Supreme Court Update for Banking and Financial Services Professionals

by Charles W. Prueter

Unanimous opinions in cases concerning relatively mundane matters generally are not the stuff of the nightly news. These are not the hot-button cases that capture the nation — one obvious and important exception is Brown v. Board of Education, in which the Court spoke with one voice to strike down the separate but equal doctrine. One recent unanimous opinion, however, is notable both for its relevance to the financial services industry and for its author. Carrying on a half-hearted tradition, Justice Brett Kavanaugh’s first opinion is a unanimous opinion — Henry Schein Inc. v. Archer and White Sales Inc., No. 17-1272 (Jan. 8, 2019). (This “tradition” is only half-hearted because the justices don’t appear to go too far out of their way to follow it. For example, the late Justice Antonin Scalia dissented from Justice Elena Kagan’s first opinion for the Court in January 2011.) 

         Henry Schein is an arbitration case. As the Update noted in the December issue, the arbitration-or-litigation fight — i.e., whether the parties will resolve their differences in a contractually agreed upon private forum or the public forum provided by the appropriate state or federal court — has been ongoing for years. And because the contracts containing arbitration agreements almost always touch on interstate commerce, the Federal Arbitration Act is the governing statutory authority for these cases. So it is here in Henry Schein.

         Right off the bat in this opinion, Justice Kavanaugh straightforwardly breaks down the issue: “When a dispute arises, the parties sometimes may disagree not only about the merits of the dispute but also about the threshold arbitrability question — that is, whether their arbitration agreement applies to the particular dispute. Who decides that threshold arbitrability question?” The answer lies, Justice Kavanaugh explains, in what the parties’ contract says. That is, if the parties agreed, ex ante, that the arbitrability of any dispute would be decided by an arbitrator, then an arbitrator must decide whether the dispute is arbitrable. This all seems simple enough — indeed, this already was the law, based on precedents from as early as 1995 and as recent as 2010.

         Nevertheless, some courts have declined to enforce agreements delegating questions of arbitrability to an arbitrator if the court concludes that the claim of arbitrability is “wholly groundless.” In other words, under that approach, if a court concludes that there is no merit to the argument that the dispute is actually arbitrable, even if the parties’ contract delegates that decision to an arbitrator, the court may keep the case without allowing for an arbitrator to even consider the matter. (Recall that plaintiffs typically prefer to stay in the court forum, where discovery and other litigation rules are generally more favorable.) The problem with this approach, however, is that finds no support in the Federal Arbitration Act or in the precedent of the Supreme Court. As a result, Justice Kavanaugh concludes for the unanimous Court, regardless of whether the court thinks the claim of arbitrability is wholly groundless, partially groundless, or fully grounded, “when the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.”

         This decision, as you probably have gathered if you’re still reading, is not sexy. But it is important. First, with respect to arbitration agreements in particular, it re-centers the law on the text of the statute, which provides private parties the right to enter into agreements to order their affairs on the front end. For businesses, this brings an important level of certainty to risk management. Second, this unanimous opinion, however small and seemingly obscure it may be, represents a bulwark against judges refashioning the law based on policy preferences. Not that Congress is a model of efficient operation, but our system of government vests in Congress, not the judiciary, the power to make federal law.  

         In perhaps the biggest upcoming case testing the limits of the administrative state, in Kisor v. Wilkie, No. 16-1929, the Court has agreed to reconsider what is known as the Auer doctrine. Under that doctrine, federal courts will defer to an agency’s reasonable interpretation of its own ambiguous regulation. In the last several years, this doctrine has come under attack from Justices Thomas and Gorsuch among others, as one pernicious effect has been to allow agencies to promulgate ambiguous regulations and yet maintain the power to alter the meanings of those regulations without notice to the individuals and businesses affected. For example, as Justice Thomas explained in a 2015 case, in 2006 the Department of Labor construed certain of its regulations to exclude “mortgage-loan officers” from the definition of “employees whose primary duty is selling financial products.” But in 2010, the Department of Labor reversed course, concluding exactly the opposite. Thus, as Justice Thomas warned, if courts are to accord controlling weight to both the 2006 and 2010 interpretations, pursuant to the Auer doctrine, then the regulated entities are subject to two opposite legal rules imposed under the same regulation.

         In Kisor, this doctrine is squarely in the Court’s crosshairs. This case involves a decision from the Department of Veterans Affairs to refuse to provide certain disability benefits for service-related PTSD, based on the VA’s own interpretation of its own ambiguous regulation. The veteran’s legal argument before the Supreme Court turns on the basic proposition that the courts, not the VA, should have the final say in what that regulation actually means. If the fundamental truth of our Constitution — that the Legislature makes the laws, the Executive enforces the laws, and the Judiciary interprets the laws — carries the day in this case, I think there is a good possibility that the Court will overrule Auer and dispose of the doctrine.

Charles W. Prueter is a trial and appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at