CHAPTER 6, D. Bound to Arbitrate? Arbitration Agreements in Light of Supreme Court Decisions

• Jurisdiction: United States

D. Bound to Arbitrate? Arbitration Agreements in Light of Supreme Court Decisions

ABI Journal

May 2019

Angela N. Grewal

Adams and Reese LLP

Jacksonville, Fla.

Jamie W. Olinto

Adams and Reese LLP

Jacksonville, Fla.

You are a party to an agreement with a mandatory arbitration provision. One of the parties to the agreement files for bankruptcy. How enforceable is that arbitration provision in bankruptcy? Of course, the answer depends on what precisely the parties are contesting, but as the U.S. Supreme Court has continued to issue decisions reiterating the validity and enforceability of arbitration agreements, and limiting exceptions to enforcement of the same, such a provision is increasing likely to be enforced.

Although the specific issue of enforcement of arbitration agreements in bankruptcy has not yet reached the Supreme Court, it is an issue with which bankruptcy, district and circuit courts have struggled. Despite the uncertainty, it has become less clear that involvement in a bankruptcy case does not automatically prohibit enforcement of arbitration agreements. As the Supreme Court issues more decisions eliminating exceptions and strengthening the importance of the enforcement of arbitration provisions, it seems inevitable — absent an unexpected shift — that the Court will follow their current trajectory and continue to enforce arbitration provisions, even in bankruptcy.

The Supreme Court's Decisions on Arbitration Enforcement

The Federal Arbitration Act (FAA) sets forth national approval of arbitration. The FAA provides that an arbitration agreement shall be "valid, irrevocable, and enforceable."¹ The Arbitration Act establishes "a liberal federal policy favoring arbitration agreements."²

In Shearson/American Express Inc. v. McMahon, the Supreme Court acknowledged that the FAA's arbitration mandate "may be overridden by a contrary congressional command."³ However, the Court further found that a party opposing arbitration on the basis that it is contrary to a federal statute has the burden to show that Congress intended to prohibit arbitration agreements from being enforced through (1) statutory text, (2) legislative history or (3) "from an inherent conflict between arbitration and the statute's underlying purposes."⁴ This is not a burden that is easily met. The Supreme Court has rejected every argument (except for a temporary exception that was later overruled)⁵ that a federal statute conflicted with the FAA.⁶

In Epic Systems Corp. v. Lewis, the Supreme Court issued another decision in 2018 upholding the enforceability of arbitration agreements, even in the face of a potentially contradictory federal statute. The Court held that arbitration agreements providing for individualized proceedings (that is, prohibiting class actions) were enforceable, and the National Labor Relations Act (NLRA) did not provide otherwise.⁷ The majority opinion noted that the NLRA "does not express approval or disapproval of arbitration" or even "hint at a wish to displace the [FAA]."⁸ Since the NLRA did not manifest a clear intention to displace the FAA, the Court could read the statutes in harmony and was required to enforce the arbitration provision.

In early 2019, the Supreme Court handed down its unanimous decision in Henry Schein Inc. v. Archer & White Sales Inc., again removing an exception that some lower courts used to undercut the question of which entity determined the validity of the arbitration provision itself.⁹ The Court held that if a party's contract delegates the question of whether an arbitration provision is valid to an arbitrator, there is no "wholly groundless" exception that would allow a court to override that designation.¹⁰ The FAA itself does not contain a "wholly groundless" exception, thus courts cannot read one into the Act.¹¹

Arbitration in the Bankruptcy Context

Although the issue of bankruptcy and arbitration has yet to reach the Supreme Court, multiple circuit courts (along with district and bankruptcy courts) have grappled with the issue. The Third Circuit, noting the then-recent Supreme Court decisions reiterating the importance of enforcing arbitration agreements, stated in 1989 that it could "no longer subscribe to a hierarchy of congressional concerns that places the bankruptcy law in a position of superpriority over" the FAA.¹² As seen in Schein and Epic Systems, further Supreme Court decisions have only underscored the importance of enforcing arbitration agreements.

At least two circuits have explicitly held that neither the text itself nor the legislative history of...