Member Article

Justice Kavanaugh’s first authored opinion as a Supreme Court Justice inHenry Schein, Inc. v. Archer and White Sales, Inc., No. 17-1272, 586 U.S. ____ (2019) further cements the Supreme Court’s stance on arbitration.

Over the years, the Supreme Court has consistently held in favor of arbitration and rejected attempts by parties and the lower courts to ignore binding arbitration clauses. For instance, inAT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740(April 2011), the Supreme Court rejected state laws that attempted to prohibit arbitration for certain types of claims, holding “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the [Federal Arbitration Act (“FAA”) 9 U.S.C. §1et seq.].” More recently, inEpic System Corp. v. Lewis, 138 S. Ct. 1612(May 2018), the Supreme Court held that arbitration clauses prohibiting class actions in employment contracts were enforceable and were not preempted by the National Labor Relations Act (“NLRA”), 29 U.S.C. §151et seq.—which guarantees basic rights of private sector employees to take collective action.The Supreme Court reasoned that the FAA and NLRA “have long enjoyed separate spheres of influence . . .” and the FAA is “a Congressional command requiring us to enforce, not override, the terms of the arbitration agreements….”

Justice Kavanaugh’s opinion inHenry Scheinstays true to the foregoing Supreme Court precedent. InHenry Schein,defendant Schein sought to compel arbitration to resolve a contract dispute. Schein relied upon an arbitration clause, which provided in relevant part: “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 [Schein]), shall be resolved by binding arbitration . . . .” Plaintiff Archer objected to arbitration on the grounds that the complaint sought injunctive relief, in part, and thus was exempt from arbitration. Schein, in response, argued the arbitration clause delegated the question of arbitrability to an arbitrator.

But the District Court declined to compel arbitration, finding the threshold question of arbitrability was “wholly groundless.” In so ruling, the District Court decided the merits of the arbitrability of the dispute and skipped over any need to make a determination as to whether the arbitration clause designated the question of arbitrability to an arbitrator. Schein appealed and the Fifth Circuit affirmed.

The Supreme Court granted certitori on June 25, 2018. Arguments were held on October 29, 2018, and Justice Kavanaugh issued his opinion on January 8, 2019. In a pithy and matter-of-fact opinion, Justice Kavanaugh rejected the District Court’s “wholly groundless” exception, opining that the FAA does not include any such exception and “we are not at liberty to rewrite the statute passed by Congress and signed by the President.” Justice Kavanaugh further rejected Archer’s argument that the court must always decide arbitrability because Section 3 and 4 of the FAA indicate that a court must be satisfied with arbitration. As Justice Kavanaugh succinctly responded: “that ship has sailed.” Justice Kavanaugh further noted that Supreme Court precedent firmly establishes that parties may agree to designate the question of arbitrability to an arbitrator “so long as the parties’ agreement does so by ‘clear and unmistakable’ evidence.”

Applying these fundamental tenets of the FAA and Supreme Court precedent, the Supreme Court vacated the Fifth Circuit’s judgment and remanded the case back to the District Court to determine whether the arbitration clause designated the question of arbitrability to an arbitrator. If so, the District Court would be obligated to compel the dispute to arbitration.

In sum, Justice Kavanaugh’s opinion (i) reinforces that the Supreme Court will continue to strictly enforce arbitration contracts and (ii) closes the door on the “wholly groundless” exception as a means to avoid arbitration. That said, if there is any ambiguity in the arbitration clause as to the question of arbitrability, the District Court may very well use that ambiguity to avoid arbitration yet again. Indeed, the history of arbitration before the Supreme Court indicates that the District Courts will continue to find creative ways to avoid arbitration irrespective of the FAA and Supreme Court precedent. As the saying goes: “when one door closes, another door opens.”

While there will likely always be new and creative challenges to arbitration,Henry Scheinprovides clarity that a clear and unmistakable designation of the question of arbitrability to an arbitrator must be enforced. To make the most of this clarity provided byHenry Schein, financial services providers should review any arbitration clauses in their contracts to ensure that the clauses clearly and unmistakably designate the question of arbitrability to an arbitrator.