In Rent-A-Center West, Inc. v. Jackson, 561 U.S. 63 (2010), the Supreme Court stated that arbitration is a creature of contract and held that the parties can agree to the procedures they want to govern their arbitration. The Court held that this includes the right to delegate to the arbitrator the authority to decide the validity of their arbitration agreement and what issues it covers.
Despite this ruling, several federal courts have held that, even when such a delegation has been made, they can deny a motion to compel arbitration if they believe that the demand for arbitration is “wholly groundless.” On January 8, 2019, in the first opinion written by Justice Kavanaugh, the Supreme Court unanimously rejected this line of authority and put an end to the “wholly groundless” argument. It held that if the parties’ contract gives the arbitrators the right to decide their own jurisdiction or adopts rules that do so, the courts must honor those contractual provisions and let the arbitrators decide threshold issues of arbitrability. Henry Schein, Inc. v. Archer & White Sales, Inc., (January 8, 2019).
In the Henry Schein case, Archer & White Sales, Inc. (Archer) sued Henry Schein, Inc. (Schein) in federal court for antitrust violations and sought monetary and injunctive relief. The parties contract, which adopted the rules of the American Arbitration Association (AAA), provided that any disputes relating to the agreement would be arbitrated, but it made an exception for cases requesting injunctive relief. Schein asked the district court to compel arbitration, but Archer argued that, because Archer was seeking injunctive relief as well as damages, the dispute was not arbitrable. Schein argued that the AAA rules give the arbitrator the right to decide such jurisdictional questions, but Archer responded by arguing that Schein’s request for arbitration was “wholly groundless” and that the court had the authority to decide it.
The district court agreed with Archer, and the Fifth Circuit affirmed. The Supreme Court reversed. It held that the “wholly groundless” exception to arbitrability is inconsistent with the Federal Arbitration Act (FAA) and the Court’s prior decisions. Under the FAA, arbitration is a matter of contract and the courts have the duty to enforce arbitration agreements in accordance with their terms. Thus, if the parties’ agreement gives the arbitrator(s) the authority to decide “gateway questions of arbitrability,” the court must enforce those provisions even if it believes that the claim to arbitrability is not only wrong but “wholly groundless.”
The Court noted that the FAA does not include a “wholly groundless” exception to arbitration and that, under its structure, courts review arbitration’s decisions at the end of the process. Thus, if an arbitrator exceeds his or her authority by arbitrating matters not covered by the parties’ agreement, the courts can correct that error during the award confirmation stage. The Court found no basis for Archer’s implication that arbitrators are incapable of properly deciding questions of arbitrability or that such a “wholly groundless” exception is necessary or appropriate to prevent frivolous attempts to compel arbitration.
Practice Tip: In the absence of a clause giving the arbitrator the right to decide his or her own jurisdiction or the adoption of arbitration rules that give the arbitrator this authority, the courts are responsible for deciding issues of arbitrability. This can open the door to prolonged litigation and expense and hamper the resolution of the dispute. To avoid this, parties should include a clause in their arbitration agreements that delegates authority to decide jurisdictional questions to the arbitrator or which adopts arbitration rules that do the same thing.