Yesterday, the Supreme Court unanimously reversed an arbitration decision that will affect non-competition litigation
between employees and employers who have incorporated arbitration clauses into
their agreements. The Court ruled that
the Federal Arbitration Act requires the arbitrability of a dispute to be
resolved by the arbitrator even if the trial court finds the request for arbitration
to be “wholly groundless” if the
parties’ agreement reserved questions of arbitrability to the arbitrator. Henry
Schein, Inc. v. Archer & White Sales, Inc.,
No 17-1272 (1-9-19). In
that case, the parties’ contract provided for arbitration of disputes, except
when the party was seeking injunctive relief. While the contract did not specifically
address the question of arbitrability, its brief two-sentence arbitration
clause referred to the AAA rules, which provides that arbitrators can decide
arbitrability. The plaintiff filed suit
seeking damages and injunctive relief and the defendant sought to have the entire
matter referred to arbitration. The
plaintiff objected on the grounds that the defendant’s request was “wholly
groundless” (because of the contract’s exception for injunction requests) so
that the trial court could resolve the arbitrability question. The trial and appellate court agreed, but the
Supreme Court reversed and found that the FAA does not contain an exception for
“wholly groundless” arguments as to arbitrability. However, because the contract was silent about
the question of arbitrability, the Court remanded the matter to determine if
the parties’ contract reserved the question of arbitrability to be decided by
the arbitrator or the trial court.
The Court rejected the defendant’s
argument that Sections 3 and 4 of the FAA only require a court to stay litigation
pending arbitration and to refer a matter to arbitration after an initial evaluation
of arbitrability.
This Court has consistently held that
parties may delegate threshold arbitrability questions to the arbitrator, so
long as the parties’ agreement does so by “clear and unmistakable” evidence. First Options, 514 U. S., at 944
(alterations omitted); see also
Rent-A-Center, 561 U. S., at 69, n. 1.
To be sure, before referring a dispute to an arbitrator, the court
determines whether a valid arbitration agreement exists. See 9 U. S. C.
§2. But if a valid agreement exists, and
if the agreement delegates the arbitrability issue to an arbitrator, a court
may not decide the arbitrability issue.
The Court also refused to impose a
common law exception into the FAA to prevent a waste of the parties’ resources. Moreover, it was doubtful that systematic
resources would be spared when there was likely to be collateral litigation
over arbitrability regardless of whether the arbitrator or trial court decided
the issue.
Under the Act, arbitration is a matter
of contract, and courts must enforce arbitration contracts according to their
terms. Rent-A-Center, 561 U. S., at
67. Applying the Act, we have held that
parties may agree to have an arbitrator decide not only the merits of a
particular dispute but also “‘gateway’ questions of ‘arbitrability,’ such as
whether the parties have agreed to arbitrate or whether their agreement covers
a particular controversy.” Id., at 68–69; see also First Options, 514 U. S., at 943. We have explained that an “agreement to
arbitrate a gateway issue is simply an additional, antecedent agreement the
party seeking arbitration asks the federal court to enforce, and the FAA
operates on this additional arbitration agreement just as it does on any
other.” Rent-A-Center, 561 U. S., at 70.
. . .
We must interpret the Act as written,
and the Act in turn requires that we interpret the contract as written. When
the parties’ contract delegates the arbitrability question to an arbitrator, a
court may not override the contract. In those circumstances, a court possesses
no power to decide the arbitrability issue.
That is true even if the court thinks that the argument that the
arbitration agreement applies to a particular dispute is wholly groundless.
That conclusion follows not only from
the text of the Act but also from precedent. We have held that a court may not
“rule on the potential merits of the underlying” claim that is assigned by
contract to an arbitrator, “even if it appears to the court to be frivolous.” AT&T
Technologies, Inc. v. Communications Workers, 475 U. S. 643, 649–650
(1986). A court has “‘no business weighing the merits of the grievance’”
because the “‘agreement is to submit all grievances to arbitration, not merely
those which the court will deem meritorious.’” Id., at 650 (quoting Steelworkers
v. American Mfg. Co., 363 U. S. 564, 568 (1960)).
. . . .
The [wholly groundless] exception is
inconsistent with the statutory text and with our precedent. It confuses the
question of who decides arbitrability with the separate question of who
prevails on arbitrability. When the
parties’ contract delegates the arbitrability question to an arbitrator, the
courts must respect the parties’ decision as embodied in the contract
Ultimately, however, the Court expressed
no view about whether the contract at
issue in this case in fact delegated the arbitrability question to an
arbitrator. The Court of Appeals did not decide that issue. Under our cases, courts “should not assume
that the parties agreed to arbitrate arbitrability unless there is clear and
unmistakable evidence that they did so.”
First Options, 514 U. S., at
944 (alterations omitted). On remand,
the Court of Appeals may address that issue . . .
This decision will affect employers
because many employment agreements contain non-competition and non-solicitation
clauses as well as arbitration clauses that similarly carve out exceptions for
when the employer seeks injunctive relief.
The reason for such carve-outs is so that the employer can obtain speedy
preliminary injunctive relief when damages will be inadequate for the harm
caused by the improper competition or solicitation. However, if the employee seeks to have the
entire matter referred to arbitration, resolution of the dispute could be
delayed while the parties select an arbitrator, etc. to resolve the
arbitrability issue.
NOTICE: This summary is designed merely to inform and alert you of
recent legal developments. It does not constitute legal advice and does not
apply to any particular situation because different facts could lead to
different results. Information here can be changed or amended without
notice. Readers should not act upon this information without legal advice. If
you have any questions about anything you have read, you should consult with or
retain an employment attorney.
