U.S. Supreme Court: No FAA “wholly groundless” exception to tribunal’s jurisdiction over questions of arbitrability

The U.S. Supreme Court has issued a unanimous ruling holding that courts may not decide issues of arbitrability where the underlying arbitration agreement delegates such determinations to the arbitrator, even where the arbitration bid is argued to be “wholly groundless.”  The decision—which resolved a long-running split among lower courts—is further evidence of a continuing U.S. trend in favor of parties’ rights to contract for arbitration.

In a January 8, 2019 decision (available here), the U.S. Supreme Court unanimously held that courts may not override a contract delegating to arbitrators questions of arbitrability, even in cases where the arbitration bid is argued to be “wholly groundless.”  The decision, which was the first authored by newly-appointed Justice Brett Kavanaugh, resolved a circuit court split on the question.

Factual background

Archer and White Sales, Inc. (“Archer and White”), a dental equipment distributer, sued Henry Schein, Inc. (“Schein”), a dental equipment manufacturer, alleging violations of U.S. federal and state antitrust law and seeking both money damages and injunctive relief.  The contract between the parties provided for arbitration of “[a]ny dispute arising under or related to” the agreement, except for actions seeking injunctive relief.  Additionally, the contract provided that such disputes “shall be resolved . . . in accordance with the arbitration rules of the American Arbitration Association,” which provide that only arbitrators may resolve questions of arbitrability.

After Schein moved to compel arbitration under the Federal Arbitration Act (the “FAA”), Archer and White opposed, arguing that the dispute was not arbitrable because Schein was seeking injunctive relief.  In response, Schein contended that, because the contract expressly provides for arbitration in accordance with the rules of the American Arbitration Association, that the arbitrator, and not the court, should decide whether the arbitration agreement applied to the dispute.  That clause notwithstanding, Archer and White argued that Schein’s motion to compel arbitration over its claim for injunctive relief was “wholly groundless” and that the District Court—and not an arbitrator—should therefore resolve the threshold arbitrability question.

The FAA contains no “wholly groundless” exception
The Supreme Court rejected Archer and White’s argument that a “wholly groundless” exception to questions of arbitrability existed, finding it to be inconsistent with the FAA, the text of which contains no such exception.

Courts “are not at liberty to rewrite the statute passed by Congress and signed by the President,” Kavanaugh wrote.  “When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.”

Citing longstanding precedent, the Court noted that “[a] Court has no business weighing the merits of the grievance, because the agreement is to submit all grievances to arbitration, not merely those with which the court will deem meritorious.”  This principle applies with equal force to the threshold issue of arbitrability, the Court held.

Archer and White argued that going to the courts on decisions of arbitrability would save parties’ time because, in cases where the argument for arbitration is determined to be wholly groundless, the arbitrator “will inevitably conclude that the dispute is not arbitrable and then send the case back to the district court.”  The Supreme Court rejected this argument, noting that reading a “wholly groundless” exception into the FAA would not only be inconsistent with the Act, but that such an exception would also likely “spark collateral litigation over whether a seemingly unmeritorious argument for arbitration is wholly groundless, as opposed to groundless.

Archer and White also claimed that the “wholly groundless” exception is a necessary tool to deter frivolous motions to compel arbitration.  The Court rejected this argument as well, finding that it “overstated” the problem because arbitrators can efficiently dispose of frivolous cases by quickly ruling that a claim is not arbitrable.  Moreover, the Court noted that frivolous motions to compel arbitration are deterred even in the absence of a “wholly groundless” exception, as arbitrators still have the ability to impose fee-shifting and cost-shifting sanctions.

Significantly, the Court declined to express a view on whether the mere incorporation of the rules of the American Arbitration Association was in fact sufficient to delegate the question of arbitrability to an arbitrator.  When parties agree to arbitrate arbitrability, American law requires that they agree to do so “clearly and unmistakably.”  Archer and White argued that using a so-called “delegation provision” was sufficient to meet this “clear and unmistakable” threshold.  And while all lower courts to consider the question have indeed found such a provision to be sufficient, the Supreme Court chose instead to remand for the lower court to decide on the question. 

Considered together, this decision further evidences the United States’ strong policy in favor of arbitration and commitment to referring all matters to arbitration where parties have contractually committed to doing so.