Legal Alert

Unanimous Supreme Court Holds No "Wholly Groundless" Exception to Arbitrability Under FAA

January 9, 2019

Deciding an important gateway arbitration issue that has divided the circuits, the U.S. Supreme Court has held that the Federal Arbitration Act (FAA) requires courts to enforce arbitration agreements that delegate questions of arbitrability to the arbitrator even if they believe that the claim of arbitrability is "wholly groundless." In his first published Supreme Court opinion, Justice Brett Kavanaugh delivered the unanimous decision of the Court in Henry Schein, Inc. v. Archer & White Sales, Inc.

Archer & White sued Henry Schein for antitrust violations and sought money damages and injunctive relief. Henry Schein moved to compel arbitration, which Archer & White opposed because the arbitration agreement excluded actions seeking injunctive relief. Henry Schein contended that the applicable rules of the American Arbitration Association permitted the arbitrator to resolve disputes about arbitrability. However, the district court concluded that Henry Schein's argument that the dispute was subject to arbitration was wholly groundless and denied its arbitration motion. The U.S. Court of Appeal for the Fifth Circuit affirmed.

 In light of the disagreement on the "wholly groundless" issue between the U.S. Courts of Appeal for the Fourth, Fifth, Sixth, and Federal Circuits on the one hand, and the U.S. Courts of Appeal for the 10th and 11th Circuits, on the other hand, the Supreme Court granted Mr. Schein's petition for certiorari. 

The Court determined that the "wholly groundless" exception is inconsistent with the text of the FAA and the Court's precedent holding that under the FAA, arbitration agreements must be enforced as written, emphasizing that:

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 that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.

The Court rejected Archer & White's argument that as a practical and policy matter, it would be a waste of the parties' time and money to send the arbitrability question to an arbitrator if the argument for arbitration is wholly groundless. It emphasized that because the FAA contains no "wholly groundless" exception, "we may not engraft our own exceptions onto the statutory text." Moreover, the Court found it "doubtful" that the "wholly groundless" exception would save time and money systematically, since the exception "would inevitably spark collateral litigation (with briefing, argument, and opinion writing) over whether a seemingly unmeritorious argument for arbitration is wholly groundless, as opposed to groundless." It saw "no reason to create such a time-consuming sideshow."

Still awaiting the Court's decision are two additional arbitration cases. The question in Lamps Plus, Inc. v. Varela is whether the FAA forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements. New Prime, Inc. v. Oliveira involves the question of whether an exemption in the FAA for certain transportation workers who signed "contracts of employment" applies to independent contractors in the transportation industry, and whether this arbitrability question should be decided by a court or an arbitrator.

The Consumer Financial Services Group is nationally recognized for its guidance in drafting and implementing arbitration agreements in consumer and commercial contracts and structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance. Ballard Spahr's Labor and Employment Group routinely assists employers in drafting, reviewing, and defending the enforceability of employment and arbitration agreements. Attorneys in Ballard Spahr's Antitrust Group offer strategic counseling, regulatory, investigative, and litigation services to help clients identify, manage, and mitigate antitrust risk.

Copyright © 2019 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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