United States: Supreme Court Finds "Wholly Groundless" Exception In Arbitrability Disputes To Be Wholly Groundless

Last Updated: July 2 2019
Article by Robert E. Day

In Justice Brett Kavanaugh's first opinion, Henry Schein, Inc. v. Archer and White Sales, Inc., 586 U.S. ___ (Jan. 8, 2019), the Supreme Court rejected the "wholly groundless" exception to the enforcement of certain arbitration delegation clauses. The opinion provides the Court's most recent reminder that the terms of arbitration agreements must be interpreted strictly and protected from unjustified court intrusion.

Arbitration agreements, by their very nature, define a set of claims an arbitrator, not a court, will decide. If a party brings such a claim in court, then the court, honoring the parties' previously expressed will, must refer the matter to arbitration without reviewing its merit. See AT&T Techs., Inc. v. Commc'n Workers of Am., 475 U.S. 643, 649–50 (1986).

But who decides whether a particular dispute falls within an arbitration agreement? The parties' intent, as expressed in their agreement, provides the answer to this so-called arbitrability question. If the parties agree to delegate arbitrability questions to an arbitrator by "clear and unmistakable evidence," then that agreement must be enforced. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995) (internal quotation omitted). In the absence of such a "delegation" agreement, the court presumes the parties "reasonably would have thought a judge, not an arbitrator, would decide" arbitrability and resolves the question itself. Id. at 945.

But some circuit courts (the Fourth, Fifth, Sixth, and Federal Circuits) decided that there are times when the parties' "clear and unmistakable" intent shouldn't control—namely, when the argument that a particular claim falls within the arbitration clause's scope is "wholly groundless." On that reasoning, the district court can simply deny a motion to compel arbitration, rather than allow a frivolous argument to invoke the "rigmarole of arbitration" on plainly false pretenses. Douglas v. Regions Bank, 757 F.3d 460, 464 (5th Cir. 2014); see also Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F.3d 522, 528–29 (4th Cir. 2017); Turi v. Main Street Adoption Servs., LLP, 633 F.3d 496, 507 (6th Cir. 2011); Qualcomm, Inc. v. Nokia Corp., 466 F.3d 1366, 1373 & n.5 (Fed. Cir. 2006).

In Schein, the Fifth Circuit relied on the "wholly groundless" exception to affirm a district court's denial of a motion to compel arbitration. The arbitration agreement provided, "Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief . . . ), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association." Archer & White Sales, Inc. v. Henry Schein, Inc., 878 F.3d 488, 491 (5th Cir. 2017). It was obvious to the panel that the plaintiff's action, which sought injunctive relief, could not be arbitrated under the Agreement. Id. at 495–97. It was less clear, however, whether the parties wanted a court or an arbitrator to make this call. Id. at 493–95.

The "wholly groundless" exception allowed the panel to answer the easy question without resolving the hard one. The panel saw "no plausible argument that the arbitration clause applie[d]" to the plaintiff's cause of action. Id. at 497. So even if the parties had intended for the arbitrator to resolve the dispute, the "wholly groundless" exception still justified the district court's denial. Accordingly, the panel affirmed the district court's judgment denying the motion to compel arbitration without resolving the delegation debate.

The Supreme Court vacated this judgment, briskly rejecting the "wholly groundless" exception. Two recurring themes drive the analysis. The first—reflecting in part Justice Kavanaugh's textualist approach—concerns the Federal Arbitration Act's parameters. At several points, the opinion notes the absence of a "wholly groundless" exception from the FAA's text. See Schein, slip op. at 5–8. By creating the exception nonetheless, the circuit courts had impermissibly "redesign[ed] the statute" through judicial construction. Id. at 6.

The second, more dominant, theme is the sanctity of an arbitration agreement's terms. The opinion repeatedly emphasizes that "courts must enforce arbitration contracts according to their terms." Id. at 4. "When the parties' contract delegates the arbitrability question to an arbitrator, the courts must respect the parties' decision as embodied in the contract." Id. at 8. The "wholly groundless" exception disrupts that contractual decision because it requires the court, rather than an arbitrator, to examine the arbitrability of a particular claim. This was unacceptable, the Court concluded.

The Court remanded the case to the court of appeals, requiring it to answer the question the panel had tried to avoid—namely, whether the parties had clearly and unmistakably agreed to arbitrate arbitrability.

Schein's practical import, in a certain sense, is minor: it merely removes the "wholly groundless" exception from a court's review of arbitrability questions. And as the opinion itself implies, this removal is unlikely either to bog down or economize arbitration disputes. See id. at 7–8. Courts must still decide whether the delegation clause clearly and unmistakably cedes arbitrability to the arbitrator. But the ruling—which was unanimous—highlights the importance of the terms of an arbitration agreement and the ever-shrinking ground for arguments that appeal to concepts beyond its four corners.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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