Arbitration Agreement Update: Who Decides Arbitrability of a Claim?

Last month, the U.S. Supreme Court decided in two scenarios where it could and could not enforce an arbitration agreement. On January 8, 2019, in Henry Schein, Inc. v. Archer & White Sales, Inc., the Supreme Court stated that a court cannot decide what claims are covered under an arbitration agreement where the agreement states that the arbitrator must decide.

There, Archer & White had an arbitration agreement governing its business arrangement with Henry Schein, but filed suit for alleged antitrust violations and injunctive relief. Their arbitration agreement excluded injunctive relief from the terms of the arbitration agreement, but stated that the arbitrator must decide what is arbitrable. Schein sought to enforce the arbitration agreement; however, Archer & White claimed that, because it sought injunctive relief, Schein’s argument for arbitration was “wholly groundless” and a frivolous attempt to transfer the dispute from the court to arbitration. Under the circumstances, Archer & White claimed the court should determine the issue of arbitrability of the claims, and not the arbitrator.

Ultimately, the Supreme Court stated that the Federal Arbitration Act (FAA) does not have a “wholly groundless” exception, and where an arbitration agreement states that arbitrability must be resolved by the arbitrator, courts must follow the terms of the agreement.

Conversely, on January 15, 2019, in New Prime, Inc. v. Oliveira, the Supreme Court stated that it cannot enforce arbitration under federal law where the FAA does not apply to an arbitration agreement, even where the agreement says that the arbitrator must determine the arbitrability of claims.

There, New Prime was an interstate trucking company, and Oliveira had an agreement to work as an independent contractor. Notwithstanding the agreement, Oliveira sued for wage and hour claims based on misclassification as an independent contractor. New Prime sought to enforce the arbitration agreement, which included a provision that the arbitrator must decide whether a claim is subject to the arbitration agreement. The Supreme Court stated that Oliveira was exempt from the FAA because he was an interstate driver. Additionally, even though he was classified as an independent contractor, the FAA interstate transportation worker exemption still applied to him.

In sum, there is an order of operation when determining arbitrability. First, a court must determine applicability of the FAA, which would give it jurisdiction under federal law to rule on the terms of the arbitration agreement; then, if subject to the FAA, the court may enforce the terms of the agreement, including delegation of arbitrability to the arbitrator. Employers with employees not subject to the FAA must take care to review state arbitration rules with legal counsel before issuing arbitration agreements.