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SCOTUS Loves Arbitration?—It's Not That Simple

UGA Law Dean Bo Rutledge (left) and Amanda Newton (Photo: John Disney/ ALM)
UGA Law Dean Bo Rutledge (left) and Amanda Newton (Photo: John Disney/ ALM)

UGA Law Dean Bo Rutledge (left) and Amanda Newton (Photo: John Disney/ ALM)

Conventional narratives often depict the Supreme Court as displaying an unflinching sympathy for arbitration. Like most conventional narratives (about the court and otherwise), this one contains an element of truth but masks a much more complex, if subtle, pattern in its jurisprudence. Two recent decisions by the Supreme Court—Henry Schein, Inc. v. Archer & White Sales, Inc. and New Prime, Inc. v. Oliveira—magnify this understated, yet critical, distinction.

The Schein Decision

The dispute in Schein arose in the context of two parties who contractually agreed to submit certain disputes to arbitration but disagreed about the arbitrability of a particular dispute. The Schein court was tasked with answering whether the parties’ contractual agreement to arbitrate applied to the "gateway question of arbitrability." In other words, who decides whether the particular dispute is subject to arbitration—the court or an arbitrator?

In 2010, the Supreme Court in Rent-A-Center, West, Inc. v. Jackson applied the Federal Arbitration Act to the gateway question of arbitrability and found that parties could agree to have an arbitrator decide this threshold inquiry. The court relied on its earlier holding in First Options of Chicago, Inc. v. Kaplan, where it found that parties generally presume that an arbitrator, not the courts, will resolve disputes regarding the use of arbitration, absent express contractual language to the contrary.

Despite the court’s decision in First Options and Rent-A-Center, some lower courts, including the Fifth Circuit in Schein, found that, where the argument in favor of arbitration was "wholly groundless," the court could decide the threshold question of arbitrability. The Fifth Circuit rationalized that courts would conduct a more-efficient threshold inquiry and that judicial efficiency outweighed the parties’ contractual agreement to delegate arbitrability questions to an arbitrator if the controversy was frivolous.

In the first opinion by Justice Brett Kavanaugh, the Supreme Court in Schein rejected the Fifth Circuit’s efficiency rationale as “dubious” and admonished it for attempting to “weigh the merits of the grievance.” The court reminded lower courts that they “must respect the parties’ decision as embodied in the contract,” especially in light of the express language of the FAA. Doing so put lower courts on notice that the "wholly groundless" exception to the gateway question of arbitrability is not a viable one. More broadly, the decision also furthered the general belief that the court would support parties’ agreements to arbitrate.

The Court in New Prime

One week after the Court published Schein, it issued its decision in New Prime, Inc. v. Oliveira. In New Prime, the court considered the scope of the ‘transportation’ exception to the FAA’s interstate commerce rule, a hotly-contested issue since the court’s decision in Circuit City Stores, Inc. v. Adams. The FAA generally requires courts to enforce arbitration agreements involving interstate commerce, but Section 1 of the FAA exempts contracts for transportation employees. The New Prime court found that a truck driver whose contract was structured in a manner similar to an independent contractor was nonetheless considered an employee for the purposes of the transportation exception to arbitration. In other words, the court unanimously found that these independent contractors could not be forced into mandatory arbitration based on the structure of their contracts.

Importantly, the New Prime court found that a court could determine whether the FAA’s Section 1 exclusion applied to the dispute, even where the parties’ contracting agreement designated an arbitrator to resolve this threshold inquiry. The Schein court had said that courts must enforce a contract delegating "gateway questions of arbitrability" to an arbitrator. Here, however, the court found that, when interpreting a provision of the FAA (rather than a contractual provision as in Schein), the decision is not automatically one for an arbitrator. Put more succinctly, what Jackson and Schein giveth, New Prime taketh a bit away.

The Court’s View of Arbitration Moving Forward

Though the Schein and New Prime decisions do not directly contradict one another (nor does New Prime reference Schein), the court’s willingness to read the FAA exception broadly in New Prime illustrates the subtle complexity in the Supreme Court’s arbitration jurisprudence and belies over-simplistic (if simple) narratives about its pro-arbitration bias. We have been here before. Nearly a decade ago, when decisions like AT&T v. Concepcion caused stirs about the court’s supposed pro-arbitration bias, the court also handed down Granite Rock Co. v. International Brotherhood of Teamsters, which reaffirmed a court’s power to resolve a dispute over the meaning of a collective bargaining agreement containing an arbitration clause.

As in prior eras of this complex jurisprudence, court watchers can expect to await additional signs about another subtlely complex area of the court’s arbitration jurisprudence, namely the law applicable to the interpretation of an arbitration agreement. The same month that the court heard oral arguments in Schein and New Prime, it also heard oral arguments in Lamps Plus, Inc. v. Varela.

Lamps Plus presents the question of whether either state law or federal common law—grounded in the FAA—should control the interpretation of arbitration agreements, an issue with vestiges in some of the court’s most important modern arbitration decisions like Prima Paint. Quipping during oral arguments that the “FAA is not a suicide pact,” Chief Justice John Roberts (who coincidentally argued First Options when he was a Supreme Court litigator) questioned the applicability of arbitration to class action claims.

Argued the same day as Schein, the Lamps Plus decision is expected shortly. The bar should watch carefully for how the court, in the wake of New Prime, examines the enforceability of an agreement to arbitrate.

Peter B. “Bo” Rutledge is dean of the University of Georgia School of Law, where he holds the Herman Talmadge Chair of Law. A former clerk to U.S. Supreme Court Justice Clarence Thomas, Rutledge pursues teaching and research of international dispute resolution, arbitration, international business transactions and the U.S. Supreme Court.

Amanda W. Newton is a third-year law student and research clerkship and merit scholarship recipient at the University of Georgia School of Law. In addition to serving as a research assistant for the dean of the law school, she is a member of the executive board on the Journal of Intellectual Property Law, a representative on the Honor Court and a dean’s ambassador.