When the 68th Congress in 1925 enacted the U.S. Arbitration Act (more commonly known as the Federal Arbitration Act or FAA), it was addressing directly a prevailing hostility to arbitration and laying the foundation for arbitration to become a fixture as an alternative to litigation for commercial disputes. To the extent there remain areas in which courts play a role in defining the scope of arbitrable disputes, the U.S. Supreme Court has taken a step to reduce that role in further deference to arbitration. In its recent decision in Henry Schein v. Archer & White Sales, 139 S. Ct. 524 (2019), the Supreme Court concluded that Congress stripped federal courts of authority to adjudicate any aspect of the gateway issue of arbitrability between parties who have an existing arbitration agreement which delegates that issue to the arbitrator(s). Does this decision portend further deference to empower arbitrators, and not courts, to decide other gateway issues, and what does this possibility mean for parties negotiating arbitration agreements or considering litigation notwithstanding such an agreement?

Addressing a lawsuit alleging antitrust violations and seeking both money damages and injunctive relief in federal court despite the existence of a valid arbitration agreement between the parties incorporating the American Arbitration Association (AAA) Rules, the Supreme Court in Henry Schein held that when parties have delegated the question of arbitrability to the arbitrator(s), “[i]n those circumstances, a court possesses no power to decide the arbitrability issue.” Id. at 529 (emphasis added). In so holding, the Supreme Court reversed the decision of the U.S. Court of Appeals for the Fifth Circuit that the appellant's invocation of the arbitration agreement was “wholly groundless” since the arbitration agreement expressly excluded “actions seeking injunctive relief.” Id. at 528. Justice Kavanaugh, writing for a unanimous court, concluded that allowing a court to override the parties' written agreement that an arbitrator determine the arbitrability of any dispute “is inconsistent with the text of the [Federal Arbitration] Act.” Id. at 529 (quoting 9 U.S.C. §2 (Written agreements to arbitrate “shall be valid, irrevocable, and enforceable.”)). Rather than serve a discretionary gatekeeping function to ferret out spurious claims of arbitrability, courts retain a single threshold task before referring a dispute to an arbitrator: determining “whether a valid arbitration agreement exists.” Id. at 530. Henry Schein clarified that “if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.” Id.

The Supreme Court's holding that courts have “no power” to decide the arbitrability question in the face of a valid arbitration agreement delegating that determination to an arbitrator would appear to apply beyond the context of an arbitrability determination. The words “no power” provoke, in the first instance, questions about subject matter jurisdiction. Federal courts have grappled over whether arbitration agreements deprive courts of jurisdiction even as federal question or diversity grounds for jurisdiction exist. Indeed, parties often bring their motions to compel arbitration under Federal Rule of Civil Procedure 12(b)(1). On the other hand, a number of courts before Henry Schein had held that arbitration agreements were simply “contractual arrangements for resolving disputes rather than [] an appropriation of a court's jurisdiction.” DiMercurio v. Sphere Drake Ins., 202 F.3d 71, 76 (1st Cir. 2000). The ruling in Henry Schein that an agreement which reflects the parties' intent to arbitrate disputes, including threshold questions of arbitrability, deprives courts of the power to decide such matters indicates that the question is jurisdictional and not merely contractual. And in matters of jurisdiction, just as when a court shall dismiss an action even if it learns well into litigation that the parties lack diversity, dismissal in favor of an arbitration agreement that is brought to the attention of the court could be obtained at any time. See Fed. R. Civ. P. 12(h)(3).

Prior to Henry Schein, courts routinely had denied motions to compel arbitration brought by parties which substantially invoked the judicial process, citing litigation waiver. See, e.g., Forby v. One Technologies, 909 F.3d 780 (5th Cir. 2017). Yet the reasoning applied in Henry Schein undermines that defense to an otherwise valid arbitration agreement. If the parties have entered into an arbitration agreement which broadly delegates to the arbitrator(s) questions relating not just to arbitrability, but to the scope and validity of the agreement, would that not deprive a court of the power to adjudicate such defenses? In this regard, the same AAA Rules adopted by the parties in Henry Schein vest the arbitrator with 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.” AAA Commercial Rule 7(a). The International Chamber of Commerce (ICC) and JAMS Rules similarly reserve for arbitrators broad discretion as to all threshold matters. See ICC Arbitration Rules, art. 6(3) (reserving for arbitrators resolution of any defense to the claims asserted based on “the existence, validity or scope of the arbitration agreement”); JAMS Rule 11(b) (“Jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought … shall be submitted to and ruled on by the Arbitrator.”).

This is a logical extension of Henry Schein's reasoning. After all, a litigation waiver defense is fundamentally an argument that a party has waived its right to invoke an otherwise enforceable arbitration agreement. If the parties' arbitration agreement reflects their express agreement to reserve defenses to enforcement for the arbitrator(s), the Supreme Court has now held that “a court may not override the contract.” Henry Schein, 139 S. Ct. at 529. That further reinforces the notion that a party retains the option to invoke its bargained-for contractual right to arbitrate at any point in the proceedings.

There remains a legitimate concern that a party could engage in prolonged litigation, to the detriment of the court as well as the opposing party, before making a strategic decision to arbitrate. If a court lacks the power to adjudicate defenses to enforcement of an arbitration agreement, that could result in expensive and inefficient proceedings. Such concerns may be less compelling in cases involving two equal and sophisticated parties, but arbitration agreements often arise in cases of unequal bargaining power. Consider the employee who sues her longtime employer in federal court for discrimination, discovers evidence validating her claim in the course of discovery, and successfully opposes a defense motion for summary judgment, only to confront an eleventh-hour defense motion to compel arbitration under an agreement the employee contends does not cover her discrimination claim. If the court is powerless to determine that the employer waived its right to invoke the arbitration agreement by engaging in litigation, the employer may well get two bites at the apple. The court, however, would still have the authority to sanction a party that engages in such tactics, just as it does when a party abuses the judicial process by litigating without a basis for diversity jurisdiction. The availability of sanctions should be a deterrent to a party to an arbitration agreement choosing to litigate.

Strategic gamesmanship over forum shopping may be further mitigated in a post-Henry Schein world. Anticipating that courts could be compelled to refer to arbitrator(s) threshold questions under arbitration agreements, contracting parties are well advised to include instructions of their intent in their dispute resolution provisions, either in express terms or in their choice of administrative rules. When a dispute arises between contractual parties who have agreed to refer all gateway questions to arbitration, those parties should know to proceed directly to arbitration. If one party proceeds to litigation, the other party must move to compel arbitration promptly.

It is also arguably incumbent on the court in the post-Henry Schein world to make inquiries of the parties, adopting procedures to learn at the outset of litigation of any arbitration agreement which might exist between them. If there is such an agreement, and it provides for broad referral to arbitration, then the court on its own could direct the parties to arbitration. Proactive court intervention would also help alleviate the concern over a less sophisticated party being prejudiced by another party bringing an eleventh-hour motion to compel arbitration. The bottom line is that Henry Schein gives contracting parties even greater ability to limit the power of the court, and now, more than ever, parties are well advised to consider the implications of vesting an arbitrator with plenary power to decide both substantive and threshold questions affecting the parties' right to litigate long before a dispute arises.

Alan Howard is a partner at Perkins Coie in New York. Adam Mandelsberg is an associate at the firm.