High court dodges toothy question on arbitration authority

15461191 - supreme court of united statesThe U.S. Supreme Court’s recent dismissal of a closely watched case involving two dental distribution competitors has left a large hole unfilled in the arbitration world.

Henry Schein Inc. had asked the court to rule that because an arbitration agreement incorporated the rules of the American Arbitration Association (AAA), the arbitrator should decide the applicability of the agreement’s exclusion clauses. The respondent, Archer and White Sales Inc., however, argued that a court can intervene because the agreement expressly contains a carve-out exemption for judicial relief.

The underlying dispute dates back to 2016, when competitor Archer filed a lawsuit in Texas against Henry Schein and dental equipment manufacturer Danaher Corporation, alleging price-fixing and violations of federal and state free-trade laws. The defendants filed motions to compel arbitration, noting a carve-out clause in the contract that stated “any dispute arising under or related to this agreement … shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.”

In dismissing the case, the Supreme Court justices likely couldn’t decide the carve-out question, because that presumes the parties had “clearly and unmistakably” delegated the question to an arbitrator. Imre Stephen Szalai, a professor at Loyola University New Orleans College of Law, explained this in an interview with Law360. The question is, “if there’s an exception, a carve-out, to a clear delegation, how is that handled? But there’s no clear delegation to begin with,” Szalai said.

The legal and arbitration communities had hoped to get clarity from the case because of its potentially heavy implications on the efficiency and fairness of dispute resolution. The Supreme Court’s dismissal without a decision leaves unanswered the critical question of who decides the scope of an arbitrator’s authority in the first instance: a court or an arbitrator. Cases have long held that the court should make that determination unless the parties have expressed a clear and unmistakable agreement that the arbitrators should decide.

Application of that standard has led some courts to conclude that in cases where the arbitration agreement refers to arbitral rules that grant the arbitrator authority to decide the scope of their jurisdiction, that mere reference qualifies as a sufficiently clear agreement that the arbitrators should decide. Other courts, however, have disagreed, holding that the mere reference to such rules hardly qualifies as a “clear and unmistakable” agreement that arbitrators should decide.

The lack of a clear and unmistakable answer from the Supreme Court will continue to foster confusion and spawn more litigation over arbitration agreements. As a practical matter, the issue can be avoided completely by including express language in the arbitration agreement addressing the scope of the arbitrators’ authority to determine their own jurisdiction. With experience in the US and internationally, the law firm of Ehrenstein|Sager can guide you in litigation and arbitration disputes.