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Supreme Court Will Review Whether “Carve Out” Clause Negates Delegation to Arbitrators to Determine Arbitrability

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On June 15, 2020, the U.S. Supreme Court announced it will consider an issue important to resolving disputes by arbitration. The Court will determine whether it is possible both to carve out certain disputes from arbitration and to delegate the decision whether a dispute is arbitrable to an arbitral panel.

Disputes often arise about whether a particular dispute must be resolved by arbitration or by a court, the question referred to as “arbitrability.” Once a dispute has arisen, parties frequently angle to steer a dispute to one or the other forum, depending on their view about which forum is more favorable. But then a dispute arises about who decides that question – a court or an arbitral tribunal. The Supreme Court has previously decided that parties to a contract may agree to allow an arbitrator or arbitral panel to decide whether a particular dispute falls within the parties’ agreement to arbitrate. Such a delegation of the threshold determination of arbitrability must be made clearly and unmistakably. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). This delegation may be made by including an express provision in the parties’ arbitration clause stating that the arbitral panel has authority to decide issues of arbitrability. The majority of federal circuit courts have also held that parties can delegate the decision to the arbitrators by selecting institutional arbitration rules that give the arbitrators power to determine questions of arbitrability, such as the rules of the American Arbitration Association or JAMS. See, e.g., Dish Network L.L.C. v. Ray, 900 F.3d 1240, 1246 (10th Cir. 2018) (collecting cases).

In Henry Schein, Inc. v. Archer and White Sales, Inc., No. 19-963, 2020 WL 3146679 (June 15, 2020) (granting certiorari), the Supreme Court will return to the question who decides arbitrability. This case illustrates how a dispute about who determines arbitrability can derail the resolution of a case’s merits for years. The parties have been litigating that issue for eight years, including a prior trip to the Supreme Court in 2019. The Supreme Court has now granted certiorari for the second time in the case. This time, the Court will consider language in the arbitration clause carving out certain types of disputes from arbitration. The Court will decide:

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.

The case involves an antitrust dispute between two dental equipment distributors. The critical part of the parties’ contractual arbitration clause reads:

Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes relating to trademarks, trade secrets or other intellectual property . . . ) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.

As noted above, the parties’ selected rules, those of the American Arbitration Association, give the arbitrator power to decide issues of arbitrability. The selection of these rules, by itself, would be a clear and unmistakable delegation of the arbitrability question to the arbitrators under many circuit court decisions. The question, then, is whether the parenthetical carve-out of actions involving injunctive relief and intellectual property disputes cancels – or makes unclear – the delegation of the arbitrability decision to the arbitrators.

Some speculate that the Court may consider the circuits’ approach to institutional rules along the way to reaching the carve-out issue. Unless the incorporation of the institutional rules is a clear and unmistakable delegation, then the question of arbitrability has not been delegated to the arbitrators. Without effective delegation of the arbitrability question, a court will decide arbitrability, and the carve-out has no real effect on who decides arbitrability.

While these seemingly esoteric questions may appear to be useful fodder only for arbitration seminars, the Supreme Court’s decision will likely provide practical guidance for drafting effective arbitration clauses – precisely the sort of clauses that will avoid years of procedural wrangling and send cases to arbitration rather than multiple trips to the Supreme Court.

V&E’s International Dispute Resolution & Arbitration (IDR) practice assists clients in all aspects of dispute resolution, from drafting contractual arbitration clauses to resolving disputes through mediation, arbitration, and litigation. Consistently recognized in Global Arbitration Review’s GAR 100 (2008-2020), V&E’s IDR team of over 40 members located in Washington, Houston, London and Dubai has handled disputes related to projects around the world in over 80 countries, in virtually every arbitral venue, and under all major international and regional rules systems.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.