In a unanimous decision yesterday, the U.S. Supreme Court ruled that courts can no longer usurp a clear contractual delegation of arbitrability.
The Case – Henry Schein, Inc., et al. v. Archer & White Sales, Inc.
Schein involved a dispute over whether the arbitration clause in an equipment distribution contract applied to a conflict concerning federal and state antitrust law violations.
The parties’ agreement indicated that any dispute arising under or related to the contract – except for actions seeking injunctive relief or over intellectual property – would be resolved by arbitration in accordance with the rules of the American Arbitration Association (AAA).
After Archer & White sued, Schein asked the trial court to refer the matter to arbitration per the contract’s dispute clause. Archer & White objected, arguing the case was not subject to arbitration because it was seeking injunctive relief in addition to damages. Consequently, a secondary conflict arose between the parties over whether the antitrust suit should be subject to arbitration or be litigated in a judicial forum and who should make that determination, an arbitrator or the court.
Stein argued the contract indicated the rules of the AAA applied and under such rules arbitrators determine arbitrability while Archer & White maintained the court should make the decision because Schein’s basis for arbitration was “wholly groundless.” The trial court and ultimately the Fifth Circuit agreed with Archer & White.
Archer & White’s argument was based on Fifth Circuit precedent that created an exception to the Federal Arbitration Act requiring arbitrators to decide arbitrability. The exception, which other Courts of Appeals have also followed, provided that even when a contract clearly delegates the question of arbitrability to an arbitrator, courts should nevertheless make this threshold determination when the argument for arbitration is “wholly groundless.” Other Courts of Appeals had not carved out this exception. Thus, in order to resolve a split between the appellate courts, the Supreme Court ruled that this exception is inconsistent with the Federal Arbitration Act and when an agreement clearly delegates arbitrability to an arbitrator, courts may not override the contract.
The Takeaway – Unambiguously Address Arbitrability In Your Contract
In disputes where a contract provision for arbitration exists, the question of who determines whether the dispute is subject to arbitration is clear after Schein. It is the arbitrator if the contract has a clear delegation of such authority. As the Court points out, though, issues may nevertheless arise around whether the contract in fact delegates arbitrability, which, it says is a decision for the courts to make. Accordingly, to mitigate litigation (and therefore costs) around arbitrability, parties should carefully consider who they want deciding the threshold matter of whether the dispute is subject to arbitration and then provide for such clearly in the agreement.