Lawrence W. Newman and David Zaslowsky
The U.S. Supreme Court’s recent decision in Henry Schein v. Archer and White Sales, No. 17-1272, 2019 WL 122164 (Jan. 8, 2019) has attracted much attention in that it has been viewed as further support for the court’s strong preference for enforcing the terms of arbitration agreements as written. But the undercurrent in Henry Schein was the competence-competence principle—that is, does U.S. law apply the principle that arbitrators are the ones who are competent to decide whether a particular dispute is arbitrable? In this article, we look at the development of that issue under U.S. law and compare it to how other countries address the issue.
The Development of U.S. Law
In 1986, the Supreme Court held that the question of arbitrability is undeniably an issue for judicial determination. It said, “unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.” AT&T Technologies v. Communication Workers of America, 475 U.S. 643, 649 (1986).
The logical corollary of this holding, of course, is that if the parties “clearly and unmistakably” do delegate authority to decide jurisdiction to the tribunal, that decision must be respected. This point was confirmed by the Supreme Court in its 1995 ruling in First Options of Chicago v. Kaplan. There, the Supreme Court stated that “the court’s standard for reviewing the arbitrator’s decision about its jurisdiction should not differ from the standard courts apply when they review any other matter that parties have agreed to arbitrate.” In other words, “the court should give considerable leeway to the arbitrator, setting aside his or her decision only in certain narrow circumstances.”
Another development in the law concerned whether there was a sufficiently clear and unmistakable delegation of the arbitrability issue to the arbitrators when parties agreed to arbitrate under institutional rules that granted such authority to the arbitrators. Many courts answered that issue in the affirmative. For example, Belnap v. Iasis Healthcare, 844 F.3d 1272, 1280 (10th Cir. 2017) concerned an arbitration agreement that called for arbitration administered by JAMS. JAMS Rule 8(c) provides that “jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted and ruled on by the Arbitrator.” Based on this rule, the Tenth Circuit held that agreeing to a JAMS-administered arbitration was an agreement that the arbitrators would decide the issue of arbitrability.
The ‘Henry Schein’ Decision
The Henry Schein case reached the Supreme Court because of the so-called “wholly groundless” rule. Several circuit courts had decided the question of arbitrability in the first instance despite the existence of a clause delegating the issue to the arbitrators because, in the court’s view, the argument that the arbitration clause applied to the dispute at issue was “wholly groundless.” Other courts disagreed and the Supreme Court granted certiorari to resolve the circuit split.
In Henry Schein, Archer & White Sales sued Henry Schein, Inc., alleging violations of federal and state antitrust law and seeking both money damages and injunctive relief. The relevant contract provided for arbitration of any dispute arising under or related to the agreement, except for, among other things, actions seeking injunctive relief. Invoking the Federal Arbitration Act, Schein asked the district court to refer the matter to arbitration, but Archer & White argued that the dispute was not subject to arbitration because its complaint sought injunctive relief, at least in part. Schein contended that, because the rules governing the contract provide that arbitrators have the power to resolve arbitrability questions, an arbitrator—not the court—should decide whether the arbitration agreement applied. Archer & White countered that Schein’s argument for arbitration was wholly groundless, so the district court could resolve the threshold arbitrability question. The district court agreed with Archer & White and denied Schein’s motion to compel arbitration. The Fifth Circuit affirmed.
On appeal, the Supreme Court rejected the “wholly groundless” exception to arbitrability. The court explained that, when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless.
Interestingly, the arbitration agreement in Henry Schein called for arbitration under the Rules of the American Arbitration Association (AAA). Under AAA Rule 7(a), “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” Numerous cases have held that this rule means that parties have agreed to delegate the arbitrability issues to the arbitrators. Nevertheless, the Supreme Court “expressed no view about whether the contract at issue … in fact delegated the arbitrability question to an arbitrator,” and remanded that question to the Court of Appeals. In that regard, it is also worth noting that the chief reporter of the ALI’s Restatement of the U.S. Law of International Commercial and Investor-State Arbitration, Prof. George Bermann of Columbia Law School, submitted an amicus brief in Henry Schein questioning the principle that incorporation of arbitration rules satisfies the “clear and unmistakable” standard. He wrote:
Although a majority of courts have found the incorporation of rules containing such a provision to satisfy First Options’ “clear and unmistakable” evidence test, the ALI’s Restatement of the U.S. Law of International Commercial and Investor-State Arbitration has concluded, after extended debate, that these cases were incorrectly decided because incorporation of such rules cannot be regarded as manifesting the “clear and unmistakable” intention that First Options requires.
