Antitrust Law Daily Arbitrability determination not delegated to arbitrator, due to carve-out clause
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Thursday, August 15, 2019

Arbitrability determination not delegated to arbitrator, due to carve-out clause

By Nicole D. Prysby, J.D.

The arbitration agreement’s clause excluding actions seeking injunctive relief from arbitration meant that for any action containing a claim for injunctive relief, the gateway arbitrability question was not delegated to an arbitrator.

An agreement that any dispute except actions seeking injunctive relief would be subject to arbitration under American Arbitration Association (AAA) rules, did not delegate the issue of arbitrability to an arbitrator for an action that contained claims for both injunctive relief and damages, the U.S. Court of Appeals in New Orleans decided in a case on remand from the U.S. Supreme Court. The dispute at issue involved antitrust claims brought by one dental products distributor against another. The plain language of the agreement incorporated AAA rules—and therefore delegated arbitrability—for all disputes except those under the carve-out. Given that carve-out, the contract did not evince a "clear and unmistakable" intent to delegate arbitrability. And even though the plaintiff also sought damages, the action was not subject to mandatory arbitration because the carve-out clause did not limit the exclusion to actions seeking only injunctive relief or to only claims for injunctive relief (Archer and White Sales, Inc. v. Henry Schein, Inc., August 14, 2019, Higginbotham, P.).

Plaintiff Archer and White Sales, Inc., distributor of low-cost dental equipment, alleged that Henry Schein, Inc., a leading distributor of dental equipment, took part in a conspiracy to terminate or reduce Archer and White’s distribution territory by engaging in an illegal boycott. Archer and White requested damages, estimated to be in the "tens of millions of dollars," and injunctive relief. The parties’ contract contained an arbitration clause and they disputed whether the claims were arbitrable.

The federal district court district in Marshall, Texas, held that the court should decide the question of arbitrability and that the dispute was not arbitrable because the plain language of the arbitration clause expressly excluded lawsuits including requests for injunctive relief. On appeal, the Fifth Circuit held that the claims were not subject to mandatory arbitration, basing the decision on the "wholly groundless" exception to arbitrability, that permits a court to decide the threshold question of arbitrability when the question was wholly groundless, even though the governing arbitration rules delegated arbitrability questions to the arbitrator.

On appeal from the Fifth Circuit, the U.S. Supreme Court overruled the "wholly groundless" exception, finding it to be inconsistent with the text of the Federal Arbitration Act (FAA) and with Supreme Court precedent. Under the FAA, arbitration is a matter of contract and courts must enforce arbitration contracts according to their terms, the Supreme Court noted. Parties may agree to have an arbitrator questions of arbitrability, such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.

Decision on remand. On remand, the Fifth Circuit considered whether the parties delegated the threshold arbitrability determination to an arbitrator and concluded that they did not. The parties’ agreement stated: "Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property...), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)].

Archer argued that if a case falls within the carve-out, the agreement did not incorporate the AAA rules and the gateway arbitrability question was not delegated to an arbitrator. Henry Schein took the position that the agreement’s incorporation of the AAA rules ended the inquiry and warned that to read the contract as Archer suggested would require the court to make a merits determination about the scope of the carve-out—whether this was indeed an action seeing injunctive relief—to answer the delegation question, precisely the category of inquiries a court was precluded from making in answering the delegation question. The Fifth Circuit sided with Archer, finding that it could not re-write the words of the contract and the most natural reading of the arbitration clause was that any dispute, except actions seeking injunctive relief, shall be resolved in arbitration in accordance with the AAA rules. The plain language incorporated the AAA rules—and therefore delegated arbitrability—for all disputes except those under the carve-out. Given that carve-out, the contract did not evince a "clear and unmistakable" intent to delegate arbitrability. The parties could have unambiguously delegated this question, but they did not.

The court also rejected Henry Schein’s argument that because the complaint sought both injunctive relief and damages, the court should read the carve-out to permit injunctive relief only as a preliminary matter to preserve the status quo pending arbitration. Otherwise, Henry Schein asserted, a party may tack on a vague request for injunctive relief to evade arbitration. That argument failed because the arbitration clause created a carve-out for "actions seeking injunctive relief," according to the court. It did not limit the exclusion to "actions seeking only injunctive relief" nor does it limit the carve-out to claims for injunctive relief. The mere fact that the arbitration clause permitted Archer to avoid arbitration by adding a claim for injunctive relief did not change the clause’s plain meaning.

The case is No. 16-41674.

Attorneys: Lewis T. Leclair (McKool Smith, PC) for Archer and White Sales, Inc. Christopher E. Ondeck (Proskauer Rose LLP) for Henry Schein, Inc. Jonathan Bradley Pitt (Williams & Connolly, L.L.P.) and Brett Christopher Govett (Norton Rose Fulbright US, L.L.P.) for Danaher Corp., Instrumentarium Dental, Inc., Dental Equipment, L.L.C., Kavo Dental Technologies, L.L.C. and Dental Imaging Technologies, Corp.

Companies: Archer and White Sales, Inc.; Henry Schein, Inc.; Danaher Corp.; Instrumentarium Dental, Inc.; Dental Equipment, L.L.C.; Kavo Dental Technologies, L.L.C.; Dental Imaging Technologies, Corp.

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