Arbitration carve outs: Will the exception swallow the rule?

Arbitration carve outs: Will the exception swallow the rule?

June 23, 2020

United States
United States
United States
In a closely watched case on the construction of arbitration clauses, the US Supreme Court granted certiorari to review Schein v. Archer & White Sales, Inc. on June 15, 2020. The Petitioner, Henry Schein, Inc., (Henry Schein) presents the question of whether 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. 
 
It is the Court’s second look at the price fixing case in which Archer & White accuses Henry Schein of conspiring with dental distributors to maintain higher than competitive margins by threatening not to buy products from manufacturers that sell to low-margin distributors. The first time it heard the case in 2019, the Court held that the Federal Arbitration Act does not allow a court to decide questions of arbitrability if the parties have clearly delegated that question to an arbitrator.
 
The current dispute arises from the Court’s remanding the case to the Fifth Circuit to determine whether the agreement of the parties delegated the arbitrability question to an arbitrator. The Fifth Circuit held that it did not, concluding that the exemption of certain claims from the scope of the arbitration clause negated the otherwise clear and unmistakable evidence of the parties’ intention to delegate arbitrability. Specifically, the Fifth Circuit focused on the following language in the disputed clause, which reads:
 
Disputes. This Agreement shall be governed by the laws of the State of North Carolina. 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 of Pelton & Crane), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association (AAA) . The place of arbitration shall be in Charlotte, North Carolina. 1
 
While the Commercial Rules of the American Arbitration Association (AAA) provide arbitrators the power to rule on their own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim, the Fifth Circuit determined that the syntax of the agreement—the ordering of the words—was dispositive:
 
We cannot re-write the words of the contract. The most natural reading of the arbitration clause at issue here 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. Given that carve-out, we cannot say that the Dealer Agreement evinces a “clear and unmistakable” intent to delegate arbitrability. 2
 
The case now heads back to the Supreme Court to test whether the Fifth Circuit Court of Appeals decided the issue correctly. The Petitioner, Henry Schein, has roundly criticized the Fifth Circuit, saying that the decision “defies the law as well as common sense, flouting the presumption in favor of arbitration and rendering the delegation a self-defeating nullity.”
 
The Supreme Court’s consideration of the case should address and possibly clear up conflicting legal rules among the states concerning the effect of carve-out provisions in the face of otherwise clear and unmistakable delegations of arbitrability to arbitrators. In the meantime, the best practice remains careful drafting, an explicit statement incorporating the applicable arbitration rules in arbitration agreements and contracts containing arbitration clauses and an explicit statement that the issue of arbitrability is to be left to the arbitral body and not the courts.
 
_____
 

1  Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274, 277 (5th Cir. 2019).

 2 See id. at 281-82. 

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