A litigation boutique based in Oakland, California, representing plaintiffs and defendants in complex civil litigation.
Arbitration Update: Supreme Court Weighs In On Delegation Clauses
By Matt Turetzky
January 23, 2019
Many arbitration agreements contain a delegation clause – i.e., a clause delegating to an arbitrator the determination of whether a dispute is subject to arbitration. When a party to such an agreement files a lawsuit in court, the court must then first decide whether it can decide arbitrability, or whether it must defer to the arbitrator under the delegation clause. The Supreme Court recently issued two unanimous decisions on this topic within a week. Both decisions have implications for companies that use delegation clauses in their arbitration agreements.
In the first case, Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272, 2019 WL 122164, the Court held that lower courts must defer to an arbitrator’s determination of arbitrability when the arbitration agreement contains a clear and unambiguous delegation clause. The Court rejected a “wholly groundless” exception, under which a court could still decide arbitrability when there is no “plausible argument that the arbitration agreement requires the merits of the claim to be arbitrated.” Archer & White Sales, Inc. v. Henry Schein, Inc., 878 F.3d 488, 495 (5th Cir. 2017). The Court held that even in a situation when the “wholly groundless” exception could apply, lower courts must defer to an arbitrator’s determination of arbitrability, because under the Federal Arbitration Act, “[w]hen the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract.” The Court rejected the argument that “it is easy to tell when argument for arbitration of a particular dispute is wholly groundless.” It explained the exception would create collateral litigation, which it described as “a time-consuming sideshow.”
The Court left open whether the specific contract at issue in fact delegated the arbitrability question to the arbitrator. The Court noted that the lower courts did not decide the issue and that courts “should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.”
One week later, the Supreme Court issued its decision in New Prime, Inc. v. Oliveira, No. 17-340. In that case, the Court held that a lower court must first decide whether an arbitration agreement is subject to the Federal Arbitration Act even when the arbitration agreement contains a clear delegation clause. In New Prime, Oliveira argued section 1 of the Federal Arbitration Act carves out from the Act’s coverage “contracts of employment of . . . workers engaged in foreign or interstate commerce.” Oliveira argued that as an independent contractor working as a truck driver for New Prime, his contract fell within the Act’s carve-out, notwithstanding the delegation clause.
The Court addressed two questions. First, whether lower courts should, before compelling arbitration in accordance with a delegation clause, determine whether the arbitration agreement was subject to the Federal Arbitration Act? And if so, are “independent contractors” such as Oliveira within the ambit of the carve out for “contracts of employment”?
On the first issue, the Court held “a court should decide for itself whether §1’s ‘contracts of employment’ exclusion applies before ordering arbitration,” because only pursuant to the Federal Arbitration Act could a court compel arbitration. “The parties’ private agreement may be crystal clear and requires 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 therefore held that courts should first decide whether the arbitration agreement is excluded from the Act before compelling arbitration, even when a delegation clause is present.
The Court’s analysis of the second issue was particularly interesting. In modern corporate settings, a “contract of employment” suggests an employer-employee relationship. But Oliveira was an independent contractor. Should the “contract of employment” carve-out apply to Oliveira’s contract? The Court answered yes by considering what “contract of employment” meant when the Federal Arbitration Act was passed in 1925. The phrase had not yet become a term of art describing a formal employer-employee relationship. Instead, it was then understood as describing a contract to perform work. The Court held Oliveira should be given the benefit of what “contract of employment” meant in 1925, and therefore Oliveira’s agreement was excluded from the Federal Arbitration Act.
After these two decisions, parties to an arbitration agreement with a delegation clause, or those considering adding one to a contract, should carefully consider the language. As a threshold issue, the parties should determine whether the agreement is subject to the Federal Arbitration Act. Under New Prime, courts retain the ability to determine whether arbitration agreements are subject to the Act, even if the agreement contains a clear and unambiguous delegation clause. No contract can escape the courthouse on that issue.
And when an agreement is subject to the Act, the parties should confirm their agreement contains unmistakable language about their intent to delegate arbitrability determinations to an arbitrator. If the parties wish to delegate arbitrability, then they need to expressly say so. Simply incorporating arbitration rules (e.g., incorporating the AAA rules, as the parties did in Henry Schein) may not be enough. After Henry Schein, clear and unmistakable language is key to keeping the arbitrability determination firmly in the hands of the arbitrator.