The U.S. Supreme Court seems likely to favor arbitration in a case that asks whether an arbitrator or a court should decide if a dispute falls under a carve-out provision of an agreement that exempts certain claims from arbitration.
Henry Schein Inc. v. Archer and White Sales Inc. involves a commercial antitrust dispute between two dental-equipment businesses, but the high court’s interpretation of the Federal Arbitration Act is applicable to employment arbitration agreements. So a ruling in the case might impact how workplace arbitration agreements are drafted.
The petitioner, Henry Schein Inc., argued that the applicable agreement incorporated American Arbitration Association (AAA) rules stating that the arbitrator should decide threshold questions about the arbitrability of a claim. The respondent, Archer and White Sales Inc., argued that a court should decide the question, because the agreement excluded the claims for injunctive relief (a court order requiring a party to start or stop doing something).
[Join SHRM or renew your membership by Dec. 16 and receive a free SHRM tumbler. Use code: Tervis]
“The court appears poised to agree with Henry Schein,” said Joshua Nadreau, an attorney with Fisher Phillips in Boston. “I think this court, which has been very receptive to arbitration generally, is unwilling to create an exception … that could swallow the rule.”
Nadreau predicts that the high court will hold that, in the case of an ambiguous delegation provision, the issue of “who decides if a case is arbitrable” should be put to the arbitrator, even if the agreement prevents the arbitrator from ultimately hearing the merits of the dispute.
Questions about arbitration agreements frequently find their way to the Supreme Court. In general, the high court has deemed that courts should decide whether a dispute falls within the scope of an arbitration agreement, unless there is “clear and unmistakable evidence” that the parties agreed to have an arbitrator decide that threshold question.
In 2019, the Supreme Court clarified in this case that arbitrators, not courts, should decide whether an arbitration agreement applies to a dispute—even when the language of the agreement suggests that a particular claim isn’t covered by the contract—if the agreement gives arbitrators the power to make that threshold decision.
Arbitrators can efficiently dispose of frivolous cases by quickly ruling that a claim is not arbitrable, the high court noted.
[Need help with legal questions? Check out the new SHRM LegalNetwork.]
The case was sent back to the lower courts to decide whether the agreement actually delegated the arbitrability question to the arbitrator. The appeals court, however, sided with Archer and White and ruled that it did not.
The Supreme Court is revisiting the case to answer “a more nuanced question” that was raised in the appeals court on remand, explained Rich Meneghello, an attorney with Fisher Phillips in Portland, Ore. Does an agreement that carves out certain claims—but generally delegates questions of arbitrability to an arbitrator—require that the arbitrator decide whether the carved-out claim is arbitrable?
That’s a pretty technical question. But Craig O’Loughlin, an attorney with Snell & Wilmer in Orange County, Calif., said the answer will hopefully give employers clearer guidance on how to properly draft employment arbitration agreements and how clear the agreement has to be about whether the arbitrator can decide certain threshold questions.
During oral arguments, Archer and White was represented by Daniel Geyser, an attorney with Alexander Dubose Jefferson in Dallas. He highlighted that the delegation clause was contained in the agreement only by reference to AAA rules. If the relevant dispute is carved out of the arbitration agreement, “then it’s not subject to arbitration and it’s not subject to the AAA rules, and the court gets to make that predicate determination,” he said.
Chief Justice John Roberts Jr. asked, “How do you distinguish a situation we call the run-of-the-mill situation where there is no express carveout?” He provided the following hypothetical situation in the labor and employment setting:
Just say that the agreement applies to all labor disputes within the factory, and there’s a storage facility right next door where they keep things that are used in the factory, but they also keep other stuff, and the union says, ‘We want to arbitrate a dispute about that building.’ And the factory owner comes in and says, ‘No, no, that’s not within the arbitration agreement. That’s not part of the factory.’
“What makes that situation different?” Roberts asked. He pointed to Henry Schein’s argument “that the issue that you’re trying to elevate outside the normal situation comes up all the time, because arbitrators are always deciding whether something is within the scope of arbitration.”
Justice Brett Kavanaugh noted that nearly every arbitration agreement sets limits on its scope or contains carveouts. “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.
The justices also posed challenging questions to Henry Schein’s counsel, Kannon Shanmugam, an attorney with Paul, Weiss in Washington, D.C.
Shanmugam argued, “If you have a dispute about whether something is, in fact, arising under the agreement, in our view, that should go to the arbitrator by virtue of the incorporation [of the AAA rules].”
Roberts observed that the agreement’s carveout specified that the parties didn’t want arbitrators dealing with actions that ask for injunctive relief. “Now, if that’s the case, and it was important enough for them to spell it out right at the outset, wouldn’t the last thing you’d think they would want is for an arbitrator to decide which disputes qualify?”