inc. v. Jackson, 561 U.S. 63, 69-70 (2010). Thus, if an agreement to arbitrate exists, a court must determine who decides the question of arbitrability, i.e., who determines the arbitrator’s jurisdiction. The “who decides” question is critical because if an arbitrator is tasked with determining his or her own jurisdiction, the arbitrator’s decision can only be challenged under the limited grounds provided in section 10 of the FAA after the arbitration has concluded. For this reason, the Supreme Court has cautioned that, before delegating arbitrability issues to an arbitrator, courts should require “clear and unmistakable evidence” that the parties intended to do so. See First Options v. Kaplan, 514 U.S. 938, 944 (1995). If a party makes that showing, however, the Court must stop its inquiry and refer the issue to the arbitrator. Schein addressed the question of whether there are circumstances in which a court may nonetheless circumvent this procedure.
The Schein Decision
Schein’s predecessor (Pelton & Crane) entered into a contract with Archer & White for the distribution of dental products. The arbitration clause in the contract provided, in relevant part, that:
Any dispute arising under or relating to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Schein]), shall be resolved in accordance with the arbitration rules of the American Arbitration Association [AAA].
Archer subsequently sued Schein in federal district court in Texas for alleged violations of the antitrust laws, seeking damages and injunctive relief. Because an agreement to arbitrate existed, Schein moved to compel arbitration. In its motion, Schein argued that the incorporation of the AAA rules in the contract amounted to “clear and unmistakable evidence” that the parties had agreed to have an arbitrator decide whether their dispute fell within the arbitration agreement. In so arguing, Schein relied on the fact that the AAA rules empower arbitrators to resolve questions of arbitrability.
Archer argued in response that the court could resolve the arbitrability question itself and dismiss Schein’s motion under the “wholly groundless” rule recognized in the Fifth Circuit. Relying on the arbitration clause’s express exclusion of claims for injunctive relief, Archer took the position that Schein’s motion was obviously meritless because Archer’s complaint sought injunctive relief in part. In these circumstances, Archer argued that the “wholly groundless” rule permitted the court to forgo the additional step of referring the arbitrability questions to the arbitrator, and instead resolve the issue itself. The district court and the Fifth Circuit Court of Appeals agreed with Archer and held that, because Schein’s application was “wholly groundless,” the lower court was empowered to deny the motion outright.
The Supreme Court reversed. Writing for a unanimous Court, Justice Kavanaugh reiterated that the Court had stated in First Options and subsequent cases that parties are free to contract to have an arbitrator decide arbitrability. Schein, No. 17-1272, slip op. at 4. When the parties choose to do so, a court cannot “override the contract” by declaring that an application to compel arbitration is “wholly groundless.” Id. at 5. To allow such an exception would effectively rewrite section 2 of the FAA, which requires that arbitration clauses be enforced according to their terms. Id.
Justice Kavanaugh further explained that lower courts are prohibited from ruling on the merits of any dispute assigned to an arbitrator, “even if it appears to the court to be frivolous.” Id. at 5 (citations omitted). Courts are required to enforce delegation clauses in the same manner that they enforce agreements to arbitrate the merits of a dispute.
Notwithstanding Archer’s arguments, the Court found no support for the “wholly groundless” exception in the FAA itself. Id. at 5-6. The Court was also unpersuaded that any efficiencies would be gained by permitting courts to preemptively resolve jurisdictional questions that were properly delegated to an arbitrator. While allowing that the “wholly groundless” exception could preserve resources in individual cases, the Court’s view was that, on the whole, permitting the exception would simply result in more collateral litigation. Id. at 7. Moreover, the Court viewed arbitrators as equally capable of disposing meritless applications for arbitration. Id. at 7-8.
What You Should Know About Schein
Schein is the latest in a line of arbitration-related decisions from the Roberts Court that reinforce the principle that arbitration is a matter of contract and that those contracts must be enforced as written. Lower courts may not rewrite the parties’ agreements. The result in Schein is not surprising, nor is the fact that the decision was unanimous.
Of further note, the Court expressly declined to address the question of whether the mere incorporation of AAA or other institutional rules in an arbitration clause amounts to “clear and unmistakable evidence” that the parties agreed to delegate arbitrability questions to the arbitrator. Id. at 8. More often than not, institutional arbitration rules, like the AAA rules, will delegate questions of arbitrability to arbitrators. Given that the Court left this question open, parties who desire courts to resolve the jurisdiction of an arbitrator should expressly say so in the contract, rather than relying on an assumption that courts will do so in the absence of “clear and unmistakable evidence.” Thus, it remains critical that parties draft arbitration agreements with care, and not simply add terms as boilerplate in the closing stages of negotiations.