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Article: March 2019: Supreme Court Trims Judicial Role Under Federal Arbitration Act

Business Litigation Reports

The Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., continues its ubiquitous presence on the U.S. Supreme Court’s docket. Hardly a Term has gone by in recent years without at least one decision by the Court interpreting and applying the statute, and this Term is no exception; no fewer than three merits cases on the Court’s docket arise under the Act.

The first of those cases to be decided, Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019), presented a perennial issue: who decides whether a particular dispute is subject to arbitration—a court or an arbitrator? As the Court has previously explained, contracting parties are free to delegate this “arbitrability” (or “gateway”) issue itself to an arbitrator. Notwithstanding that rule, at least four federal courts of appeals—the Fourth, Fifth, Sixth, and Federal Circuits—held in recent years that courts always remain free to decide arbitrability disputes where the arguments in favor of arbitration are “wholly groundless.” In contrast, two other federal courts of appeals—the Tenth and Eleventh Circuits—rejected the “wholly groundless” exception, and held that the FAA requires courts to enforce agreements to arbitrate arbitrability no matter how far-fetched the arguments in favor of arbitration.

The Supreme Court granted review in Henry Schein to resolve that circuit conflict, and—in the maiden opinion by Justice Brett Kavanaugh— unanimously rejected the “wholly groundless” arbitrability, no less than any other kind of arbitration agreements, must be enforced according to their terms. Whether the court deems the arbitrability question hard or easy on the merits is irrelevant, and conflates the underlying arbitrability question with the distinct issue of who decides that question.

While rejecting the “wholly groundless” exception, the Supreme Court skirted the more fundamental issue: under what circumstances will courts interpret arbitration agreements to assign arbitrability disputes to an arbitrator? The “wholly groundless” exception, after all, represented at most a narrow exception to the rule that parties are free to assign arbitrability disputes to an arbitrator. Now that the Supreme Court has dispensed with that judicially-crafted “safety valve,” courts will have no choice but to compel arbitration of arbitrability disputes upon interpreting an agreement to send such disputes to arbitration, so that interpretive issue looms larger than ever.

The Fifth Circuit dodged that interpretive issue in Henry Schein by holding that, even assuming that the parties’ agreement were interpreted to require arbitration of arbitrability disputes, the arbitration demand in that case was “wholly groundless.” Accordingly, after the Supreme Court rejected the “wholly groundless” exception, it remanded the case for the Fifth Circuit to address that interpretive issue in the first instance, simply reiterating its prior observation that courts “‘should not assume that the parties agreed to arbitrate arbitrability unless is there clear and unmistakable evidence that they did so.’” 139 S. Ct. at 531 (emphasis added; quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). The Supreme Court shed no additional light on what particular contractual language will be deemed such “clear and unmistakable evidence,” and it is likely that the issue will return to the Supreme Court in the near future. In the meantime, parties entering into arbitration agreements, or seeking or opposing arbitration under such agreements, would be well-advised to be aware of arguments for and against construing agreements to delegate arbitrability disputes to an arbitrator.

Background: Arbitrating Arbitrability
As the Supreme Court has emphasized in a line of cases dating back decades, the FAA reflects a liberal federal policy favoring arbitration agreements. Although arbitration is a matter of consent, not coercion, and parties cannot be forced to arbitrate—as opposed to litigate—disputes that they did not agree to arbitrate, the Court has construed the Act to direct that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).

As a matter of law and logic, one of the issues that parties can agree to arbitrate is a dispute over who decides a dispute over the scope of arbitrable issues. Say, for example, that the parties agree to arbitrate disputes “arising out of or relating to” a particular contract. If one of the parties wishes to litigate a statutory claim in court, the threshold question is whether that dispute “arises out of or relates to” the contract. In determining whether the parties have delegated the resolution of that arbitrability dispute to the arbitrator, the general presumption in favor of arbitration is flipped: a court will not assume that parties intended to arbitrate arbitrability in the absence of “‘clear and unmistakable’” evidence that they did so. First Options, 514 U.S. at 944 (brackets omitted; quoting AT&T Techs., Inc. v. Communications Workers 475 U.S. 643, 649 (1986)).

