In Henry Schein, Inc. v. Archer & White Sales, Inc., (January 8, 2019), a decision written by Justice Kavanaugh, the Supreme Court unanimously ruled that:

Under the Federal Arbitration Act, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms. Rent-A-Center, West, Inc. v. Jackson, 561 U. S. 63, 67. The parties to such a contract may agree to have an arbitrator decide not only the merits of a particular dispute, but also “‘gateway’ questions of ‘arbitrability.’” Id., at 68–69. Therefore, 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.”

The Court noted that:

the Fifth Circuit and some other Courts of Appeals have determined that the court rather than an arbitrator should decide the threshold arbitrability question if, under the contract, the argument for arbitration is wholly groundless. Those courts have reasoned that the “wholly groundless” exception enables courts to block frivolous attempts to transfer disputes from the court system to arbitration.

The Court ruled:

The question presented in this case is whether the “wholly groundless” exception is consistent with the Federal Arbitration Act. We conclude that it is not. The Act does not contain a “wholly groundless” exception, and we are not at liberty to rewrite the statute passed by Congress and signed by the President. When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract. We vacate the contrary judgment of the Court of Appeals.

The Court went on to say:

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.

This decision reflects a strict, restricted reading of the Federal Arbitration Act and strong support for enforcement of contracts according to their terms. The case involved party adoption of American Arbitration Association arbitration rules that delegate issues of arbitrability to the arbitrator. Negotiators and drafters of contractual arbitration provisions will need to be more careful, aware and strategic as to the terms of their arbitration agreement provisions and the ADR agency rules they adopt.

Query: If the Court rejects a judicially crafted addition to the Act with regard to arbitrability issues at the front end of an arbitration, does it portend that judicially created additional grounds for vacature of an arbitration decision on “public policy”, unconscionability” and other judicially created grounds at the back end of an arbitration might also be rejected or restricted by the Supreme Court in the future?

The decision can be accessed at the following URL:

Employment arbitration agreement upheld over contract, unconscionability and statutory objections.

In Suzanne Young v. AMISUB of South Carolina, Inc. d/b/a Piedmont Medical Center, 2018 WL 5668619 (November 1, 2018), the U.S. District Court upheld an agreement to arbitrate that was made shortly after the employee was hired. After six years, the employee was terminated and the employee sought to invalidate the arbitration agreement on multiple grounds, including:

  • Failure of agreement;
  • Lack of consideration;
  • Unconscionability;
  • Violation of Title VII of the Civil Rights Act of 1964 and the Americans with Disabilities Act of 1990; and
  • Statutory preemption of civil rights and discrimination claims.

On the failure of agreement argument, the employee signed an “Acknowledgement” document shortly after being hired which contained an agreement to arbitrate all “claims”, adopted American Arbitration Association procedural rules and provided that the Employer would bear most of the arbitration costs. The Employer accepted the signed “Acknowledgment” but did not sign it. The Court found under those circumstances that a valid agreement had been made. The Court also had no problem finding sufficient consideration being exchanged from the employment relationship entered into and the mutual agreements made.

With regard to the unconscionability argument, the Court applied the rule that in order to establish an arbitration agreement as unconscionable, the claimant must show that both (1) she lacked a meaningful choice as to whether to arbitrate because the Agreement’s provisions were one-sided, and (2) the terms were so oppressive no reasonable person would make them and no fair and honest person would accept them. (See: Simpson v. MSA of Myrtle Beach, Inc., 373 S.C. 14, 24-25, 644 S.E.2d 663, 668 (2007)) The Court determined that the employee could not satisfy the second prong of the rule thereby rejecting the unconscionability argument.

As for the arguments that claims based upon anti-discrimination statutes are the exclusive responsibility of the courts and are not subject to contractual agreements to arbitrate such claims, the Court cited Circuit Court and Supreme Court precedents which supported the arbitrability of such claims. (Case analysis reported by Cheryl Shoun, Esq., Nexsen Pruet)

Ninth Circuit upholds sufficiency of arbitrator’s disclosure where a disappointed party failed to investigate public records and failed to inquire before proceeding with arbitration hearings.

[I]n 2009, plaintiffs American Brokerage Network and its owner Cung Thai (collectively, “ABN”) and American General Life and Accident Insurance Company (“AGLA”), a subsidiary of American International Group, Inc. (“AIG”), entered into a master general agent agreement, which was terminated in 2013. In 2015, ABN brought an arbitration under the rules of the American Arbitration Association (the “AAA”) against AGLA, AIG and later American General Life Insurance Company, successor to AGLA (collectively, “American General”), asserting claims of intentional interference with business relationships, breach of contract and breach of the implied covenant of good faith and fair dealing in connection with the agreement. Defendants counterclaimed for breach of contract and contractual indemnity. The sole arbitrator in the case made disclosures of certain relationships of her law firm with defendants and their subsidiaries. ABN asked no questions about her disclosures and she was accepted as arbitrator. In June 2016, the arbitrator dismissed AIG from the case. Thereafter, in September 2016, after ten days of testimony and other evidence, the arbitrator issued a Final Award, denying both sides’ claims for relief. After receiving the Award, ABN learned, through public records, of alleged undisclosed relationships between the arbitrator’s law firm and defendants’ alleged subsidiaries. ABN then moved in the California district court to vacate the Final Award due to the alleged incomplete disclosures. In June 2017, the district court granted the motion to vacate, finding that the arbitrator breached her duties of disclosure and investigation, and that the nondisclosures created a reasonable impression of bias, and that ABN did not waive its right to challenge the arbitrator. Defendants appealed to the Ninth Circuit.

The Ninth Circuit overturned the California district court’s decision, noting that “[g]iven the arbitrator’s disclosure that AIG was a former client of her firm, ABN had some duty to inquire about the nature of that relationship.” But the Ninth Circuit further noted that “ABN asked no questions and proceeded with the hearing.” According to the Court, “the laborious efforts required to discover the undisclosed relationships give credence to the reasonableness of the arbitrator’s investigation.” Finally, the Court held that “the undisclosed relationships, considered in the light of those the arbitrator did disclose, are insufficient to create a ‘[r]easonable impression of partiality.’” Thus, the Ninth Circuit reversed the California district court’s decision and remanded the case to the district court with instructions to enter judgment confirming the arbitration award.

American Brokerage Network and Cung Thai v. American General Life Insurance Co., No. 3:16-cv-06952 (9th Cir. Nov. 30, 2018). (Case analysis written by Jeanne Kohler. Carlton Fields. (With thanks to Paul Lurie, Chicago.))