December 26, 2019 Practice Points

New Henry Schein Decision Demonstrates Importance of Careful Drafting

The decision issues a warning that the wording of an arbitration clause and any carve-outs must be carefully written to avoid unnecessary disputes and/or unintended consequences.

By Mark Kantor

In Henry Schein, Inc. v. Archer and White Sales, Inc., the U.S. Supreme Court rejected a “wholly groundless” exception to its general principles allocating arbitrability issues between court and arbitrator. The Court then sent the case back to the Fifth Circuit for reconsideration. 

On August 14, 2019, the Fifth Circuit issued its new opinion in that case (Archer and White Sales, Inc. v. Henry Schein, Inc., No. 16-41674, Aug. 14, 2019. There, the Fifth Circuit concluded that the parties’ arbitration clause did not clearly and unmistakably allocate the question of arbitrability to the arbitrators. The court then held that, based on an exclusion in the clause for “actions seeking injunctive relief” the dispute in question was not arbitrable. The Fifth Circuit relied on contract interpretation principles to reach this result and thereby emphasized the importance of precise drafting of arbitration clauses and any exceptions.

Archer and White Sales, Inc. (Archer) brought an antitrust complaint against Henry Schein, Inc. and others for anticompetitive practices and sought both money damages and injunctive relief. Archer argued that the case was not subject to arbitration due to an exclusion in the parties’ arbitration clause which read:

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)].

(Emphasis added.)

Under AAA Commercial Arbitration  Rule 7(a), “[t]he arbitrator shall have 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.” However, the Fifth Circuit interpreted the parties’ arbitration clause to exclude actions seeking injunctive relief from arbitration. Thus, Rule 7(a) did not come into play, and the parties had not clearly and unmistakably delegated the issue of arbitrability of an action seeking injunctive relief to the arbitrator.

The Fifth Circuit began its analysis in the customary two-step fashion, asking first if there is any arbitration agreement at all and thereafter considering whether the particular claims were covered by the arbitration agreement. The parties agreed that there was an arbitration agreement, so the court focused on the second step of the analysis:

When considering whether there was a valid delegation, “the court’s analysis is limited.” . . . we turn to the delegation clause and ask “whether the purported delegation clause is in fact a delegation clause—that is, if it evinces an intent to have the arbitrator decide whether a given claim must be arbitrated.” When determining that intent, “[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clear and unmistakable’ evidence that they did so.” If there is a valid delegation, the court must grant the motion to compel.

Archer and White argued that the arbitrability issue was for the courts to make whereas Henry Schein argued that, by operation of AAA Commercial Arbitration Rule 7(a), the parties had expressly delegated that issue to the arbitrator.

The Fifth Circuit agreed with Archer, holding that the “plain language” of the arbitration clause did not incorporate the AAA rules for disputes “under the carve-out”:

the placement of the carve-out here is dispositive. We cannot re-write the words of the contract. The most natural reading of the arbitration clause at issue here states that any dispute, except actions seeking injunctive relief, shall be resolved in arbitration in accordance with the AAA rules. The plain language incorporates the AAA rules—and therefore delegates arbitrability—for all disputes except those under the carve-out. Given that carve-out, we cannot say that the Dealer Agreement evinces a “clear and unmistakable” intent to delegate arbitrability.

The court then considered whether the “backdrop of a strong presumption in favor of arbitration” would result in referring the dispute to arbitration. But the court said the language of the exclusion in the arbitration clause was clear. The court noted that the clause excluded “actions seeking injunctive relief,” not “actions seeking only injunctive relief.” The court therefore refused to compel arbitration, even of only the claim for damages.

The Henry Schein decision is of particular importance to intellectual property practitioners. It is common for patent licensing and similar agreements to contain arbitration clauses. However, those clauses often expressly exclude certain disputes from arbitration such as claims concerning the validity, scope, infringement, and essentiality of a patent or a patent claim. Moreover, it is extremely common in all sorts of contracts for an arbitration clause to authorize a disputing party to seek injunctive relief from the courts.

The Henry Schein decision issues a warning that the wording of an arbitration clause and any carve-outs must be carefully drafted to avoid unnecessary disputes and/or unintended consequences. 

Mark Kantor is a member of the College of Commercial Arbitrators in Washington, D.C.

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