Supreme Court Rules That Agreements Delegating Arbitrability Determinations To Arbitrators Must Be Enforced As Written And Are Not Subject To A “Wholly Groundless” Exception
On January 8, 2019, in a unanimous opinion authored by Justice Kavanaugh, the United States Supreme Court held that courts must enforce as written arbitration agreements that require the “gateway” question of arbitrability to be decided through arbitration. In so doing, the Court reversed a decision of the United States Court of Appeals for the Fifth Circuit which had held (as had other Courts of Appeals) that, when a motion to compel arbitration is “wholly groundless,” the court may resolve whether the dispute is properly subject to arbitration — even if the parties’ agreement requires that such determinations shall be made by the arbitrator. Henry Schein, Inc., v. Archer & White Sales, Inc., —U.S.—, 2019 WL 122164 (2019).
The parties in Schein were involved in a dispute governed by an agreement generally providing that disputes arising under or related to the contract were to be resolved by arbitration pursuant to the American Arbitration Association rules, under which arbitrators decide whether a dispute is subject to arbitration. The contract’s arbitration provision, however, contained an exception for, among other things, actions seeking injunctive relief. In response to a complaint filed in federal district court in Texas, which sought both money damages and injunctive relief, defendant invoked the Federal Arbitration Act (“FAA”) and moved to compel arbitration. Plaintiff objected, and argued that, because defendant’s request was “wholly groundless” (in light of the contract’s exception to arbitration for actions seeking injunctive relief) the court could itself decide the threshold question of arbitrability. The district court agreed, and denied defendant’s motion. The Fifth Circuit affirmed.
The Supreme Court vacated the lower court’s decision, holding that the “wholly groundless” exception adopted by the Fifth Circuit and other courts was “inconsistent with the text” of the FAA as well as Supreme Court precedent. Id. at *4. The Court reasoned that, because arbitration under the FAA is a matter of contract, “[w]hen the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract.” Id. And this is so “even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Id. The Court further rejected plaintiff’s arguments that courts should decide arbitrability in such instances because the FAA provides for back-end judicial review if an arbitrator “exceeded” his or her “powers,” and because an arbitration argument that was “wholly groundless” would inevitably wind up before the courts in any event. The Court held that the FAA was clear in making arbitration a matter of contract, and the Court was not permitted to “engraft our own exceptions onto the statutory text.” Id. at *5. Finally, the Court rejected a policy argument that crafting an exception was necessary to deter frivolous motions to compel arbitration. In this regard, the Court observed that there did not appear to be a substantial problem of frivolous motions to compel arbitration in Circuits that had not recognized the “wholly groundless” exception and, in any event, “under certain circumstances, arbitrators may be able to respond to frivolous arguments for arbitration by imposing fee-shifting and cost-shifting sanctions.” Id.
The Court did not, however, decide whether the parties’ contract in fact required that arbitrability be arbitrated, and remanded the case to the Fifth Circuit to address that question. The Court emphasized that courts should not assume that the parties intended to arbitrate arbitrability absent “clear and unmistakable evidence.” Id. at *6.
This decision is the latest example of the Court’s prevailing view favoring the enforcement of arbitration agreements as written.