Courthouse Steps Oral Argument Teleforum: Henry Schein Inc. v. Archer and White Sales Inc.

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.

 

Nick Marr:  Welcome, everyone, to The Federalist Society's Teleforum conference call as this afternoon, December 11, 2020, we have a Courthouse Steps Oral Argument Teleforum on Henry Schein Inc. v. Archer and White Sales Inc. I'm Nick Marr, Assistant Director of Practice Groups at The Federalist Society.

 

      As always, please note that expressions of opinion on today's call are those of our expert.

 

      We're joined this afternoon by Erika C. Birg. She's a Partner at Nelson Mullins Riley & Scarborough. She's also an arbitrator on the commercial panel with the American Arbitration Association.

 

      After Erika gives her opening remarks and covers the oral arguments, we'll have some time for audience questions, so be thinking of those as we go along—or maybe you brought them to the call—and be ready to ask questions at that time.

 

      Thanks for being with us this afternoon, Erika. I'll hand the floor off to you.

 

Erika C. Birg:  Great. Thank you, Nick. It's a pleasure to be with everyone today to talk about arbitration, and more particularly, the apparently hot-button issues from the Supreme Court's perspective. Who decides whether a particular legal claim is subject to arbitration? The court or an arbitrator?

 

      This is also known as arbitrability, and the question is usually framed as whether the parties delegated to arbitration the question of arbitrability. You'll hear me use those terms—delegation and arbitrability—throughout.

 

      The Supreme Court held oral argument in Henry Schein Inc. v. Archer and White Sales Inc. on Tuesday, December 8, 2020. This was the case's second appearance before the court with oral argument by the same attorneys playing out about two years and six weeks from their first round with the justices.

 

      This case made its reappearance following the Fifth Circuit's decision on the question asked by the Supreme Court in an opinion written by Justice Kavanaugh on remand: whether the contract at issue in this case, in fact, delegated the arbitrability question to an arbitrator.

 

      While I thought about just preparing a dramatic reading of Judge Patrick Higginbotham's opinion for the Fifth Circuit because it presents the factual and procedural background thoroughly, I'll endeavor to give you how this case has been tied up for the last eight years without proceeding on the merits because of a parenthetical in the arbitration agreement.

 

      That's a point that has not been lost on many commentators over the years. If this is something that interests you, I highly recommend first Judge Higginbotham's opinion for clarity in an otherwise unfathomable commercial litigation saga over an arbitration clause. That's at 935 F.3d 274.

 

      Archer and White is a family-owned dental equipment distributor. It sued Henry Schein Inc. and certain subsidiary corporations that manufactured dental equipment for anti-competitive conduct, bringing claims under federal and state antitrust law. So, then, how, do you ask, how could this be subject to arbitration?

 

      Well, Archer and White had signed a dealer agreement with one of Henry Schein's predecessors, Pelton & Crane. That dealer agreement has an arbitration clause. That arbitration clause provides "This agreement shall be governed by the laws of 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 Pelton & Crane) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association, AAA. The place of arbitration shall be in Charlotte, North Carolina."

 

      Only the middle sentence is at issue; 48 words, one sentence, and two trips to the Supreme Court. If that is not a warning to all who draft arbitration clauses, then I'm not really sure what would be.

 

      Archer and White sued in 2012, and Henry Schein moved to compel arbitration. The magistrate judge recommended granting the motion, finding that it was plausible that the parties agreed to delegate the question of arbitrability to the arbitrator in the first instance. Thus, the magistrate judge said, the dispute over whether the antitrust claim seeking injunctive relief should be decided in arbitration instead of court should itself be decided in arbitration.

 

      I know I just read you the clause. Do you remember the bit about delegation? Of course not because the word delegation or arbitrability do not appear in the clause at all. Instead, the key words that gave breadth to the magistrate judge's opinion were "any dispute," "except for," and "in accordance with the arbitration rules of the American Arbitration Association." The magistrate judge reasoned that "any disputes" included any disputes over the question of whether a dispute was subject to arbitration.

 

      Henry Schein wanted the question of whether the antitrust claims were arbitrable to be decided in arbitration. That's obvious. And we know that they wanted that, and we can guess why. I expect most of you know where I'm going. It's because arbitrators are known to be most likely to find a claim arbitrable.

 

      I want to affirm, as an arbitrator myself, that is not necessarily true, but I've run across, as an advocate, many an arbitrator who thinks exactly that way. Once they have a case, they will not let it go.

