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by Andrew Flake

The “injunctive relief” carve-out, which lies quietly in various forms in many arbitration agreements, is a too-often overlooked landmine. Its most frequent purpose, allowing parties to go to court for emergency relief while preserving their right to send the underlying dispute to arbitration, is benign; including the carve-out reflects the historical concern (not as often applicable now) that injunctive relief would not be available, or if available, would be inefficient to seek, from the tribunal. Thus, for example, in a trade secrets dispute, the plaintiff would secure an injunction against disclosure or further use of its secrets in court, and then move its claim for misappropriation and for damages to arbitration. So far, so good. But as the Fifth Circuit’s decision in its second Archer & White Sales, Inc. opinion (“Archer & White II”) illustrates, painfully for one of the parties, an imprecisely drafted carve-out can explode, obstructing what was intended to be a clear road to arbitration, and creating years of additional litigation on a non-merits issue.

Let’s take a look at the arbitration clause from that case, keeping in mind that AAA’s commercial rules (in 2012 when Archer & White was filed, and now) allow the arbitrator to decide what is arbitrable:

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.

Notice that the parenthetical exception specifically refers not only to “injunctive relief” but to certain disputes involving Pelton & Crane, a predecessor of one of the parties. This provision departs from the AAA’s standard form language and was evidently the subject of some intentional revision, if not negotiation.

We can fairly assume that the drafters wanted to have the ability to seek rapid injunctive relief in court, and also to litigate IP disputes before a district court, probably in view of the well-established federal case law and range of IP-specific remedies. But did the drafters intend to provide for — or give any thought at all to — who would make the decision about which cases fell into that exception, in other words, about which claims were arbitrable?

The Fifth Circuit was not able to say, at least not by “clear and unmistakeable evidence,” that the parties committed these gateway determinations to arbitration. Like a majority of its sister circuits, the Fifth Circuit has previously determined that incorporation of AAA’s commercial rules does indeed signify clear and unmistakeable intent. In the Archer & White II agreement, however, it was the placement of the carve-out that changed the result: “Any dispute…except for actions seeking injunctive relief…shall be resolved…in accordance with [AAA rules].”

For the Archer & White II panel, the question was a straightforward instance of contract reading; disputes “seeking injunctive relief” are not included in the group of disputes resolved under AAA rules and thus, not in the group of disputes in which arbitrability is decided by the arbitrator. Put another way, there is a difference between whether the claim belongs in arbitration, and who determines whether it belongs.

So despite a reference elsewhere in the clause to AAA rules, the placement of the carve-out meant that the district court got to decide. Although it could have then applied the contract language to cover the claims and sent the matter to arbitration, it did not, finding the carve-out reserved the antitrust claims (which included injunctive relief) for judicial decision. The Fifth Circuit affirmed.

For the Defendants, this may have been the tail (keeping a right to go to court for a TRO) wagging the entire dog right back into the courthouse. To see how the clause could have been differently drafted, and to bring the result into more focus, consider the arbitration clause and carve-out in another Fifth Circuit case, one in which the court did find, based on reference to the AAA rules, clear and unmistakable intent:

Any and all disputes in connection with or arising out of the Provider Agreement by the parties will be exclusively settled by arbitration before a single arbitrator in accordance with the Rules of the American Arbitration Association. The arbitrator must follow the rule of Law, and may only award remedies provided for in the Provider Agreement…. Any such arbitration must be conducted in Scottsdale, Arizona, and Provider agrees to such jurisdiction, unless otherwise agreed to by the parties in writing. The expenses of arbitration, including reasonable attorney’s fees, will be paid for by the party against whom the award of the arbitrator is rendered…. Arbitration shall be the exclusive and final remedy for any dispute between the parties in connection with or arising out of the Provider Agreement; provided, however, that 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….

Crawford Prof’l Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 256 (5th Cir. 2014) (emphasis added). The Fifth Circuit did not focus on the carve-out, but did find, its inclusion notwithstanding, clear and unmistakable evidence that all questions, including the gateway arbitrability question, were intended for the arbitrator. I think the reason is that the Crawford carve-out is not really a carve-out; it is an expression of a cumulative right to seek injunctive relief, on top of a full commitment of issues to arbitration, without waiving the right to arbitrate.

What moral or wise morsel lies here? For one thing, when drafting, reviewing, or negotiating an arbitration clause that contains a carve-out, do some minesweeping. Read it closely, and consider not only which claims you want included in its scope, but who you want making that decision. If nothing else, you can save a round of briefing and argument — and looking at Archer & White II, perhaps eight years and running of ancillary litigation!

[The case is Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274, 277 (5th Cir. 2019), cert. dismissed as improvidently granted, 141 S. Ct. 656 (2021).]