Kavanaugh, arbitrability and groundlessness

January 9, 2019

Henry Schein Inc. v. Archer & White Sales Inc., No. 17-1272 – arbitrability upheld, wholly groundless exceptions invalidated.

After all of the controversy surrounding his nomination, how interesting that Kavanaugh’s first opinion is about arbitration and the “wholly groundless” exception. And it is a good one at that. U.S. Courts tend to invent concepts to circumvent the FAA and it is heartening to see that this attempt by the Fifth Circuit and other Courts  has been put to rest once and for all.

The case is also a good example of the need for good drafting. While the decision upheld the concept of arbitrator determination of arbitrability when the parties clearly agree to arbitrate arbitrability, that may not be the case here. Including arbitrabiity in the arbitration agreement is important even if the rules or the statute at the seat allow for it. Better safe than spend time and money litigating about it after the fact.

Another drafting issue  highlighted in this case is the use of ‘carve outs’. Again, care in drafting is essential. While most jurisdictions  allow for injunctive relief to be sought in court, which was one of the exceptions in this clause, agreeing to arbitrate everything but “disputes related to trademarks, trade secrets, or other intellectual property” opens the door to interpretation. This is especially true with respect to the arbitrability question raised above.

In sum, drafter beware, and, although I am often against the overzealous pro-arbitration stance of US courts with respect to  arbitration ‘agreements’ in employment and consumer contracts, this is a welcome pro-arbitration decision by the US Supreme Court.