Do you know what your arbitration provisions say about arbitrability? If not, now is a good time to review them in light of the U.S. Supreme Court’s unanimous decision this week in Henry Schein, Inc. v. Archer & White Sales, Inc. holding that, where parties have entered into an arbitration agreement, and that agreement clearly delegates to an arbitrator the question of which disputes must be arbitrated (i.e., questions of “arbitrability”), courts must enforce those terms and permit the arbitrator – not the judge – to determine whether the specific dispute in question will proceed in arbitration or in court.
The case was filed in Texas federal court by Archer and White (“Archer”) after its relationship with Henry Schein, Inc. (“Schein”) soured. Archer, a dental equipment distributor, entered into a contract with Pelton and Crane (“Pelton”) to distribute dental equipment manufactured by Pelton. Archer thereafter sued Pelton’s successor-in-interest and Schein alleging violations of federal and state antitrust laws, seeking both monetary damages and injunctive relief.
The parties’ contract contained a mandatory arbitration clause for disputes “arising under or related to” their agreement, “except for actions seeking injunctive relief” and intellectual property disputes. The parties agreed to be bound by the rules of the American Arbitration Association (“AAA”), which expressly provide that arbitrators have the power to resolve arbitrability questions. Pursuant to this provision of the contract, and invoking the Federal Arbitration Act (“FAA”), Schein moved to compel arbitration in the district court. Archer opposed the motion arguing that, because its complaint, in part, sought injunctive relief, defendants’ argument for arbitration was “wholly groundless.” Relying on Fifth Circuit precedent that recognized the “wholly groundless” exception to compelling arbitration under the FAA, the district court agreed with Archer and denied Schein’s motion. The Fifth Circuit affirmed.
The Supreme Court unanimously reversed, explaining that, under the FAA, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” The Court described the “wholly groundless” exception as one created by judges “to block frivolous attempts to transfer disputes from the court system to arbitration” even when the “parties’ contract delegates the threshold arbitrability question to an arbitrator.” Stated more bluntly, the Court characterized the doctrine as one used by certain federal courts to “short-circuit the process and decide the arbitrability question themselves.”
The Court held that the “wholly groundless” exception to arbitrability is inconsistent with the FAA and its own precedent. The FAA, as written, requires deference to the contractual terms the parties agreed to with respect to the question of arbitrability. To that end, the Court explained that “[j]ust 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.” Importantly, the Court did not rule on whether Archer and Schein’s arbitration agreement actually delegated arbitrability to an arbitrator by incorporating the rules of the AAA. This was something that the Fifth Circuit was to decide in the first instance on remand. Specifically, the Fifth Circuit was instructed to apply Supreme Court precedent requiring there to be “clear and unmistakable evidence” that the parties agreed to arbitrate the question of arbitrability.
So why does this matter? For parties who prefer arbitration over litigation, it is important that any arbitration provisions contain clear and unmistakable evidence that the parties are agreeing to delegate the question of whether a particular dispute is arbitrable to the sole discretion of an arbitrator. This is true for both business-to-business contracts, as well as business-to-consumer contracts, such as online terms and conditions of sale. With respect to the latter, in addition to having a clear provision which delegates arbitrability to an arbitrator, companies operating online should consider including a clear class action waiver, as well as a mechanism whereby each customer is required to agree to the terms, such as during the online checkout process.