Supreme Court Update: Arbitrator Gets To Decide When A Dispute Must Be Arbitrated if the Arbitration Clause Specifically Assigns That Task to the Arbitrator
U.S. Supreme Court decides that when the parties agree to arbitrate disputes between them and assign the power to an arbitrator to determine if a particular dispute is one that must be arbitrated, the arbitrator must make that decision.
Contracting parties in many contexts agree that disputes between them will be submitted to binding arbitration rather than litigation in court. Courts generally uphold such agreements to arbitrate, for two key reasons: First, enforcing agreements to arbitrate promotes freedom of contract by holding parties to their contractual promises and remedies. Second, the Federal Arbitration Act (“FAA”), and many states’ similar arbitration acts, favor a policy of enforcing parties’ agreements to arbitrate. Courts therefore frequently hold that parties who have agreed to arbitrate must submit their dispute to arbitration, even when the substance of the dispute is very one-sided or there is arguably only one reasonable result that could be reached. Under the FAA, there is only limited judicial review of an arbitration award, which must come after the arbitrator issues the award.
Sometimes, however, the parties might not even agree on whether a particular dispute must be arbitrated (or is “arbitrable”). Who gets to decide the dispute about the dispute, i.e. whether a dispute is arbitrable: the arbitrator or the court?
In Henry Schein, Inc. v. Archer & White Sales, Inc., decided last week, the United States Supreme Court held that if the threshold question of arbitrability is delegated to the arbitrator under the parties’ contract, then that question is for the arbitrator to decide, not the court. Archer and White Sales, Inc. (“A&W”) sued Henry Schein, Inc. and Pelton and Crane (“Schein”) in federal court regarding the parties’ contract for distribution of dental equipment. The sales contract included a provision dictating that certain types of disputes were subject to arbitration, and incorporating the American Arbitration Association’s (AAA) arbitration rules. Rule R-7(a) of the AAA rules for commercial disputes (mentioned, but not directly quoted or analyzed by the Court), provides that “the 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.”
Schein asked the federal court to enforce the parties’ agreement to arbitrate. A&W objected, arguing that this particular dispute was not arbitrable under the parties’ agreement and that the court could resolve that issue because any argument in favor of arbitrability was “wholly groundless”—an exception recognized by some courts to the usual rule that arbitrators decide the question of arbitrability when assigned that power under the arbitration agreement. The court held that the “wholly groundless” exception applied and denied Schein’s motion to compel arbitration.
The Supreme Court disagreed, holding that there is no “wholly groundless” exception contained within the FAA, and the courts do not have the power to create one. Congress carefully structured the FAA to provide for certain limited judicial review following an arbitrator’s decision, and allowing front-end court challenges would not be consistent with the statutory scheme. It was already established law that courts do not have the power to make front-end rulings on the substance of the underlying dispute if the dispute is arbitrable, and the Court held that the same logic applies to the threshold question of arbitrability. If there is “clear and unmistakable evidence” that the parties agreed to arbitrate the question of arbitrability, the court must allow the arbitrator to decide that question in the first instance. The Court did not decide whether the parties’ incorporation of the AAA rules by reference constituted an express agreement to allow the arbitrator to decide this threshold issue, but instead remanded to the lower courts for further proceedings to determine whether, by that incorporation, the parties “clear[ly] and unmistakabl[y]” agreed to the arbitrator deciding arbitrability.
Some lower courts have found exceptions or otherwise enlarged the power of courts relative to arbitrators, or otherwise found ways to limit arbitration agreements. The Supreme Court has been active in recent years in applying the FAA broadly, enforcing agreements to arbitrate, and directing disputes to arbitration. This decision closes another gap parties have sometimes used to attempt to move disputes from arbitration into court. Litigating parties should be aware that courts sometimes award sanctions against parties who file cases in court where there is an agreement to arbitrate, and also sometimes deny attorneys’ fee awards to parties who seek to compel arbitration but did not do so promptly.
What the Court did not decide is also of significant concern. This opinion left open the question whether incorporating by reference certain arbitration rules that provide for arbitrators to decide arbitrability is enough to satisfy the “clear and unmistakable evidence” standard for compelling arbitration on that issue. Looking forward, contracting parties should carefully consider—and discuss with counsel—whether or not they want an arbitrator to decide particular issues (including arbitrability) and how to best structure their contracts to accomplish those objectives.
Our firm’s lawyers are regularly involved in drafting contracts that contain arbitration clauses and litigating in various arbitration forums. If you have questions about these recent legal developments or related issues, please contact us.
Click here to view the Supreme Court's decision.