U.S. Supreme Court Provides More Guidance on Arbitration Agreements
In the last two weeks, the nation’s high court issued two opinions concerning an important issue relating to enforceability of arbitration agreements, namely, who decides the “gateway” issue of whether or not a particular dispute is arbitrable—a court or an arbitrator? According to the Court, if the arbitration agreement contains a provision expressly delegating issues of arbitrability to the arbitrator (rather than a court), that provision governs, and a court does not have authority to decide the issue. There is a limited exception to this principle, however. If the dispute involves transportation workers who are involved in interstate commerce, the issue of arbitrability must be decided by a court because the Federal Arbitration Act (“FAA”) expressly states that it does not apply to contracts of employment for such workers. Thus, even if an arbitration agreement with an interstate transportation worker includes a clause delegating arbitrability issues to an arbitrator, a court still must decide the issue of arbitrability in that limited context. The two Supreme Court decisions setting forth these holdings are discussed more fully below.
Henry Schein, Inc. v. Archer & White Sales, Inc.
In Henry Schein, Inc. v Archer & White Sales, Inc., Archer & White, a dental equipment distributor, sued Henry Schein, a dental equipment manufacturer, for antitrust violations and sought monetary damages as well as injunctive relief. The parties had entered into an arbitration agreement that required all disputes between them to be resolved by way of arbitration. However, the agreement expressly claims for injunctive relief from its coverage. After the lawsuit was filed, Schein filed a motion to compel arbitration of the dispute. Archer & White opposed the motion, arguing that the dispute was not arbitrable because it involved a claim for injunctive relief and such claims were expressly carved out of the arbitration agreement. Schein responded by arguing that the court should still grant the motion and let the arbitrator decide whether the dispute was arbitrable, because the parties’ arbitration agreement arguably incorporated a rule delegating gateway issues of arbitrability to the arbitrator for decision. The district court (and Fifth Circuit Court of Appeals) disagreed with Schein, reasoning that the claim of arbitrability was “wholly groundless” (based on the agreement’s express exclusion of actions for injunctive relief) and, therefore, there was no valid basis for ordering an arbitrator to decide anything. The Supreme Court granted review and reversed the Fifth Circuit’s decision. The Supreme Court, in a unanimous opinion authored by Justice Kavanaugh, reasoned as follows:
“Under the [FAA], arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms. Rent-A-Center, 561 U. S., at 67. Applying the Act, we have held that parties may agree to have an arbitrator decide not only the merits of a particular dispute but also ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.’ Id., at 68–69; see also First Options, 514 U. S., at 943. We have explained that an ‘agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other.’ Rent-A-Center, 561 U. S., at 70. Even when the parties’ contract delegates the threshold arbitrability question to an arbitrator, the Fifth Circuit and some other Courts of Appeals have determined that the court rather than an arbitrator should decide the threshold arbitrability question if, under the contract, the argument for arbitration is wholly groundless. Those courts have reasoned that the ‘wholly groundless’ exception enables courts to block frivolous attempts to transfer disputes from the court system to arbitration. We conclude that the ‘wholly groundless’ exception is inconsistent with the text of the Act and with our precedent. We 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 an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue. That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.”
The bottom line here is that this is another strong opinion from the Supreme Court reinforcing the principle that arbitration agreements governed by the FAA must be enforced according to their terms, and courts are not free to disregard the terms of an arbitration agreement even if they believe that an argument for arbitration is “wholly groundless.” If an arbitration agreement contains an express delegation clause providing that gateway issues of arbitrability must be decided by an arbitrator, that provision will be enforced. Note, however, that there must be “clear and unmistakeable” evidence that the parties to an arbitration agreement agreed to delegate gateway issues of arbitrability to the arbitrator, rather than to a court. This type of delegation provision will not be implied.
Does this mean that employers should, as a matter of best practice, include this type of delegation provision in their arbitration agreements? Not necessarily so. On the one hand, delegating the issue of arbitrability to an arbitrator makes it more likely that a dispute will be determined to be arbitrable (because, duh, arbitrators are financially motivated to find in favor of arbitration). On the other hand, there is some risk in delegating too much gateway power to an arbitrator. Where a dispute involves a class claim, you don’t want an arbitrator deciding whether the class claim is arbitrable (on a class basis). Class arbitration is lengthy and expensive (and profitable for an arbitrator). As such, you run a greater risk of having an arbitrator, as opposed to a court, rule that a class claim is arbitrable. If you get a bad arbitrator ruling on the issue of arbitrability, there are very limited and ineffective avenues for judicial review and reversal. Consider expressly delegating gateway issues regarding enforceability of a class action waiver to a court, and not to the arbitrator.
