10 www.uslaw.org USLAW Words Matter Whether a Court Compels Arbitration Often Depends on the Contract’s Language

Noel D. Humphreys Connell Foley LLP

A contract’s arbitration clause is not appeared in the paper wrapper headed accused some other firms of colluding boilerplate. The specific words there ac- “Rental Terms & Conditions,” but the against it in Texas. The agreement that tually matter. Some recent decisions have rental agreement incorporated terms contained this clause was with one of the made clear that the words drafters chose from the “rental jacket.”i The court de- accused colluders, now a predecessor in in- may imply hidden or unexpected, maybe cided the “Agreement does not incor- terest of the remaining defendant. unintended, meanings. For example: porate the rental jacket beyond doubt,” Initially in front of a magistrate judge, • If the parties intend to exclude injunctive because the printed form failed to call defendants invoked the Federal Arbitration relief from arbitration, how that excep- the wrapper by the name on the wrap- Act and moved to compel arbitration. tion is expressed may make a difference per. That simple drafting error made a Archer & White opposed that motion, ar- to how the matter proceeds if a dispute difference. guing that its complaint sought injunctive arises. Take this fairly simple-seeming arbitra- relief (as well as damages), and the arbi- • Enforceability of an arbitration provision tion clause: tration clause explicitly excluded actions may hinge on whether the parties spec- Disputes. This Agreement shall be gov- seeking such relief. The magistrate judge ify a particular arbitration source such as erned by the laws of the State of North granted the motion, determining that the AAA or JAMS rather than specifying no Carolina. Any dispute arising under arbitrator should decide whether the mat- service provider. Whether an arbitrator or related to this Agreement (except ters in arbitration should be decided by the or a court decides what is arbitrable may for actions seeking injunctive relief arbitrator or a court pursuant to this clause. hang in the balance. and disputes related to trademarks, The magistrate’s idea was that the clause in- • There is a difference between a provision trade secrets, or other intellectual corporated the AAA rules, which, in gen- that makes all disputes between the par- property of Pelton & Crane), shall be eral, permit the arbitrator to decide what ties subject to arbitration and a provision resolved by binding arbitration in ac- he or she is empowered to decide. The that make only disputes arising out of the cordance with the arbitration rules of magistrate said defendants presented at agreement subject to arbitration. To facil- the American Arbitration Association least a “plausible construction” that would itate a court’s decision regarding whether [(AAA)]. The place of arbitration compel arbitration. to compel arbitration in a particular case, shall be in Charlotte, North Carolina. Three years later, the district court a contract drafter seems well-advised to vacated that order and held that the court include explicit statements with as few The clause has generated multiple could decide the threshold arbitrability exceptions and limitations as possible decisions from a federal district court, the question. The district court reasoned that regarding what the parties intend if a dis- Fifth Circuit Court of Appealsii and even this action fell squarely within the arbitra- pute arises. the U.S. Supreme Court.iii tion clause’s express exclusion of actions • In a recent Third Circuit decision in- The still-pending case arose when a seeking injunctive relief. volving rental cars, the arbitration clause dental supply firm, Archer & White Sales, The Fifth Circuit affirmed, asserting USLAW www.uslaw.org 11

