Arbitration agreements often have carveouts for types of litigation, such as emergency injunction applications to protect intellectual property. Drafted cleanly, such a provision can save valuable time and resources; drafted loosely, it can cause procedural delay and uncertainty about the proper place to resolve a dispute.
The arbitration carveout in Archer & White
The plaintiff, a distributor of dental equipment, alleged violations of Section 1 of the Sherman Act, “contending that the Defendants’ activities occurred over the preceding four years and are ‘continuing’ violations, and seeking both damages (‘estimated to be in the tens of millions of dollars’) and injunctive relief.”
The defendants sought to compel arbitration based upon a “dealer agreement” with the plaintiff, which said:
“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 Pelton & Crane), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)]. The place of arbitration shall be in Charlotte, North Carolina.”
The dispute was whether the question of arbitrability would be decided by the court or by the arbitration process; the specific issue was whether the plaintiff’s lawsuit was an “action[] seeking injunctive relief” within the meaning of the carveout. A magistrate judge found that the matter should be arbitrated; the district court vacated that order and denied the motion to compel arbitration. The Fifth Circuit affirmed.
To decide who should rule on arbitrability, the Fifth Circuit applied “the two-step inquiry adopted in Douglas v. Regions Bank,” 757 F.3d 460 (5th Cir. 2014). “First, [the test asks] whether the parties ‘clearly and unmistakably’ intended to delegate the question of arbitrability to an arbitrator. If so, ‘the motion to compel arbitration should be granted in almost all cases.’” Then, the “second step asks whether there is a plausible argument for the arbitrability of the dispute. Where there is no such plausible argument, ‘the district court may decide the “gateway” issue of arbitrability despite a valid delegation clause.”’”
Issue one: Does the clause “clearly and unmistakably” address arbitrability?
As to the first factor, the Court found that “the interaction between the AAA Rules and the [injunctive relief] carve-out is at best ambiguous.” and declined to rule on the .” Two cases set the background for its analysis.
In Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671 (5th Cir. 2012), the arbitration agreement said: “The arbitration shall be administered by the American Arbitration Association (‘AAA’), pursuant to the Construction Industry Arbitration Rules (the ‘Rules’).” Those rules, in turn, said that “the 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.” Accordingly, “the express adoption of these rules presents clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.”
Two years later, in Crawford Professional Drugs v. CVS Caremark Corp., 748 F.3d 249 (5th Cir. 2014), the Fifth Circuit addressed an arbitration provision with a typical carveout: “. . . nothing in this provision shall prevent either party from seeking injunctive relief for breach of this Provider Agreement in any state or federal court of law … .“ Because the provision also incorporated the same AAA rule as Petrofac, the Court again found “clear and unmistakable evidence that the parties . . . agreed to arbitrate arbitratbility, and so we conclude that whether the Plaintiffs’ claims are subject to arbitration must be decided in the first instance by the arbitrator, not a court.”
As to the clause before it in Archer & White, the Court saw two, credible, competing readings. The defendants argued that the clause should be read so that the AAA Rules applied to all disputes about the parties’ agreement, emphasizing the words: “Any dispute arising under or related to this Agreement . . . shall be resolved . . . in accordance with the arbitration rules of the American Arbitration Association [(AAA)].” The contrary reading notes that “the provision expressly exempts certain disputes and the Rules apply only to the remaining disputes.”
Issue two: Is the assertion of arbitrability “wholly groundless”?
The Court chose not to resolve that issue, concluding that the second Douglas question was dispositive. That question asks whether the “assertion of arbitrability is wholly groundless,” which the Court found to be the case.
Focusing on the specific phrase, “actions seeking injunctive relief,” the Court held that it “does not limit the exclusion to ‘actions seeking only injunctive relief,’ nor ‘actions for injunction in aid of an arbitrator’s award.’ Nor does it limit itself to only claims for injunctive relief.”
Accordingly, “[t]he mere fact that the arbitration clause allows Archer to avoid arbitration by adding a claim for injunctive relief does not change the clause’s plain meaning.” The district court correctly denied the motion to compel arbitration, as part of the plaintiff’s lawsuit sought injunctive relief.
Takeaways
The dispute in Archer & White illustrates a broader, and classic, problem in contract law. The real-world lawsuit that actually happens between the parties is often very different from what the parties thought their potential disputes might look like.
One way to minimize that difference is, as Archer & White suggests, giving serious consideration to terms such as “solely” and “only” when drafting the scope of a carveout. Conversely, if the parties intend to have arbitrability decided by an arbitrator, that issue could be addressed by a separate sentence – or even an entirely separate clause – from the language that describes the types of disputes for arbitration.
Another possible solution to the Archer & White problem is to revisit dispute resolution over time, as the parties learn more about their business relationship and potential areas of friction. In the employment setting, subject to common-law contract principles that will not enforce a one-sided “illusory” contract, this is often done by periodically revising an employee manual that contains the employer’s dispute resolution rules.
Simply being aware of the Archer & White issue, however, is the first step. Remembering that a dispute resolution clause will likely be used by different people in a new business setting can only help in drafting the clause more precisely.
David S. Coale is a partner at Lynn Pinker Cox & Hurst, where he specializes in appellate law.