That is so, the Court explained, because once the parties have agreed to arbitrate some matters, “one can understand why the law would insist on clarity before concluding that the parties did not want to arbitrate a related matter.” First Options, 514 U.S. at 945 (emphasis in original). In contrast, the question of who should decide the arbitrability question “is rather arcane,” and “[a] party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers.” Id. Thus, courts “hesitate to interpret silence or ambiguity on the ‘who should decide arbitrability’ point as giving the arbitrators that power, for doing so might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide.” Id.

The Rise of the “Wholly Groundless” Exception
The default rule that, absent clear and unmistakable evidence, contracting parties are deemed to intend courts, not arbitrators, to resolve arbitrability disputes proved easier to announce than to apply. Some arbitration agreements are very explicit, specifically delegating to arbitrators the authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of the arbitration agreement. But other arbitration agreements are less clear, merely providing that arbitration will take place under common arbitration rules, like those of the American Arbitration Association (AAA) or Judicial Arbitration & Mediation Services (JAMS). In referencing such common arbitration rules, the parties may, or may not, realize that those rules may give arbitrators the power to decide arbitrability issues. For example, Rule 7(a) of the AAA’s Commercial Arbitration Rules and Mediation Procedures provides that “[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.” Similarly, Rule 11(b) of the JAMS Comprehensive Arbitration Rules & Procedures provides that “[j]urisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter.”

Many courts have concluded that a decision to adopt arbitration rules that empower arbitrators to decide arbitrability disputes, like the AAA and JAMS rules quoted above, amounts to “clear and unmistakable” evidence that the parties intended for the arbitrators to decide such disputes. See, e.g., Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F.3d 522, 527-28 (4th Cir. 2017); Belnap v. Iasis Healthcare, 844 F.3d 1272, 1281-84 (10th Cir. 2017); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1372-73 (Fed. Cir. 2006); Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir. 2005). For some courts, the conclusion that the parties intended for the arbitrator to decide arbitrability ended the inquiry; in that event, the court could not do so. See, e.g., Jones v. Waffle House, Inc., 866 F.3d 1257, 1268-69 (11th Cir. 2017); Belnap, 844 F.3d at 1284-93.

Other courts, however, embraced the theory that, regardless of whether the parties intended to arbitrate arbitrability disputes, courts could resolve such disputes if the argument for arbitration was “wholly groundless.” See, e.g., Simply Wireless, 877 F.3d at 528-29; Douglas v. Regions Bank, 757 F.3d 460, 462-64 (5th Cir. 2014); Turi v. Main Street Adoption Servs. LLP, 633 F.3d 496, 507, 511 (6th Cir. 2011); Qualcomm, 466 F.3d at 1373-74. These courts found it anomalous, wasteful, and potentially abusive for a party to be able to trigger arbitration with respect to a dispute plainly outside the scope of an arbitration clause.

Henry Schein
Against this backdrop of division in the lower courts, the Fifth Circuit decided Henry Schein. That case arose from a complaint seeking both (1) tens of millions of dollars in damages for alleged violations of federal and state antitrust law, and (2) injunctive relief. 878 F.3d 488, 491 (5th Cir. 2017). The defendant moved to compel arbitration under an agreement between the parties providing that “[a]ny dispute arising under or related to this Agreement (except for actions seeking injunctive relief …) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.” Id. at 493 (emphasis omitted).

As the Fifth Circuit recognized, the threshold question was whether a court or an arbitrator should decide whether the lawsuit fell within the scope of the parties’ arbitration agreement. The court stated that “[a] contract need not contain an express delegation clause to meet the [‘clear and unmistakable’] standard” for delegating the issue to an arbitrator, and that a reference to the AAA rules generally would do the trick. See id. at 493. But the court then held that, in this particular provision, “the interaction between the AAA Rules and the carve-out [for actions seeking injunctive relief] is at best ambiguous.” Id. at 494-95. In particular, the carve-out could be read to remove actions seeking injunctive relief from the ambit not only of arbitration but also of the AAA rules. Id. at 494-95.

