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U.S. Supreme Court Rejects ‘Wholly Groundless’ Exception to Delegation Clauses in Arbitration Agreements

On January 8, 2019, the United States Supreme Court issued a unanimous opinion in Henry Schein, Inc. v. Archer & White Sales, Inc. strengthening the enforceability of arbitration “delegation clauses.” These clauses have been previously upheld by the U.S. Supreme Court and allow parties to agree that an arbitrator, rather than a court, will decide the threshold issue of whether a dispute must be arbitrated, as well as the merits of the dispute. The Supreme Court in Henry Schein rejected a doctrine adopted by several federal Circuit Courts of Appeals and the California Court of Appeal, which permitted courts to decline to enforce delegation clauses if the underlying assertion of arbitrability was “wholly groundless.” Under Henry Schein, courts must refer questions of arbitrability to the arbitrator when the parties have agreed to a clear and unmistakable delegation, even if the court believes the claim of arbitrability is frivolous.

Lower Court Proceedings

In Henry Schein, the parties entered into an arbitration agreement that incorporated the rules of the American Arbitration Association. These rules give the arbitrator the power to decide his or her own jurisdiction, so Henry Schein contended that the incorporation of the rules constituted a delegation clause. The district court and Fifth Circuit Court of Appeals refused to delegate the question of whether the parties’ substantive dispute was arbitrable to an arbitrator based on a finding that Henry Schein’s argument for arbitration was “wholly groundless.”

The FAA Does Not Include A “Wholly Groundless” Exception For Delegation Clauses

The U.S. Supreme Court unanimously reversed the Fifth Circuit, finding that a “wholly groundless” exception to the enforceability of delegation clauses is “inconsistent with the text of the [Federal Arbitration Act] and with our precedent.” The high court held that it must interpret the Federal Arbitration Act as written, which in turn requires courts to interpret arbitration agreements as written. If the contract delegates arbitrability questions to an arbitrator, a court may not override the contract simply because it believes the questions are obvious. The Supreme Court previously held in AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 649–650 (1986) 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.” The Court in Henry Schein held that this same principle applies when the issue assigned by contract to an arbitrator is the arbitrability of a party’s underlying substantive claims.

Public Policy Considerations

Archer & White, the party opposing arbitration, argued that it would be a waste of time and money to send the arbitrability question to an arbitrator if the argument for arbitration is wholly groundless. But the Supreme Court refused to create an exception to the Federal Arbitration Act that was not included in the statutory text. Further, the Court held that recognizing such an exception would spur “a time-consuming sideshow” of collateral litigation regarding when an argument is wholly groundless, as opposed to merely groundless. The Court also noted that while a court may find the answer to arbitrability questions obvious, an arbitrator might hold a different view and that the parties’ choice to have the arbitrator decide must be respected. The Court held that if a demand for arbitration is truly frivolous, the arbitrator can quickly dispose of the matter and may be able to impose fee and cost-shifting sanctions in proper circumstances.

Court Limits Its Holding To The “Wholly Groundless” Exception

The Supreme Court expressly did not decide whether incorporation of the American Arbitration Association rules is by itself an effective clear and unmistakable delegation clause. This issue has divided some courts, particularly where one of the parties is an unsophisticated individual. The Court in Henry Schein made clear that its holding was limited to the validity of the “wholly groundless” exception.

Takeaways

Ultimately, Henry Schein provides further support for the enforceability of delegation clauses in arbitration agreements. It solidifies employers’ and employees’ right to contract to have arbitrators decide not only the merits of their disputes, but also the question of whether such disputes are arbitrable. Because Henry Schein is an interpretation of section 2 of the FAA, which governs arbitration agreements affecting interstate commerce—including those used in most employment agreements, it should be binding in both state and federal court. The opinion is therefore relevant to most employers and will affect litigation involving arbitration agreements, and delegation clauses specifically, at both the federal and state level. While Henry Schein answered the particularly narrow question regarding the validity of the “wholly groundless” exception previously recognized by some circuits and California courts, the U.S. Supreme Court’s opinions in two other arbitration cases, Lamps Plus v. Varela and New Prime Inc. v. Oliveira, should shed some further light on the current Court’s views on arbitration.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

John Ellis, law firm Sheppard Mullins San Francisco, CA Office Labor and Employment attorney
Associate

John Ellis is a special counsel in the Labor and Employment Practice Group in the firm's San Francisco office.

Mr. Ellis Practices in the Following Areas:

Labor and Employment

  • Labor and Employment Counseling

  • Labor and Employment Litigation

    • Wage and Hour Class Actions

    • Wrongful Termination

John Ellis' Education:

  • J.D., University of California, Los Angeles, 2009
  • B.A., University of California, Los Angeles, 2006
415.774.2912
Associate

Tyler Johnson is an associate in the Labor and Employment Practice Group in the firm's Los Angeles Office.

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