In his first Supreme Court opinion, Justice Kavanaugh, writing for a unanimous court, held that when a contract delegates to arbitrators gateway questions regarding arbitrability of disputes, courts may not override that contractual delegation, even if the court believes that the argument for arbitrability is wholly groundless. Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272, 586 U.S. ____ (Jan. 8, 2019). Prior to this decision, the circuit courts of appeals were split on this issue, with the Fourth, Fifth, Sixth, and Federal Circuits applying a “wholly groundless” exception to enforcement of such delegation clauses, and the Tenth and Eleventh Circuits enforcing delegation clauses without limitation.
The Federal Arbitration Act and Supreme Court precedent allow parties to delegate issues of arbitrability, including whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy, to arbitrators rather than courts. See Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 68-69 (2010). Even when the parties include a delegation clause in their arbitration agreement, however, the Fourth, Fifth, Sixth, and Federal Circuits applied an additional hurdle to arbitration. These circuit courts determined that the court, rather than the arbitrator, should decide the issue of arbitrability if the argument for arbitration was “wholly groundless.”
This case arose from a contract between Archer and White, a small dental equipment distributor, and a dental equipment manufacturer. Archer and White sued Henry Schein, Inc., the manufacturer’s successor-in-interest, in the Eastern District of Texas, alleging violations of federal and state antitrust law, and seeking both money damages and injunctive relief. The contract contains an arbitration provision providing for arbitration of disputes “arising under or related” to the contract, “except for actions seeking injunctive relief . . . .” The arbitration provision incorporated by reference the American Arbitration Association’s rules, which provide that arbitrators have the power to resolve gateway questions of arbitrability.
Schein moved to compel arbitration, and Archer and White opposed, arguing that the dispute was not subject to arbitration because the complaint sought, in part, injunctive relief and the arbitration agreement did not cover suits for injunctive relief. The district court applied Fifth Circuit precedent and denied the motion to compel arbitration, finding that Schein’s argument for arbitrability was wholly groundless. The Fifth Circuit affirmed.
Before the Supreme Court, Schein argued that neither the text of the Federal Arbitration Act nor Supreme Court case law included a “wholly groundless” exception to enforcement of delegation clauses, and that courts should enforce arbitration agreements as written, rather than read in additional hurdles to arbitration. Archer and White raised four arguments in support of the “wholly groundless” exception, each of which was rejected by the Court. First, Archer and White argued that Sections 3 and 4 of the Act refer to the court’s power to stay litigation and compel arbitration upon being “satisfied” that the issue is referable to arbitration, which must mean that courts are empowered to resolve questions of arbitrability. The Court rejected this reasoning, stating, “But that ship has sailed.” (Slip Op. at 6.) Under Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 68-69 (2010), among other cases, the Court “has consistently held that parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by ‘clear and unmistakable evidence.’” Id. (citations omitted). “[I]f a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.” Id.
Second, Archer and White argued that because Section 10 of the Act allows a court to determine after an arbitration award whether the arbitrator has “exceeded” his or her “powers,” 9 U.S.C. § 10(a)(4), “the court at the front end should also be able to say that the underlying issue is not arbitrable.” Schein, slip op. at 6. The Court stated that “Congress designed the Act in a specific way, and it is not our proper role to redesign the statute.” Id.
Third, Archer and White argued that a “wholly groundless” exception helps avoid the waste of the parties’ time and money that would occur when a delegation clause would require a court to send a frivolous arbitrability argument to the arbitrator. The Court reiterated its strict construction of the statutory language: “The short answer is that the Act does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute passed by Congress and signed by the President.” Id. at 7. The Court also cast doubt on whether the “wholly groundless” exception would even save time and resources, as it would “inevitably spark collateral litigation” and create “a time-consuming sideshow.” Id.
Last, Archer and White argued that the “wholly groundless” exception is necessary to deter frivolous motions to compel arbitration. The Court was unpersuaded: “Arbitrators can efficiently dispose of frivolous cases by quickly ruling that a claim is not in fact arbitrable,” and “may be able to respond to frivolous arguments … by imposing fee-shifting and cost-shifting sanctions.” Id. at 8.
The Court expressed no opinion as to whether the contract at issue in fact delegated arbitrability to the arbitrator for resolution, but invited the Fifth Circuit to address that question and others on remand.
Now, enforcement of arbitration with delegation clauses is a uniform, two-step process. If a court finds: (1) that the parties formed an agreement to arbitrate; and (2) that the arbitration agreement clearly and unmistakably evidences an intent to delegate arbitrability to the arbitrator, then the court must delegate the issue of arbitrability to the arbitrator without inquiry into the strength of the arbitrability argument.
The Court’s decision continues a trend of both strict statutory construction and rigorous enforcement of arbitration provisions as written. See, e.g., Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018) (holding that neither the Federal Arbitration Act’s Savings Clause nor the National Labor Relations Act provides a basis for refusing to enforce arbitration agreements waiving collective actions); Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017) (holding that Kentucky’s clear-statement rule, requiring an explicit statement in a power of attorney that the attorney-in-fact has authority to waive the principal’s state constitutional rights to access the courts and to a jury trial, disfavors arbitration agreements and therefore is preempted by the Federal Arbitration Act).
Schein may also provide an indication of how the Court will decide two other arbitration cases pending before it this term. See Lamps Plus, Inc. v. Varela, 138 S. Ct. 1697 (2018) (granting certiorari to determine whether the Federal Arbitration Act 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, 138 S. Ct. 1164, 200 L. Ed. 2d 313 (2018) (granting certiorari to determine: (1) whether a dispute over applicability of the Federal Arbitration Act’s Section 1 exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and (2) whether the FAA’s Section 1 exemption, which applies on its face only to “contracts of employment,” is inapplicable to independent contractor agreements).
We are continuing to watch these cases.
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