U.S. Supreme Court Holds Arbitrability Questions Not Subject to A “Wholly Groundless” Exception

Carlton Fields

Archer & White Sales, Inc. (“Archer”) sued Henry Schein, Inc. (“Schein”) in federal court seeking both monetary and injunctive relief. A contract between the parties required arbitration of all claims arising from the agreement, except those seeking injunctive relief.  Schein moved to compel arbitration based on the request for monetary damages.  Archer objected, pointing to its demand for injunctive relief.  The issue thus became one of arbitrability—who decides whether the dispute is subject to arbitration, the court or an arbitrator?  The contract at issue incorporated the rules of the American Arbitration Association, under which arbitrators are to decide arbitrability issues.  The district court nonetheless decided the issue and denied Schein’s motion, holding it was “wholly groundless” because an arbitrator would inevitably conclude that the dispute is not arbitrable and refer it back to the district court.  The Fifth Circuit affirmed, but the U.S. Supreme Court unanimously vacated the judgment.

Even where a contract expressly delegates the arbitrability question to an arbitrator, the Supreme Court explained that several federal courts “short-circuit” the process and decide the question themselves when they think a request for arbitration is “wholly groundless.” To these courts, this “wholly groundless” exception is a means of blocking “frivolous” attempts to transfer cases out of the court system.  But the Supreme Court found the exception to be inconsistent with the Federal Arbitration Act (“FAA”) and Supreme Court precedent.  The FAA, Justice Kavanaugh wrote, does not contain a “wholly groundless” exception, and the Court must interpret the FAA as written.  The FAA, in turn, requires interpreting the relevant contract as written.  As a result, if a contract delegates the arbitrability issue to an arbitrator, courts have no power to decide the issue, even if they think a particular dispute is not ultimately arbitrable.  The Court held that the wholly groundless exception therefore “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.”  And such was the case here, where neither of the lower courts actually decided whether the Archer/Schein contract delegated the arbitrability question to an arbitrator, instead short-circuiting the issue based on the wholly groundless exception.  Having rejected the applicability of such exception, the Court vacated the judgment and remanded for this threshold determination.

Schein v. Archer & White Sales, Inc., No. 17–1272, 586 U. S. ____ (Jan. 8, 2019) (Slip Op.)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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