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Supreme Court Reinforces Enforceability of Delegation Clauses in Arbitration Agreements

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The High-Taxed Exception and E&P Limitation to Subpart F Income topical imageLast week, the U.S. Supreme Court held unanimously that when an arbitration delegates gateway issues of arbitrability to the arbitrator to decide, a court may not consider questions of arbitrability, even where the party resisting arbitration argues that the arbitration demand is “wholly groundless.” The decision—the first one issued by Justice Brett Kavanaugh—resolves a split in the circuit courts as to whether this “wholly groundless” exception is consistent with the Federal Arbitration Act. In rejecting this exception, the decision clarifies that courts have no role in determining threshold issues of arbitrability when the parties contractually agreed that the arbitrator would determine those issues. The ruling is the latest in the Supreme Court’s steady drumbeat of pro-arbitration decisions.   

The “Wholly Groundless” Exception Applied by the Fifth Circuit in the Schein Case

This case arose when Archer & White, a small dental equipment business, alleged violations of state and federal antitrust law against Henry Schein, Inc., a dental equipment manufacturer with whom Archer & White had entered into a contract. The arbitration provision in the contract provided that “any dispute” between the parties, except those seeking injunctive relief or those related to Schein’s intellectual property, would be resolved by binding arbitration in accordance with the rules of the American Arbitration Association. After Archer & White filed its complaint seeking both damages and injunctive relief, Schein moved to compel arbitration and argued that the parties had incorporated the rules of the AAA, which grants the arbitrator the power to resolve the threshold question of arbitrability.

Archer & White opposed on the basis that the dispute was outside the scope of the arbitration agreement because the complaint sought injunctive relief (at least in part). In response, Schein argued that, even if the claim was excluded by the carve-out for injunctive relief, the parties had agreed that the arbitrator would decide arbitrability questions. Although the rules of the AAA provide that arbitrators have the power to decide arbitrability questions, the district court, relying on the Fifth Circuit Court’s precedent in Douglas v. Regions Bank (5th Cir. 2014), denied the motion to compel arbitration as “wholly groundless” on its face because of the request for injunctive relief. The Fifth Circuit affirmed, and the Supreme Court granted certiorari to resolve a circuit split over the “wholly groundless” exception.

The Supreme Court Decision

The Supreme Court rejected the Firth Circuit’s application of the “wholly groundless” exception as contrary to both the FAA and the Court’s prior decisions.  The Court explained that, under the FAA, parties to a contract may agree to have the merits of a particular dispute, as well as threshold questions of arbitrability, decided by an arbitrator. Thus, when a “contract delegates the arbitrability question to an arbitrator, a court may not override the contract,” even when the court thinks the argument for arbitration is “wholly groundless.”

The Court outlined that the same conclusion followed from its 1986 decision in AT&T Technologies v. Communications Workers of America, where the Court held that a court may not “rule on the potential merits of [an] underlying” claim that is assigned by contract to an arbitrator, “even if it appears to the court to be frivolous.” The Court concluded that the same is true of questions of arbitrability.

The Court rejected Archer & White’s various arguments in favor of the “wholly groundless” exception:

  • First, Archer & White contended that the FAA requires a court to always resolve questions of arbitrability. In response, the Court noted that this argument had already been addressed and rejected by the Court in First Options of Chicago v. Kaplan.
  • Second, the Court rejected Archer & White’s argument that the FAA, which provides for back-end judicial review of an arbitrator’s decision if an arbitrator has “exceeded” his or her “powers”—supports the conclusion that the court at the front end should also be able to say that the underlying issue is not arbitrable. The Court held that such argument is inconsistent with the way Congress designed the Act and further noted that “it is not this Court’s proper role to redesign the Act.”
  • Third, the Court rejected the argument that it would be a waste of the parties’ resources to send wholly groundless arbitrability questions to an arbitrator. The Court held that Archer & White’s argument ignores the fact that the FAA contains no “wholly groundless” exception and this the Court may not “engraft its own exceptions onto the statutory text.” The Court further explained that the exception is not likely to save time or money systemically even though it might do so in some individual cases.
  • Finally, the Court rejected the argument that the exception is necessary to deter frivolous motions to compel arbitration as overstating the potential problem where arbitrators are already capable of efficiently disposing of frivolous cases and deterring frivolous motions. 

Takeaways

Parties that want to reduce the amount of litigation in the trial court about whether a dispute is arbitrable should make sure to include clear delegation clauses in their arbitration agreement, or adopt arbitration rules that delegate such decisions to the arbitrator. Where the parties include a delegation provision, courts may not intervene—even when the assertion of arbitrability appears baseless.  ​​​​