Employment: Arbitration – ‘Gateway Issues’

When an arbitration agreement is in effect, who decides whether an employment dispute, or any dispute for that matter, is arbitrable? The Supreme Court recently released a pair of decisions that address this issue under the Federal Arbitration Act (FAA), Henry Schein, Inc. v. Archer & White Sales, Inc.,_ S. Ct._, 202 L. Ed. 2d 480, 2019 WL 122164 (Jan. 8, 2019), and New Prime, Inc. v. Oliveira,_ S. Ct._, 2019 WL 189342 (Jan. 15, 2019).

Each case involved an arbitration agreement that contained a clause delegating the issue or arbitrability of disputes to an arbitrator rather than a court. The Supreme Court had previously held that such clauses are enforceable under the FAA. Rent-A-Center W, Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772, 177 L. Ed. 2d 403 (2010) (applying 9 U.S.C.A. ยง 2). Some courts of appeals developed an exception to this general rule, holding that a court need not grant a motion to compel arbitration under section 4 of the FAA if the argument that the underlying claim is within the scope of the arbitration agreement is “wholly groundless.”

These courts reasoned that such an exception would enable courts to block frivolous attempts to transfer dispute from the court system to arbitration. E.g., Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F.3d’522 (4th Cir. 2017). Thus, in the Schein case, the Fifth Circuit had held that when no plausible argument exists for the arbitrability of the dispute, the district court may decide the “gateway issue” of arbitrability dispute a valid clause delegating the issue to an arbitrator. Archer & White Sales, Inc. v. Henry Schein, Inc., 878 F.3d 488 (5th Cir. 2017).

In a unanimous decision, the Supreme Court rejected this ruling as inconsistent with the FAA and the Court’s precedent. Under the FAA, arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms. The parties to such a contract may agree to have an arbitrator decide not only the merits of a particular dispute, but also “gateway questions” of arbitrability. Therefore, when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override that delegation, even if it thinks the arbitrability claim is wholly groundless. The Court expressed no view on whether the agreement at issue in fact delegated the arbitrability question to an arbitrator, instead remanding the case to the Fifth Circuit to make this determination.

A statutory exception to the FAA’s requirements was at issue in the Oliveira case.

Section 1 of the Act provides an exception to a court’s authority to compel arbitration in cases involving “contracts of employment” of certain transportation workers. The case was ‘brought by a driver for an interstate trucking company who worked under an operating agreement containing a mandatory arbitration provision with a delegation clause. When the driver filed a class action alleging that the company denied its drivers their lawful wages, the company moved to compel arbitration pursuant to section 4 of the Act. The driver countered that the court lacked authority to do so because the case fell within the section 1 exception. The company then insisted that any question regarding the applicability of section 1 was for the arbitrator alone to resolve.

In another unanimous decision, the Court held that the question whether the section 1 exception applies in a given case is for the court, not the arbitrator, to decide, even if the arbitration contract contains a valid delegation clause. The role of section 1 within the structure of the Act makes clear that a court’s authority to compel arbitration does not extend to all private contracts, no matter how emphatically the contract may express a preference for arbitration. A delegation clause is merely a specialized type of arbitration agreement, and it is enforceable under section 3 and 4 of the Act only if it appears in a contact consistent with section 2 that does not trigger section 1 ‘s exception. Accordingly, the Court affirmed the-First Circuit’s identical conclusion in the case below.

A third arbitration case, Lamps Plus Inc. v. Varela, No. 17-988, has yet to be decided. At issue is whether the FAA forecloses a state-law interpretation of an arbitration agreement that has the effect of authorizing class arbitration. The Ninth Circuit applied California contract law to interpret the agreement in question, found the relevant provisions ambiguous, construed them against the drafter-employer, affirmed the district court’s finding of a contractual basis for class arbitration, and vacated the stay of arbitration. The case was argued on October 29, 2018.