Putting the Shine on Schein, and What Does Vin Diesel Have to Say About Arbitrations?
As Dominic Toretto says: “Ask any racer, any real racer, it doesn’t matter if you win by an inch or a mile, winning’s winning.” “Fast and Furious” is the tenth highest-grossing film series ever, with a combined gross of over $5.8 billion (according to Wikipedia). The franchise includes action films, short films, a television series, live shows, video games and theme park attractions. With money and theme park attractions, there will be litigation. And with litigation there are contract disputes. And with contract disputes and theme park attractions and street racing and spies, there is the inevitable question: Is there a delegation clause?
That “gateway” question was addressed in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 526 (2019), but in the two plus years since has seen such a variety of configurations – including in Fast and Furious litigation – that it becomes increasingly difficult to derive a simple, globally useful conclusion from Schein. Under the Federal Arbitration Act, parties to a contract may agree that an arbitrator rather than a court will resolve disputes arising out of the contract. When a dispute arises, the parties sometimes may disagree not only about the merits of the dispute but also about the threshold question of arbitrability – that is, whether their arbitration agreement applies to the particular dispute. But who decides that threshold question? Under the Act and the U.S. Supreme Court, the question of who decides arbitrability is itself a question of contract. The Act allows parties to agree by contract that an arbitrator, rather than a court, will resolve threshold arbitrability questions as well as underlying merits disputes. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68–70 (2010).
In 2019, the Supreme Court held that there is no “wholly groundless” exception to the Federal Arbitration Act. Even if the threshold arbitrability question is “wholly groundless,” arbitration is a matter of contract, and courts must enforce arbitration contracts – including provisions delegating to an arbitrator the power to determine arbitrability – without regard to the merits of a particular dispute. Schein, 139 S. Ct. at 526. But as unequivocal as that sounds, it does not resolve the issue in all cases. Rather, depending on the specific terms of the arbitration agreement, even that gateway question – whether the parties have delegated the issue of arbitrability – becomes increasingly complicated and opaque.
The issue is illustrated by the facts of Schein: Archer and White, a small business that distributes dental equipment, entered into a contract with a dental equipment manufacturer to distribute its equipment. The relationship eventually soured and Archer and White sued the manufacturer’s successor-in-interest, Henry Schein, Inc., in Federal District Court in Texas. Archer and White's complaint alleged violations of federal and state antitrust law, and sought both money damages and injunctive relief. The relevant contract provision provided:
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 binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)]. Schein invoked the Federal Arbitration Act and asked the District Court to refer the antitrust dispute to arbitration.
The AAA rules provide that arbitrators have the power to resolve arbitrability questions. See Rule 7(a) (“[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim”). Schein argued that the contract's express incorporation of the AAA rules meant that an arbitrator – not the court – had to decide arbitrability. Archer and White responded that where the defendant's argument for arbitration is “wholly groundless” – as Archer and White argued was the case there – the District Court itself may resolve the threshold question of arbitrability. Archer and White argued that the dispute was not subject to arbitration because the complaint sought injunctive relief and the contract barred arbitration of disputes seeking injunctive relief. The district court ruled that Schein’s argument for arbitration was wholly groundless and denied the motion to compel arbitration. The Fifth Circuit affirmed.
Citing disagreement in the Courts of Appeals over whether the “wholly groundless” exception is consistent with the Federal Arbitration Act, the Supreme Court granted certiorari and reversed the Fifth Circuit’s ruling. The Court held that parties to 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 determination to an arbitrator, a court may not “override the contract . . . even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Schein, 139 S. Ct. at 529. The Court expressed no view as to whether the contract at issue in fact delegated the arbitrability question to an arbitrator and noted that courts “should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.” 139 S. Ct. at 531. The case was remanded for further proceedings consistent with the Opinion. On remand, the district again determined that the case was not subject to the arbitration clause, and the Fifth Circuit again affirmed, concluding that “the parties have not clearly and unmistakably delegated the question of arbitrability to an arbitrator. ” Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274, 277 (5th Cir. 2019). The Fifth Circuit noted that the plain language of the contract incorporates the AAA rules—and therefore delegates arbitrability—for all disputes except those under the carve-out. “Given that carve-out, we cannot say that the Dealer Agreement evinces a ‘clear and unmistakable’ intent to delegate arbitrability.” Schein, 935 F.3d at 281-82. A writ of certiorari was granted, and then dismissed as improvidently granted. Henry Schein, Inc v. Archer & White Sales, Inc., 141 S. Ct. 656 (2021).