 

      So if Henry Schein wanted to take advantage of a number of the aspects of arbitration, which there are many that are favorable, the best way to secure that likelihood was to get an arbitrator to decide arbitrability in the first place.

 

      Going back to the clause, the analysis begins, as always, with the concept that saying "any disputes" is the broadest type of agreement to arbitrate. Then, comes the "except for," which is called a carve out from the broad agreement to arbitrate. It pulls only those types of claims mentioned from the default of arbitration. Here, the one that was at issue was the claims for injunctive relief.

 

Then, there is the reference to the American Arbitration Association, or AAA, rules, and I'll note that, in the argument, Justice Kavanaugh refers to it as the A-A-A, which is not commonly heard most places. I think people will know what you talk about if you talk about the AAA.

 

      That reference to the AAA rules is called an incorporation clause, and it has significant meaning because, under Rule 7(a) of the AAA rules, arbitrators have the right to decide their own jurisdiction, including arbitrability. So, if the AAA rules are incorporated, as the Fifth Circuit held, then by definition it would be assumed that the arbitrator, or panel of arbitrators, would decide arbitrability, if Henry Schein wanted.

 

      That means that an arbitrator would decide whether the antitrust claims specifically seeking injunctive relief should be subject to arbitration.

 

      So we have a magistrate judge's decision three years later accounting for some of the total eight-year history of the case. Judge Gilstrap in the Eastern District of Texas disagreed with the magistrate judge. Judge Gilstrap held that "any dispute" did not include disputes about arbitrability of actions involving injunction relief because of the carve out.

 

      I'm going to largely skip discussion of the first round at the Supreme Court in which the justices told the Fifth Circuit that they used the wrong standard. But on remand, the Fifth Circuit agreed with Judge Gilstrap. The parties had not agreed to submit the question of arbitrability to the arbitrator because of the carve out. Thus, the Fifth Circuit went on to decide arbitrability and found the claims not arbitrable. Not particularly surprising.

 

But, it goes on. Assuming that the incorporation of the AAA rules was a delegation of authority to the arbitrator to decide all arbitrability issues, the Fifth Circuit said that the carve out here was a carve out to that as well, meaning that the parties agreed to accept all claims within the carve out from all arbitration, including whether the claim itself was within the carve out.

 

That decision was generally in line with decisions from the Supreme Court of Delaware and the Second Circuit but contrary to decisions from the Ninth Circuit and the Supreme Court of Kentucky, and that's where the circuit split came out.

 

Henry Schein, obviously very concerned about proceeding in court or in front of Judge Gilstrap, perhaps, petitioned for cert with this question: Whether a provision in the agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.

 

Archer and White called that question unworthy of review and filed a cross petition asking the Court to answer these two questions instead. One, whether an arbitration agreement that identifies a set of arbitration rules to apply if there is an arbitration clearly and unmistakably delegates to the arbitrator disputes about whether the parties agreed to arbitrate in the first place, and, two, whether an arbitrator or court decides whether a non-signatory to an arbitration agreement can enforce the arbitration agreement through equitable estoppel. The argument being Henry Schein, since it was coming through a predecessor, was not a signatory.

 

Henry Schein's petition was granted, and Archer and White's petition was denied.

 

I'm going to pause here because the framing questions had a fairly significant impact during oral arguments. Because, although Archer and White's petition was denied, Archer and White spent considerable time on its question number one in its brief, a fact that Henry Schein's counsel noted repeatedly during oral argument and was discussed most prominently during arguments. I'd say most of the time was spent on this argument.

 

Archer and White's proposed question number two was not discussed, most likely because [inaudible 00:10:30] below is moot. Though, if this case returns, it appears that that question may survive for Archer and White to raise another day when they see a third round of this case at the Supreme Court.

 

Talking about the incorporation issue, the AAA rules, whether reference in an arbitration clause to the AAA rules amounts to clear and unmistakable evidence of the parties' agreement to delegate the issue of arbitrability to the arbitrator has been answered by many courts below without a significant amount of dispute.

 

Those courts say that incorporation of the AAA rules constitute "clear and unmistakable" delegation of authority to the arbitrator to rule on her own jurisdiction, including the arbitrability of any claims.

 

It was rather interesting that Archer and White pressed on it, but certainly can understand that Henry Schein's question presented it as assumed—they assumed that to be true—and the Supreme Court has never answered the question directly before. Now is a pretty ripe opportunity to get a direct answer given that Henry Schein as going to assume that it was answered, as the Fifth Circuit did.

