Many contracts have provisions that state that disputes relating to the agreement will be resolved in arbitration. But often questions arise as to whether a particular dispute should be decided in arbitration or in court. Who decides this question of arbitrability? An arbitrator or a judge? Decisions by the U.S. Supreme Court and Appeals Court in a recent case, Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274, 277 (5th Cir. 2019), on remand from 139 S.Ct. 524, help answer these questions.
Since arbitration is a matter of contract, the parties to an arbitration agreement get to decide whether a particular dispute is for an arbitrator or a court to determine. The parties may agree for an arbitrator to determine not only the merits of a particular dispute, but also gateway questions of “arbitrability.” Arbitration agreements can include a provision that expressly vests an arbitrator, not the court, with the authority to determine issues of arbitrability.
Some arbitration agreements contain a “carve-out” provision that excludes certain types of disputes from mandatory arbitration. The inclusion of such carve-out provisions may affect the issue of arbitrability.
In Archer & White Sales, the plaintiff, a distributer of dental equipment, sued its competitors for state and federal antitrust violations, alleging defendants agreed to restrict plaintiff’s sales and boycott it. Plaintiff sought damages and injunctive relief. The agreement between the parties contained the following arbitration clause:
Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related 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).
Defendants moved to compel arbitration, arguing that incorporation of AAA rules meant an arbitrator – not the court – must decide whether plaintiff’s suit was arbitrable. The trial court disagreed and held that it, and not the arbitrator, decided the issue of arbitrability because the lawsuit included a claim for injunctive relief and the arbitration provision agreement stated that claims for injunctive relief were not subject to arbitration. The Fifth Circuit Court of Appeals affirmed. The Supreme Court, however, reversed, and sent the case back to the Fifth Circuit to determine whether the arbitration clause “clearly and unmistakably” delegated the question of arbitrability to an arbitrator. Henry Schein, Inc., 139 S. Ct. at 531.
On remand, the Fifth Circuit recognized that an arbitration agreement that incorporates the AAA rules “presents clear and unmistakable evidence that the parties agreed to arbitrate arbitrability” because AAA rule 7(a) delegates such authority to the arbitrator. Thus, the court found that the parties delegated threshold questions of arbitrability to an arbitrator for at least some types of cases. But based on the placement of the carve-out provision, the court found that the arbitration agreement did not delegate the question of arbitrability to an arbitrator as to plaintiff’s case:
The most natural reading of the arbitration clause at issue here states that any dispute, except actions seeking injunctive relief, shall be resolved in arbitration in accordance with the AAA rules. The plain language incorporates the AAA rules – and therefore delegates arbitrability – for all disputes except those under the carve-out. Given that carve-out, we cannot say that the Dealer Agreement evinces a “clear and unmistakable” intent to delegate arbitrability.… The Parties could have unambiguously delegated this [arbitrability] question, but they did not, and we are not empowered to re-write their agreement.
935 F.3d at 281-282. The Court of Appeals agreed with the trial court’s conclusion that plaintiff’s action was not subject to arbitration. The Fifth Circuit noted that the plain and unambiguous language of the arbitration clause created a carve-out for “actions seeking injunctive relief” – not “actions seeking only injunctive relief,” not “actions for injunction in aid of an arbitrator’s award,” and not “claims for injunctive relief. The court recognized that the clause permitted plaintiff to avoid arbitration by adding a claim for injunctive relief, but that did not change the plain meaning of the clause.
The Court’s decision in Archer & White Sales underscores the need for careful drafting of arbitration clauses, especially where the parties seek to carve out certain types of disputes from arbitration but delegate all issues of arbitrability to the arbitrator. The case illustrates a few potential pitfalls in drafting arbitration agreements. First, the arbitration agreement combined into just one sentence the arbitration clause, the carve-out clause, and the clause incorporating AAA rules delegating arbitrability questions to an arbitrator. The parties could have eliminated ambiguity by having a separate provision that unambiguously delegated questions of arbitrability to an arbitrator. Second, the carve-out provision also excluded “actions seeking injunctive relief” from mandatory arbitration. As the court noted, this essentially allowed plaintiff to avoid arbitration so long as plaintiff included a claim for injunctive relief in the action.
Parties entering into agreements containing arbitration provisions should carefully consider whether they want a judge or arbitrator to decide the issue of arbitrability, and whether the language in the agreement conforms to the parties’ intent.
The Fifth Circuit’s opinion can be found here.