U.S. Supreme Court Unanimously Rejects “Wholly Groundless” Exception to Court Deference to Contract Provision Providing the Arbitrator Determines Issues of Arbitrability

On January 8, 2019, the first day available for announcement of decisions by the Court, the United States Supreme Court again reminded all of the high court’s deference to parties’ contractual agreements regarding arbitration.  In his debut opinion for the Court, Associate Justice Brett Kavanaugh rejected the so-called “wholly groundless” exception to arbitration, finding it inconsistent with the Federal Arbitration Act (FAA) and the Court’s precedents. The remaining justices unanimously agreed.

In Henry Schein, Inc. v. Archer & White Sales, Inc. (Docket No. 17-1272), the Court reversed a ruling by the Fifth Circuit Court of Appeals (and that of several other circuits and California Courts of Appeals) which relied on the exception, holding a contract’s terms are controlling in determining who has the authority to decide whether a claim is subject to arbitration. In so doing, the Court reinforced its adherence to the express terms of arbitration agreements and the actual language of the FAA.

In the case before it, the parties entered into an arbitration agreement that incorporated the rules of the American Arbitration Association. These rules give the arbitrator the power to decide his or her own jurisdiction, so Henry Schein contended that the incorporation of the rules constituted a delegation clause. The district court and Fifth Circuit Court of Appeals refused to delegate the question of whether the parties’ substantive dispute was arbitrable to an arbitrator based on a finding that Henry Schein’s argument for arbitration was “wholly groundless.”

Archer & White, the party opposing arbitration, argued public policy favored a court dispensing with obviously frivolous efforts to compel arbitration, wasting time and money.  The Court rejected this argument noting there was no reason to believe an arbitrator could not resolve the issue equally if not more quickly than the court (a reasonable assumption since this case had languished for years in the courts) and reasoned a “wholly groundless” exception would mire litigation in additional motion practice.

Ultimately, the Court simply referred to the language of the Federal Arbitration Act itself, which includes no exception which would allow a court to ignore the parties’ agreement requiring the arbitrator to determine issues of arbitrability.  The only role of the court is to determine whether there is a binding arbitration agreement.  It did not rule on whether incorporation of AAA Rules into the contract amounted to a delegation cause.

This is another in a series of cases enforcing a business’s right to have arbitrators resolve gateway questions such as arbitrability.