US Supreme Court returns to issue of double standards in delegating gateway issues of arbitrability

"The FAA [Federal Arbitration Act] was enacted in 1925 in response to widespread judicial hostility to arbitration agreements." AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011). This "hostility ... manifest[s] itself in 'a great variety' of 'devices and formulas'...." Id. at 342. Perhaps nowhere have the courts been more jealous of their prerogatives than when deciding whether (or not) a dispute belongs in arbitration -- the so-called 'gateway' issues of arbitrability. So jealous, in fact, that the U.S. Supreme Court has had to grant certiorari for the second time in three years in the same case.

It has been long settled that parties may delegate 'gateway' arbitrability questions to an arbitrator, so long as there is "clear and unmistakable" evidence of the delegation. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010). Last term, the court unanimously rejected an attempt by lower courts to carve out an exception to this rule where sending the dispute to arbitration would be "wholly groundless" because the underlying claim is clearly inarbitrable under the agreement. In Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019), the court rejected the idea that a "wholly groundless" exception could be read into the FAA for three reasons. First, as always, because "courts must enforce arbitration contracts according to their terms." Second, because "[w]e must interpret the Act as written." Third, "the Act contains no 'wholly groundless' exception, and we may not engraft our own exceptions onto the statutory text."

Now Henry Schein has returned the Supreme Court. The first time around, after the court held there was no "wholly groundless" exception in the FAA, it remanded the case to the 5th U.S. Circuit Court of Appeals to determine whether there was "clear and unmistakable" evidence of delegation. (The 5th Circuit avoided this threshold issue the first time by going straight to the non-existent exception.). On remand, the 5th Circuit held that there was not. Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019). The Supreme Court granted certiorari again in June.

This is where things get a little odd. The arbitration agreement in question incorporated the AAA's Commercial Rule 7(a), which gives an arbitrator "the power to rule on his or her own jurisdiction." Such incorporation, by itself, has been held to be "clear and unmistakable" evidence that "gateway" issues of arbitrability have been delegated. Brennan v. Opus Bank, 796 F.3d 1125, 1130-31 (9th Cir. 2015). But the agreement also contained a "carve-out clause," providing that it did not apply to claims for injunctive relief (one form of relief requested). The 5th Circuit concluded that there was "clear and unmistakable" evidence of delegation of "gateway" issues as to suits that were not excluded by the "carve-out clause." But no such evidence as to lawsuits that were.

If this all strike you as a little circular, join the club. The "wholly groundless" exception was created for the scenario present in Henry Schein: An arbitration agreement delegates "gateway" issues, but also limits the scope of claims to which the agreement applies, so that compelling arbitration would be "wholly groundless" because the arbitrator would have to apply the language of the agreement to find the dispute inarbitrable. The Supreme Court held that the FAA contains no such exception. So, the 5th Circuit then turns around and reasons that very same contractual language that made compelling arbitration "wholly groundless," also now means that an otherwise "clear and unmistakable" delegation of "gateway" issues is not so clear (and unmistakable).

What the 5th Circuit did, in effect, was hold that when it comes to disputes that fall within the agreement's "carve-out" clause, only delegation in haec verba would satisfy Rent-A-Center's "clear and unmistakable" standard. See James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006) (with a carve-out, "something other than the incorporation of the AAA rules" was "needed to establish that the parties intended to submit arbitrability questions to an arbitrator."). This disregards the Supreme Court's command that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)

It is not hard to see how this will all end. Last term the Supreme Court held courts "must interpret the Act as written, and the Act in turn requires that we interpret the contract as written. When the parties' contract delegates the arbitrability question to the arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue." Henry Schein, 139 S. Ct. at 529. The language used was absolute, unanimous, and admitted no qualification. The 5th Circuit made no attempt to square its reasoning with this command, and I cannot see one.

The 5th Circuit joined the 2nd Circuit in holding that delegation of "gateway" determinations for claims that fall under a carve-out clause requires delegation in haec verba. See NASDAQ OMX Group, Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d. Cir. 2014). The 9th Circuit has rejected such a rule. Oracle America, Inc. v. Myriad Group A.G., 724 F.3d 1069, 1076-77 (9th Cir. 2013) (criticizing James & Jackson).

But in other contexts, even the 9th Circuit has indulged the notion that Rent-A-Center's "clear and unmistakable" standard can be elevated to require delegation in haec verba where the prerogatives of the judiciary are involved. In Martin v. Yasuda, 829 F.3d 1123 (9th Cir. 2016), it held that such a standard applied to questions of whether a party waived the right to compel arbitration as a result of litigation conduct. Several unpublished California decisions have reached the same result. See Nelson v. Superior Court, D075542 (Cal. Ct. App., Oct. 23, 2019); HPROF, LLC v. Bank of America, N.A., A147748 (Cal. Ct. App., Mar. 21, 2017).

The stakes in Henry Schein II are much larger than the narrow conflict among the circuits regarding delegation of "gateway" issues in agreements that "carve out" certain types of claims from arbitration -- before the court is the practice of modifying Rent-A-Center's "clear and unmistakable" standard for certain kinds of "gateway" issues that are thought to be in the particular province of the courts. Look for the Supreme Court to reaffirm the basic purposes of the FAA -- to combat judicial hostility to arbitration in all of its many forms, and insure that private agreements to arbitrate are enforced "according to their terms." Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989). 