In Henry Schein, Inc., et al. v. Archer and White Sales, Inc., the Supreme Court of the United States once again rejected efforts to create exceptions to the Federal Arbitration Act’s command that courts enforce the terms of arbitration agreements as-written. In the unanimous decision dated January 8, 2019, the Court held that, where parties to a contract delegate threshold issues of arbitrability (i.e., whether the dispute-at-issue is subject to a contracted-for arbitration clause) to an arbitrator, the Federal Arbitration Act prohibits a court from deciding that issue itself, even in instances where the argument for arbitrability is “wholly groundless.” The decision resolved a division in the lower courts that had emerged over the application of that “wholly groundless” exception. In the first decision penned by Justice Brett Kavanaugh, the Court signaled that parties can continue to rely on federal courts strictly to enforce the terms of arbitration agreements, including provisions governing who decides threshold questions of arbitrability.
Circuit Split Regarding the “Wholly Groundless” Exception
Under the Federal Arbitration Act, parties to a contract may agree to send disputes arising under their contract to an arbitrator rather than a court. Arbitration clauses in commercial contracts sometimes contain delegation provisions, which give arbitrators explicit power to decide any substantive issues related to the arbitrability of a dispute arising under the contract. Unless this power is explicitly delegated to an arbitrator, courts in the United States will generally decide threshold issues of arbitrability.
The Supreme Court has vigorously enforced the Federal Arbitration Act’s command that courts adhere to the terms of arbitration agreements, including terms regarding threshold issues of arbitrability. In recent years, however, the courts of appeals had reached opposite conclusions on whether federal courts could apply a so-called “wholly groundless” exception to the general policy of enforcing delegation provisions in arbitration agreements. Several circuit courts had decided the question of arbitrability in the first instance despite the existence of a delegation clause if, in the court’s view, the argument that the arbitration clause applies to the dispute-at-issue is “wholly groundless.”1
The Henry Schein Decision
In Henry Schein, the Supreme Court squarely rejected the “wholly groundless” exception. The Court unanimously held that the “wholly groundless” exception is inconsistent with the Federal Arbitration Act and prior Supreme Court precedent. Accordingly, contracted-for arbitration provisions delegating power to arbitrators to determine threshold questions of arbitrability must be enforced, and courts entirely lack power to address questions of arbitrability where such delegation clauses exist.
Henry Schein involved antitrust claims brought by Archer and White Sales, Inc. (“Archer”), a dental equipment distributor, against Henry Schein, Inc. (the successor-in-interest to Pelton and Crane), Danaher Corp., and several subsidiaries of Danaher Corp. (collectively, “Schein”). Archer and Pelton and Crane had previously executed a distribution contract that contained an arbitration clause that established that any disputes that arose under the contract would be submitted to arbitration, except for actions seeking injunctive relief and certain types of intellectual property disputes. The arbitration clause expressly incorporated the American Arbitration Association’s Commercial Arbitration Rules, which provide that arbitrators have the power to rule on the threshold issue of arbitrability. Archer brought suit against Schein in federal district court, and Schein moved to compel arbitration of the dispute.
Archer opposed Schein’s motion, arguing that the dispute was not arbitrable because it involved, in part, a request for injunctive relief. Invoking the “wholly groundless” exception, Archer argued that because the arbitration agreement explicitly excluded disputes seeking injunctive relief, the issue of arbitrability should be determined by the court, and the dispute should not be submitted to an arbitrator. A magistrate judge rejected Archer’s argument and ordered that the case be sent to arbitration. On Archer’s request for reconsideration, a federal district court agreed with Archer that the “wholly groundless” exception applied, vacated the magistrate judge’s order, and denied Schein’s motion to compel arbitration. The U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s decision.
Writing for the Supreme Court, Justice Kavanaugh noted that the underlying issue was one of contract law. He explained that the Federal Arbitration Act allows parties to “agree by contract that an arbitrator, rather than a court, will resolve threshold arbitrability questions.” He went on to explain that the “wholly groundless” exception existed nowhere within the Federal Arbitration Act, and that federal courts are “not at liberty to rewrite” the Act nor “engraft [their] own exceptions onto the statutory text.” Where parties delegate questions of arbitrability to arbitrators, he concluded, “the courts must respect the parties’ decision as embodied in the contract.” Accordingly, the Court vacated the Fifth Circuit’s decision, expelling the “wholly groundless” exception from federal jurisprudence.
The Supreme Court Continues to Protect and Promote Parties’ Agreements to Arbitrate Disputes Arising from Commercial Contracts
The Henry Schein decision is consistent with a long line of Supreme Court precedents rigorously enforcing the Federal Arbitration Act’s strong federal policy in favor of respecting contractual arbitration agreements. The Supreme Court’s rejection of the “wholly groundless” exception thus provides parties with increased assurance that their bargained-for arbitration agreements — including delegation clauses in those agreements — will be enforced by federal courts. If parties want threshold arbitrability issues to be decided by an arbitrator, they can include a delegation clause that provides for such and can rest assured that the clause will be respected. And the decision will serve as another reminder to lower courts that the Supreme Court takes a dim view of judicially crafted exceptions to the Federal Arbitration Act’s command that courts enforce arbitration agreements as-written.