Case preview: Arbitration déjà vu

Tuesday’s argument in Henry Schein Inc. v. Archer and White Sales Inc. brings the justices back to their ongoing battle with the lower courts about the scope of the Federal Arbitration Act. The case involves “gateway” arbitrability clauses: those that delegate to an arbitrator the authority to determine whether any particular dispute is subject to arbitration. Henry Schein Inc. and Archer and White Sales – two companies involved in the sale and distribution of dental equipment – entered a sales contract that plainly included an arbitration agreement, but when their business relationship soured, Archer and White sued Henry Schein in court, alleging antitrust violations. When Henry Schein moved for arbitration, Archer and White opposed the request, arguing that the case was not arbitrable under the terms of the parties’ agreement. Henry Schein argued that an arbitrator (not the courts) should decide whether the dispute was arbitrable. Ultimately, the lower federal courts rejected those arguments, ruling for Archer and White.

An aura of déjà vu should pervade the virtual courtroom during the argument. “Haven’t we heard all of this before?” “Didn’t we already say that the arbitrator had to decide if this was arbitrable?” “Weren’t we unanimous?” The answers are “yes,” “yes,” and again “yes” – all in the first Supreme Court opinion written by then-junior Justice Brett Kavanaugh. So why is the case here again?

When this dispute came to the justices a few years ago, the U.S. Court of Appeals for the 5th Circuit had assumed that the parties had included in the contract a gateway provision delegating the question of arbitrability to the arbitrator, but decided that the courts should ignore that provision when the argument for arbitration is “wholly groundless.” The justices granted review and unanimously rejected the “wholly groundless” exception, sending the case back to the court of appeals to decide whether the contract in fact included a gateway arbitrability provision.

On remand, the 5th Circuit decided that the contract did include such a provision, but the appeals court still did not send the case to arbitration. Rather, the court reasoned that because the contract had a “carve-out” clause that excluded some disputes from arbitration, the court should decide for itself in the first instance whether the carve-out applied to this dispute. Reaffirming its earlier conclusion that this particular dispute was carved out of the arbitration agreement, the court of appeals sent the case back to the district court for trial. The Supreme Court promptly put that decision on hold at the request of Henry Schein, and then granted Henry Schein’s petition for review on the merits (again).

Henry Schein’s argument is as simple as it could be. First, the company notes the finding by the court of appeals that the parties’ agreement includes the “clear and unmistakable evidence” of a gateway delegation clause necessary to move the question of arbitrability from the court to the arbitrator. On that point, I should explain that the gateway clause comes through a boilerplate provision of the parties’ contract calling for arbitration under the Rules of the American Arbitration Association. Rule 7(a) states: “The arbitrator tribunal shall have the power to rule on his or her own jurisdiction, including any questions with respect to the existence, scope or validity of the arbitration agreement.”

Second, Henry Schein continues that the last time the Supreme Court addressed this dispute, it explained that a gateway delegation provision is “merely a specialized type of arbitration agreement,” which is “antecedent” to the parties’ substantive arbitration agreement. Because the FAA imposes a presumption of arbitrability on any agreement to arbitrate, Henry Schein reasons, the court should apply a presumption of arbitrability in determining whether the parties intended for the arbitrator to decide the scope of the arbitration clause.

Third, nothing in the gateway delegation provision here (that is, in Rule 7(a)) suggests any limitation on the power of the arbitrator to evaluate the breadth of the carve-out. Henry Schein argues that the contrary decision of the court of appeals completely guts the enforceability of the delegation clause, as it essentially means that the arbitrator will only determine whether a particular dispute is arbitrable if neither party asks a court to do so instead.

Archer and White tries mightily to shift the terrain on which to engage Henry Schein. Specifically, the bulk of its brief (more than half of the pages devoted to its argument on the merits) attempts to persuade the court to affirm the decision below by holding that the parties in fact did not delegate the question of arbitrability to the arbitrator. Several problems may hamper that effort. First, Archer and White raised that same argument at the review stage, filing a cross-petition for certiorari asking the justices to review that question. But the justices denied that petition when they granted review of Henry Schein’s petition suggesting that they are not interested in addressing it. Second, even if the justices did review the question that Archer and White raises, Archer and White would have to persuade the justices to contravene an abundance of lower-court precedent. Eleven of the courts of appeals and numerous state courts have addressed Rule 7(a), and all of them have read it just as the 5th Circuit did here: as delegating the arbitrability decision to the arbitrator. Given the clarity of the language in that rule, and the strong presumption of arbitrability that motivates several of the justices, it is hard to imagine that a majority of justices would take up that question and rule that the parties’ agreement did not delegate the gateway issue of arbitrability to an arbitrator.

When, near the end of its brief, Archer and White finally turns to the question that the court agreed to review – whether the court or the arbitrator should decide if this dispute is arbitrable – the company essentially reiterates its argument from the last time the case was at the Supreme Court. It contends that the carve-out provision so plainly exempts this action from any plausible delegation that courts properly can decide the delegation question. That argument, however, is in tension with the text of the arbitration clause, which states:

Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief …) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.

That clause does suggest that the parties have not agreed to adjudicate actions seeking injunctive relief, but read against Rule 7(a) it is difficult to doubt that the contract calls for the arbitrator to decide whether the dispute falls within the carve-out (a question the parties debated with considerable vigor the last time they were before the court). What could Rule 7(a) have meant by delegating “questions with respect to the … scope … of the arbitration agreement” if it does not include the question whether this dispute falls within the parties’ agreement to arbitrate?

The oral arguments in cases like this one often are interesting, in part because some of the justices have a strong (and at least partially justifiable) sense that lower courts are resisting the Supreme Court’s FAA decisions by refusing to apply them sincerely. I would not be surprised if some of the justices express frustration on Tuesday at the need to decide this case twice to reach a result they may regard as obvious.