 

But Archer and White's approach was met with a little bit of unfriendliness. Chief Justice Roberts certainly chided Archer and White's counsel saying, "I wish you'd just leave the AAA rules out of it. I think that's what we tried to do when we denied cert on that question."

 

But the attorney responded confidently, "If, in fact, the delegation is in the AAA rules, and the sentence says, on its face, that some disputes but not others are subject to the AAA rules, then there's no delegation." I have to admit, I kind of wanted to cheer for him at that point.

 

I'll see it through for another second before coming back to the justices' question, but one of the precedents much discussed during the case was First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) case. Chief Justice Roberts argued that case on behalf of the Kaplans, challenging the arbitrator's decision that the claim was arbitrable. The Chief won with a finding from the Court that his clients, the Kaplans, did not agree to arbitrate arbitrability. And that's where we actually get the "clear and unmistakable" evidence standard.

 

So, if Henry Schein wins here, I'll be very interested to see how Justice Roberts rules and if he drafts or joins in one of those opinions.

 

Going back to the point about incorporation, all was not lost for Archer and White on the point. Justice Barrett very much pressed Henry Schein's counsel on the question of incorporation. She asked whether they were enough to constitute that clear and unmistakable delegation of authority, particularly when there was the carve out.

 

By the sound of her questions, she did not seem decided on the notion that mere reference to the AAA rules was sufficient to decide the question. Of course, she was not on the Court at the time the petition for cert was granted.

 

I'm not alone, I think, in saying that one of the silver linings about the new form of the Supreme Court argument is hearing what Justice Thomas asked. His first question out of the box to the Henry Schein's counsel was geared towards helping him understand where the delegation clause existed. At first, I thought it was to challenge it, but in the end, I think it was intended to be a softball.

 

In sum, Henry Schein's counsel responded that "Under ordinary principles of contract formation, the incorporation of a document suffices in order to render that document part of the contract." And that was the point he stuck with in answering all of the questions.

 

But it did seem to trouble Justice Alito some. In his dialogue back with Archer and White's counsel, he acknowledged the problem created by not granting cert on Archer and White's question number one in the cross petition.

 

Justice Alito said, "Assume we are not going to decide that question of the effect of incorporation of AAA rules. He says, "Really, I don't know how to answer the question that we granted cert on because it does seem to turn on the degree of delegation to the arbitrator of the power to decide whether the arbitrator can decide." Sort of round robin. So, it's hard to tell how he's going to come out here, but it was very clear problematic that they didn't grant cert.

 

Turning back to the question as it was framed, it's interesting because it does assume that incorporation of the AAA rules and it is assumed that it will be considered clear and unmistakable evidence of delegation and that the parties wanted an arbitrator to decide arbitrability rather than a court.

 

Personally, I think it's preposterous. To think that most drafters have never read the AAA rules. More than a dozen courts may disagree with me, but in reality, I don't think folks who are putting arbitration clauses in their operating agreements or commercial contracts understand that they are thereby having that delegation occur and certainly their clients don't.

 

I think that this will be a wake-up call certainly if we find that the Court says it is unmistakable and clear.

 

Contrary to what the justices and Henry Schein think, I think it's a little absurd, and I was silently cheering for Archer and White's counsel to make some inroads there. But that put me in odd company with the plaintiff's bar. That was very much the amicus point is that employees should not be subject to that situation.

 

Looking at this, I think that the question there likely will remain unanswered. Given the number of times that the Court used the word "assumed" during argument, which was a lot, I don't think that the Court is going to reach it. I think that the Court is likely to find some way to craftily work around that.

 

But I do think that Archer and White's gutsy move to argue a point on which cert wasn't granted paid off because the justices definitely spent more time talking about that than talking about the question that Henry Schein had wanted the Court to focus on.

 

Again, I think that very few drafters have ever contemplated this question let alone discussed it with their clients, but I do hope that -- I think it’ll [inaudible 00:16:50] that the Court actually does get to that so that drafters can be aware of this very important point even if it might come out the other way than I might like.

 

I may have misled you a little bit on pausing because it really was the primary point of oral argument. The secondary thing was actually the one that Henry Schein wanted to talk about all along, and that was did the Fifth Circuit err because it failed to apply the presumption in favor of arbitrability once it found that the AAA rules were otherwise a clear and unmistakable delegation of the question of arbitrability to arbitration?

