Antitrust Law Daily High Court to review arbitrability question in distributor dispute, again
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Monday, June 15, 2020

High Court to review arbitrability question in distributor dispute, again

By Peter Reap, J.D., LL.M.

The Supreme Court will revisit the arbitrability implications of the arbitration clause in a dental products distribution agreement, having granted Henry Schein, Inc.’s petition for review.

The U.S. Supreme Court has decided to review a decision of the U.S. Court of Appeals in New Orleans, rejecting arbitration in a boycott case involving dental products manufacturers and distributors. The Court on June 15 granted a petition for certiorari filed by defending dental products distributor Henry Schein, Inc., which argued that there is an entrenched conflict between appellate courts on the question of whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator. Henry Schein was sued by rival dental products distributor Archer and White Sales for participating in a boycott. In 2019, the High Court vacated the Fifth Circuit’s first decision that the underlying boycott claims were not subject to arbitration. The Court also denied a conditional cross-petition filed by Archer and White Sales, that asked the Court to take up two additional questions if it decided to accept Henry Schein’s petition for review (Henry Schein, Inc. v. Archer and White Sales, Inc., Dkt. No. 19-963, and Archer and White Sales, Inc. v. Henry Schein, Inc.Dkt. No. 19-1080).

Procedural history. In its complaint, Archer and White Sales, distributor of low-cost dental equipment, alleged that Henry Schein—a leading distributor of dental equipment—and dental equipment manufacturer Danaher Corporation conspired with others to terminate or reduce Archer and White’s distribution territory in response to its low prices by engaging in an illegal boycott, in violation of Section 1 of the Sherman Act and the Texas Free Enterprise and Antitrust Act. Archer and White requested damages and injunctive relief.

A federal district court 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. Specifically, the clause at issue provides: "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)]." The defendants then appealed that decision to the Fifth Circuit, which reasoned that if an assertion of arbitrability is deemed to be "wholly groundless," a court "need not submit the issue of arbitrability to the arbitrator." Under that "wholly groundless" exception, it decided that there was no plausible argument that the arbitration clause applied to Archer and White’s action because the lawsuit sought injunctive relief.

The Supreme Court overruled the "wholly groundless" exception to arbitrability that the Fifth Circuit had based its decision upon. The case was remanded to the Fifth Circuit with the High Court expressing no view as to whether the contract at issue did in fact delegate the arbitrability question to the arbitrator. On remand the Fifth Circuit issued the ruling at issue, holding that the parties did not clearly and unmistakably delegate the question of arbitrability to an arbitrator. 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. Earlier this year, the Supreme Court stayed proceedings in the case.

Petition granted. Henry Schein argued that its petition should be granted because there is an entrenched conflict between appellate courts on the question of whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator. One federal court of appeals (the Ninth) and one state court of last resort (the Kentucky Supreme Court) have held that, because the question of whether a provision exempts a particular claim from arbitration is itself a question of arbitrability, the arbitrator must decide that question once the moving party has demonstrated the existence of a clear and unmistakable delegation. In contrast, like the Fifth Circuit in this case, one other federal court of appeals (the Second) and one state court of last resort (the Delaware Supreme Court) have held that the presence of such a carve-out provision negates an otherwise clear and unmistakable delegation. The only realistic prospect to resolve this conflict was intervention by the High Court, according to the petitioner.

Furthermore, the decision below by the Fifth Circuit was clearly wrong and could not be allowed to stand, the petitioner contended. Despite the Supreme Court’s clear holding that parties are free to delegate threshold disputes of arbitrability to an arbitrator, the Fifth Circuit refused to enforce the delegation at issue in this case. The Fifth Circuit accepted that the incorporation of the AAA rules in the parties’ agreement provided the requisite clear and unmistakable evidence that the parties intended to delegate at least some questions of arbitrability to an arbitrator. However, then the Fifth Circuit ruled that the presence of a carve-out provision exempting certain claims from the scope of the arbitration provision negated that otherwise clear and unmistakable evidence as to the exempted claims. In particular, the court concluded that the carve-out for "actions seeking injunctive relief" exempted such actions not only from the broader arbitration provision, but also from the incorporation of the AAA rules and thus from the delegation. Next, apparently based on a determination that this case involves an action() seeking injunctive relief," the Fifth Circuit ruled that the parties delegated the dispute over that very question to the arbitrator.

The appellate court’s logic was deeply flawed, in the petitioner’s view. It conflated the question of who decides arbitrability with the question of whether the dispute is arbitrable—questions that the Supreme Court has made clear are analytically distinct.

The question presented for review was whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.

Cross-petition denied. Archer and White Sales contended in its cross petition, that the question presented by Henry Schein was unworthy of review. However, if the Court granted that petition, it should also grant Archer’s conditional cross-petition to decide two additional questions.

Those two conditional questions were:

  1. Whether an arbitration agreement that identifies a set of arbitration rules to apply if there is arbitration clearly and unmistakably delegates to the arbitrator disputes about whether the parties agreed to arbitrate in the first place.
  2. Whether an arbitrator or a court decides whether a nonsignatory to an arbitration agreement can enforce the arbitration agreement through equitable estoppel.

Archer argued that the first question of whether the agreement delegates any arbitrability disputes is logically antecedent to cross-respondent’s question presented. A conflict exists among the lower courts regarding whether and under what circumstances implied delegation is sufficient to satisfy this Court’s "clear and unmistakable" delegation test, it said. Further, as to the second question, whether that delegation extends to deciding whether a nonsignatory can invoke an arbitration agreement, lower courts are in disagreement whether the court or the arbitrator decides that question.

For details about these and other petitions and cases pending before the Supreme Court, please consult the Antitrust Law Daily Supreme Court chart.

Attorneys: Kannon K. Shanmugam (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Henry Schein, Inc. Lewis T. LeClair (McKool Smith, P.C.) and Daniel L. Geyser (Geyser P.C.) for Archer and White Sales, Inc.

Companies: Henry Schein, Inc.; Archer and White Sales, Inc.; Danaher Corp.

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