Competence-Competence Outside the U.S.
More than 80 countries have enacted the UNCITRAL Model Law on International Commercial Arbitration (the Model Law). It specifically adopts the competence-competence principle. Thus, Article 16 provides: “The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.” If such a ruling is made in a preliminary decision, a court may revisit this decision if appealed within 30 days (Article 16(3)). If that ruling is included in the merits decision, it can be challenged under the ordinary rules for challenging awards (e.g., Article 34(2)(a)(ii), which permits setting aside an award that “deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration”).
Noticeably absent from the Model Law is the level of deference, if any, that a reviewing court should accord to the decision of the arbitrators on the issue of arbitrability. The authors are informed by their colleagues in Germany and Singapore, for example, that courts there undertake a de novo review in dealing with an application to set aside an arbitral tribunal’s award on the ground of lack of jurisdiction. Indeed, according to Gary Born’s treatise, “the weight of better-reasoned national court authority in UNCITRAL Model Law jurisdictions has … permitted full judicial consideration (rather than only prima facie review) in either all or some cases involving interlocutory challenges to the existence, validity, or legality of the arbitration agreement (but not as to the scope of the agreement, which is treated differently).” See Gary Born, International Commercial Arbitration (2d Ed.) at 1085.
England and Wales take the opposite approach to the United States regarding delegation of arbitrability to the tribunal. Under Article 30 of the Arbitration Act 1996, “the arbitral tribunal may rule on its own substantive jurisdiction” unless the parties have agreed otherwise. As in the United States, English courts may not examine the arbitrability issue during an arbitration. However, English courts are empowered to decide anew the issue of jurisdiction through a full rehearing on the merits if the issue is later raised in annulment or enforcement proceedings (such as under §67(1)(a) of the 1996 Act).
In the Middle East, Dubai is probably the leading international arbitration seat. The new UAE Arbitration Law (Federal Law no.6 of 2018 enacted on May 3, 2018) recognizes the principle of competence-competence in that an arbitral tribunal is empowered to rule on its own jurisdiction, including on any objections regarding the existence or validity of the arbitration agreement or any objections alleging that the subject matter of the dispute falls outside the scope of the arbitration agreement (Article 19(1)). That decision is subject to court review but will be give much deference, just as in the United States.
Peru follows the UNCITRAL Model Law. Arbitrators are authorized to decide whether a dispute is arbitrable, which decision may be challenged in court as part of an annulment procedure at the end of the arbitration. Although such review is nominally de novo, it is made in the context of Peruvian law, which is presumptively in favor of arbitration.
Is one process “better” than another for determining the arbitrability issue? The competence-competence regime is often seen as more pro-arbitration than U.S. law, which starts with the presumption that the arbitrability issue is one for the courts. But that analysis does not hold up to close scrutiny. It is the experience of the authors that the majority of arbitration clauses that are litigated in the U.S call for institutional arbitration and, therefore, under U.S. law, would fall under the category of cases in which the arbitrators would decide the gateway arbitrability issues (based on the institutional rules that so provide). Moreover, once that decision is made by the arbitrators, it would be entitled to the deference given to arbitration awards in general, meaning that it would rarely be disturbed. Accordingly, there is, for the most part, just one bite at the arbitrability apple.
In contrast, under a competence-competence regime, although arbitrators make the initial decision on the arbitrability issue, that decision is then reviewable by the court. In the many jurisdictions in which there is a de novo review, it is essentially necessary to prevail twice on the arbitrability issue. Moreover, in many situations, the challenge to arbitrability cannot be made until after the award is rendered on the merits. Thus, there is a risk that the parties may spend substantial amounts of time and money going through an entire arbitration, only for the award possibly to be vacated after a court’s de novo review of the award on the issue of arbitrability. Under such circumstances, the process under U.S. law certainly seems preferable.
Lawrence W. Newman is of counsel andDavid Zaslowsky is a partner in the New York office of Baker McKenzie. They can be reached at firstname.lastname@example.org and email@example.com, respectively. Nicholas Kennedy, an associate in the firm’s Dallas office, assisted in the preparation of this article.