Supreme Court Gives Teeth to Delegation Clauses in Arbitration Provisions
Taking the time to include a well-crafted arbitration agreement in your employment contracts sometimes feels like a moot point, but a recent unanimous U.S. Supreme Court opinion in Henry Schein, Inc. v. Archer & White Sales, Inc. should inspire some confidence in the enforcement of arbitration. The story is a familiar one—an employee who signed an agreement sues their employer, the employer tries to invoke the agreement’s arbitration clause, and both parties spend countless time and money arguing over who should decide whether the dispute is subject to arbitration: the judge or an arbitrator? To cut off such fights, some employers put “delegation clauses” in their arbitration agreements. A delegation clause states that it is the arbitrator who decides whether the dispute is fit for arbitration. Even with such language in agreements, delegation clauses have been fiercely contested and courts could determine that they and not the arbitrator should hear the case because the assertion of arbitrability was “wholly groundless.”
The Henry Schein case, issued on January 8, 2019, clarifies some of this madness and gives teeth to delegation clauses. The contract in Henry Schein did not contain a specific delegation clause but did incorporate the rules of the American Arbitration Association (AAA). Because the AAA rules give arbitrators authority to decide their own jurisdiction, Henry Schein argued that their incorporation in the contract amounted to a delegation clause and that an arbitrator should determine whether the case was fit for arbitration. The district court rejected this argument, and the Fifth Circuit Court of Appeals agreed. The appeals court said that the underlying argument for arbitration was “wholly groundless” and thus the court should not delegate the issue to an arbitrator.
In a unanimous decision, the Supreme Court reversed the appeals court and rejected the “wholly groundless” exception to delegation clauses. It held that where parties agree to delegate arbitrability, a court must give effect to that intent and cannot override delegation to an arbitrator even if the court believes the answer is obvious. The Supreme Court also wrote that to allow courts to take the case is both “inconsistent with the text of the [Federal Arbitration Act] (FAA) and with precedent.” The employee in Henry Schein who did not want to go to arbitration supported its position by arguing that it was a waste of resources and money to send the issue to an arbitrator if the basis for arbitration was wholly groundless. Not only did the Supreme Court reject that argument, it also raised concerns about a “time-consuming sideshow” of collateral litigation to determine whether an argument was wholly groundless or merely groundless. Where a demand for arbitration is truly meritless, “[a]rbitrators are already capable of efficiently disposing of frivolous cases.” The opinion further challenged whether the question of arbitrability would indeed be obvious, noting that the arbitrator may reach a different conclusion.
The Court stopped short of deciding whether incorporation of the American Arbitration Association rules is, by itself, an ‘effective, clear and unmistakable’ delegation clause. The impact of Henry Schein is limited to invalidating the “wholly groundless” exception where the court has either inferred delegation, such as from the incorporation of AAA rules or where the contract has an express delegation clause. Employers favoring arbitration and wishing to soften the time and expense of litigation should consider adding delegation clauses to arbitration provisions in employment agreements as well as other contracts. In light of this recent decision, it will be much more difficult for employees to avoid arbitration where the agreement they signed has a properly drafted arbitration provision and delegation clause.