The U.S. Supreme Court has long held that parties may agree to have an arbitrator decide not only the merits of a dispute but also gateway questions of arbitrability – such as the validity and scope of their arbitration agreement – where such delegation of authority to the arbitrator in the parties’ agreement is "clear and unmistakable". If the clear-and-unmistakable standard is not met, the U.S. rule has been that a court may intervene and decide the arbitrability question. What exactly constitutes "clear and unmistakable" delegation, however, still remains undefined and largely depends on the context and interpretation. Courts around the country have attempted to define the correct legal standard in multiple conflicting decisions, which show a lack of uniform understanding of who is competent to decide what.
One central question remaining unsettled is whether incorporation by reference of institutional rules in arbitration clauses constitutes clear and unmistakable evidence that the parties agreed to delegate the arbitrability issues to the arbitrator. Another related question is whether an arbitration agreement that carves out certain issues (e.g. injunctive relief) from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to the arbitrator.
In a 2019 decision, Henry Schein, Inc v Archer & White Sales, Inc, 139 S.Ct. 524 (2019), the Supreme Court had an opportunity to bring clarity to these two issues. Unfortunately, the Court did not directly address either question, leaving lower courts to grapple with various aspects of competence-competence. In Henry Schein, the dispute resolution clause provided for arbitration under AAA rules "except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Schein]". The Supreme Court held that "[w]hen the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract." But the Court went on to state, "[w]e express no view about whether the contract at issue in this case in fact delegated the arbitrability question to an arbitrator." Thus, the Court did not address the interplay between the delegation provision and the carve-out provision. That matter was remanded to the Fifth Circuit. On remand, the Fifth Circuit Court of Appeals reverted to the district court’s position, concluding that the question of arbitrability was to be decided by the court rather than the arbitrator because the carve-out provision in the arbitration clause negated the delegation provision referring to the AAA rules. It then proceeded to determine that the entire action was non-arbitrable. The Supreme Court first granted certiorari and then dismissed it as improvidently granted, allowing the Fifth Circuit’s decision to stand. The Henry Schein saga, with its long, multilayered appellate history, vividly illustrates the circular conundrum of a power struggle between courts and arbitral tribunals.
Since most arbitration agreements reference institutional arbitration rules (AAA, CPR, JAMS, etc.), much of the debate focuses on the issue of incorporation by reference. The overwhelming majority of federal appellate courts have held that reference to such rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability. But state courts have been less uniform. Ten of the fifteen state supreme courts that have addressed the issue have agreed that incorporation of the AAA (or similar) rules is sufficient to delegate the arbitrability question to the tribunal, while the remaining five have held that incorporation by reference may or may not be sufficient, depending on particular circumstances. And at least one court has held that when an agreement merely refers to the AAA rules – without explicitly stating that the arbitration is to be governed by those rules – it does not meet the high standard of clear and unmistakable delegation.
Most courts have held that the clear-and-unmistakable test is met when an arbitration agreement applies broadly to all possible claims without carving out any specific claims – such as a provision allowing injunctive relief by a court. But courts are split on the effect of incorporation by reference when it is accompanied by a carve-out provision. The Second Circuit, for example, reached a similar result as the Fifth Circuit in Henry Schein, holding that carve-out language creates sufficient ambiguity to prevent the arbitrability question from being decided by the arbitrator. In contrast, the Eleventh Circuit and the Kentucky Supreme Court both have held that by agreeing to arbitrate in accordance with the AAA rules the parties clearly and unmistakably delegated questions of arbitrability to an arbitrator, even though the arbitration clauses at issue in both cases included a carve-out for certain claim types.
The AAA recently attempted to bring some clarity to the conundrum by adding language to AAA Commercial Rule 7(a) in its 2022 revision. The prior version of that rule provided that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction …", but the new version adds, "without any need to refer such matters first to a court." It is too early to tell whether this revision will provide its intended clarity.
Who decides arbitrability can have a profound impact on the efficiency of dispute resolution. It implicates enforcement of the parties’ intentions and contractual obligations, as well as their right of access to courts. If arbitrability is determined by an arbitrator, it will be subject to only the limited review given to arbitration awards. But if this determination is made by a court, the result could be prolonged litigation, allowing parties to avoid or delay their commitment to arbitrate.
Given the expansive use of arbitration in the U.S., finding the right balance between public and private adjudication of arbitrability is critical. It appears, however, that the confusion will continue until the Supreme Court takes a more decisive stand. Meanwhile, as U.S. courts wrestle with the competence-competence doctrine, they should always be mindful of its core purpose – efficiency – and should expedite their procedures and decisions accordingly.