New Prime, Inc. v. Oliveira
A week after issuing its Henry Schein decision reinforcing the enforceability of delegation clauses in arbitration agreements, the Supreme Court issued another decision coming out differently on this issue in circumstances where an arbitration agreement is not covered by the FAA. New Prime, Inc. v. Oliveira involved a dispute between an interstate trucking company and one of its drivers, who sued the company alleging he had been improperly classified as an independent contractor and that he and other drivers had not been paid all wages owed to them by law. The independent contractor agreement between Oliveira and New Prime contained an arbitration clause providing that all disputes between the parties would be resolved by arbitration, including gateway disputes over the scope of the arbitrator’s authority. Based on this provision, New Prime responded to Oliveira’s lawsuit by filing a motion asking the court to compel arbitration of the dispute. Oliveira opposed the motion, arguing that the court did not have authority under the FAA to compel arbitration because Section 1 of the FAA expressly states that the Act does not apply to “contracts of employment” of workers involved in interstate transportation. New Prime responded by arguing that (1) the delegation provision in the arbitration agreement required that an arbitrator, and not the court, decide whether or not the dispute was, in fact, arbitrable; and (2) even if the court had authority to decide the arbitrability issue, it still should compel arbitration of the dispute because Oliveira was an independent contractor, not an employee, and, therefore, the FAA’s exclusion for contracts of “employment” of transportation workers did not apply. The district court and First Circuit Court of Appeals both agreed with Oliveira and refused to compel arbitration of the dispute. Last week, the Supreme Court affirmed.
With Justice Gorsuch writing for the Court, the Court acknowledged that the FAA favors enforcement of arbitration agreements pursuant to their terms and that if a party to an arbitration agreement refuses to arbitrate, Sections 3 and 4 of the FAA generally authorize and require a court to order arbitration in accordance with the parties’ agreement. However, Section 2 of the FAA makes clear that the Act only applies where the arbitration provision is set forth in a maritime transaction or in a contract evidencing a transaction involving commerce. Furthermore, Section 1 of the FAA states that “nothing” in the Act “shall apply” to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Section 1 generally has been interpreted to mean that contracts with interstate transportation workers are not covered by the FAA. Based on these sequential statutory provisions, the Court held:
“Given the statute’s terms and sequencing, we agree with the First Circuit that a court should decide for itself whether §1’s “contracts of employment” exclusion applies before ordering arbitration. After all, to invoke its statutory powers under §§3 and 4 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or beyond the boundaries of §§1 and 2. The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.”
The Court further explained:
“To be sure, New Prime resists this straightforward understanding. The company argues that an arbitrator should resolve any dispute over §1’s application because of the ‘delegation clause’ in the parties’ contract and what is sometimes called the ‘severability principle.’ A delegation clause gives an arbitrator authority to decide even the initial question whether the parties’ dispute is subject to arbitration. Rent-A-Center, West, Inc. v. Jackson, 561 U. S. 63, 68–69 (2010). And under the severability principle, we treat a challenge to the validity of an arbitration agreement (or a delegation clause) separately from a challenge to the validity of the entire contract in which it appears. Id., at 70–71. Unless a party specifically challenges the validity of the agreement to arbitrate, both sides may be required to take all their disputes—including disputes about the validity of their broader contract—to arbitration. Ibid. Applying these principles to this case, New Prime notes that Mr. Oliveira has not specifically challenged the parties’ delegation clause and submits that any controversy should therefore proceed only and immediately before an arbitrator. But all this overlooks the necessarily antecedent statutory inquiry we’ve just discussed. A delegation clause is merely a specialized type of arbitration agreement, and the Act ‘operates on this additional arbitration agreement just as it does on any other.’ Id., at 70. So a court may use §§3 and 4 to enforce a delegation clause only if the clause appears in a ‘written provision in . . . a contract evidencing a transaction involving commerce’ consistent with §2. And only if the contract in which the clause appears doesn’t trigger §1’s ‘contracts of employment’ exception.”
After holding that a court must decide the initial issue of whether the FAA applies (regardless of a contractual provision delegating issues of arbitrability to the arbitrator), the Court turned to the issue of whether the lower courts properly determined that the FAA did not apply to the agreement between Oliveira and New Prime. New Prime argued that the FAA’s Section 1 exception did not apply because it did not have a “contract of employment” with Oliveira. Rather, it had an independent contractor agreement with Oliveira. The Court rejected this argument, reasoning that at the time the FAA was enacted in 1925, the term “contracts of employment” appeared to refer to any contract for the performance of work (regardless of whether as an employee or independent contractor). The Court found that there was no evidence that the statutory language or legislative intent was to regulate only “employee” relationships and not independent contractor relationships. As such, the Court agreed with the First Circuit that the agreement between New Prime and Oliveira was a “contract of employment” for interstate transportation services and, thus, was within the scope of Section 1 of the FAA. For this reason, New Prime’s motion to compel arbitration under the FAA properly was denied.
Bottom line: if you are an interstate transportation services employer, the New Prime case unfortunately serves to (1) reinforce the inapplicability of the FAA to arbitration agreements with interstate transportation workers, regardless of whether they are classified as independent contractors; and (2) ensures that a dispute regarding FAA coverage will be decided by a court and not by an arbitrator.