Trial Magazine

Three recent decisions have added to the U.S. Supreme Court’s line of case law on forced arbitration and raise issues related to arbitrability that plaintiff attorneys should be aware of when facing these questions.¹

Henry Schein v. Archer and White Sales

Archer and White, a dental equipment distributor, sued competitor Henry Schein, a dental equipment supplier, alleging violations of the Sherman Antitrust Act and Texas antitrust law and seeking damages and injunctive relief.² Henry Schein moved to compel arbitration.³ The district court denied the request, ruling that it was “wholly groundless” because the plaintiff sought injunctive relief, which the parties’ arbitration agreement excluded; the Fifth Circuit affirmed.⁴ Addressing a circuit split, the Supreme Court held that the court-made wholly groundless exception to arbitrability is inconsistent with the Federal Arbitration Act (FAA).⁵ It held that generally courts must enforce contracts that delegate threshold arbitrability questions to an arbitrator.⁶

Since Henry Schein dealt with a court-made exception to the threshold arbitrability question rather than a challenge to the validity of an arbitration clause itself,⁷ standing alone, the decision should have no bearing on challenges to arbitration grounded in the wording of the FAA. Notably, the Court left intact the rule that courts must first decide whether a valid arbitration agreement exists at all.⁸

New Prime v. Oliveira

Petitioner New Prime, an interstate trucking company that hired Dominic Oliveira as a driver pursuant to an “Independent Contractor Operating Agreement,” argued that arbitration was mandatory because Oliveira’s contract contained a delegation clause giving the arbitrator authority to decide threshold questions of arbitrability.⁹ The Court addressed how to define the language in §1 of the FAA, which exempts “contracts of employment” of “workers engaged in foreign or interstate commerce.”¹⁰ While most federal courts have held that only “employee” contracts were exempted, the Court affirmed the First Circuit, holding that contracts of all transportation “workers,” including independent contractors and employees, were exempted.¹¹ Ruling against New Prime, the Court held that courts should decide whether §1 applies before ordering arbitration.¹² A significant result of the Court’s decision is that independently contracted truck drivers will no longer be required to defend their rights through forced arbitration.¹³

Lamps Plus v. Varela

Frank Varela tried to file a class action against his employer, Lamps Plus, after his personal information was released in a phishing scam that targeted the company.¹⁴ Citing the employment contract that Varela signed, Lamps Plus moved to compel simple bilateral arbitration.¹⁵ However, the district court allowed class treatment after finding the agreement was ambiguous on the issue.¹⁶

While Henry Schein and New Prime were decided unanimously, Chief Justice John Roberts delivered the split decision in Lamps Plus. The five conservative justices rejected the ­widely relied on common law rule of contra proferentem: Ambiguous contracts are construed against their drafter. Instead, they found that when an arbitration contract is being reviewed and the ambiguity concerns whether plaintiff-employees may arbitrate on a class basis, classwide arbitration is not available unless it was contracted for specifically.¹⁷

The majority invoked three principles of the Supreme Court’s recent forced arbitration jurisprudence: the FAA requires courts to enforce arbitration agreements according to their terms; while courts usually interpret arbitration agreements by applying state contract law, the FAA preempts state law that treats arbitration contracts differently from other contracts; and there is a “‘fundamental’ difference between class arbitration and the individualized form of arbitration envisioned by the FAA.”¹⁸

This third principle was key to the Court’s 2010 decision in Stolt-Nielsen v. AnimalFeeds International Corp., which held that arbitrators cannot order class arbitration when the arbitration agreement is silent as to the use of class procedures.¹⁹ Relying on Stolt-Nielsen, Lamps Plus held that ambiguity, like silence, “does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice the principal advantage of arbitration.’”²⁰ This conclusion relied in part on the majority’s skepticism about the benefits of class arbitration. Chief Justice Roberts’s decision drew four separate vociferous dissents.²¹

What to Take Away

Ever since Rent-A-Center, West, Inc. v. Jackson, the Supreme Court has held that the FAA mandates enforcement of an agreement to delegate the determination of arbitrability, including whether a dispute should proceed directly to the arbitrator rather than the court.²² This deference has not been unlimited though, as courts still have placed limits on direct referrals, particularly in the area of contract formation.²³

However, an overly broad reading of Henry Schein will lead arbitration proponents to attempt to require a referral to the arbitrator in virtually all cases by arguing that the ruling permits a court to answer only whether a valid arbitration agreement exists and whether that agreement delegates questions of arbitrability to an arbitrator.²⁴ If both of these conditions are met and no specific exception under the FAA applies, these advocates would argue that “a court may not decide the arbitrability issue.”²⁵

But this argument ignores that the Court has held that the delegation clause must be valid and enforceable (and encompass the specific arbitrability question at issue).²⁶ Moreover, Henry Schein does not address waiver by litigation conduct at all. If confronted with this issue, you should argue that Schein’s dicta is being taken out of context, and the only clear holding is that a court may not use the wholly groundless exception to deny arbitration.

