United States: Lit Alerts—February 2019

Arbitration: US Supreme Court Declines to Recognize a "Wholly Groundless" Exception to the Federal Arbitration Act

In Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1212, Justice Kavanaugh delivered his first written opinion for the Supreme Court, a unanimous decision holding that a court may not override a contract that delegates the threshold question of arbitrability to the arbitrator, even if the court considers the arbitrability claim to be wholly groundless.

Archer & White brought suit in Texas federal court against Henry Schein, Inc. (Schein) for alleged violations of federal and state antitrust laws in connection with a contract to distribute dental equipment. Schein moved to compel arbitration under the parties' contract. Archer & White responded that the dispute was not subject to the arbitration provision because it sought injunctive relief, and the parties' contract barred the arbitration of disputes in such situations.

In turn, Schein argued that an arbitrator, not the court, must determine whether the arbitration provision applied to the particular dispute. Archer & White relied on existing Fifth Circuit precedent holding that a court may determine the threshold question of arbitrability if, under the contract, the argument for arbitration was "wholly groundless." The district court agreed and rejected the arbitration demand as wholly groundless. The Fifth Circuit affirmed.

The Supreme Court rejected the "wholly groundless" exception as inconsistent with the text of the Federal Arbitration Act and Supreme Court caselaw. It explained that arbitration is a matter of contract and the courts must interpret contracts as written. When the parties' contract delegates the question of arbitrability to an arbitrator, a court may not disregard the contract, even if it believes such a claim is wholly groundless.

Employment Law: Seventh Circuit Holds Age Discrimination in Employment Act Does Not Apply to Job Applicants

The Seventh Circuit held that while the Age Discrimination in Employment Act (ADEA) bars discrimination against older employees, it does not provide the same protection to outside job applicants.

In Kleber v. CareFusion Corp., No. 17-1206 (Jan. 23, 2019), Dale Kleber applied for a senior in-house legal position with CareFusion. The job description required applicants to have "3 to 7 years (no more than 7 years) of relevant legal experience," and Kleber, then age 58, had more than 7 years of relevant legal experience. CareFusion passed on Kleber and hired a 29-year-old applicant whose legal experience fell within the described range. Kleber sued, alleging disparate impact and disparate treatment claims under the ADEA. The district court granted CareFusion's motion to dismiss the disparate impact claim on the ground that the ADEA does not apply to outside job applicants. Kleber voluntarily dismissed his disparate treatment claim.

In affirming the ruling, the Seventh Circuit examined the plain language of the statute in its entirety, refusing to look at words in isolation. The court recognized that although the statute uses the term "an individual," the ADEA "proscribes certain conduct by employers and limits its protection to employees." The language thus "plainly demonstrates that the requisite impact must befall an individual with status as an employee," meaning the ADEA's protections do not extend to outside job applicants.

Insurance: Second Circuit Denies Rehearing in Insurance Coverage Dispute

The Second Circuit last month declined to review a December 2018 decision in Patriarch Partners, LLC v. Axis Insurance Co., which held that Axis Insurance Company (Axis) was not required to cover costs arising from Patriarch Partners, LLC (Patriarch) and its defense against an SEC investigation because such costs were excluded due to a warranty signed by Patriarch's CEO. The plaintiff, Patriarch, sued Axis in March 2016 after Axis refused to pay under a $5 million excess insurance policy in connection with an SEC investigation. By that point, Patriarch had incurred more than $25 million in defense fees for an SEC investigation into whether Patriarch and its CEO, Lynn Tilton, had reported misleading values for assets held by three collateral loan obligation funds, known as the Zohar Funds.

Patriarch argued that Axis should pay under the excess policy because the SEC investigation did not formally begin until Patriarch received a subpoena in February 2012—after the Axis policy had taken effect. The district court disagreed, finding that the SEC's formal investigation began when the agency issued its first order of investigation in June 2011, two months before the Axis policy went into effect. As a result, the district court ruled that "the pending or prior claim exclusion" applied, and Axis was not obligated to cover the legal fees at issue. On appeal, the Second Circuit affirmed on different grounds, holding that the coverage obligations were nullified by a warranty Tilton signed in 2011. It found that this warranty erased coverage for "claims relating to facts or circumstances" that Patriarch was aware of and "would reasonably have expected to result in a claim covered by" the policy at issue.

In its rehearing petition, Patriarch argued that the Second Circuit should revisit its December 2018 decision because the court had improperly upheld the district court's decision on an issue not raised below. The Second Circuit refused to revisit its decision, denying the petition in a one-line order without explanation.

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