FAA Doesn’t Allow for ‘Wholly Groundless’ Exception, SCOTUS Rules

Supreme Court upholds broad scope of arbitrators to decide arbitrability in one case, then limits it in another

In his first Supreme Court opinion, Justice Brett Kavanaugh used only eight pages to strike an argument that some litigants used to get a dispute out of arbitration.

On Jan. 8, the Supreme Court ruled unanimously that a “wholly groundless” exception to arbitrability is inconsistent with the Federal Arbitration Act. Commercial litigators say the court’s decision, while unsurprising and straightforward, should have companies revisiting their arbitration agreements to make sure they clearly spell out who gets to decide whether a dispute is arbitrable.

A week later, the Supreme Court would uphold an exception in the FAA for transportation workers in a decision that, albeit more limited in scope, was a rare ruling against an employer seeking arbitration.

Ireland Stapleton Announcement ad

In the case dealing with the “wholly groundless” exception, Henry Schein, Inc. v. Archer and White Sales, Inc., the dispute arose when the relations broke down between dental equipment distributor Archer and White and an equipment maker’s successor-in-interest, Henry Schein. Archer and White sued Schein for antitrust violations in federal district court. But Schein moved to pull the suit from district court into arbitration, and Archer and White objected. The question then became who decided whether the claim was arbitrable — the district court or the arbitrator? 

The companies’ arbitration agreement invoked American Arbitration Association rules, which allow an arbitrator to decide that question. But Archer and White argued that Schein’s case for arbitration was “groundless” — the arbitration provision also contained an exception for any dispute seeking injunctive relief, which Archer and White’s complaint was. 

Archer and White contended that the dispute should stay in district court, even on that threshold question of whether it should be arbitrated in the first place.

The 5th Circuit sided with Archer and White’s argument for the wholly groundless exception. But the Supreme Court reversed, saying such an exception was contrary to the FAA, although the court was silent on whether the contract in the case actually deferred to an arbitrator.

“[W]hen the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless,” wrote Kavanaugh in the opinion.

The court saw the wholly groundless exception as solution to overstated problems: Archer and White argued that forcing this arbitrability question to go before an arbitrator would be a waste of time and money, and the exception would enable courts to quash frivolous attempts to move disputes into arbitration.

“When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract,” the opinion states. “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.”

While the Supreme Court has mostly fallen on the pro-arbitration side when interpreting the FAA in recent years, those decisions are rarely unanimous, like in Schein’s case.

Schein was “like a slap-down to lower federal courts that have been reading exceptions into arbitration statutes that aren’t there,” said Holly Stein Sollod, a partner in Holland & Hart’s downtown Denver office who litigates commercial disputes and is also an arbitrator and mediator. She noted that the 10th Circuit Court of Appeals, which hears federal appeals out of Colorado, wasn’t one of the “stubborn circuit courts” that had essentially crafted an exception out the federal arbitration statute. The Supreme Court is “really telling those other circuits, ‘Stop messing with the FAA and listen to what we’ve been saying,’” she said.

Stein Sollod said it’s important for companies to know whether the arbitrator or the district court decides the threshold arbitrability question, if only because companies want certainty. Otherwise they could potentially see the matter dragged out: Archer and White first filed its lawsuit back in 2012. Having to go to court first and spend nearly seven years hashing out the arbitrability question is “contrary to the efficiency and cost saving theories behind the Federal Arbitration Act,” Stein Sollod said. 

Tripp Lake, a commercial and intellectual property litigator who is a partner out of Lewis Brisbois’ Denver and San Francisco offices, said it was predictable for the Supreme Court to decide Schein the way it did. Nonetheless, he added, every company that uses arbitration clauses that could be read to defer the arbitrability question to an arbitrator “needs to take this decision into account.”

“The scope of this decision is as broad as the scope of the Federal Arbitration Act,” Lake said.

On remand, the 5th Circuit could still decide that the contract’s reference to the AAA rules, by itself, wasn’t enough to show that the parties agreed to have an arbitrator handle the arbitrability question, Lake said. “Schein may not be over. I think it is, but it may not be.”

He said companies might revise their own arbitration clauses to go a step further and “spell it out” if the parties want the arbitrator to decide the gateway question, in addition to naming the rules that will govern the proceedings.

“Then you avoid what I think are disputes to come,” Lake said.

A week later, the Supreme Court would deliver a rare decision to limit the power of arbitration clauses under the FAA, this time in a case involving a class action brought by truckers.

On Tuesday, the court ruled in New Prime v. Oliveira that a court should determine whether the FAA’s exclusion for disputes that involve “contracts of employment” for transportation workers applies before ordering arbitration. 

New Prime, which considers truck driver Dominic Oliveira an independent contractor, had argued the exclusion didn’t apply in his situation because he wasn’t an employee, but the Supreme Court disagreed, saying the FAA’s term “contract of employment” refers to “any agreement to perform work.”

The decision, for which Justice Neil Gorsuch wrote the opinion with Justice Ruth Bader Ginsburg concurring, was also unanimous except with Kavanaugh having taken no part.

— Doug Chartier

Previous articleSherman & Howard Adds Two
Next articleBrownstein’s Next Managing Partner Looks Ahead

LEAVE A REPLY

Please enter your comment!
Please enter your name here