January Litigation Update: Justice Kavanaugh Delivers Big Win for Arbitration Advocates

On January 8, 2019, the U.S. Supreme Court issued its decision in Henry Schein, Inc. v. Archer & White Sales, Inc.[1] Not only did this case clarify whether arbitrators or courts should decide arbitrability under the Federal Arbitration Act, but it also gave us our first indication that the newest Supreme Court Justice, Brett Kavanaugh, will continue to apply his straightforward style to writing opinions for the highest court in the land and will reinforce the Court's ever-strengthening textualist approach to statutory cases.

First, in the Court's unanimous decision, Justice Kavanaugh relied on the text of the Federal Arbitration Act to hold that courts may not override a contract delegating the question of whether a claim must be arbitrated or litigated to arbitrators. The decision overruled a Fifth Circuit decision which held that courts could reject a party's request to compel arbitration if the arbitrability argument was "wholly groundless," regardless of whether the contract provided that arbitrators should decide whether a dispute falls within the purview of the arbitration clause.

In Henry Schein, Inc. v. Archer & White Sales, Inc., Archer and White, a distributor of dental equipment, entered into a contract with Pelton and Crane, a dental equipment manufacturer and the predecessor-in-interest to Henry Schein, Inc., to distribute Pelton and Crane's equipment. The contract provided, in relevant part, that "[a]ny 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 of [Schein]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [ (AAA) ]." Archer and White sued Henry Schein, Inc. in Federal District Court in Texas, alleging violations of federal and state antitrust law. Archer and White sought both money damages and injunctive relief. Schein subsequently invoked the Federal Arbitration Act, contending that the American Arbitration Act's rules, which were expressly incorporated into the contract, provide that arbitrators have the power to resolve arbitrability questions. Archer and White objected, arguing that its claim for injunctive relief took the dispute out of the purview of the contract's arbitration clause. Applying Fifth Circuit precedent, the district court agreed with Archer and White, holding that Schein's argument for arbitration was "wholly groundless" due to the contract's exception for actions seeking injunctive relief. The Fifth Circuit affirmed. Due to a circuit split on the issue,[2] the Court granted certiorari.

Relying on the "text" of the Federal Arbitration Act, which provides that "[a] written provision in…a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract…shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,"[3] the Court explained that an "agreement to arbitrate a gateway issue [of arbitrability] 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."[4] The Court reasoned that it "must interpret the Act as written, and the Act in turn requires that [courts] interpret the contract as written."[5] The Court went so far as to say that even if a court actually thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless, the court, nevertheless, "possesses no power to decide the arbitrability issue" when the contract delegates the arbitrability question to the arbitrator.[6]

Perhaps the most obvious sign of the Court's continuing textualist turn, the Court rejected the argument that "as a practical and policy matter," allowing courts to reject "wholly groundless" arbitration requests saves time and money. The Court reasoned that "the Act contains no 'wholly groundless' exception, and we may not engraft our own exceptions onto the statutory text."[7] In the arbitration context, the Court's opinion reinforces the importance of drafting clear and explicit arbitration clauses to achieve as much certainty as possible for the parties to the contract regarding the arbitration process.

More holistically, the Henry Schein, Inc. v. Archer & White Sales, Inc. appears to reinforce the Court's growing tendency, especially with the additions of Justice Gorsuch and Justice Kavanaugh, to defer to the legislature to address policy matters. Indeed, in his first opinion, also writing for a unanimous Court, Justice Gorsuch relied on the plain and ordinary meaning of the applicable statute's text to resolve the question before the Court.[8] Critically, in his opinion, Justice Gorsuch disregarded public policy arguments about the legislature's intent in passing the law at issue.[9] While both of these cases were straightforward statutory cases, the unabashed textualist underpinnings of the decisions appear, at least for now, to be well-grounded in the re-aligned U.S. Supreme Court.

[1] 17-1272, 2019 WL 122164 (U.S. Jan. 8, 2019).

[2] The Fourth, Fifth, Sixth and Federal Circuits had adopted the "wholly groundless" exception, whereas the Tenth and Eleventh Circuits did not adopt such an exception and, instead, deferred to the express language of the applicable contract.

[3] 9 U.S.C. § 2.

[4] 2019 WL 122164, at *3. (quoting Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 70 (2010)).

[5] Id. at *4.

[6] Id.

[7] Id. at *5.

[8] See Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718, 198 L. Ed. 2d 177 (2017).

[9] Id.