 

This was the issue because Henry Schein's point was that the Fifth Circuit was right up to the point when it decided arbitrability. It erred when it did not give a presumption in favor of arbitration.

 

The Fifth Circuit had ruled that the claim wasn't arbitrable, and Henry Schein was saying he should've found it was. Although several justices discussed this, Justice Kagan took it up. She really took presumptions and wanted to talk about them. She framed it sort of this way. First, we have the presumption in favor of arbitration, and that's the one Henry Schein wanted to do.

 

Then, she said, second, is the exception to that presumption for matters dealing with arbitrability, which is to presume that the court is to decide those matters unless there is this clear and unmistakable evidence. And then she said, "Henry Schein's trying to add a third, and that is that if there's any evidence of delegation, such as reference to the AAA rules, then there should be a presumption that the parties meant to delegate all arbitrability questions to the arbitrator instead of the court."

 

She understood Henry Schein's argument to be that if there is any evidence of a decision to arbitrate arbitrability, then it should be as to all claims, even carved out claims, because it would not make sense to do partial delegations of decision making on arbitrability—some to the court and some to arbitration—as Henry Schein's counsel said. It's just not workable. Nobody does that.

 

In rebuttal to that point, Henry Schein's counsel came back and said if a court is faced with deciding whether a party intended to delegate a decision regarding arbitrability to the arbitrator, then the court should apply this presumption in favor of arbitrability rather than in favor of the court making the decision.

 

Justice Alito clearly was dubious about the origin of the so-called presumption in favor of arbitrability. He asked Henry Schein's attorney for the basis, saying, "Where does the federal policy that produces a presumption in favor of arbitrability come from?" Counsel, like many arbitration practitioners would, admitted that the Court itself has never provided an explanation. It sort of came out sua sponte.

 

He wound through a potential answer, leading through some labor law decisions, never talking about legislative history, but generally, he just came up with a guess. There was no basis for the presumption that can be discerned from the Court's precedent.

 

Justice Gorsuch picked up on Justice Alito's point, asking why courts shouldn't just apply the law as written, which is following normal contract rules and trying to discern the parties' intentions. At that point, Henry Schein's counsel made what I thought was a rather odd reference to an article by Dean Cox noting that parties do not focus on arbitrability when drafting an arbitration clause. My point to you earlier.

 

But then he retreated back to his untethered "strong federal policy in favor of arbitration," but he admits it's of unknown origin. Justice Gorsuch went back and he focused on the statutory language, so we may see something here on that point.

 

Those were the two hot-button issues. One, delegation, which is not likely to be answered but assumed. And two, the applicability of presumptions in favor of arbitration, which likely will be answered, but probably in multiple opinions.

 

In the end, I see little chance of the Fifth Circuit being reversed given the contract language and the lack of clear intent to arbitrate claims that are carved out from arbitration in spite of the AAA incorporation clause, however, the Court may approach it.

 

While we're waiting for this decision, if drafting an arbitration clause, please make sure you decide who you want to decide arbitrability. If not, all disputes are subject to arbitration. That is definitely the takeaway from this oral argument in this case.

 

Nick, I'm happy to field any questions if there are any.

 

Nick Marr:  Great. Thank you. Erika, we have a question now.

 

Bob Fitzpatrick:  Hi. Bob Fitzpatrick. Fantastic presentation. Thank you. This is a very confusing case, to say the least. Let me try to frame the question this way. Let's assume that they don't bite the bullet on was the incorporation of the AAA rules a clear and unmistakable delegation but they just assume that that was the holding below. They didn't take cert on it so they're not going to touch that issue.

 

So, the issue, it sounds from what you're saying, are we going to adopt this presumption that no one could come up to satisfy Gorsuch that it has any case law or statutory basis? Or are we going to go with, it sounds like freedom of contract.

 

If they go with freedom of contract, does that take all the issue in the Court's lap of the "except for" clause? Or does it just only leave some part of the case in the Court's lap and another part of the case in the arbitrator's lap? Which is what I think-- certainly, clients don't want that, and I wouldn't think the Supreme Court wants to see the ball being in two different courts on the same case. So, I don't know if my question makes this even muddier or not.

 

Erika C. Birg:  It totally makes sense to me. No, it totally makes sense to me as somebody who follows these issues. First, I don't think they're going to bite the bullet. I don't think, given that they didn't grant cert on it; that they only granted cert with the question that assumed that to be the case, that incorporation -- and it was really just a reference to the AAA rules—"in accordance with"—that that will be sufficient to show, in most cases, clear and unmistakable delegation of the question of arbitrability to arbitration.

