February 08, 2018 Practice Points

How (Not) to Carve Out Injunctive Relief from Arbitration Clauses

By D.C. Toedt III

When drafting an arbitration carve-out that would permit claims for injunctive relief to go to court instead of to arbitration, be careful not to exclude the entire action in which injunctive relief is sought.

A party brought a Sherman Act antitrust lawsuit seeking both damages and injunctive relief. The defendant moved to compel arbitration because of the following provision in an agreement signed by an alleged predecessor of the plaintiff:

Any dispute arising under or related to this Agreement (except for [i] actions seeking injunctive relief and [ii] disputes related to [intellectual property]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [AAA] . . .

 

Archer and White Sales, Inc., v. Henry Schein, Inc., No. 16-41674, slip op. at 2 (5th Cir. Dec. 21, 2017) (emphasis and bracketed romanettes added).

The Fifth Circuit affirmed the district court's refusal to compel arbitration, even while acknowledging that the incorporated AAA rules clearly delegated the question of arbitrability to the arbitrator. Because of the explicit carve-out of entire actions seeking injunctive relief, the court said, "the argument that the claim at hand is within the scope of the arbitration agreement is wholly groundless" and therefore "the district court may decide the gateway issue of arbitrability despite a valid delegation clause." Id. at 4 (emphasis added).

The arbitration clause creates a carve-out for “actions seeking injunctive relief.” It does not limit the exclusion to actions seeking only injunctive relief, nor actions for injunction in aid of an arbitrator’s award. Nor does it limit itself to only claims for injunctive relief. Such readings find no footing within the four corners of the contract. . . . We see no plausible argument that the arbitration clause applies here to an action seeking injunctive relief. The mere fact that the arbitration clause allows Archer to avoid arbitration by adding a claim for injunctive relief does not change the clause’s plain meaning. While ambiguities in the language of the agreement should be resolved in favor of arbitration, we do not override the clear intent of the parties, or reach a result inconsistent with the plain text of the contract, simply because the policy favoring arbitration is implicated.

Id. at 12–13 (cleaned up; emphasis in original).

The court elected not to address another argument—which might have provided a more straightforward path to the result, but the court seemed to want to reiterate and flesh out its wholly-groundless doctrine, which appears to have originated in Douglas v. Regions Bank, 757 F.3d 460, 464 (5th Cir. 2014):

There is a strong argument that the Dealer Agreement’s invocation of the AAA Rules does not apply to cases that fall within the carve-out. It is not the case that any mention in the parties’ contract of the AAA Rules trumps all other contract language. Here, the interaction between the AAA Rules and the carve-out is at best ambiguous. On one reading, the Rules apply to “[a]ny dispute arising under or related to [the] Agreement.” On another, the provision expressly exempts certain disputes and the Rules apply only to the remaining disputes. We need not decide which reading to adopt here because Douglas provides us with another avenue to resolve this issue: the “wholly groundless” inquiry.

Archer and White, slip op. at 8.

 

D.C. Toedt III is an attorney and arbitrator (tech contracts and IP) in Houston, Texas.


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