Does an arbitration agreement containing a provision that excludes certain claims from arbitration negate a provision in the same agreement that delegates the question of whether an issue should be heard by an arbitrator, rather than a court?
This case asks the Supreme Court to consider whether an arbitration agreement that incorporates the American Arbitration Association’s (“AAA”) rules delegates the question of arbitrability to the arbitrators, in light of an express exclusion clause for injunctive relief, where the plaintiff sought both damages and injunctive relief. The arbitration agreement at issue in this case includes a “carve-out” provision excluding from arbitration any claims seeking injunctive relief. Rule 7(A) of the AAA’s rules states that the arbitrator has the power to rule on the arbitrability of any claim or counterclaim. Petitioner Henry Schein, Inc. argues that the incorporation of the AAA rules “clearly and unmistakably” delegates all questions of arbitrability to the arbitrator, and that, because some issues are delegated to the arbitrator, the presumption of arbitrability should be read to delegate to the arbitrator the question of the application of the exclusion clause. On the other hand, Respondent Archer and White Sales, Inc. contends that the question of arbitrability should remain for the court to decide because of the explicit carve-out exemption. The outcome of this case has heavy implications for the efficiency and fairness of dispute resolution.
Questions as Framed for the Court by the Parties
Whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.
The dispute in this case originates from 2016. Respondent Archer and White Sales, Inc. ("Archer") is a distributor of dental equipment, purportedly nationally recognized for its low prices and quality service. Archer & White Sales, Inc. v. Henry Schein, Inc., (E.D. Tex. 2017) at 1. Archer competed directly against Petitioner Henry Schein, Inc. ("Henry Schein"), the country’s largest distributor of dental equipment. Id. The dispute also included Danaher Corporation, as well as its subsidiaries, which form the country's largest dental equipment manufacturer. Id. Archer alleged that Henry Schein and a second competitor not named as a defendant refused to compete with each other in selling dental equipment to dental professionals and conspired to engage in price-fixing. Id. Archer also alleged that Henry Schein conspired with Danaher and its subsidiaries to eliminate Archer’s distribution territory because of its low prices and that this constituted an illegal boycott. Id.
In August 2012, Archer filed suit against Henry Schein and Danaher and its subsidiaries claiming violations of §1 of the Sherman Act, §16 of the Clayton Act, and the Texas Free Enterprise and Antitrust Act, seeking both damages and injunctive relief. Id. at 2; Archer & White Sales, Inc. v. Henry Schein, Inc., (5th Cir. 2019) at 277. Both defendants filed motions to compel arbitration and stay proceedings, pursuant to a clause in the contract between Archer and Pelton & Crane, a defendant predecessor-in-interest. Archer & White Sales (5th Cir. 2019) at 277–78. The arbitration clause stated that "any dispute arising under or related to this agreement (except for actions seeking injunctive relief and disputes relating to trademarks, trade secrets, or other intellectual property of Pelton & Crane), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association (“AAA”)." Id. at 277. The magistrate judge issued an order granting the motion, finding that the arbitrator should determine the arbitrability question because of the incorporation of the AAA rules in the agreement. Id. at 278. Three years after the magistrate judge issued that order, the United States District Court for the Eastern District of Texas voided the order, holding that the court was able to decide the question of arbitrability and that the dispute was not arbitrable based on the plain language of the arbitration clause expressly excluding suits that involved requests for injunctive relief. Id.
In 2017, Henry Schein and Danaher Corporation appealed to the United States Court of Appeals for the Fifth Circuit, which affirmed the district court's ruling that the dispute was not arbitrable. Id. The Circuit Court noted that it was not required to reach the question of whether the agreement delegated the issue of arbitrability to the arbitrator because of an exception that applied where the assertion of arbitrability was "wholly groundless." Id. at 277. Henry Schein and Danaher Corporation appealed again to the United States Supreme Court, which reversed the decision. Id. at 278. The Supreme Court held that the "wholly groundless" assertion exception was inconsistent with the Federal Arbitration Act (“FAA”), and remanded the case to the Fifth Circuit to determine whether the contract did in fact delegate the determination of arbitrability to an arbitrator. Id. On remand, the Fifth Circuit held that the parties had not “clearly and unmistakably” delegated the question to the arbitrator, and therefore, held that the district court had correctly determined that the issue of arbitrability was not subject to the arbitration clause. Id. at 279, 282.
