Posted on Monday December 7th, 2020 at 4:21 pm by Ronald Mann
Tuesday’s argument in the Henry Schein Inc. v. Archer and White Sales Inc. case brings the judges back to their ongoing battle with the lower courts over the scope of the federal arbitration tribunal. The case concerns arbitration clauses for the gateway: those that give an arbitrator the power to determine whether a particular dispute is the subject of arbitration. Henry Schein Inc. and Archer and White Sales – two companies involved in the sale and distribution of dental equipment – signed a purchase agreement that clearly contained an arbitration agreement. When their business relationship deteriorated, Archer and White brought Henry Schein to court for antitrust violations. When Henry Schein requested arbitration, Archer and White denied the request, arguing that the case was non-arbitral under the terms of the parties’ agreement. Henry Schein argued that an arbitrator (not the courts) should decide whether the dispute was arbitral. Ultimately, the lower federal courts rejected these arguments and ruled Archer and White.
An aura of déjà vu should permeate the virtual courtroom during the dispute. “Haven’t we heard any of this before?” “Haven’t we already said that the referee has to decide whether this is an arbitrator?” “Didn’t we agree?” The answers are yes, yes, and then yes again – all in the first Supreme Court opinion prepared by then junior judge Brett Kavanaugh. Why is this the case again?
When that dispute came to the judges a few years ago, the U.S. Court of Appeals for the 5th Circuit had assumed that the parties had included a gateway provision in the contract that delegated the issue of arbitration to the arbitrator, but decided that the courts should ignore this provision if the argument for arbitration is “wholly unfounded”. The judges granted a review and unanimously rejected the “wholly unfounded” exception and sent the case back to the appeals court to determine whether the contract did indeed contain a gateway arbitration clause.
While in custody, the 5th Circuit ruled that the contract contained such a provision, but the appeals court still did not send the case to arbitration. Rather, the court found that the court should decide in the first instance for itself whether the spin-off is applicable to this dispute, as the contract contains a “carve-out” clause that excludes some disputes from arbitration. The appeals court upheld its earlier conclusion that this particular dispute had been worked out of the arbitration agreement and sent the case back to the district court for trial. The Supreme Court immediately put this decision on hold at the request of Henry Schein and then (again) granted Henry Schein’s motion for a review.
Henry Schein argues as simply as possible. First, the Company takes note of the Court of Appeal’s finding that the parties’ agreement contains the “clear and unequivocal evidence” of a gateway delegation clause necessary to move the issue of arbitration from court to arbitrator. On this point, I should state that the gateway clause comes about through a boiler plate provision of the parties’ contract that provides for arbitration under the rules of the American Arbitration Association. Rule 7 (a) states: “The arbitral tribunal has the power to rule on its own jurisdiction, including any matter relating to the existence, scope, or validity of the arbitration agreement.”
Second, Henry Schein goes on to explain that the last time the Supreme Court considered this dispute, it stated that a Gateway delegation provision was “just a special type of arbitration agreement” that “precedes” the parties’ essential arbitration agreement. Because the FAA imposes a presumption of arbitrability for reasons of arbitration, the court should use a presumption of arbitrability to determine whether the parties intended the arbitrator to rule on the scope of the arbitration clause.
Third, nothing in the gateway delegation provision here (ie, in rule 7 (a)) suggests any limitation on the arbitrator’s power to assess the breadth of the outsourcing. Henry Schein argues that the Court of Appeal’s decision to the contrary completely undermines the enforceability of the delegation clause, as it essentially means that the arbitrator will only decide whether a particular dispute is arbitral if neither party requests a court to do so instead.
Archer and White try mightily to shift the terrain on which Henry Schein is to be attacked. In particular, the majority of his pleading (more than half of the pages devoted to his reasoning on the matter) tries to convince the court to uphold the following decision by finding that the parties are in fact not addressing the issue of arbitration have delegated the arbitrator. Several problems can hamper this effort. First, at the review stage, Archer and White made the same argument and filed a cross petition for Certiorari asking the judges to review this issue. However, the judges denied this petition when they allowed consideration of Henry Schein’s petition, which indicated that they are not interested in bringing it up. Second, Archer and White would have to convince the judges to break a plethora of court precedents, even if the judges were to consider the issue raised by Archer and White. Eleven of the appeals courts and numerous state courts have dealt with rule 7 (a), and all of them read it just like the 5th circuit here: delegating the arbitration decision to the arbitrator. Given the clarity of language in this rule and the strong presumption of arbitrability motivating several of the judges, it is difficult to imagine that a majority of judges would take up this issue and decide that the agreement of the parties did not delegate the gate to the issue Arbitration for an arbitrator.
Finally, towards the end of their pleading, when Archer and White move on to the issue the court has agreed to review – whether the court or the arbitrator should decide whether this dispute is arbitral – the company is essentially repeating its reasoning from the last one The case was in the Supreme Court. It is argued that the spin-off provision exempts this claim from any plausible delegation so clearly that the courts can properly rule on the delegation issue. However, this argument contradicts the text of the arbitration clause, which states:
Disputes arising out of or in connection with this Agreement (other than injunctions …) will be resolved through binding arbitration under the arbitration rules of the American Arbitration Association.
This clause suggests that the parties have not agreed to rule on injunctions, but contrary to rule 7 (a) it is hard to doubt that the contract requires the arbitrator to decide whether the dispute is under the Outsourcing falls (a challenge with considerable force the parties that last debated in court). What could Rule 7 (a) have meant if “Questions Regarding … Scope … of the Arbitration Agreement” had been delegated if it had not included the question of whether this dispute was covered by the parties’ arbitration agreement?
The oral argument in such cases is often interesting, partly because some of the judges have a strong (and at least partially justified) feeling that the lower courts are resisting the FAA Supreme Court rulings by refusing to honestly apply them. I would not be surprised if some of the judges on Tuesday expressed their frustration at the need to resolve this case twice in order to achieve an outcome they consider obvious.
Ronald Mann, Case Preview: Arbitration Already Seen,
SCOTUSblog (December 7, 2020, 4:21 p.m.), https://www.scotusblog.com/2020/12/case-preview-arbitration-deja-vu/