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On January 25, 2021, the United States Supreme Court dismissed, as “improvidently granted,” a writ of certiorari it had previously granted on a petition asking it to consider “[w]hether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”  Henry Schein, Inc. v. Archer & White Sales, Inc., 592 U.S.___ (2021) (“Henry Schein II”).  The petitioner in Henry Schein II argued that the Fifth Circuit erred in holding that the carve-out in the parties’ arbitration provision negated the parties’ delegation of the question of arbitrability to an arbitrator, stating the decision “defies common sense” and  “deepens a conflict among” the courts that will encourage and reward forum shopping.  The Supreme Court’s rare dismissal of a previously granted cert petition means that the justices have declined to reconsider the Fifth Circuit’s decision refusing to send the underlying dispute to arbitration.  Therefore, litigants and practitioners in the Fifth Circuit should continue to look to the Fifth Circuit’s decision for guidance in determining “who” decides whether a claim is arbitrable.

The History of Henry Schein II and the Fifth Circuit’s Decision That Arbitrability Must Be Determined by a Court Under the Carve-Out at Issue.

The parties in the underlying dispute, a manufacturer and a distributor of dental equipment, entered into a dealer agreement that included the following arbitration provision:

Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property …), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(“AAA”].

The distributor filed suit against the manufacturer in federal district court alleging antitrust violations and seeking damages and injunctive relief, and the manufacturer moved to compel arbitration under the Federal Arbitration Act.  The distributor argued that the inclusion of its request for injunctive relief brought the case under the carve-out in the arbitration provision.  The Fifth Circuit denied the motion to compel arbitration in a confusing decision that found a valid delegation clause but applied an exception for “wholly groundless” assertions of arbitrability.

This is now the second time this case has been before the Supreme Court on issues of arbitrability.  In the first instance, the Court considered who – the court or an arbitrator – decides whether the dispute must be arbitrated.  In a unanimous decision, the Supreme Court held that the parties may agree to have an arbitrator decide not only the merits of a particular dispute but also the “gateway” question of arbitrability if their delegation provision is “clear and unmistakable.”  It also rejected the “wholly groundless” exception altogether. The Court, however, “express[ed] no view about whether the contract at issue…in fact delegated the arbitrability question to the arbitrator.”  It remanded the case for the Fifth Circuit to determine whether the parties agreed to delegate the arbitrability of the claim at issue to an arbitrator.  On remand, the Fifth Circuit again refused to compel arbitration because the arbitration provision contained a “carve-out” for actions seeking injunctive relief and the underlying claims included a request for injunctive relief.

In reaching its decision, the Fifth Circuit looked to the Second Circuit’s decision in NASDAQ OMX Grp., Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d Cir. 2014), another case involving an arbitration clause which incorporated the AAA rules and explicitly exempted certain claims from arbitration.  The Second Circuit held that because there was ambiguity as to whether the parties intended to have the arbitrability question with respect to “carve-out” claims decided by an arbitrator—the claim at issue arguably fell within the carve-out and there was not clear and unmistakable evidence that the parties delegated arbitrability for such a claim—the arbitrability question was for the court to decide.  In agreeing with the Second Circuit, the Fifth Circuit held in Henry Schein II that the “most natural reading of the arbitration clause at issue [] states that any dispute, except actions seeking injunctive relief, shall be resolved in arbitration in accordance with the AAA rules.  The plain language incorporates the AAA rules – and therefore delegates arbitrability – for all disputes except those under the carve-out.”  Thus, “[g]iven the carve-out,” the court could not “say that the [agreement] evince[d] a ‘clear and unmistakable’ intent to delegate arbitrability” as to the carved-out claims.  Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019).

The Practical Impact of the Supreme Court’s Deferral of Resolution of this Arbitrability Issue. 

Although the Supreme Court’s one-sentence order in Henry Schein II does not explain why it dismissed the cert petition it had previously granted, commentators have suggested it might be because the Court was not comfortable deciding the “carve-out” issue in a meaningful way without also addressing the underlying issue of whether the incorporation of the AAA rules by reference is a “clear and unmistakable” delegation of arbitrability to an arbitrator (an issue it had previously declined to address).  This rare reversal of field by the Supreme Court—essentially recalling its own decision to grant a cert petition—leaves unresolved the conflict over who decides whether a claim must be arbitrated if there is a carve-out in the arbitration provision.

Until the Supreme Court addresses this dispute, litigants and practitioners in the Fifth Circuit can expect that when limiting language is present, the court – not an arbitrator – will determine the arbitrability of claims arguably covered by a carve-out, even if there is an otherwise clear and unmistakable delegation of the question of arbitrability to an arbitrator.  This is because courts cannot re-write the parties’ agreement, and an agreement that exempts certain disputes from arbitration does not clearly and unmistakably delegate arbitrability to the arbitrator for disputes that fall within the exception.  The arbitrability of disputes beyond the scope of a carve-out should be delegated to an arbitrator.   If the contracting parties wish to delegate the arbitrability of all potential carve-out situations to an arbitrator, however, they should clearly and unmistakably include wording to this effect in their arbitration provision.

If you need assistance drafting arbitration agreements or interpreting an agreement already drafted, contact Tommy McGoey or Melanie Derefinko.

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