On January 8, 2019, a unanimous Supreme Court tightened the grounds for avoiding contractual obligations to arbitrate in Henry Schein, Inc. v. Archer & White Sales, Inc. The Court’s decision simultaneously reins in the ability of state and federal courts to limit the authority of arbitrators, while affirming the power of some arbitrators to determine their own jurisdiction under federal law.
Under the Federal Arbitration Act (FAA), courts must enforce contractual agreements to arbitrate as written. When faced with a potential dispute governed by the FAA, two questions immediately arise. First, do the parties’ claims and allegations fall within the scope of their existing arbitration agreement? Second, who has the power to resolve any dispute over the answer to the first question: a judge or the arbitrator? Even when arbitration agreements clearly empower arbitrators to decide this second question of “arbitrability,” some litigants nevertheless seek to dodge their contractual obligation to arbitrate by filing suit in state or federal court. These litigants then argue to courts that there was no need to involve an arbitrator, supposedly because it is “obvious” that the claims fall outside the scope of the agreement to arbitrate.
In Henry Schein, the Supreme Court resolved a conflict among the circuit courts by ruling that there is no such “wholly groundless” exception to the requirement that courts must enforce valid delegations of this authority to arbitrator. The “wholly groundless” exception, developed principally in the Fifth, Sixth and Federal Circuits, permitted courts to decide the second question of arbitrability as a threshold matter, even when parties had contractually delegated arbitrability to an arbitrator. The Supreme Court has now held that this judicially crafted exception is inconsistent with the FAA. The holding is in line with existing case law in the Third, Fourth, and Eleventh Circuits.
The plaintiff’s complaint in Henry Schein had sought both damages and injunctive relief on the basis of state and federal antitrust laws. The arbitration clause applied to “any dispute” between the parties, but excluded claims for injunctive relief. After the plaintiff filed suit in federal court, the defendant moved to compel arbitration and argued that parties had incorporated the rules of the American Arbitration Association, which grants the arbitrator the power to resolve the threshold question of arbitrability. In lieu of compelling arbitration on this threshold issue, however, the district court and the Fifth Circuit held that the arbitration clause excluded the claim on its face because of the request for injunctive relief. Both Courts invoked the “wholly groundless” exception to determine that no arbitration was required to answer either question.
In vacating the judgment, the Supreme Court made clear that the proper analysis must begin by determining whether arbitrability is a question delegated to the arbitrator or reserved for the court. When parties have properly delegated the question to an arbitrator, that agreement must be respected and enforced, even if the court believes it is “obvious” that the parties’ dispute falls outside the scope of their arbitration agreement. The Supreme Court dismissed various statutory and practical arguments that the FAA contemplated a threshold court review and rejected the notion that considerations of efficiency weighed in favor of adopting such an exception.
But, the Court’s ruling applies only when the question of arbitrability is contractually committed to the jurisdiction of the arbitrator. If there is no such delegation, the court decides. Furthermore, when a party files suit to avoid arbitration, the court will still decide whether this power was delegated to the arbitrator in a “clear and unmistakable” fashion.
Relevant to this inquiry, the contract clause in Henry Schein required arbitration under the rules of the American Arbitration Association, which state that arbitrability is a question for the arbitrator. The Supreme Court specifically declined to address whether the contract, and by extension the American Arbitration Association rules, contained an enforceable delegation of that question to the arbitrator, since the Fifth Circuit did not reach that issue. Therefore, the Supreme Court remanded this issue to the lower courts. Other cases have held that the parties’ explicit incorporation of the rules of a forum are a sufficient delegation to the arbitrator, see, e.g., Belnap v. Iasis Healthcare, 844 F. 3d 1272, 1284 (10th Cir. 2017), which may be the result on remand in this case.
In sum, Henry Schein makes clear that courts may not utilize a judicially crafted exception to guard their own power to decide arbitrability when a proper contractual delegation exists. For parties who wish to ensure that arbitrators exercise maximum control over future disputes, the Court’s opinion reinforces the critical importance of drafting clear and explicit agreements to submit threshold question of arbitrability to an arbitrator. In the absence of such a delegation, courts retain full decision-making control over the question of arbitrability. If properly drafted, however, Henry Schein directs federal and state courts applying the FAA to honor these agreements in their entirety. Finally, although the Court’s decision does not directly address issues related to the ability to pursue class actions in arbitration, the opinion serves as an expansion of the decision-making authority of arbitrators in lieu of courts.