Case of the Day: Henry Schein v. Archer & White Sales

Supreme Court building in the evening
Credit: Joe Ravi (CC BY-SA)

They say that a new Supreme Court justice’s first opinion is usually a softball. So the fact that today’s case of the day, Henry Schein, Inc. v. Archer & White Sales, Inc. (S. Ct. 2019), was assigned to Justice Kavanaugh was probably a good indication of how the case was bound to come out: continuing the trend of many years in the Supreme Court, the party seeking to enforce an agreement to arbitrate as written prevailed.

For many years the Supreme Court has been very firm in implementing the policy of the Federal Arbitration Act, which is to replace the common law’s traditional hostility to private commercial arbitration with a pro-arbitration policy that treats written agreements to arbitrate, in the words of the statute, as “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Just how to interpret the statute’s pro-arbitration policy has been highly controversial in recent years, with most of the controversy involving consumer contracts and other contracts that could be viewed as contracts of adhesion—contracts in which one party has little if any bargaining power and the contract is drafted entirely by the other party. Take a look at your agreement with your cell service provider and you will see what I mean. Arbitration is said to be wholly based on the consent of the parties, but there are very legitimate questions about the reality of consent in the consumer context.1 Thus many of the decisions involving consumers or workers have been 5-4 decisions: think agreements to arbitrate that forbid claims brought on behalf of a class (AT&T Mobility v. Concepcion), even in the labor context, where the rights of workers to act collectively are usually protected by federal law (Epic Systems Corp. v. Lewis).

But there is much greater consensus about the enforceability of agreements to arbitrate in a purely commercial context. The main issue there is the issue of arbitrability. Who gets to decide if a dispute is arbitrable? The answer isn’t simply “the arbitrator, dummy;” as a general rule, the decision about whether a case must be arbitrated is for a judge, not an arbitrator to make. But the parties are free to agree to empower the arbitrator to make that decision, either directly or by adopting rules such as the AAA Commercial Arbitration Rules that give the power to the arbitrator to determine his or her own jurisdiction. A rule like this is sensible, so as to allow the parties to minimize the risk of satellite litigation. The courts simply require that the parties’ intent be “clear and unmistakable” from the text of their agreement or the rules they have adopted.2

Despite the apparent clarity of the rule, some courts have said that arbitrability should not be referred to the arbitrator if the argument in favor of arbitration is “wholly groundless.” The most readily apparent policy in favor of the “wholly groundless” exception to the ordinary rule is cost and efficiency: when a party has brought a motion to compel arbitration, why require the parties to litigate the question of arbitrability before the arbitrator when the court that already has the matter before it can easily reach an obviously correct conclusion? But in today’s decision, the Court, in a unanimous opinion per Justice Kavanaugh, rejected the “wholly groundless” exception out of hand. It found no suppport in the FAA for such an exception to the ordinary rules. Perhaps the closest thing to an argument for the exception grounded in the statute was the observation that under the FAA, courts have the power to vacate an arbitral award if the arbitrator exceeded his authority: why should he or she not have a similar power before the arbitration? But the statute is not written that way, and the Court was unwilling to rewrite it.

The net result: it should be no surprise to anyone to learn that when the parties agree to have questions of arbitrability decided by the arbitrator, courts will enforce that agreement even if a particular court thinks that the argument for arbitration is frivolous.

  1. In addition to serving on the American Arbitration Association’s panel of commercial arbitrators, I also hear consumer disputes. These are not money-makers, but I regard it is as a form of public service, in a way, to provide consumers with a hearing and decision that is as fair and correct as I can make it. Sometimes consumers raise issues about arbitrability that are clearly foreclosed by law. What I say to them—particularly when they are acting pro se, is, “I know you would rather be presenting your case to a judge or a jury than to me. I don’t make the rules about what disputes have to be arbitrated. But while you are here, I will make the hearing as fair as possible and make sure to give your evidence and arguments the most careful consideration I can.” I think consumers feel sometimes that in arbitration the deck is stacked against them, and all I can say is that the arbitrators I know, including I myself, strive to make the process as fair as can be.
  2. As you can imagine, even this straightforward rule is not simple to apply. A current circuit split, for example, asks whether adopting the AAA rules is clear and unmistakable evidence of an intent to have the arbitrator decide whether a claim brought on behalf of a class is arbitrable.

3 responses to “Case of the Day: Henry Schein v. Archer & White Sales”

  1. I’m curious about footnote 2. Which circuits support the Restatement’s view that adoption of institutional rules do not deprive the court of the power to determine arbitrability?

    1. Steven, I had in mind the split on whether incorporation of the AAA rules, which give the arbitrator the power to rule on arbitrability, also give the arbitrator the power to decide whether the arbitration can proceed on a class basis. Liz Kramer wrote a post on this in August at Arbitration Nation. She identifies the 3d, 4th, 6th, and 8th Circuits as holding that adoption of rules that delegate the decision on arbitrability generally to arbitrators is not enough to show that the arbitrator can decide class arbitrability.

      1. Steven Skulnik

        Thanks for the clarification

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