United States: Supreme Court Holds Threshold Question Of Arbitrability Is One Of Contract And Valid Agreements To Submit Question To Arbitrator Will Be Enforced

(January 8, 2019) - Today, the U.S. Supreme Court in Henry Schein, Inc. v. Archer & White Sales, Inc. unanimously held that where parties agree in a contract to submit even the gateway question of arbitrability to an arbitrator, the Federal Arbitration Act and Supreme Court precedent compel federal courts to honor that contractual agreement even where the arbitration demand appears 'wholly groundless.'

Today's opinion (authored by newly appointed Justice Brett Kavanaugh) resolves a split in the federal circuits concerning propriety of the 'wholly groundless exception' to the FAA, which was applied by the district court to deny application of the parties' contractual arbitration provision to the dispute at bar. Importantly, while the Court's decision arose in the context of an antitrust dispute, it is not confined to the antitrust arena.

Archer & White Sales, Inc. (Archer) sued Henry Schein, et al. (Schein) for Schein's alleged federal and state antitrust law violations related to the parties' involvement in the dental equipment manufacturing industry. Archer had a dental equipment distribution agreement with Schein's predecessor company, and the relationship soured. The parties' distribution contract provided that "any dispute arising under or related to the Agreement (except for actions seeing injunctive relief . . .) shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association." Id., at 2. Archer argued that the arbitration clause plainly did not apply because the suit sought, in part, injunctive relief, and thus the arbitration demand was wholly groundless because suits seeking injunctive relief are not subject to arbitration.

The threshold question the Court addressed , then, was who decides arbitrability of a dispute. The American Arbitration Association (AAA) rules, expressly incorporated by the parties' contract, provide that arbitrators have the power to decide arbitrability questions. The Court has previously applied the FAA to the gateway question of arbitrability, holding that parties may agree to have an arbitrator decide not only the merits of a particular dispute, but also the "gateway questions of 'arbitrability,' such as whether their agreement covers a particular controversy." Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-69 (2010). The reasoning is that an agreement to arbitrate a gateway issue is simply an antecedent agreement the party seeks the federal court to enforce, and the FAA operates on this type of agreement just as it does on any other. Id., at 70.

In addition to the text of the FAA applying to this gateway question, Supreme Court precedent holds that a court may not "'rule on potential merits of the underlying claim' that is assigned to an arbitrator, even if it appears to the court to be frivolous." AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649-650 (1986). This principle applies with equal force to the question of arbitrability. Just as a court may not decide the merits of a question that should be arbitrated, a court may not decide the merits of whether a case should be arbitrated.

Archer advanced four arguments in support of the wholly groundless exception. First, Archer argued that the FAA's provision that a court must stay litigation "upon being satisfied that the issue [is] referable to arbitration" means that a court must always resolve the threshold question of arbitrability. Archer, at 6. The Court agreed with Archer that a referring court must always determine whether a valid arbitration agreement exists; but so long as the arbitration agreement is valid, the court's authority to determine arbitrability ends there.

Archer's second argument was that the FAA provides for judicial review of an arbitrator's decision to determine whether an arbitrator has exceeded their power, and so the court should decide if an arbitration demand is wholly groundless in the first instance rather than merely on review. But this is not how the FAA was designed to work, and the Court declined to decide the case contrary to the statute. Id.

Archer's third and fourth arguments travelled similar paths, arguing that sending a wholly groundless arbitration demand to an arbitrator would save the parties' time and money; and the wholly groundless exception is necessary to deter frivolous motions to compel arbitration. The Court rejected both of these arguments on statutory grounds, and on the grounds that Archer presented no evidence that circuits which did not apply the wholly groundless exception suffered the harm Archer predicted.

In the end, the Court rejected the wholly groundless exception and makes quite clear that so long as the parties' contract refers the question of arbitrability to an arbitrator then that contract will be enforced even if the arbitration demand appears to be wholly groundless. This holding is not limited to cases involving antitrust claims, such as the underlying claims at bar in Archer – any contractual arbitration provision will be subject to the Court's ruling here.

Of note, the Court did not decide whether this particular arbitration clause constituted referral of the gateway question to the arbitrator. As noted above, the gateway question was referred to the arbitrator by action of the expressly-referenced AAA rules. The opinion contains only a single sentence, noting that courts "should not assume that the parties agreed to arbitrability unless there is clear and unmistakable evidence that they did so." Id., at 8, citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, at 944 (1995). But here, the Court pointedly did not express a view about whether this contractual provision in fact delegated the arbitrability question to an arbitrator. And so, although certain circuits hold that reference to the AAA rules constitutes just such a referral, the standard arbitration provision with reference to AAA rules may not suffice in all jurisdictions.

You can read the full Supreme Court decision here.

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