Deciding Who Decides: U.S. Supreme Court Holds Parties’ Decision to Submit Question of Arbitrability to Arbitrator Should Not be Overridden by Court

Construction and Procurement Law News, Q1 2019

Firm Alert

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When parties contractually agree to submit their disputes to arbitration, one of the frequent threshold issues that arises is whether their arbitration agreement applies to a particular dispute. In Henry Schein, Inc. v. Archer and White Sales, Inc., decided in January 2019, the U.S. Supreme Court held that when the parties’ contract delegates the question of whether a particular dispute is arbitrable to an arbitrator, the courts must respect the parties’ decision as outlined in their contract.

Archer and White (“Archer”) was a distributor of dental equipment that entered into a contract with Pelton and Crane (“Pelton”), a dental equipment manufacturer, to distribute Pelton’s equipment. During Archer and Pelton’s business relationship, disputes arose, and Archer sued Pelton’s successor-in-interest and Henry Schein, Inc. (“Schein”). The contract between Archer and Schein contained an arbitration provision, 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…shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.

After Archer sued, Schein asked the U.S. District Court for the Eastern District of Texas to refer the matter to arbitration. Archer objected, arguing that the dispute was not covered by the parties’ arbitration agreement because Archer’s suit sought injunctive relief. Schein contended that the parties’ contract provided that an arbitrator, not the court, should decide whether the parties’ dispute was covered by the arbitration agreement. In response, Archer argued that in cases where a party’s argument for arbitration was “wholly groundless,” the trial court could resolve the threshold question of arbitrability. Both the U.S. District Court and the 5th Circuit Court of Appeals agreed with Archer and denied Schein’s motion to refer the matter to arbitration.

Justice Kavanaugh, writing for a unanimous U.S. Supreme Court, noted that under the Federal Arbitration Act, arbitration is a matter of contract, and courts must enforce arbitration contracts according to the parties’ agreed terms. Referring to prior precedent, the Court noted that it had previously held that a court may not rule on the potential merits of an underlying claim that is assigned by contract to an arbitrator, even in situations where the court thinks that the argument that the dispute is governed by the parties’ arbitration agreement is frivolous.

In determining whether a dispute should be referred to arbitration, the U.S. Supreme Court reiterated that the trial court still must make a determination that a valid arbitration agreement exists. However, once the trial court determines that a valid arbitration agreement exists, and the agreement delegates the question of whether the dispute is arbitrable to an arbitrator, the trial court may not make its own decision regarding arbitrability, even where the trial court thinks the merits of a claim are frivolous or “wholly groundless.” The Supreme Court also reinforced previous decisions where the Court held that the parties may delegate threshold arbitrability questions to the arbitrator, so long as that delegation is outlined in the parties’ contract with “clear and unmistakable” language.

Following the Supreme Court’s ruling in Henry Schein, assuming that a party desires that the question of arbitrability be decided by the arbitrator, that party should draft its arbitration agreement to include specific language that requires an arbitrator to determine questions regarding whether a particular dispute is arbitrable. With that attention to detail, parties who wish to arbitrate disputes will spend more time actually arbitrating those disputes rather than spending valuable time litigating the threshold issue of whether the dispute should actually be arbitrated in the first place.