After noting the difficulty of this interpretive question, the Fifth Circuit sidestepped it. “Regardless of whether an agreement clearly and unmistakably delegates the question of arbitrability, [the ‘wholly groundless’ exception] provides a narrow escape valve.” Id. at 495. Because the lawsuit in that case sought injunctive relief (in addition to substantial money damages), the court held that it was clearly outside the scope of the arbitration agreement in light of the express carve-out for “actions seeking injunctive relief.” The court noted that the carve-out “does not limit the exclusion to ‘actions seeking only injunctive relief,’ nor ‘actions for injunction in aid of an arbitrator’s award,’” and “[n]or does it limit itself to only claims for injunctive relief.” Id. at 497 (emphasis added by Fifth Circuit). Accordingly, the Fifth Circuit affirmed the district court’s order denying the motion to compel arbitration.

As noted above, the Supreme Court granted review and vacated the Fifth Circuit’s decision. The Supreme Court’s analysis was straightforward: the FAA requires courts to interpret contracts as written, and thus courts may not decide arbitrability issues that the parties have delegated to an arbitrator. See 139 S. Ct. at 529. Whether a court thinks the arbitrability issue is “wholly groundless” is irrelevant where the parties entrusted that decision to an arbitrator. “Just 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.” Id. at 530. The Court rejected arguments that, as a practical and policy matter, it would be a waste of time and money to send a wholly groundless arbitrability issue to an arbitrator, noting that the contours of the “wholly groundless” exception are themselves murky, and there is no guarantee that an arbitrator will always agree with a court with respect to what arguments are “wholly groundless.” See id. at 530-31. To the extent that parties file frivolous motions to compel arbitration, an arbitrator can dispose of them quickly, and may even be able to impose sanctions. See id. at 531.

After rejecting the “wholly groundless” exception, the Court “express[ed] no view about whether the contract at issue in this case in fact delegated the arbitrability question to the arbitrator,” given that the Fifth Circuit had not decided that issue. Id. The Court thus remanded for the Fifth Circuit to address that issue in light of the

principle that “courts ‘should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.’” Id. (quoting First Options, 514 U.S. at 944).

Looking Ahead: “Clear and Unmistakable Evidence” To Arbitrate Arbitrability
The Supreme Court’s unanimous rejection of the “wholly groundless” exception in Henry Schein returns the focus of the inquiry to the critical question of what qualifies to “clear and unmistakable” evidence that parties intended to assign arbitrability disputes to an arbitrator. As noted above, in some cases that is an easy inquiry, because the arbitration provision expressly delegates such disputes to the arbitrator. The harder issue arises in cases where the parties provide that their arbitration will be governed by particular set of procedural rules, like those of the AAA and JAMS, that empower (but do not require) arbitrators to decide arbitrability questions. Insofar as such rules authorize arbitrators to decide arbitrability, is a provision agreeing to arbitrate in accordance with such rules enough to evince a “clear and unmistakable” intent to arbitrate arbitrability? That issue can be argued both ways. On the one hand, it can be argued that the parties must be deemed to know the arbitral rules they are incorporating, and that incorporation of an arbitral rule empowering an arbitrator to decide arbitrability reflects a choice to have the arbitrator exercise that power. On the other hand, it can also be argued that an agreement to follow rules that empower arbitrators to decide arbitrability does not invariably mean that the parties intended for the arbitrators to decide arbitrability—the existence of a power is not the same as a decision to invoke that power.

These interpretive questions over who decides arbitrability are often more difficult than the underlying arbitrability question itself, which is one of the reasons why the “wholly groundless exception” offered courts an appealing alternative ground to resolve such cases. Now that this alternative is gone, courts will have no choice but to face the difficult interpretive question.

As a practical matter, parties supporting or opposing arbitration should be aware that the incorporation of common arbitration rules (e.g., AAA and JAMS) in an arbitration agreement may be characterized as “clear and unmistakable” evidence that the parties intended to arbitrate arbitrability. If that is not their intention, they may wish to modify their arbitration agreements accordingly, because this issue is clearly headed for further litigation in light of Henry Schein.