FEDERAL ARBITRATION ACT
Who Decides Arbitrability When the Demand for Arbitration Is Wholly Groundless?
Who Decides Arbitrability When the Demand for Arbitration Is Wholly Groundless?
The Federal Arbitration Act requires courts to enforce agreements to arbitrate, including agreements allowing an arbitrator, rather than a court, to decide the gateway question of whether the parties have agreed to arbitrate in the first place. The Supreme Court must decide whether the Act includes an exception allowing courts to decline to send the arbitrability question to an arbitrator when the demand for arbitration is “wholly groundless.”
Does the Federal Arbitration Act permit a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes that the demand for arbitration is “wholly groundless”?
Congress passed the Federal Arbitration Act (the Act) in 1925 to ensure that arbitration agreements “shall be valid, irrevocable, and enforceable” in court. 9 U.S.C. § 2. The Supreme Court has followed this directive to develop a robust jurisprudence favoring the enforcement of arbitration agreements. For example, the Court has held repeatedly that the Act requires enforcement of arbitration agreements that are otherwise unconscionable and unenforceable under state law. Nitro-Lift Techs., LLC. v. Howard, 568 U.S. 17 (2012); Marmet Health Care Ctr., Inc. v. Brown, 565 U.S. 530 (2012); KPMG LLP v. Cocchi, 565 U.S. 18 (2011); AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). The Court has also enforced arbitration agreements over claims that they infringe on substantive rights granted by other federal statutes. Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018) (National Labor Relations Act); Am. Express Co. v. Italian Colors Rest., 570 U.S. 228 (2013) (Sherman Act and Clayton Act).
Cases such as these rely on the Court’s discernment of what it calls the “national policy favoring arbitration.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006). Because the Act “was designed to promote arbitration,” the Court has enforced arbitration agreements in a variety of circumstances and over a variety of obstacles.
This case explores the limits of this principle as applied to a general agreement by parties to let the arbitrator decide if a dispute is subject to arbitration. The question is whether this general agreement should be enforced even when the argument that a particular dispute should go to the arbitrator is “wholly groundless.” In that narrow case, would it not be better to let a court decide for itself that the dispute is not arbitrable, thus avoiding the time and expense of shipping a dispute to the arbitrator just for it to be returned back to court?
The case arises out of an alleged antitrust conspiracy in the market for dental equipment and supplies. Archer and White Sales, Inc. (Archer) is a distributor in the market. Archer sued a number of other distributors and manufacturers in 2012, including Henry Schein, Inc. (collectively Schein), alleging that they illegally conspired to exclude low-cost distributors from the market and seeking damages and an injunction halting the behavior. One of the manufacturers moved to compel arbitration based on a provision in its distribution agreement with Archer providing that:
Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes relating to trademarks, trade secrets or other intellectual property of [the manufacturer]) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.
The other defendants joined the request, arguing that they were also entitled to arbitration on the ground of equitable estoppel, even though they had not entered a similar agreement with Archer.
Archer’s argument against arbitration was straightforward: because the complaint sought injunctive relief, the case was disqualified from arbitration by the parenthetical exception to the arbitration clause. The magistrate judge disagreed. Because damages, not injunctive relief, were “the predominant relief sought,” the magistrate judge reasoned, there was a “plausible construction” of the agreement requiring arbitration. Moreover, because the American Arbitration Association rules delegate to the arbitrator the right to decide whether a particular dispute is arbitrable, the invocation of those rules gave the arbitrator, rather than the court, the authority to decide if the dispute was arbitrable in the first place. The magistrate judge accordingly ordered the dispute to arbitration.
Archer filed a “motion for reconsideration,” which the court did not act on for over three years, apparently due to confusion about whether it should be decided by the magistrate judge or treated as objections to be reviewed by the district judge. The district judge eventually construed the filing as an objection to the magistrate judge’s order and reversed, ordering the matter to proceed in court. The district judge relied on the Fifth Circuit’s decision in Douglas v. Regions Bank, 757 F.3d 460 (5th Cir. 2014), holding that an arbitrability question should not go to an arbitrator where the demand for arbitration is “wholly groundless.” Because the arbitration provision unambiguously excluded any matter seeking injunctive relief, the court held that any argument in favor of arbitrating the dispute was implausible. Sending the dispute to arbitration would thus be pointless, and so the district judge ordered that the matter should remain in court.
The Fifth Circuit affirmed on similar grounds, and the Supreme Court granted certiorari.
The Act does not explicitly mention a “wholly groundless” exception, but Archer identifies several statutory provisions that it contends supply a basis for the exception. First, Section 4 of the Act requires that before ordering arbitration, courts must be “satisfied” that a nonmovant “fail[ed] to comply” with the arbitration agreement. 9 U.S.C. § 4. According to Archer, “If a dispute is not even ‘arguably’ subject to arbitration, there is no possible ‘failure to comply’ by filing in court,” and so Section 4’s requirement is not met.
