In reversing the Fifth Circuit and overturning precedent in other circuits, the Supreme Court struck down the "wholly groundless" exception. It held that such an exception is inconsistent with and not found in the Federal Arbitration Act.
On January 8, 2019, in Henry Schein, Inc. v. Archer and White Sales, Inc., Case No. 17-1271, the Supreme Court of the United States issued a unanimous, groundbreaking opinion concerning whether a court may override a contract delegating the arbitrability of a matter to an arbitrator. Before this decision, there was a split among certain circuit courts, in which some held that the district courts did have jurisdiction to decide the threshold question of arbitrability of a dispute (Fourth Circuit; Fifth Circuit; Sixth Circuit; and Federal Circuit) and certain circuit courts held otherwise (Tenth Circuit and Eleventh Circuit). In reconciling that inconsistency, the Supreme Court has now held that courts may not override a contract delegating the arbitrability of a dispute to an arbitrator, even if the motion to compel arbitration is alleged to be "wholly groundless."
Respondent Archer & White is a distributor of dental equipment. It sought millions of dollars in damages, accusing petitioner Henry Schein, Inc. of federal and state antitrust law violations for conspiring to limit its sales territories under distribution agreements. Archer & White's complaint sought both money damages and injunctive relief.
In response to the complaint, Henry Schein moved to compel the litigation to arbitration per the companies' contract, which contains an arbitration provision. The provision requires arbitration of any dispute arising under the parties' contract, with the exception, inter alia, for actions seeking injunctive relief. The Fifth Circuit affirmed the District Court ruling denying Henry Schein's bid to arbitrate, holding that Henry Schein's arbitration bid was wholly groundless because the contract specifically said actions seeking injunctive relief were not subject to arbitration. Previously, certain courts have reasoned that where an argument for arbitration is wholly groundless, this exception enables courts to block frivolous attempts to transfer disputes from court to arbitration.
In reversing the Fifth Circuit and overturning precedent in other circuits, the Supreme Court struck down the wholly groundless exception. It held that such an exception is inconsistent with and not found in the Federal Arbitration Act. The opinion, authored by Justice Kavanaugh, holds:
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 of an issue. That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.
One of the arguments Archer & White advanced in attempt to overcome "the statutory text," which the Court did not find persuasive, was that "as a practical and policy matter" it was a waste of time and money to send the arbitrability question to an arbitrator if the argument for arbitration is wholly groundless. In other words, if it is obvious that the arbitrator will inevitably conclude that the dispute is not arbitratable and send it back to the district court, why should a party waste time and money submitting it to the arbitrator? While it is a seemingly practical argument in support of judicial economy, the Court nonetheless concluded that the Federal Arbitration Act contains no wholly groundless exception; additionally, the Court did not agree that this exception is not always so clear-cut.
The Supreme Court's opinion is significant and should be closely reviewed by companies that are parties to contracts containing arbitration provisions. Based upon the Henry Schein opinion, in cases in which a contract at issue contains an arbitration provision, the opportunities to file suit in federal court and have the court decide to what extent the causes of action/issues are covered by arbitration now has been extinguished.
Duane Morris attorneys will continue to monitor developments in this area and other related issues and report on the key details.
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