Judicial “Wholly Groundless” Doctrine Regarding Delegation of Arbitrability Issues is Wholly Groundless Under the FAA
The U.S. Supreme Court has decided that the Federal Arbitration Act (“FAA”) requirement that courts enforce arbitration agreements according to their terms includes the parties’ agreement to have an arbitrator decide “not only the merits of a particular dispute, but also ‘gateway’ questions of ‘arbitrability’....” Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 (U.S. Jan. 8, 2019). (As is customary, the rookie Justice (Kavanaugh, J.) delivered the Court’s unanimous opinion.) This judgment, issued little more than two months after oral argument, shatters the “wholly groundless” doctrine, which purported to enable federal courts to adjudicate gateway arbitrability issues notwithstanding the parties’ clear and unmistakable delegation of such issues to an arbitral tribunal, if the court decided that the argument for arbitrability was “wholly groundless.” (The Courts of Appeals were split on the viability of that doctrinal exception.)[1]
SCOTUS held that the “wholly groundless” doctrine is inconsistent with the FAA and SCOTUS precedent that requires courts to enforce arbitration agreements according to their terms. See FAA § 2 (9 U.S.C. § 2); Rent-A-Center West, Inc. v. Jackson, 561 U.S. 63, 67 (2010). The FAA provides that a written arbitration provision “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2 (FAA § 2).
The arbitration agreement in question provided in pertinent part for arbitration of “any dispute . . . (except for actions seeking injunctive relief . . .)” under American Arbitration Association (“AAA”) rules. Slip Op. at 2. Those AAA rules include a provision that “arbitrators have the power to resolve arbitrability questions.” Id. at 3. Thus, there was an arguable basis for a federal court to find that the parties had clearly and unmistakably delegated arbitrability issues to the arbitrator(s). But neither the District Court nor the Circuit Court made such a delegation determination (a) because plaintiff Archer & White had brought an antitrust suit against Henry Schein seeking, in part, injunctive relief, and (b) the lower courts considered that Henry Schein’s argument for compelling arbitration was therefore wholly groundless. Thus, the District Court denied Henry Schein’s motion to compel arbitration, and the Court of Appeals affirmed.
But an agreement to arbitrate arbitrability is, according to SCOTUS, merely an antecedent agreement of the sort that the FAA compels a federal court to enforce just as it would any other arbitration agreement. Slip Op. at 4. Therefore, when the parties delegate the arbitrability question to an arbitrator, “a court possesses no power to decide the arbitrability issue,” whatever the Court’s views regarding it may be. Id. at 5.
The fundamental point is that the FAA enables parties to agree that an arbitrator, rather than a court, should decide disputes arising out of a contract, including disputes concerning threshold arbitrability issues, Slip Op. at 1, because the question of who decides such arbitrability issues is itself a contract issue, id., citing Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-70 (2010); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943-44 (1995). Therefore, a court’s decision to eschew making the determination regarding delegation on the ground that the argument in favor of arbitrability is “wholly groundless” is inconsistent with the FAA, which contains no such exception. Id. at 1-2. Rather, the courts must enforce the arbitration agreement as made by the parties.
The Supreme Court found none of the respondent’s arguments in favor of a “wholly groundless” exception – two FAA-related arguments and two policy arguments – to be persuasive.
SCOTUS therefore vacated the Fifth Circuit’s judgment affirming a Texas District Court’s denial of Henry Schein’s motion to compel arbitration, and remanded the case so that the Court of Appeals might address the question of “whether the contract at issue ... in fact delegated the arbitrability question to an arbitrator.” Slip Op. at 8.
In light of this decision, the Ninth Circuit is likely to take its arbitration lumps next when SCOTUS eventually issues its decision in Lamps Plus v. Varela. Stay tuned.
[1] The Fifth, Fourth, Sixth, and Federal Circuits had upheld the “wholly groundless” exception as consistent with the FAA, while the Tenth and Eleventh Circuits had held to the contrary. See Slip Op. 3-4.