The United States Supreme Court granted certiorari on June 15, 2020
CLEAR AND UNMISTAKABLE EVIDENCE OF DELEGATION
Henry Schein notes that the FAA provides two interpretive rules in deciding arbitrability, meaning whether a dispute can be arbitrated and the precedent question of who decides that issue. Brief for Petitioner, Henry Schein, Inc. at 21. Henry Schein identifies the two interpretive rules as (1) the presumption of arbitrability, where, when parties have agreed that at least some matters will be settled by arbitration, any ambiguities as to the scope of the agreement is resolved in favor of arbitration, and (2) the "clear and unmistakable" evidence rule, which, as an exception to the default presumption, requires courts to conclude that parties have delegated the initial question of arbitrability to an arbitrator only when "clear and unmistakable" evidence exists showing the parties intended to do so. Id. at 21–22. Henry Schein argues that the “clear and unmistakable evidence” rule only covers the initial question of whether the parties delegated resolving issues of arbitrability to the arbitrator. Id. at 22. Accordingly, Henry Schein asserts that the presumption of arbitrability determines whether a specific issue of arbitrability falls under the scope of a proper delegation. Id. at 25. In light of these two interpretive rules and their purported application, Henry Schein argues that once "clear and unmistakable" evidence exists that the parties intended to arbitrate some arbitrability disputes, the standard presumption of arbitrability applies and all disputes over arbitrability should be subject to arbitration, unless contrary evidence exists. Id. Therefore, Henry Schein concludes that the scope of the delegation provision is governed by the presumption of arbitrability, so the arbitrator decides all issues of arbitrability, absent clear contrary evidence. Id. at 27.
In support of this contention, Henry Schein argues that this interpretation would best represent the "clear and unmistakable" evidence rule and serve the intentions of the parties. Brief for Petitioner at 27–28. According to Henry Schein, the “clear and unmistakable evidence rule” mitigate any risk that parties will have to arbitrate an issue they did not agree to arbitrate. Id. at 28. Moreover, Henry Schein contends that using the presumption of arbitrability to determine the scope of a delegation better conforms to the expectations and interests of the parties. Id. Henry Schein explains that parties arbitrate arbitrability to avoid delays and inefficiencies caused by having to appear before the court on the front-end, thus presuming that parties delegated all questions of arbitrability contributes to that goal. Id. at 28–29. Henry Schein ultimately concludes that vesting authority to the arbitrator in this case to resolve disputes over the scope of delegation clauses and the arbitrability of matters is consistent with the parties' stated intent expressed in the agreement. Id.
As a preliminary matter, Archer contends that the court should first determine whether the arbitration agreement contained a delegation clause at all, because the language of the agreement was ambiguous as to whether the parties intended to delegate arbitrability. Brief for Respondent, Archer & White Sales, Inc. at 15. Before the court can interpret the arbitration clause, Archer emphasizes, the court must establish whether the incorporation of AAA rules results in a valid delegation. Id. 10–11. Archer argues that this case is simply resolved by a plain reading of the arbitration agreement: that it generally allows for arbitration, but excludes certain types of actions, while requiring any arbitration to conform to the AAA rules. Id. at 11. Thus, without the fictitious delegation issue, Archer proposes, it is easy to comprehend and implement the carve-out provision. Id. at 11. Therefore, Archer contends that the incorporation issue presents a simple alternative for affirming the Fifth Circuit's holding, falling squarely within the case’s key question, which is premised on a “clear and unmistakable delegation.” Id. at 11–12. Archer concludes, therefore, that the court cannot analyze the carve-out provision without first addressing the AAA incorporation issue. Id. 11.
Consequently, Archer argues that there is no "clear and unmistakable" evidence of a delegation clause in the parties' arbitration agreement, and that one would only exist by incorporation through the agreement's adoption of the AAA's rules. Brief for Respondent at 13–14. Archer notes that the rule delegating the arbitrability issue is one among fifty-eight rules in the AAA and the rule itself does not clearly answer the delegation issue. Id. at 14. Archer further contends that the interpretive rule of the presumption of arbitrability is just that, an interpretive rule, which assumes that the parties agreed to arbitrate arbitrability in the first place. Id. Archer specifically highlights the silence on delegation in the parties' arbitration agreement, as a simple phrase such as "the arbitrator shall decide arbitrability" would satisfy the "clear and unmistakable evidence" standard, and the choice not to include such a phrase is indicative of the parties’ intent. Id. at 16. Archer concludes, therefore, that because the arbitration agreement is silent on the delegation issue, it should remain an issue for the court. Id. In addition, Archer argues that evidence in favor of delegation is rebutted by the notion that the primary purpose of incorporating the AAA rules is simply to provide general rules for arbitration, rather than intending to delegate the arbitrability issue to the arbitrator. Id. at 17.