 

      I think they may approach it different ways, but I don't think that they will decide it given that they didn't grant cert on it.

 

      As to this presumption of arbitrability, that's where I think we will likely see, perhaps, more than one opinion on this because Justice Breyer seemed particularly interested in the origins of the presumption coming from labor law, and so we may see a split along that line. That there is some benefit to having that presumption for certainty and for commercial certainty to have that clear line.

 

      But if you do freedom of contract, I think that's the best way to go, personally, as somebody who spends time in this area. Draft the clause that you want to have. Don't draft a clause that leaves it to two different parties two different places.

 

I don't think they need to decide this particular case as saying that some cases the question arbitrability is delegated, in some cases it's through the courts, because, here, the clause is pretty clear as to the injunctive relief. There were two claims: there's a federal antitrust claim, a state antitrust claim. They both asked for injunctive relief. They're clearly claims seeking injunctive relief.

 

If there's no arbitration about injunctive relief claims, and an arbitrator cannot grant injunctive relief, then the parties—and this was actually a point that Chief Justice Roberts made quickly—then, clearly, they didn't expect the arbitrator to decide whether it's arbitrable to begin with because they didn't anticipate going to arbitration.

 

      So, I think that they can go to that freedom of contract point, get to a point where maybe there are two forums for deciding arbitrability, depending on what happens, without there being any real conflict.

 

Bob Fitzpatrick:  Can I interject?

 

Erika C. Birg:  I'm sorry. Go ahead.

 

Bob Fitzpatrick:  Yeah, Bob. Before a judge can -- if freedom of contract means that I wrote this contract and this contract means that a judge decides whether one side or the other gets an injunction, then the judge has to conduct a [inaudible 00:26:42] not an evidentiary hearing. Shouldn't that evidentiary hearing be conducted by the arbitrator?

 

But if it's conducted by the judge, then the judge makes a finding that there is a basis here or isn't a basis here for an injunction, and then the arbitrator decides damages? It seems a fool's errand.

 

Erika C. Birg:  Well, and that's -- I don't think that the question was framed that way, certainly at the Fifth Circuit. It’s a point that Henry Schein's counsel made, which is, sure, the injunctive relief is severable, but it should be only if it's in aid of arbitration.

 

      There are other defenses that Archer might have to arbitration that haven't been decided yet that have been put to the back. So, there's still a lot there, but it seems to me in this one that the fact that there is a colorable claim to injunctive relief because that is relief under the statute, the court would take the whole thing and not make a decision on sending part of it to arbitration.

 

      I don't think that Henry Schein is arguing that it would be able to have the case going in two places at the same time. I don't think they want that. I don't they've argued it. But it wouldn't be the first time to have seen it. There are many cases where the parties have multiple disputes and some of the claims are arbitrable, some of the claims aren't, and they proceed in parallel in the two forms. That is not uncommon. It is not welcome, certainly, because it's expensive, but that's what they wrote and that's what they get.

 

Bob Fitzpatrick:  Thank you.

 

Erika C. Birg:  Thank you.

 

Nick Marr:  So, Erika, we don't have any questions in the queue right now. If we get one, I'll let you know, but I'll send the floor back to you. Do you want to cover anything you didn't cover, or if you want to offer some closing remarks and end a bit early?

 

Erika C. Birg:  Yeah, closing remarks as I think that it's surprising to most folks that a 48-word sentence—now, maybe you shouldn't have a 48-word sentence—has made two trips to the Supreme Court.

 

To those who are listening, go to your transactional lawyers and let them know that this is an issue that they need to be considering. I think we're going to have a lot of law firm alerts and Listservs once this decision comes out so our transactional brethren know what to be on the lookout for when they're drafting those arbitration clauses. I may be sending gift copies of the AAA rules to all my corporate partners pretty soon.

 

      I do appreciate everybody joining today. It'll be interesting to see what happens.

 

      Thanks, Nick.

 

Nick Marr:  Great. Thank you very much, Erika. On behalf of The Federalist Society, I want to thank you for the benefit of your valuable time and expertise this afternoon, to our audience for calling in, for the excellent question we got. Be keeping an eye on your emails and our website for announcements about upcoming Teleforum calls and events. We have a busy week next week, so check those out.

 

      Thank you all for being with us here today, and Erika especially. Have a good weekend everyone. We are adjourned.

 

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.