By Adam C. Reeves Stoll Keenon Ogden PLLC
As anyone who has signed a contract likely knows, arbitration agreements are tools contracting parties use to privately resolve disputes absent sometimes costly and prolonged litigation. Whether arbitration is actually cheaper is up for debate, but a recent decision by the United States Supreme Court may help parties to arbitration agreements avoid the courtroom entirely.
In Schein v. Archer & White Sales, 129 S. Ct. 524 (2019), the United States Supreme Court addressed a frequent dilemma in contract disputes: Who decides whether the parties’ dispute should be arbitrated? This question arises because parties to a contract often disagree over whether their arbitration agreement covers their dispute in the first place.
This question of “arbitrability” may seem simple in some cases. If a restaurant and vendor agree to arbitrate disputes involving produce delivery, then they must arbitrate a dispute concerning the vendor’s delivery of rotten tomatoes. But not all disputes are clear cut. Would the same agreement require the parties to arbitrate a dispute concerning whether that vendor is responsible for its employee driving a delivery truck through the restaurant’s front window?
To make matters worse, while the Federal Arbitration Act allows parties to require that an arbitrator–and not a court–determine the arbitrability of their dispute, some courts have nevertheless permitted litigation over this question where the argument for the applicability of an arbitration agreement was “wholly groundless.” See, e.g., Douglas v. Regions Bank, 757 F.3d 460 (5th Cir. 2014). Thus, where two contracting parties agreed (at least originally) to arbitrate any disputes, and even when they specified that an arbitrator would decide the applicability of their arbitration agreement, they still faced the prospect of litigating their dispute in a courtroom.
The Schein decision put an end to this prospect, at least for those contracts subject to the Federal Arbitration Act. In a unanimous decision authored by Justice Brett Kavanaugh, the Court held that when parties to an arbitration agreement specify that an arbitrator will decide the “gateway” question of arbitrability, “a court may not override the contract” to determine the arbitration agreement’s applicability. Schein, 129 S. Ct. 524, at *3. “In those circumstances,” wrote Justice Kavanaugh, “a court possesses no power to decide the arbitrability issue.” Id. at *5. This is true “even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Id. The Court found that any exception would “inevitably spark collateral litigation (with briefing, argument, and opinion writing),” and saw no reason “to create such a time-consuming sideshow.” Id. at *7.
The Schein decision is good for parties wishing to avoid future litigation through arbitration agreements. But the lesson is, as always, to read contracts closely. To avoid the courtroom entirely, make sure your contract’s arbitration agreement requires an arbitrator to decide not only any future dispute, but the arbitration agreement’s applicability in the first place.
If you want to know how this ruling might affect your business, contact Adam C. Reeves.