THE “CARVE-OUT” PROVISION
Henry Schein argues that a carve-out provision does not eliminate a delegation of arbitrability without clear evidence the parties planned to provide for the arbitrator and the court to share responsibility of arbitrability. Brief for the Petitioner at 31. According to Henry Schein, one of the disputes revolves around the extent of the issues that are “carved out” of a contract’s arbitration agreement. Id. Henry Schein contends that in this case the “carve-out” provision covers any court case that seeks protection from arbitration, enabling parties to litigate the merits of certain disputes. Id. at 31–32. Here, Henry Schein emphasizes, the court must decide whether the parties’ dispute seeks injunctive relief—thereby falling under the “carve-out” provision—before it imposes the delegation because the issue is whether the court can interpret such a provision to create a delegation of arbitrability. Id. at 31. Henry Schein concludes that an arbitrator can determine arbitrability because the presumption of arbitrability applies. Id. at 32. Accordingly, because the contract clearly delegates arbitrability, Henry Schein asserts that the court should presume the arbitrator can resolve any questions of arbitrability as the carve-out provision does not clearly identify whether the court or an arbitrator should decide arbitrability. Id. at 32– 33.
Additionally, Henry Schein argues that the entire purpose of an arbitrability provision is to allow an arbitrator to establish if the claim is part of the original contract’s arbitration agreement. Id. at 33. Henry Schein contends that a court establishing a claim as part of an original contract would effectively cause a court to infringe upon the rules established in the arbitration agreement. Id. at 34. Henry Schein argues that the rule from United Steelworkers of America v. Warrior & Gulf Navigation Company—which held that a “carve-out” must clearly refer to elements that are not part of arbitration—should extend to the delegation of arbitrability. Id. at 35. Furthermore, Henry Schein contends that most contracts with arbitration provisions limit its scope to some extent. Id. at 37. Thus, Henry Schein warns that individuals who wished to avoid arbitration could argue that arbitrability has not been designated to the arbitrator if a section of the contract does not apply to their claims. Id. According to Henry Schein, allowing individuals to raise a case over a disputed section only in the court system would always prevent arbitrators from resolving arbitrability problems. Id. Henry Schein concludes that even if an arbitration provision had exceptions, if the arbitration provision did not address arbitrability, a court should not take control of arbitrability decisions from an arbitrator. Id. at 37–38.
Archer counters that the contract does not state who determines arbitrability and that it is improper to give every decision related to arbitration to the arbitrator. Brief for the Respondent at 26. Archer reasons that it is important to differentiate between the entire arbitration clause and the specific delegation of arbitrability “carve-out.” Id. at 26–27. Archer acknowledges that the arbitration clause does not mention arbitrability. Id. at 2, 26. However, Archer understands the delegation of arbitration “carve-out” clause to function like a clause which stated: “except for actions seeking injunctive relief, the parties agree to arbitrate arbitrability.” Id. at 27. Therefore, Archer reasons that the contract restricts the authority of an arbitrator to determine arbitrability in this case. Id. Archer argues that the “carve-out” does not prevent all arbitration over arbitrability. Id. Instead, Archer reasons that the parties prevented specific arbitrability issues from reaching an arbitrator. Id. at 26–27. Archer argues that acknowledging the rule in the contract both protects a delegation “carve-out” and honors the original goal of the instruction. Id. at 28. Archer reasons that attempting to separate the “carve-out” clause from the rest of the contract ignores the express desires of the contracting parties. Id. Archer cites Rent-A-Center West Inc. v. Jackson to support the argument that contracting parties assume that a court will decide if they agreed to arbitration unless there is an express provision otherwise. Id. at 28–29. Therefore, Archer reasons that even if the court decides to ignore the “carve-out” section, a court should review the arbitrability of the case as the original contract did not specify who should judge arbitrability. Id.
Archer further asserts that, given the wording of the contract, it is unlikely that the parties considered arbitrability in their contract discussions to a level where the court could assume that arbitrability was negotiated. Id. at 30. Archer contends that under contract principles the clause should be read “with reference to the whole” contract. Id. at 32. Archer argues that in the current contract, the Supreme Court should consider the entire arbitration clause as a whole, with the limitation of the “carve-out” provision. Id. at 32–33. Moreover, even if a single sentence is elevated over another, Archer asserts that the specific restriction of the “carve-out” clause should overcome the general arbitration provision. Id. at 33. Archer reasons that courts decide arbitration cases based on the clarity of the parties’ intentions to bind one another to arbitration. Id. at 36. The original drafter of the sentence in question, Arthur argues, did not choose to specifically delegate power to an arbitrator. Id. at 34. Therefore, Archer concludes that the court should honor the “carve-out” clause which prevented delegation of arbitration under an injunctive relief claim. Id. at 39.
