In 9-0 Decision, Justice Kavanaugh Writes In His First Majority Opinion That Arbitration Is Governed By Contracts, Not Judges

Client Alert

 

In Henry Schein Inc. v. Archer and White Sales Inc., No. 17-1272, 586 U. S. ____ (2019), the United States Supreme Court unanimously held that the language in contracts – not judges – controls whether a claim must be arbitrated as the “wholly groundless” exception to arbitrability is inconsistent with the Federal Arbitration Act (“FAA”) and U.S. Supreme Court precedent. In so holding, the Court reiterated its long-standing precedent that, pursuant to the FAA, arbitration is a matter of contract and courts must enforce arbitration agreements as they are written. Thus, if parties contractually agree to have an arbitrator decide the preliminary issue of whether a claim is to be litigated in court or arbitrated in arbitration, a concept known as “arbitrability,” then a court must abide by that language and is prohibited from overriding the contract, even if the court believes that the arbitrability claim is wholly groundless.

The case arose out of a commercial contract dispute. Archer & White Sales, Inc. (“Archer”) sued Henry Schein, Inc. (“Schein”) in federal court for the Eastern District of Texas for alleged violations of federal and state antitrust law. Archer sought both monetary damages as well as injunctive relief. According to the terms of the parties’ contract, however, any dispute between the parties was to be arbitrated except for, among other things, actions seeking injunctive relief. In response to the complaint, Schein invoked the FAA and requested that the court compel the dispute to arbitration pursuant to the parties’ agreement. Archer, on the other hand, argued that the matter was not subject to arbitration because it sought injunctive relief, which was specifically omitted from the parties’ arbitration agreement. Schein countered that the agreement expressly incorporated the arbitration rules of the American Arbitration Association, which provided that arbitrators have the power to resolve arbitrability questions. Archer refuted this position by arguing that Schein’s position was wholly groundless and that the District Court could resolve the threshold issue of arbitrability. Relying on Fifth Circuit precedent, the District Court sided with Archer, utilized the “wholly groundless” exception, and denied Schein’s motion to compel the case to arbitration. The Fifth Circuit Court of Appeals affirmed that decision.

The U.S. Supreme Court, however, disagreed. Writing his first majority opinion for the Court, Justice Kavanaugh explained that the “wholly groundless” exception to arbitrability is contrary to federal law and Supreme Court precedent. In particular, the Court reasoned that, since the enactment of the FAA in 1925, arbitration has been a matter of contract and arbitration agreements must be enforced by courts pursuant to their terms. This includes provisions that require arbitrators – as opposed to judges – to determine the gateway issue of arbitrability.

Despite this near-century old custom, however, courts have judicially created the “wholly groundless” exception to prevent frivolous efforts to arbitrate non-arbitrable claims. In support of this practice and the underlying decision at issue, Archer argued four main points, none of which the Court found persuasive. First, Archer argued that §§3 and 4 of the FAA, when interpreted together, mean that a court must always resolve questions of arbitrability and that an arbitrator may never do so. The Court rejected this argument, finding that the role of the court is to determine whether a valid arbitration agreement exists and, if it contains language delegating the arbitrability issue to an arbitrator, to enforce that provision. Second, Archer argued that §10 of the FAA specifically allows for after-the-fact judicial review of an arbitrator’s decision if an arbitrator has exceeded their jurisdiction (such as determining arbitrability), so a court should also be able to initially determine the scope of that jurisdiction as well. The Court disagreed, finding that Congress specifically wrote the FAA as it did – allowing for back-end review but not front-end review – and it was not the role of the courts to rewrite the statute. Third, Archer made the policy argument that it would be a waste of time and resources to compel a matter to arbitration when the argument for arbitration is wholly groundless because the arbitrator will simply send the case back to court. The Court rejected this argument on several grounds, namely that (1) the “wholly groundless” exception is nevertheless not contained in the FAA’s statutory text and the courts cannot write it in there, (2) having a court decide the issue may not actually be more efficient because it would result in collateral litigation over whether an argument in support of arbitration is groundless or wholly groundless, and (3) an arbitrator granted authority to resolve the arbitrability issue under the parties’ contract may reasonably reach a different conclusion than a judge. Finally, Archer asserted the policy argument that the “wholly groundless” exception deterred the filing of frivolous motions to compel arbitration. The Court swiftly dismissed this argument by stating that this policy concern was not grounds to judicially rewrite the FAA and, moreover, that arbitrators can easily dispose of cases that are not arbitrable as well as discourage such cases by imposing fee-shifting and cost-shifting sanctions against parties who bring non-arbitrable claims in arbitration.

Accordingly, the “wholly groundless” exception was categorically rejected by the Court as it ruled that, when contracts delegate the arbitrability question to an arbitrator, courts must respect that language and allow the arbitrator to decide that issue. The Supreme Court’s ruling in Schein resolves a split amongst the Circuit Courts of Appeals, and overrules the Fourth, Fifth, Sixth, and Federal Circuits, which had previously adopted a “wholly groundless” exception to arbitrability. The Tenth and Eleventh Circuits, in line with yesterday’s decision, had previously rejected a “wholly groundless” exception.