Supreme Court Concludes “Wholly Groundless” Exception Is Inconsistent With Federal Arbitration Act
On January 8, 2019, the Supreme Court of the United States decided whether courts may disregard contractual language calling for an arbitrator to decide questions of arbitrability if the argument that the arbitration agreement applies to the particular dispute is “wholly groundless.” The Court ruled that a “wholly groundless” exception is inconsistent with the Federal Arbitration Act (FAA), and courts are not free to override the terms of parties’ agreements to arbitrate. Henry Schein, Inc. v. Archer and White Sales, Inc., Supreme Court of the United States, No. 17-1272 (January 8, 2019).
The case involves a business dispute between a distributor of dental equipment, Archer and White Sales, Inc., and the successor-in-interest to a dental equipment manufacturer, Henry Schein, Inc. The contract between the parties provided that any dispute arising under or relating to the contract, but not including actions seeking injunctive relief, “shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.” Archer and White sued in federal district court in Texas, alleging antitrust law violations and seeking both money damages and injunctive relief. Schein responded by invoking the FAA and asking the court to compel arbitration. Archer and White opposed the request, arguing that the dispute was not subject to arbitration because the action sought injunctive relief.
The question then became whether an arbitrator or the court can decide if a dispute is subject to arbitration. Schein pointed to the rules of the American Arbitration Association, incorporated into the contract, which provide that arbitrators have the power to resolve arbitrability questions. Archer and White, relying on precedent from the Fifth Circuit Court of Appeals, responded that, notwithstanding the contact language, because Schein’s argument for arbitration was wholly groundless (since the action sought injunctive relief) the district court could resolve the threshold question of arbitrability. The district court agreed and the Fifth Circuit affirmed. The Supreme Court grant certiorari in light of disagreement among the courts of appeals over whether the “wholly groundless” exception is consistent with the FAA.
The Supreme Court’s Decision
Writing for a unanimous Supreme Court, Justice Kavanaugh reaffirmed that, under the FAA, “arbitration is a matter of contract, and courts must enforce arbitration contacts according to their terms.” The Court noted that, in applying the FAA, the Court has held that parties may agree to have an arbitrator decide
not only the merits of a particular dispute but also “‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.”
The Court further noted that it had previously “explained that an ‘agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on the other.’”
The Court rejected the reasoning of the Fifth Circuit and some other courts of appeals that the “wholly groundless” exception “enables courts to block frivolous attempts to transfer disputes from the court system to arbitration.” Justice Kavanaugh reasoned that the Court “must interpret the [FAA] as written, and the [FAA] in turn requires that [the Court] interpret the contract as written.” “When the parties’ contract delegates the arbitrability question to an arbitrator,” Kavanaugh concluded, “a court may not override the contract.”
The Court concluded that the “wholly groundless” exception is inconsistent with both the text of the FAA and the Court’s precedent. As precedent, the Court pointed to a 1986 decision in which the Court held that “a court may not ‘rule on the potential merits of the underlying’ claim that is assigned by contract to an arbitrator, ‘even if it appears to the court to be frivolous.’” Justice Kavanaugh reasoned that the principle in that case “applies with equal force to the threshold issue of arbitrability.”
The Supreme Court’s ruling is the latest in a series of rulings supporting a broad interpretation of the FAA. The ruling eliminates a basis for opposing the enforcement of an agreement to arbitrate that existed within some federal circuits. Note, of course, that courts retain the power to decide whether an arbitration agreement is valid. However, when a valid arbitration agreement exists—and the agreement gives the arbitrator authority to decide issues of arbitrability—courts do not have the power to usurp the arbitrator’s authority. In light of this ruling, employers may consider reviewing their arbitration agreements to ensure that the agreements make clear that questions of arbitrability are to be decided by the arbitrator (assuming that is the intent of the parties).