March 18, 2019

March 18, 2019

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March 15, 2019

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Unanimous Supreme Court Holds No "Wholly Groundless" Exception to Arbitrability Under FAA

Deciding an important gateway arbitration issue that has divided the circuits, the U.S. Supreme Court has held that the Federal Arbitration Act (FAA) requires courts to enforce arbitration agreements that delegate questions of arbitrability to the arbitrator even if they believe that the claim of arbitrability is "wholly groundless." In his first published Supreme Court opinion, Justice Brett Kavanaugh delivered the unanimous decision of the Court in Henry Schein, Inc. v. Archer & White Sales, Inc.

Archer & White sued Henry Schein for antitrust violations and sought money damages and injunctive relief. Mr. Schein moved to compel arbitration, which Archer & White opposed because the arbitration agreement excluded actions seeking injunctive relief. Mr. Schein contended that the applicable rules of the American Arbitration Association permitted the arbitrator to resolve disputes about arbitrability. However, the district court concluded that Mr. Schein's argument that the dispute was subject to arbitration was wholly groundless and denied its arbitration motion. The U.S. Court of Appeal for the Fifth Circuit affirmed.

In light of the disagreement on the "wholly groundless" issue between the U.S. Courts of Appeal for the Fourth, Fifth, Sixth, and Federal Circuits on the one hand, and the U.S. Courts of Appeal for the 10th and 11th Circuits, on the other hand, the Supreme Court granted Mr. Schein's petition for certiorari.

The Court determined that the "wholly groundless" exception is inconsistent with the text of the FAA and the Court's precedent holding that under the FAA, arbitration agreements must be enforced as written, emphasizing that:

When the parties' contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue. That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.

The Court rejected Archer & White's argument that as a practical and policy matter, it would be a waste of the parties' time and money to send the arbitrability question to an arbitrator if the argument for arbitration is wholly groundless. It emphasized that because the FAA contains no "wholly groundless" exception, "we may not engraft our own exceptions onto the statutory text." Moreover, the Court found it "doubtful" that the "wholly groundless" exception would save time and money systematically, since the exception "would inevitably spark collateral litigation (with briefing, argument, and opinion writing) over whether a seemingly unmeritorious argument for arbitration is wholly groundless, as opposed to groundless." It saw "no reason to create such a time-consuming sideshow."

Still awaiting the Court's decision are two additional arbitration cases. The question in Lamps Plus, Inc. v. Varela is whether the FAA forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements. New Prime, Inc. v. Oliveira involves the question of whether an exemption in the FAA for certain transportation workers who signed "contracts of employment" applies to independent contractors in the transportation industry, and whether this arbitrability question should be decided by a court or an arbitrator.

Copyright © by Ballard Spahr LLP

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About this Author

Kaplinksy, partner, New York, finance
Partner

Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

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Mark Levin, Ballard Spahr Law Firm, Litigation Attorney
Partner

Mark J. Levin is known for his work in complex commercial, insurance, and class-action litigation, with particular experience in consumer finance litigation, the structuring and enforcement of consumer arbitration clauses, and the defense of insurance companies in class actions. He testified in 2007 for the lending industry before a subcommittee of the U.S. House Judiciary Committee at an oversight hearing on whether mandatory arbitration in consumer contracts is fair to consumers.

Mr. Levin has represented banks in defending against the first private class-action lawsuits under the Federal Trust Indenture Act, nuclear power plant owners in a year-long arbitration against an international insurance consortium, and school districts in a major funding lawsuit to recover state funds. He is currently involved in defending banks, other lending companies, and insurance companies in a wide variety of consumer class actions, including numerous class actions brought under the Pennsylvania Unfair Trade Practices and Consumer Protection Law.

215-864-8235