With no subsequent Supreme Court decision, the courts have struggled to implement the rule enunciated in Schein under circumstances that are murky at best. For example, in a case involving three payday loan agreements, the borrowers electronically signed contracts that (1) applied tribal law, (2) included a delegation clause providing for arbitration of “any issue concerning the validity, enforceability, or scope of this Agreement or this Agreement to Arbitrate,” and (3) provided that the arbitrator would apply the relevant tribal law. Gibbs v. Haynes Investments, LLC, 967 F.3d 332, 336–37 (4th Cir. 2020). Despite the apparent breadth of the delegation provision, the Court interpreted the contract language as requiring that tribal law would preempt the application of any contrary law, and found that “the effect of such provisions is to thereby make unavailable to the borrowers the effective vindication of federal statutory protections and remedies.” Distinguishing Schein, the Court concluded that the choice-of-law clauses amount to a prospective waiver such that the arbitration agreements, including the delegation clauses, are unenforceable and that the district court had the authority to decide whether the arbitration agreements were valid.
And what of “spin-off” contracts? Where we once agreed to a delegation clause, is the clause impliedly included in our spin-off agreement? A California appellate court says no, despite its reliance on Schein. See Moritz v. Universal City Studios LLC, 54 Cal. App. 5th 238, 247, 268 Cal. Rptr. 3d 467, 474 (2020). Over the course of 16 years, Neal Moritz worked for University City Studios as a producer for the film “The Fast and Furious,” and several sequels, under seven written producer contracts. The first six contracts included valid arbitration clauses. Arbitration clauses in the first four contracts delegated questions of arbitrability to an arbitrator by providing that “[t]he arbitration shall be initiated and conducted according to the JAMS/Endispute Comprehensive Arbitration Rules and Procedure” (JAMS rules). The JAMS rules, in turn, require that “[j]urisdictional and arbitrability disputes, including disputes over the existence, validity, interpretation or scope of the agreement under which [a]rbitration is sought . . . shall be submitted to and ruled on by the [a]rbitrator. The [a]rbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter.” The two other arbitration clauses contain no similar delegation clause, but provide that “[a]ny controversy, claim, or dispute arising out of or relating to this [a]greement or this agreement to arbitrate . . . shall be fully and finally adjudicated by binding arbitration to the fullest extent allowed by law.” The parties exchanged drafts of a producer contract for a spin-off film, but never finalized or signed the agreement. In a lawsuit brought in connection with the spin-off film, the superior court denied a motion to compel arbitration based on the production agreements for earlier films in the franchise. Relying on Schein, the Court of Appeals affirmed: “[N]ot only is it not clear and unmistakable here that the parties agreed to delegate arbitrability questions concerning [the spin-off film] to an arbitrator, no reasonable person in their position would have understood the [prior] arbitration provisions to require arbitration of any future claim of whatever nature or type, no matter how unrelated to the agreements nor how distant in the future the claim arose.” According to Deadline.com, Universal and Mortiz later settled their dispute and “it’s all hugs, kisses and pedal to the metal now.”
So, what is the state of the law? Just in the short time since the January 2019 Schein decision, there have been 2,284 citing references (including 26 negative citing references) to the Supreme Court’s Opinion. While the Supreme Court for now has remained off the streets, it inevitably will be brought in to provide further guidance on the issues left open in Schein, including primarily what is, and is not, a “clear and unmistakable” agreement delegating the power to decide arbitrability.
About the Author: Kathi M. Sandweiss is an attorney at the Phoenix law firm of Jaburg Wilk where she is head of the appellate law department. She is the former chair of the Arizona State Bar Appellate Practice Section. Kathi has written more than 100 appellate briefs, filed in the Arizona appellate courts, the Ninth Circuit Court of Appeals, the Bankruptcy Appellate Panel, and the U.S. Supreme Court. She is the author of the blog -That is Appealing.