that they perceived no plausible argument sentence stated clearly that disputes were as independent contractors, rather than as that the dispute was outside the scope of to be arbitrated under AAA rules, meaning employees. This decision followed other the exception.iv The Supreme Court re- that the arbitrator decides his or her juris- Circuit Court decisions that calling for a jected the circuit court’s “wholly ground- diction and authority. On the other hand, decision under AAA rules in an arbitration less” rationale. plaintiff argued that what was “clear and clause manifests “clear and unmistakable” Instead, the Supreme Court held unmistakable” was that injunctive relief was evidence that the parties had a meeting that if a “contract delegates the arbitrabil- outside the scope of the delegation to the of the minds intending that the arbitrator ity question to an arbitrator, a court may arbitrator. Defendant asserted that what must determine arbitrability issues. not override the contract.”v The Supreme the court was not permitted to do was de- This decision can be compared with Court reaffirmed its holding in its decision termine the scope of arbitrator’s authority the 2017 Third Circuit decision in Moon v. in First Options,vi that “parties may delegate after the parties had invoked the AAA rules Breathless,x1 which involved a similar claim threshold arbitrability questions to the ar- which give that power to the arbitrator. under the federal Fair Labor Standards bitrator, so long as the parties’ agreement Allowing the court to determine the scope Act (the “FLSA”). The agreement under does so by “clear and unmistakable’ evi- of delegation to the arbitrator, defendant consideration in that case included the fol- dence.” On remand, therefore, the Fifth said, was contrary to the parties’ intent. lowing clause, which did not name an arbi- Circuit considered whether the arbitration Plaintiff sought both money damages tration provider: clause set forth above was “clear and un- and injunctive relief. As a result, the court In a dispute between Dancer and mistakable” evidence that the parties had had to consider whether the contracting Club under this Agreement, ei- delegated to the arbitrator the question of parties’ intent, as expressed in the arbitra- ther may request to resolve the whether the arbitrator’s authority extended tion clause, meant bifurcation of the claims. dispute by binding arbitration. to determining whether plaintiff’s claims In other words, did the parties intend that THIS MEANS THAT NEITHER were subject to arbitration. the arbitrator should consider the money PARTY SHALL HAVE THE The standard pattern for a court in- damages portion of the case, while a court RIGHT TO LITIGATE SUCH volves, first, a determination that there is should consider the injunctive relief portion CLAIM IN COURT OR TO HAVE a valid agreement including a valid arbitra- of the case? In part, based on the construc- A JURY TRIAL — DISCOVERY tion provision and, second, a determination tion of the sentence where the language AND APPEAL RIGHTS ARE that the dispute falls within the arbitration appeared, the Fifth Circuit decision held LIMITED IN ARBITRATION. clause. The presumption is that, without that the arbitration provision’s exclusion of ARBITRATION MUST BE ON “clear and unmistakable” evidence of intent “actions seeking injunctive relief” meant that AN INDIVIDUAL BASIS. THIS to delegate arbitrability to the arbitrator, the court should hear all of plaintiff’s action MEANS NEITHER YOU NOR WE the court should decide arbitrability. Here, for damages and injunctive relief. MAY JOIN OR CONSOLIDATE the parties were not disputing that there Consequently, the Fifth Circuit deci- CLAIMS IN ARBITRATION, was a valid arbitration clause, even though sion did not compel arbitration, because the OR LITIGATE IN COURT OR defendant was not a party to the contract. parties had intended that the dispute as pre- ARBITRATE ANY CLAIMS AS A Precedent in the Fifth Circuit, the sented was not to be resolved by arbitration. REPRESENTATIVE OR MEMBER Third Circuit and other Circuitsvii holds that The court did not reach the question of OF A CLASS. a clause identifying AAA rules as the manner whether the defendant could successfully in- The panel in that matter decided that of arbitration constitutes sufficient “clear voke the arbitration clause even though the Ms. Moon’s FLSA claim did not arise out of and unmistakable” evidence of intent to del- defendant was not a party to the agreement. “this Agreement,” but instead arose out of egate the arbitrability question to the arbitra- The Supreme Court may let us know how the statute. In that decision, the court did tor. Under AAA Rule 7(a), “[t]he arbitrator properly to read this provision. The Court in not compel arbitration. shall have the power to rule on his or her June agreed to hear the case this fall. ix Recent decisions such as these suggest own jurisdiction, including any objections The recent Third Circuit decision that courts are more likely to compel arbitra- with respect to the existence, scope, or va- in Richardson v Coverall North Americax was tion if a dispute arises if the arbitration clause lidity of the arbitration agreement or to the more cursory than the Fifth Circuit’s Archer clearly and unmistakably names an arbitra- arbitrability of any claim or counterclaim.”viii & White decision. The Coverall North tion service provider and explicitly indicates Ignoring the parenthetical in the con- America decision involved claims that work- that the parties intend to delegate to the arbi- tract language, defendants argued that the ers were misclassified under New Jersey law trator threshold questions of arbitrability.

i Bacon v. Avis Budget Grp., Inc., No. 18-3780, 2020 BL 184123 (3d Cir. May 18, 2020), Noel Humphreys, Of Counsel ii Most recently, Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019). at Connell Foley in Roseland, iii Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 , 528 , 202 L. Ed. 2d 480 (2019)(”Schein”). iv Archer & White Sales, Inc. v. Henry Schein, Inc., 878 F.3d 488, 497 (2017), rev’d, 139 S. Ct. 524 , 202 L. Ed. 2d 480 (2019). New Jersey, focuses on busi- v Henry Schein, 139 S. Ct. at 529 ness transactions, lending vi First Options of Chi., Inc. v. Kaplan, 514 U.S. 938 , 944 , 115 S. Ct. 1920 , 131 L. Ed. 2d 985 (1995). vii Richardson v. Coverall N. Am., Inc., No. 18-3393, 2020 BL 157077, 2020 Us App Lexis 13568, 2020 WL 2028523 (3d transactions, organizational Cir. Apr. 28, 2020)(“Richardson”); Brennan v. Opus Bank, 796 F.3d 1125 , 1130-31 (9th Cir. 2015) (“Our holding governance and intellectual today should not be interpreted to require that the contracting parties be sophisticated . . . before a court may conclude that incorporation of the AAA rules constitutes ‘clear and unmistakable’ evidence of the parties’ intent property. Noel has participated [to delegate arbitrability].”); see also McGee v. Armstrong, 941 F.3d 859 , 863 , 865-66 (6th Cir. 2019); Arnold v. in hundreds of business combi- Homeaway, Inc., 890 F.3d 546 , 548-49 , 551-52 (5th Cir. 2018); Green v. SuperShuttle Int’l, Inc., 653 F.3d 766 , 767-69 (8th Cir. 2011). nations mergers, asset acquisitions, joint ventures, viii Am. Arbitration Ass’n, Commercial Arbitration Rules and Medication Procedures 13 (2013), strategic alliances, sourcing relationships and 1 Thehttps://www.adr.org/sites/default/files/Commercial%20Rules.pdf Product Liability Risk Retention Act of 1981 initially created risk . retention groups. The LRRA expanded the stock purchases and settlements of disputes within ix Henryconcept Schein, of risk Inc. retention v. Archer &groups White to Sales, apply Inc., to No.commercial 19-963., 2020liability BL insurance.220261, 2020 Us Lexis 3181 (U.S. June 15, 2020) x2 1986Richardson U.S.C.C.A.N. v. Coverall 5304 N. Am., Inc., No. 18-3393, 2020 BL 157077, 2020 Us App Lexis 13568, 2020 WL 2028523 (3d family-owned businesses. Cir. Apr. 28, 2020). xi Moon v. Breathless, Inc., 868 F.3d 209, 27 WH Cases2d 725 (3d Cir. 2017).