The US Supreme Court recently issued its decision in Henry Schein v Archer & White. The court’s decision abolishes the “wholly groundless” doctrine, which served as a judge-made exception to the general rule that delegated gateway issues of arbitrability are properly resolved first in arbitration. In this respect, the court’s unanimous opinion is an uncontroversial affirmation of the principle that arbitration agreements are enforced according to their terms. On closer examination, however, Schein also reserves the question about the proper allocation of decision-making authority between courts and arbitral tribunals in circumstances where parties have agreed in their arbitration clauses to the application of a set of arbitration rules.
Some context is first necessary. US arbitration jurisprudence distinguishes between “gateway” and “non-gateway” issues of arbitrability. Gateway issues are issues implicating consent to arbitration that a court will presumptively resolve itself if called upon to do so. “Non-gateway” issues are those issues that a court will leave for arbitral resolution even if it is asked to decide the point. Gateway issues include the existence, validity and scope of an arbitration agreement. Non-gateway issues include whether a condition precedent to arbitration has been fulfilled, and whether a claim sought to be resolved by arbitration is timely. These lines are often blurry, and the characterisation of a jurisdictional issue as either gateway or non-gateway is not always straightforward. Nonetheless, US courts pay particular attention to gateway issues because such issues go to the heart of consent to arbitration, and thus to the legitimacy of arbitral jurisdiction.
Under the Supreme Court’s decision in First Options v Kaplan, courts will abstain from deciding gateway issues if parties have “clearly and unmistakably” agreed that such issues be delegated for arbitral resolution. Before Schein, some circuit Courts of Appeals had begun to recognise an exception to the First Options rule in the “wholly groundless” doctrine; courts would derogate from the general rule that delegated gateway issues are for arbitral resolution where the defendant’s argument in favour of arbitration was “wholly groundless.”
Schein involved an antitrust dispute arising out of a distributorship agreement, which in turn contained a dispute resolution clause calling for arbitration “in accordance with the arbitration rules of the American Arbitration Association” (AAA Rules). Archer & White sued Henry Schein Inc. and its co-defendants (together, the defendants) in district court, and the defendants moved to compel arbitration on the basis of the above-mentioned dispute resolution clause. The salient question was who, court or arbitrator, should decide the gateway issue of whether the parties agreed to arbitrate antitrust claims.
Defendants argued that the dispute resolution clause’s incorporation by reference of the AAA Rules was sufficient to delegate the matter for arbitral resolution. This was on the theory that the AAA Rules contained a garden-variety kompetenz-kompetenz provision, which stated in relevant part that:
[T]he 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.
Archer & White invoked the “wholly groundless” exception to the First Options rule, and argued that the district court could decide the gateway issue notwithstanding the purported delegation contained in the AAA Rules.
While accepting that the parties had delegated the gateway issue, the district court agreed with Archer & White that a “wholly groundless” exception existed, and denied the defendants’ motion to compel arbitration on that basis. The Court of Appeal for the Fifth Circuit affirmed, but on the basis that the defendant’s argument for arbitration was wholly groundless. The Fifth Circuit specifically avoided deciding whether or not the parties had in fact delegated the gateway issue. The Supreme Court granted certiorari to resolve whether the “wholly groundless” exception was compatible with the US Federal Arbitration Act (FAA).
The Supreme Court unanimously held that it was not. In an initial step, the court noted that “[u]nder the [FAA], arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms,” and that “an agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce.” The court then added that it “must interpret the Act as written, and the Act in turn requires that [it] interpret the contract as written.” Accordingly, the court held that in circumstances where parties have delegated a gateway issue for arbitral resolution, “a court possesses no power to decide the [ ] issue… even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.”
In so holding, the court extinguished the “wholly groundless” exception that had gained traction in some Courts of Appeals, and affirmed the principle under US law that arbitration agreements are enforced according to their terms. The court’s holding reinstates a degree of certainty over the allocation of kompetenz-kompetenz between courts and arbitrators in circumstances where a First Options delegation has been made, and assuages concern about protracted litigation over an open-textured “wholly groundless” standard before an arbitration has even commenced.
The court, however, expressly left open the anterior question of whether agreeing to the application of a set of arbitration rules containing a kompetenz-kompetenz provision is sufficient to constitute the “clear and unmistakable” evidence of intent necessary to delegate gateway issues for arbitral resolution. The court acknowledged the issue, but was procedurally constrained by the fact that the Fifth Circuit did not decide the issue in the proceedings below:
“We express 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.’ On remand, the Court of Appeals may address that issue in the first instance… (internal citations omitted)”
While seemingly innocuous, the court’s statements above were likely prompted by an important amicus curiae brief submitted by Professor George A. Bermann. In his amicus brief, Professor Bermann argues that incorporating by reference arbitration rules containing a kompetenz-kompetenz provision should not be sufficient to delegate gateway issues. In particular, Professor Bermann doubts whether kompetenz-kompetenz provisions in arbitration rules were even intended to have the effect of conferring upon arbitrators the exclusive jurisdiction to decide gateway issues, as well as whether their mere incorporation by reference in an arbitration agreement is sufficiently probative of the “clear and unmistakable” intent required by First Options.
The issue is important and ripe for consideration, given that the practice of incorporating arbitration rules by reference in arbitration agreements is ubiquitous, and most modern arbitration rules contain kompetenz-kompetenz provisions. A majority of Courts of Appeals in the US have found a clear and unmistakable intent to delegate gateway issues in the mere incorporation of the relevant rules. However, a minority of courts and the American Law Institute’s draft Restatement of the US Law of International Commercial and Investor-State Arbitration (of which Professor Bermann is Chief Reporter) take the opposite view.
In flagging the issue for the Fifth Circuit on remand, the Supreme Court may have signaled an intention to overturn the majority position amongst Courts of Appeals. Should that be the case, parties wishing to reserve for arbitrators in the first instance all questions of kompetenz-kompetenz (whether gateway or non-gateway) would do well to include an express delegation clause in their arbitration agreement that reserves for arbitrators the exclusive right to do so.