When you see me in the street, you can tell that I’m a pro-arbitration kind of guy. I wear my FAA hoodie, usually with the hood down, the better for you to admire my snowy white hair and furrowed, gravitas-laden brow. So when a US Court of Appeals takes a swing at arbitration, my instinct is to swing back. Fifth Circuit, take this 🤜. (As a response to the decision here discussed, Archer & White Sales, Inc. v. Henry Schein, Inc., 2019 WL 3812352 (5th Cir. Aug. 14, 2019)).
Actually, the Fifth Circuit got punched already this year for being anti-arbitration, by a heavyweight champ called the Supreme Court of the United States. In Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019), the Supreme Court in a unanimous decision abrogated the Fifth Circuit’s rule that if a motion to compel arbitration is “wholly groundless,” the district court when presented with a motion to compel arbitration may decide arbitrability itself, and deny the motion, even though there is an otherwise valid and legally sufficient contractual delegation of arbitrability issues to the arbitrator. In essence, the Court held that the “wholly groundless” exception was wholly groundless, and inconsistent with the Federal Arbitration Act, because its underlying premise was that arbitrators (a very mercenary bunch) cannot be trusted to resist arbitrating disputes that clearly were agreed to be litigated.
The Fifth Circuit had wanted to apply its “wholly groundless” exception because the arbitration clause, in a business-to-business pharmaceutical distribution contract, provided for AAA Commercial Rules arbitration of all disputes except (as relevant here) “an action seeking injunctive relief …” Whereas the Plaintiff’s antitrust complaint sought money damages and injunctive relief, the Fifth Circuit thought the “wholly groundless” exception applied. And while the Supreme Court did away with that exception, it left the Fifth Circuit an opening: the case was remanded for the Fifth Circuit to decide whether the arbitration clause satisfies the “clear and unmistakable evidence” test for delegation of arbitrability to arbitrators.
The Fifth Circuit’s reasoning on this question, in its decision earlier this month — the entire sum of its analysis of the arbitration clause — is this: “Given that carve-out, we cannot say that the Dealer Agreement evinces a ‘clear and unmistakable’ intent to delegate arbitrability.” Why is it, dear judges, that you cannot say? Is it because the carve-out is so specific to the question of who (court or arbitrator) decides arbitrability, in an action seeking injunctive relief, that there is real doubt about whether the parties intended the AAA Commercial Rule empowering arbitrators to rule on their own jurisdiction to be applicable to such an action? Evidently this is not what the Fifth Circuit panel thought, or the decision would have said so. Or is the Fifth Circuit panel unable to say there is an unmistakable delegation of arbitrability to the arbitrators because it simply makes no sense to delegate anything to the arbitrators where the carve-out appears to be clear on its face? But is this not precisely the position rejected by the Supreme Court in its decision abrogating the “wholly groundless” exception?
Whereas the Fifth Circuit panel was unable to say there remains a clear and unmistakable intent to arbitrate arbitrability by virtue of the AAA Rules, permit me to say why that is so despite the carve-out.* Subject to the carve-out for “actions seeking injunctive relief,” the parties agreed to arbitrate “all disputes” arising out of the Dealer Agreement under the AAA Commercial Arbitration Rules. Many types of disputes concerning injunctive relief could arise, not all of them fitting neatly within “actions seeking injunctive relief”:
1) a motion to compel arbitration of the arbitrability of claims, filed in court, seeking both damages and injunctive relief;
2) a claim for damages and injunctive relief as remedies for the same alleged wrong
3) a claim for injunctive relief only;
4) a claim for an equitable remedy that is not, strictly speaking, an injunction, such as a constructive trust or the appointment of a receiver.
5) a claim seeking damages and reserving the right to amend to tack on a request for injunctive relief.
Which of these is “an action seeking injunctive relief”? #3 clearly is. #2 is ambiguous: maybe the parties meant the carve-out to apply just where an injunction is the only remedy sought. # 4 is ambiguous, because “injunction” might have intended literally or it might have been a code word for equitable remedies, #5 is even more ambiguous, because it is not “seeking” but “might eventually seek” an injunction. Example #1 is the dispute before the Fifth Circuit on remand in Schein. It seeks an adjudication about the allocation of power between courts and arbitrators to decide an arbitrability issue. The final determination of the motion grants no injunctive relief (except, in a sense obviously not intended by the parties, to enjoin either litigation or arbitration of the arbitrability issue), so it is painfully difficult to see how this motion to compel arbitration is an “action seeking injunctive relief.” It is procedural motion under FAA Section 3 within such an action, and the stay or dismissal of the action pending arbitration would adjudicate the action without adjudicating its arbitrability. Somebody, a court or an arbitrator, must construe the carve-out to decide whether the dispute sought to be arbitrated is “an action seeking injunctive relief.” The carve-out creates that question without answering it, and if the carve-out permits the Fifth Circuit to decide, without reasoning, that the delegation of arbitrability to the arbitrator is not “clear and unmistakable,” then the Fifth Circuit has simply resurrected its “wholly groundless” exception in a thin disguise.
When the Schein case returns to the US Supreme Court, which seems more than just possible, there would be a couple of factors in play. First, the Justices will be aware that the Supreme Court has never decided whether to adopt the position that when an arbitration clause provides for arbitration under Rules that allow arbitrators to rule on objections to their jurisdiction, that rules-adoption is clear and unmistakable evidence of an agreement to arbitrate arbitrability. But whereas every federal court of appeals to have considered whether to adopt this principle has in fact done so, the Supreme Court is not likely to grant certiorari to decide a question that was not even raised in the Schein case at the District Court or Fifth Circuit level. More likely, the Supreme Court will think the issue is what constitutes sufficient evidence of a contrary intention of the parties, concerning delegation of arbitrability, to put a cloud over the clarity otherwise resulting from the rules-adoption? And how about this for a solution: Whereas what makes the rules-adoption “clear and unmistakable evidence” is not the adoption of arbitration rules generally but rather the adoption of the specific rule empowering arbitrators in regard to objections to their jurisdiction, the cloud on clarity must come from some evidence in the contract not merely of an intention to litigate some claim, but some specific evidence in the contract of an intention to litigate rather than arbitrate arbitrability. That approach makes sense because the agreement to arbitrate under AAA Commercial Rules, as in Schein, is an agreement to arbitrate arbitrability, and the “actions seeking injunctive relief” carve-out in the arbitration clause doesn’t cast doubt on the existence or validity of that agreement, but only on the scope of arbitrable arbitrability issues. The Supreme Court has told us repeatedly for decades, going back to the Steelworkers Trilogy cases, that any doubts concerning the scope of arbitrable issues under a valid arbitration agreement are to be resolved in favor of arbitration. It seems entirely possible that this fundamental principle of US arbitration law will be sufficient for the Supreme Court to overturn the Fifth Circuit’s decision on remand in Schein.
* [Hard core gluttons for punishment may note that the Fifth Circuit’s reliance on what it saw as a parallel “carve-out” case that the Second Circuit decided in favor of judicial determination of arbitrability, NASDAQ OMX Grp., Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d Cir. 2014). But the arbitration clause in NASDAQ OMX was not an “all disputes” type of clause, it had much more sweeping exception clauses effectively making arbitration of disputes the exception rather than the rule, and making it a plausible construction that the AAA Commercial Rules only applied in an arbitration once exceptions to arbitration, if raised, had been determined in a judicial forum. Thus there was doubt about whether the parties had actually intended that the AAA Rule on arbitral determination of arbitrability would ever come into play].