In a unanimous ruling, the Supreme Court strengthened the enforceability of arbitration agreements by confirming that contract terms control who decides if the parties’ dispute is subject to arbitration in the first instance. The decision, Henry Schein, Inc. v. Archer and White Sales, Inc. (Jan. 8, 2019), rejected the so-called “wholly groundless” exception that had allowed some courts to resolve arbitrability questions when the grounds for seeking arbitration were allegedly frivolous. Instead, the Court explained the question of who decides whether a dispute is subject to arbitration must be resolved based on whether or not the contract delegates this authority to an arbitrator.

Case Background

The arbitration question arose of out alleged antitrust violations. Archer and White, a small business that distributes dental equipment, entered into a contract with Pelton and Crane, a dental manufacturer, to distribute Pelton and Crane’s equipment. The parties’ relationship eventually fell apart. Archer and White sued Pelton and Crane’s successor, Henry Schein, Inc., in federal court for alleged violations of federal and state antitrust laws, seeking both money damages and injunctive relief.

In response to the lawsuit, Schein invoked the Federal Arbitration Act and asked the district court to refer the antitrust dispute to arbitration in accordance with the parties’ contract. In relevant part, the contract included the following arbitration requirement:

Disputes. This Agreement shall be governed by the laws of the State of North Carolina. Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Schein]), shall be resolved in binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)]. The place of arbitration shall be in Charlotte, North Carolina.

Opinion at 2. Archer and White objected to arbitration. It reasoned that the dispute was not subject to arbitration under the contract terms because its complaint included a request for injunctive relief.

Threshold Arbitrability Issue

The question thus became: Who decides whether the dispute is subject to arbitration – the district court or the arbitrator? The arbitration rules of the American Arbitration Association state that arbitrators have the power to resolve arbitrability questions. Schein argued the contract’s incorporation of the AAA rules meant that the arbitrator, not the court, had to decide whether the arbitration agreement applied. Archer and White responded that, in circumstances where the argument in favor of arbitration was “wholly groundless,” a district court may resolve the threshold question of arbitrability.

The district court applied the “wholly groundless” exception followed in several circuits and ruled that the argument in favor of arbitration was groundless. The Court of Appeals for the Fifth Circuit affirmed. The Supreme Court accepted review to resolve the circuit split over the availability of the “wholly groundless” exception.

Supreme Court Enforces the Arbitration Agreement as Written

In its decision, the Supreme Court adopted a strict application of the Federal Arbitration Act and rejected the so-called “wholly groundless” exception. The Federal Arbitration Act establishes that “[a] written provision … in a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract … shall be valid, irrevocable, and enforceable, save upon such grounds as exit at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Under this framework, the Court reiterated that arbitration is a matter of contract and that courts must enforce arbitration agreements based on their terms.

The Supreme Court made short work of the “wholly groundless” exception. Although recognizing that some courts had applied this exception as a means to block frivolous attempts to transfer disputes from the court system to arbitration, the Court concluded that the exception was inconsistent with the text of the Federal Arbitration Act and not contained anywhere in the statute itself. Accordingly, the Court ruled that the threshold issue of arbitrability had to be decided by looking to the terms of the contract. The Court summarized its holding:

When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue. That is true even if the court thinks the argument that the arbitration agreement applies to a particular dispute is wholly groundless.

Opinion at 6. This rule does not change the requirement that, before referring a dispute to an arbitrator, a court must determine whether a valid arbitration agreement exists. However, “if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.” Id. In reaching this decision, the Court emphasized that arbitrators, like courts, can efficiently dispose of frivolous cases by determining that a claim is not arbitrable.

The Supreme Court did not decide whether the arbitration agreement between Archer and White and Schein actually delegated the arbitrability question to an arbitrator, but instead remanded the case for further proceedings.

Takeaways

In light of this decision, companies and in-house counsel should think carefully about the terms of any arbitration agreements when drafting or negotiating contracts. If you want the question of arbitrability decided by a specific decision-maker, consider writing that into the contract itself.