Arbitration Strengthened by New Supreme Court Decision

Tue 15 Jan 03:52 | Posted by on News

Although dismissed by The New York Times as “a minor arbitration case,” Henry Schein, Inc. v. Archer & White Sales, Inc. (17-1272), appears to be a significant strengthening of the right to compel arbitration.

Written by newly-confirmed Justice Brett Kavanaugh and announced on January 8, 2019, Schein centers on the threshold issue present in many cases involving arbitration clauses in contracts, namely, whether a court or an arbitrator gets to decide whether or not a dispute is arbitrable (subject to arbitration).

In the Schein case, the parties’ contract required arbitration by the American Arbitration Association (AAA) of all disputes “except for actions seeking injunctions.”  As is frequently the case, the contract provided that such arbitration shall be conducted according to AAA rules, which provide that the arbitrator shall decide the issue of whether the dispute is subject to arbitration in the first place. Plaintiff filed suit in U.S. District Court under federal and state antitrust laws and requested damages and an injunction. Invoking the Federal Arbitration Act, defendant demanded that the judge refer the matter to arbitration.

In the past the U.S. Fourth, Fifth, Sixth (of which Tennessee is a part), and Federal Circuit Courts of Appeal have ruled that a federal court may refuse to compel arbitration if the demand is “wholly groundless.” However, the U.S. Tenth and Eleventh Circuits have held the opposite, namely that the arbitrator alone is entitled to rule on the arbitrability of the dispute if the contract says so. In this case the contract so provided by virtue of the portion that referred to AAA rules.

In Schein the Fifth Circuit affirmed the District Court’s refusal to compel arbitration, ruling that the demand for arbitration was “wholly groundless” due to the fact that plaintiff was seeking  an injunction.  In a unanimous decision of the Supreme Court, Justice Kavanaugh stated the general rule that a court can decide whether there is a valid arbitration agreement before referring a dispute to arbitration, but added the important qualifier that “the court may not decide the arbitrability issue . . . if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator.”

For years, federal and state courts have mostly been strengthening the right of parties to agree to arbitrate disputes rather than going to court. The Schein case represents a significant continuation of that trend by enforcing contractual provisions that allow an arbitrator to make the “gatekeeper” decision of who gets to decide the dispute: a court or an arbitrator.

                                                                                                                                      by Paul Matthews