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SCOTUS Advances Arbitrability Question in Recent Rulings

The U.S. Supreme Court has recently handed down two important decisions—Schein v. Archer & White and New Prime Inc. v. Oliveira—regarding the arbitrability of claims.

Schein v. Archer & White

In Schein v. Archer & White, the court provided clear guidance as to who decides whether a case stays at the courthouse or goes to arbitration. It held that courts may not use a “wholly groundless” exception to ignore a clause in the contract that delegated the question of arbitrability to the arbitrators. Courts must allow the contractual process to play out, even when they believe the argument for arbitrability to be frivolous.

In Schein, the parties’ contract said that they would arbitrate any dispute under the rules of the American Arbitration Association (AAA). Suit was filed and the defendant asked the trial court to send the case to arbitration. The plaintiff argued that the case should not go to arbitration because of an exception to the arbitration requirement found in the contract.

The parties disagreed over who should decide the issue arbitrability—whether the case should stay at the courthouse or go to arbitration. Important to the issue was that parties agreed to follow the AAA rules, which provided that arbitrator and not the court, should decide arbitrability. The defendant asked the court to rely up this portion of the AAA rules and send the case to the arbitrator to decide arbitrability. The plaintiff disagreed and argued that the court could decide the case, despite the contract, if it determined that the argument for arbitrability was “wholly groundless,” and the plaintiff asserted the “wholly groundless” exception.

Justice Brett Kavanaugh, in his first majority opinion, wrote the decision. He found that the “wholly groundless” exception that had been adopted by some courts did not square with the Federal Arbitration Act. He said that once the people who sign the contract agree that arbitrability should be decided under a certain procedure, the courts were duty-bound to follow it. So, in this case, if the parties agreed (by adopting the AAA rules) that the arbitrator should decide arbitrability, then the court could not create an exception—in effect rewriting the contract.

Adding to the intrigue, the court remanded the case back to the Fifth Circuit to decide whether the parties had in fact delegated the arbitrability question to the arbitrator—referencing a First Options of Chicago, Inc. v. Kaplan, 514 U. S. 938, 944 (1995)—that courts should not find that arbitrability has been delegated to the arbitrator unless there is “clear and unmistakable evidence” that is what they intended to do.

This distinction is important, because the parties did not delegate arbitrability in their contract; instead they referenced AAA rules that arguably contained the delegation. Many courts have said that referencing AAA rules is enough to find clear and unmistakable evidence of delegation. It will be interesting to see if the Fifth Circuit agrees.

New Prime Inc. v. Oliveira

The second case, New Prime Inc. v. Oliveira, in an opinion written by Justice Gorsuch, held that courts, and not arbitrators determine whether the Federal Arbitration Act applies, even if the contract has a delegation clause requiring arbitrators to decide arbitrability.

The Prime case held the Federal Arbitration Act does not apply to transportation workers. The case involved a class action brought by drivers who claimed they were not independent contractors. The company tried to force the case to arbitration, but the workers argued they were exempt from Section 1 of the FAA, which states that the FAA does not apply to interstate transportation workers. The Court also held that courts should decide the issue, not the arbitrators because the question was whether the statute applied, not interpretation of the contract.

Open Questions

These two cases answer some questions, but leave others open:

First, in Schein the Court dodged (and sent to the Fifth Circuit) the question of whether incorporation of arbitration rules that delegate arbitrability, are effective. Many lower cases have held they are.

Second, New Prime left in doubt whether arbitration agreements in owner-operator agreements can be enforced by a court, and whether independent contractor drivers can be required to arbitrate claims.

Even with those open questions, these two cases are significant additions to the body of case law governing arbitrability. Those of us in the arbitration bar will be watching how the cases and the issues they raise play out.

Mark Shank is senior counsel in the Dallas office of Diamond McCarthy LLP. A Fellow in the College of Commercial Arbitrators, Shank regularly serves as an arbitrator and mediator in business disputes, and is regularly asked to serve as an independent investigator. He is Board Certified in Civil Trial Law and Labor and Employment Law by the Texas Board of Legal Specialization. Shank can be reached at Mark.Shank@DiamondMcCarthy.com.