United States: Supreme Court Overturns "Wholly Groundless" Exception To Contractual Delegations Of Arbitrability Decisions To Arbitrators

On Jan. 8, 2019, the U.S. Supreme Court issued a unanimous decision regarding an important procedural issue under the Federal Arbitration Act (FAA). In Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272, it held that under the FAA, courts must enforce provisions in arbitration agreements delegating threshold questions of whether claims are subject to arbitration to the arbitrator. In so doing, the Court overruled a rule that allowed federal courts to decide themselves whether claims were subject to arbitration, regardless of contract language, if they determined the argument for arbitrability was "wholly groundless." The Court thus eliminated one of the bases some courts have relied upon to avoid the enforcement of arbitration provisions they do not like.

The Schein case was brought by a dental equipment distributor against other manufacturers and distributors alleging violations of federal and state antitrust law and seeking both money damages and injunctive relief. The relevant contract between the parties provided for arbitration before the American Arbitration Association (AAA) of any dispute arising under or related to the agreement, except for, among other things, actions seeking injunctive relief. Invoking the FAA, the defendant asked the district court to refer the matter to arbitration. The plaintiff, however, argued that the dispute was not subject to arbitration because its complaint sought injunctive relief, at least in part.

That triggered further arguments as to whether the court or the arbitrator should determine whether the claims were subject to arbitration. The defendant contended that the AAA rules incorporated into the contract gave the arbitrator the explicit power to resolve arbitrability questions; therefore, the arbitrator ‒ not the court ‒ should decide whether the dispute was arbitrable. The plaintiff countered that the argument for arbitration in this instance was "wholly groundless," so the district court could itself resolve the threshold arbitrability question. The district court accepted the "wholly groundless" argument and denied the motion to compel arbitration. The Fifth Circuit affirmed.

In an opinion authored by Justice Brett Kavanaugh (his first majority opinion), the Court concluded that the so-called "wholly groundless" exception adopted by the Fifth Circuit and other lower courts was inconsistent with the FAA. The justices agreed that arbitration is a contractual process that the parties can frame in the manner they choose, including on issues of jurisdiction. When a contract allows arbitrators to decide whether a dispute can be resolved through arbitration, "a court may not override the contract." Specifically, if a contract provides that an arbitrator may decide whether a dispute is subject to arbitration, only the arbitrator may decide the issue. In rejecting the "wholly groundless" exception, the Court noted that "we are not at liberty to rewrite the statute passed by Congress and signed by the President" and that under the FAA's plain language, "[w]hen the parties' contract delegates the arbitrability question to an arbitrator, the courts must respect the parties' decision as embodied in the contract."

The Schein decision's elimination of the "wholly groundless" exception prevents claimants from avoiding arbitration by taking the threshold issue of arbitrability to the courts when the arbitration agreement delegates threshold arbitrability decisions to arbitrators. The ruling bolsters companies' ability to control the arbitration process for resolving disputes with customers or other businesses.

Generally, companies prefer to arbitrate claims because arbitration may be cheaper and faster than litigation in court. Court litigation tends to be longer and more expensive, and carries a greater risk of hefty damages awards by juries, who lack the legal sophistication and experience of an arbitrator. While arbitral decisions have a strong presumption of finality and are subject to only limited judicial review, many companies prefer arbitration based on their experience that it will be less expensive, more predictable and less susceptible to error than results obtained in the courts. The Supreme Court's decision gives the contracting parties greater control over the process and eliminates one potentially costly side step into court.

Notably, however, the Court left open the question of whether the arbitration agreement in the case in fact delegated the decision to arbitrate to the arbitrator, remanding that issue to the Fifth Circuit. In doing so, the Court reminded the Fifth Circuit that courts "should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so." (Slip op. at 8, quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). This remand is significant because the arbitration agreement at issue did not itself contain an express delegation of arbitrability decisions to the arbitrator. Rather, it provided only that "any dispute arising under or related to this Agreement ... shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association." Those rules in turn delegate arbitrability decisions to the arbitrator; many courts have concluded that a contract's incorporation of the AAA's rules constitutes "clear and unmistakable evidence" that the parties delegated arbitrability decisions to the arbitrator. The Fifth Circuit may have an opportunity on remand to examine whether this type of implied delegation satisfies the FAA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.