Brett Kavanaugh, a recently designated Justice of the Supreme Court of the United States of America, wrote his first 2019 decision for the Court (coincidentally, his first decision as a Justice of that Court) in the Henry Schein, Inc. et al v. Archer and White Sales, Inc. case. The decision confirms the kompetenz-kompetenz principle that it is the arbitration tribunal that should, in a first instance, decide about its own competence to hear and resolve disputes submitted to arbitration, even if the subject matter of the dispute is “evidently” not arbitrable.

The case came from the Fifth Circuit Court of Appeals. Archer and White is a company that distributes dental equipment. To this effect, it executed a distribution contract with Pelton and Crane, a dental equipment manufacturer. The purpose was to distribute the equipment produced by Pelton and Crane.  Eventually, their relationship deteriorated.

Archer and White sued Pelton and Crane – and sued its successor at law, Henry Schein Inc. – in a Federal District Court in Texas.  The claim makes reference to purported violations to antitrust Federal and State laws. The plaintiff claimed monetary damages and injunctive relief.

The pertinent portion of the distribution contract provides that:

Disputes: This Agreement shall be governed by the laws of the State of North Carolina.  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 Schein) shall be resolved by arbitration in accordance with the arbitration rules of the American Arbitration Association (AAA). The seat of the arbitration shall be Charlotte, North Carolina[1].

After Archer and White had sued, Schein invoked the Federal Arbitration Act as well as the arbitration clause and asked the Federal District Court to abstain from hearing the case due to the existence of an arbitration clause.  Archer and White objected and argued that the dispute could not be subjected to arbitration because the complaint, at least a portion of it, asked for an order of injunctive relief.
The District Court rejected Schein’s arguments for forcing the arbitration on the basis of Fifth Circuit precedents maintaining that the Court can prevent the jurisdiction of an arbitral tribunal if the subject matter of the dispute is “evidently” not arbitrable[2]. The Fifth Circuit confirmed this decision.

Thus, the question became: Who is competent to decide if a dispute based on violations to competition regulations is subject to arbitration?  
The rules of the American Arbitration Association (AAA) determine that arbitrators are empowered to resolve arbitrability questions. Schein maintained that the specific inclusion of the AAA rules in the contract meant that the arbitral tribunal was competent to do so. Archer and White argued that, if the substance of the case is “evidently” not arbitrable, it is the Court that ought to decide.

Kavanaugh’s decision is categorical upon considering that the plea about “non-arbitrable” matter is not consistent with the literal tenor of the Federal Arbitration Act.  Besides, he maintains that arbitration is, in the last instance, a contract and that the courts must enforce those contracts in accordance with their terms. Thus, the parties may agree that an arbitrator should decide on the merits of a specific dispute and also on the differences about arbitrability, or if the arbitral clause is applicable to a certain portion of the agreement.

Finally, he concludes that the law must be construed in accordance with its literal tenor and that the same is applicable to contracts. When an arbitral clause grants the arbitrator the power to determine the arbitrability of a certain issue, a court cannot overlook it – even if the matter is obviously not arbitrable.

Archer and White raised the point that when facing an issue clearly not supported by an arbitral clause, it would be unpractical and a waste of time and money to pose the arbitrability question to an arbitrator so that he would declare himself incompetent to resolve and, only at that time, to send the dispute to the judiciary.

The Court did not agree with this affirmation due to the fact that the Federal Arbitration Act does not include an exception about an “evidently” not arbitrable matter, and the Courts cannot re-write the rule as they see fit. Besides, this would give rise to myriad collateral disputes to determine whether a matter is arbitrable or is “evidently” not arbitrable.  On the other hand, a judge and an arbitrator will not necessarily be in agreement about what is or is not arbitrable.

To sum up, the award is very clear upon establishing that the arbitrators must determine whether a dispute is subject to arbitration and whether the matter is arbitrable.

On the other hand, even if the parties have not specifically granted those powers, the existence of the arbitral clause compels the judge to remit the dispute to the arbitral tribunal by virtue of the kompetenz-kompetenz principle which protects the will of the parties to resolve their disputes in that forum.

[1] Henry Schein, Inc.  v. Archer and White Sales, Inc., Supreme Court of the United States, No. 17-1272 (January 8, 2019). Page 2. [2] This plea has been used by certain federal courts to block frivolous attempts to transfer disputes from the judicial system to arbitration.

Warning: This newsletter by Pérez Bustamante & Ponce (PBP) is not and cannot be used as legal advice or opinion since it is merely of an informative nature.