Just one week after Henry Schein, the Court decided New Prime. Significantly, it held that courts should decide whether §1 applies, despite the fact that the contract in question contained an arbitration agreement with a facially clear delegation clause.²⁷

So to whom are questions of arbitrability delegated: the court or an arbitrator? Lamps Plus shows that for ambiguous contracts involving a question about class action availability, it’s neither. Unless arbitration agreements expressly permit class actions (and they almost never do), no interpretation would permit classwide treatment either in court or before an arbitrator.²⁸

Still on the Table

Not addressed by any of these decisions is the question of waiver by litigation conduct—the largest remaining basis for courts to conclude that a matter should not be referred for arbitral decision. Despite this, arbitration proponents may argue that after Henry Schein, this is now a “gateway” decision for an arbitrator to decide. However, New Prime clearly preserves an FAA contextual question for judicial resolution. Generally, if an arbitrability question hinges on the FAA’s text, then it is for the court to decide. Henry Schein does not expressly disagree with this, as it arguably only stands for the proposition that a court may not “rewrite [or ­redesign] the statute” and “may not engraft [its] own exceptions onto the statutory text” of the FAA.²⁹

When opposing a forced arbitration clause, look to the FAA’s language and see whether there is something in the statute’s text that might apply because courts are likely to refer defenses outside the text of the FAA to an arbitrator. When arguing waiver, revocation, or default, refer to the specific FAA sections addressing those issues. Because these sections were expressly contained within the FAA when it was enacted in 1925, argue that it is for the court rather than an arbitrator to decide these threshold issues.

Gerson H. Smoger is an attorney at Smoger & Associates in Dallas. He can be reached at gerson@texasinjurylaw.com. David Arbogast is an attorney at Arbogast Law in San Carlos, Calif. He can be reached at david@arbogastlaw.com. Mr. Smoger coauthored AAJ’s amicus brief in New Prime with assistance from Mr. Arbogast.

Notes

1. AAJ filed amicus briefs in the cases discussed in this column, and those filed since January 2014 are available at www.justice.org/amicusbriefs.
2. Archer & White Sales, Inc. v. Henry Schein, Inc., 878 F.3d 488, 491 (5th Cir. 2017). 
3. Id. 
4. Id. at 491, 497–98.
5. Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 528 (2019).
6. Id. 
7. Id. at 529–31. “The Act does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute passed by Congress and signed by the President.” Id. at 528.
8. Id. at 530 (“To be sure, before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists.”).
9. New Prime Inc. v. Oliveira, 139 S. Ct. 532, 536, 538 (2019).
10. Id. at 537. 
11. Id. at 539–41. See also AAJ’s amicus brief at 15–20, making the point that “contracts of employment” in 1925 referred indistinguishably to both “employee” and “independent contractor” agreements: www.justice.org/sites/default/files/_Justice/LegalAffairs/NewPrime-v-Oliveira.pdf.
12. Id. at 537.
13. See id. at 538–44.
14. Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1412–13 (2019).
15. Id. at 1413.
16. Id. 
17. Id. at 1416. 
18. Id. 
19. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).
20. Lamps Plus, 139 S. Ct. at 1416 (citing Stolt-Nielsen, 559 U.S. at 686 (internal citations omitted)).
21. Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor, and Elena Kagan each wrote separate dissents. 
22. 561 U.S. 63 (2010). 
23. See Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287, 296 (2010) (“It is similarly well settled that where the dispute at issue concerns contract formation, the dispute is generally for courts to decide.”) (citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444, n.1 (2006) (distinguishing “treatment of the generally nonarbitral question whether an arbitration agreement was ‘ever concluded’ from the question whether a contract containing an arbitration clause was illegal when formed,” which can be arbitrable in certain circumstances).
24. Henry Schein, 139 S. Ct. at 529 (citing 9 U.S.C. §2).
25. Id. at 530.
26. Rent-A-Center, 561 U.S. at 67–68 (citing 9 U.S.C. §2); see also First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944–45 (1995).
27. New Prime, 139 S. Ct. at 537. 
28. Lamps Plus, 139 S. Ct. at 1435 (“No matter what [the agreement] requires, the majority will prohibit class arbitration.”) (Kagan, J., dissenting).
29. Henry Schein, 139 S. Ct. at 528, 530.