Arbitrability Exception Struck Down

International trends continue to favour the promotion of arbitration, with courts holding that intervention into the arbitral process should be limited where possible. In Henry Schein, Inc. et al. v. Archer and White Sales, Inc., Supreme Court of the United States, No. 17-1272, the Supreme Court (the “U.S.Supreme Court”) held that pursuant to the Federal Arbitration Act (the “Act”) arbitration is a matter of contract and as such is to be enforced under such contracts in accordance with their terms. By contrast, some Circuit courts had previously held that where the arbitrability of a claim was ‘wholly groundless’, then the court may direct the dispute to proceed by litigation before the courts. However, the U.S. Supreme Court has now clarified that if there is clear and unmistakable evidence that contracting parties delegated the question of arbitrability to an arbitrator, then courts may not interfere with the question of whether claims are indeed subject to arbitration and must leave that to the arbitrator.[1]

Background

Archer & White Sales Inc. (“Archer & White”) acted as a distributor of dental equipment to Henry Schein Inc.’s (“Schein”) predecessor, a dental equipment manufacturer. Their business relationship crumbled and Archer & White sued Schein, alleging Schein had violated federal and state antitrust laws, seeking both damages and injunctive relief in the interim. The contract between the parties contained a dispute resolution clause, which provided for arbitration, with certain exceptions, including an exception for actions seeking injunctive relief.[2]

Archer & White argued that the arbitration provision from the contract should not apply because part of the relief they sought pertained to an injunction. Schein countered that only an arbitrator – not the courts – had the power to address the ‘gateway’ question of arbitrability.

The District Court held in favour of Archer & White’s argument that Schein’s request for arbitration was ‘wholly groundless’, and therefore excluded the dispute from the jurisdiction of an arbitrator. The District Court found that the threshold arbitrability question was to be resolved by the court. The Fifth Circuit affirmed the District Court’s judgement.[3]

The U.S. Supreme Court Decision

The Act allows for parties to contract for dispute resolution to be dealt with by way of arbitration, rather than by the courts. The Act provides:

“A written provision in … a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract … shall be valid, irrevocable, and enforceable …”[4]

The question of whether an arbitration agreement applies – the threshold arbitrability question – has been determined to be a question of contract.[5]

In vacating the judgement of the Fifth Circuit, the U.S. Supreme Court emphasized jurisprudence affirming that arbitration is a matter of contract and that contracts are to be enforced in accordance with their terms. The U.S. Supreme Court stated that it was well established law that parties may contract for an arbitrator to decide ‘gateway’ questions with respect to arbitrability of a dispute as well. The ‘gateway’ question of arbitrability is merely an “additional, antecedent agreement” that the courts are being asked to enforce.[6] The U.S. Supreme Court stressed that both the Act and the contract must be interpreted as written.[7]

The U.S. Supreme Court addressed the following four arguments of Archer & White, all of which it rejected:

  1. That sections 3 and 4 of the Act imply that a court must always determine arbitrability. These sections provide that a court must stay litigation where it is satisfied an issue can be referred to arbitration or compel arbitration in accordance with the terms of an agreement.[8] The U.S. Supreme Court stated that this argument had been previously rejected by it and reiterated that once a court has determined a valid arbitration agreement is in existence, the matter turns to an arbitrator. [9]
  2. That section 10 of the Act, which provides only for judicial review of a decision where an arbitrator has ‘exceeded’ his or her powers, supports the idea that a court should be able to find that a dispute is not arbitrable. The U.S. Supreme Court held that such an approach is inconsistent with how Congress had designed the Act.[10]
  3. That it is more efficient and economical to have the courts deal with the question of whether a claim for arbitration is ‘wholly groundless’. The U.S. Supreme Court held that the Act contains no such exception and the courts could not impose such an exception on the Act of their own accord.[11] It was noted that such an exception would also lead to inevitable collateral litigation, consuming further time and resources to prove whether or not the exception applied.
  4. That from a policy perspective, having the courts decide on the arbitrability question will deter frivolous motions attempting to compel arbitration. The U.S. Supreme Court concluded that arbitrators are more than capable of disposing and deterring of frivolous cases, an issue, it noted, which has not arisen in Circuits that have not recognized the ‘wholly groundless’ exception.[12]

The U.S. Supreme Court left open the question of whether the contract in the case at bar in fact delegated authority of the arbitration question to an arbitrator to the Fifth Circuit.

Significance

This decision underscores the continued trend of deference to arbitral proceedings and the importance of interpreting contracts in accordance with terms agreed upon by the parties, including where the question of ‘arbitrability’ is delegated to an arbitrator. In rejecting the ‘wholly groundless’ exception, the U.S. Supreme Court stated, “When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.”[13] This decision further reinforces the ability of companies to resolve disputes outside of the court process, allowing them greater control over their resolution processes. However, it also brings with it a word of caution, reminding contracting parties that if they wish to enforce arbitration, it is best practice to demonstrate ‘clear and unmistakable evidence’ of such an intent by specifically contracting for the arbitrability question to be determined by an arbitrator.

The Supreme Court of Canada (the “SCC”) has made similar pronouncements that courts should avoid interference with the arbitral process where possible, and rather encourage and defer to parties’ independence and the dispute resolution processes they choose.[14] Specifically, the SCC has emphasized “respect for the forum of arbitration chosen by the parties”, indicating that, if possible, the discretion of the courts should not be utilized to address arbitration matters.[15] As we discussed in a previous blog post, arbitration-friendly decisions are becoming the norm in Ontario as well, with courts showing general respect and deference to arbitral decisions.[16] The U.S. Supreme Court joins the SCC in a general pro-arbitration stance, awarding deference to arbitrators on gateway questions and merits of arbitrability, especially where the parties have specifically contracted to that effect.

[1]Henry Schein, Inc. et al. v. Archer and White Sales, Inc., Supreme Court of the United States, No. 17-1272 (“HenrySchein”).

[2] Henry Schein, supra at page 2.

[3]Archer & White Sales, Inc. v. Henry Schein, Inc., No. 2:12-cv-572-JRG, 2016 U.S. Dist. LEXIS 169245 (E.D. Tex. Dec. 7, 2016), aff’d, 878 F.3d 488(5th Cir. 2017), rev’d, No. 17-1272 (U.S. Jan. 8, 2019).

[4] Federal Arbitration Act, 9 U.S.C. Section 2.

[5] Henry Schein, supra at page 1.

[6] See e.g. comments in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 67.; AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649-650.

[7] Henry Schein, supra at page 5.

[8] Henry Schein, supra at page 6.

[9] See e.g. First Opulations of Chicago,Inc. v. Kaplan, 514 U.S. 938, 944.

[10] Henry Schein, supra at page 6.

[11] Henry Schein, supra at page 7.

[12] Henry Schein, supra at page 8.

[13] Henry Schein, supra at page 8.

[14] See e.g. comments in Sattva Capital Corp. v Creston Moly Corp., [2014] 2 SCR 633, 2014 SCC 53 [“Sattva”]; Teal Cedar Products Ltd. v British Columbia, [2017] 1 SCR 688, 2017 SCC 32.

[15] Sattva, supra at para 89.

[16] To read more about this jurisprudence, please refer to our previous blog post: Ontario Court of Appeal assesses the enforceability of arbitral awards in Popack v Lipszyc.

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