THE EFFICIENCY AND THE FAIRNESS OF ARBITRATION
DRI-the Voice of the Defense Bar (“DRI”), in support of Henry Schein, contends that one of the primary purposes of the FAA is to ensure efficient dispute resolution. Brief of Amici Curiae DRI-The Voice of the Defense Bar, in Support of Petitioners at 5. DRI asserts that the FAA gives individuals the freedom to craft their own arbitration provisions to provide an alternative to traditional court cases. Id. DRI contends that under the FAA, arbitrability can be contracted for as it is an essential part of the FAA’s goal of reducing legal expenses and increasing the effectiveness of arbitration. Id. at 6–7. DRI reasons that granting an arbitrator authority to resolve disputes over arbitrability is essential to streamline the arbitration process, reduce expenses, and increase efficiency. Id. at 6. Furthermore, DRI argues that businesses can create custom designs in their contracts over the nature of arbitrability to fit their needs and resolve any issues that might occur. Id. at 8–9. Finally, DRI also contends that massive delays would occur if arbitrability claims went through the court system. Id. at 15.
Benco Dental Supply Company (“Benco”), in support of Henry Schein, asserts that specialized arbitrability should be accepted given the complex nature of their distribution business. Brief of Amici Curiae Benco Dental Supply Company, in Support of Petitioner at 10. Benco contends that ensuring that an individual with experience in the field will resolve an issue is essential for specialized businesses. Id. Benco reasons that the lower costs and increased speed of arbitration are essential for companies to maintain their profit margin and focus on their business rather than legal issues. Id. at 11. In addition, Benco argues that enforcing arbitrability clauses helps businesses to avoid frivolous lawsuits with unsubstantiated claims. Id. at 12. Benco states that cost, time saving, and finality of judgment were some of the main benefits that the company derived from its arbitration and arbitrability clauses when it created contracts. Id. at 11. Therefore, Benco concludes that the delay where a court ruled on arbitrability negates the benefits and purpose of an arbitration clause existing in the first place. Id.
Arbitrators, Arbitration Practitioners, and Arbitration Scholars (“Scholars”), in support of Archer, counter that concerns over conflicts of interest and impartiality require a heightened “clear and unmistakable evidence standard.” Brief of Amici Curiae Arbitrators, Arbitration Practitioners, and Arbitration Scholars, in Support of Respondent at 21. Scholars contend that arbitrators who determine that they cannot resolve a dispute will lose a large amount of money, giving them a financial incentive to favor arbitration. Id. By having the court determine whether parties must arbitrate particular disputes, the Scholars maintain, the FAA bypasses this potential conflict of interest. Id. Thus, Scholars argue that protecting the objectivity of the arbitration process is essential to ensure that arbitration remains fair for all parties. Id. at 23–24. Moreover, Scholars assert that holding that the agreement delegated arbitrability would detrimentally impact large numbers of average business owners, customers, and employees as they lack the skills to fully comprehend arbitrability. Id. at 30. Scholars argue that, given the fact that the average individual is unlikely to understand the basic rules of an arbitration clause, it is extremely unlikely that the same individual will understand the nuances of arbitrability clauses. Id. at 31. Therefore, Scholars warn that finding delegation in this case may lead to small businessowners arbitrating disputes they never agreed to or refusing arbitration despite it being the most efficient option. Id.
George A. Bermann (“Bermann”), in support of Archer, argues that taking arbitrability decisions away from courts would effectively eliminate the role of courts in arbitration. Brief of Amici Curiae Professor George A. Bermann, in Support of Respondent at 28. Bermann contends that the role of courts would be removed in the lead-up to arbitration and after arbitration was concluded and a decision was reached. Id. at 29. Bermann contends that parties would not have access to the court system or be able to argue to an independent magistrate that they did not agree to arbitration. Id. at 30. Because courts traditionally follow arbitrators’ decisions except in extreme cases, Bermann argues, the entire arbitration process would be controlled by arbitrators. Id. at 29. Bermann reasons that this is negative as it gives arbitration the appearance of illegitimacy. Id. at 30.
- Hadassah Karp, A Look Ahead: Henry Schein v. Archer & White, Fordham Journal of Corporate and Finance Law (Nov. 12, 2020).
- Gilbert A. Samberg, Arbitrability, Delegation, Carve-outs and Estoppel: SCOTUS Says “Welcome Back, Henry Schein”, National Law Review (Aug. 31, 2020).
- Russ Bleemer & Heather Cameron, Supreme Court Returns Schein to Its Docket, with a Focus on Arbitrability, CPR Speaks (June 15, 2020).