≡ Menu

Incorporating AAA arb­i­tra­tion rules? Then the arb­i­tra­tor must screen all demands for arbitration — even for claims that seem in­dis­pu­tably not arbitrable

Many arbitration agreements adopt the American Arbitration Association’s rules, especially the AAA’s Commercial Arbitration Rules. In those rules, Rule R-7(a) explicitly gives the arbitrator “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 or to the arbitrability of any claim or counterclaim.” (Emphasis added.)

The likely upshot of a unanimous decision of the U.S. Supreme Court is that, if parties adopt rules such as AAA Rule R-7, and those rules “clear[ly] and un­mis­tak­abl[y]” delegate arbitrability determinations to the arbitrator, then all demands for arbitration must be run through the arbitration process at least to determine arbitrability — even if a particular demand for arb­i­tra­tion seems clearly excluded by the language of the arbitration provision it­self. See Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 (U.S. Jan. 8, 2018), reversing 878 F.3d 488 (5th Cir. 2017).

In Henry Schein, the arbitration provision in the contract expressly ex­clu­ded demands for injunctive relief:

Disputes. This Agreement shall be governed by the laws of the State of North Carolina. 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 of [Schein]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)].

Id., slip op. at 2 (citation omitted, italics added).

One of the parties sued the other in court, demanding injunctive relief (among other things) The defendant moved to compel arbitration.

A magistrate judge ruled that the arbitration provision’s incorporation of AAA rules had the effect of clearly delegating the arbitrability decision to the arb­i­tra­tor. The district judge reversed, however, and the Fifth Circuit affirmed the district judge’s ruling, on the basis that the injunctive relief carve-out in the arbitration provision made the arbitration demand “wholly groundless.” See 878 F.3d at 491.

But then, in an opinion by Justice Kavanaugh, the Supreme Court unan­i­mous­ly vacated and remanded the Fifth Circuit’s decision. While the Court ex­pressed no view whether the contract actually did delegate arbitrability de­ter­min­a­tions to the arbitrator, see slip op. at 8, it held that the “wholly ground­less” ex­cep­tion cited by the Fifth Circuit was inconsistent with the Federal Arbi­tra­tion Act. See id at 5.

(The Court was untroubled by the prospect of the case being ping-ponged between arbitration and litigation. See id. at 7.)

Drafting lesson: If your arbitration provision adopts rules that delegate arb­i­tra­bil­i­ty de­ci­sions to the arbitrator, then you might want to consider whether that’s what you want — and if not, then stating explicitly in your arbitration provision that the court, not an arbi­tra­tor, is to determine whether particular claims are arbitrable.

On Contracts is Stephen Fry proof thanks to caching by WP Super Cache