Schein counters that the requirement that a court be satisfied “merely contemplates that a court will assure itself that a valid arbitration agreement exists”—it does not allow a court to parse “the merits of the issue to be arbitrated: namely, the issue of arbitrability.” Indeed, Archer’s argument proves too much. If a court has to be “satisfied” that the arbitrator has the power to decide the merits of a case before ordering arbitration, the court would have to make the arbitrability decision itself de novo every time—not just when the argument for arbitration is “wholly groundless.” The parties then would never be able to agree to arbitrate the gateway question of arbitrability, contrary to the Court’s holding in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995).
Archer also focuses on Section 10(a)(4) of the Act, which requires courts to vacate arbitration awards “where the arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4). Archer contends that “if courts have the power (under Section 10(a)(4)) to vacate awards after months or years of costly arbitration, then surely courts have the power (under Section 4) to make the same determination where the result is a foregone conclusion.” Any other conclusion would require “an expensive and futile detour” to arbitration to obtain an arbitration award that a court will promptly vacate.
Schein answers that this view gives far too little credit to arbitrators, who are “hardly powerless in the face of a truly frivolous claim of arbitrability” and are thus unlikely to spend time and money resolving a dispute that plainly does not belong in front of the arbitrator. Arbitrators have ample authority to resolve jurisdictional disputes at a preliminary telephonic conference, for example, and can also impose sanctions against a party making a baseless argument for arbitration. The far greater danger to efficient dispute resolution is not a futile detour to arbitration, but instead the danger that courts will spend years wrangling over the peripheral issue of whether a particular argument for arbitration is “wholly groundless,” without ever getting to the merits. The poster child for this problem is this case, which has languished in the court system for six years of debate over whether the “wholly groundless” exception applies.
Archer responds that much of the delay in this case is the result of the confusion over whether the district judge or the magistrate judge should have decided Archer’s motion for reconsideration. Such anomalies aside, Archer points out that since 1991, the “wholly groundless” exception has been invoked in only 4 cases in federal appellate courts (in the Fifth, Sixth, and Federal Circuits) and only 96 cases in federal district courts. As Archer puts it, “This is hardly compelling evidence that the sky is falling.”
Both parties also make an appeal to the history and purpose of the Act. “Arbitration is a matter of contract” controlled by the parties’ intentions, Archer argues, and it should be obvious that no party would write a contract that “grants a right to assert implausible claims or waste everyone’s time with pointless detours.” The “wholly groundless” exception is thus implicit in every agreement to arbitrate. Schein counters that “the parties’ agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious,” and that the Act requires a court to honor those wishes, even where it might lead to an inefficient outcome. In short, the court should not be evaluating the wisdom of the parties’ agreement, but should instead enforce it consistent with the terms of the Act.
Schein bolsters its case by attempting to cast the “wholly groundless” doctrine as part of a longstanding trend of judicial hostility toward arbitration, a hostility that Congress intended to reverse when it adopted the Act in 1925. Archer counters with legislative history suggesting that Congress based the 1925 Act on a New York arbitration law, a law that had been interpreted by New York courts to include a version of the “wholly groundless” exception. Archer infers from this history that however much Congress wished to bolster agreements to arbitrate, it nonetheless intended to allow courts to dispose efficiently of meritless claims to arbitration.
The extended procedural history of this case gives the Court several outs if it opts not to resolve whether the Act contemplates a “wholly groundless” exception. First, the Court could hold that Schein’s argument for arbitration is not wholly groundless, and so the case should have been sent to an arbitrator regardless of whether the “wholly groundless” exception might apply in some other case. Drawing the line between a “groundless” argument and a “wholly groundless” argument is notoriously difficult, but the magistrate judge below found Schein’s argument for arbitration at least plausible (and arguably more), which would mean that the “wholly groundless” exception would not apply even assuming the Act contemplates such an exception. The Court thus has a possible basis to reverse the judgment below and to send the case to arbitration without addressing the exception and with little implication for other cases.
The Court could also choose to address the question of whether the mere incorporation of the American Arbitration Association’s rules, which allow the arbitrator to decide its own jurisdiction, are a sufficiently clear agreement to send the gateway issue of arbitrability to the arbitrator. Every court of appeals to address the question has held that it is, but the Court has not addressed the issue. Moreover, although neither party raises the issue, an amicus brief from Professor George Bermann of Columbia Law School urges the Court to take this course. Such an outcome would allow the Court to affirm the denial of the motion to send the case to arbitration while avoiding the question of whether the “wholly groundless” exception applies, but it would also significantly curtail the power of arbitrators to resolve arbitrability questions in the many agreements that speak to the arbitrability question only by reference to arbitration rules.
Assuming the Court does not take either of these off ramps, this case will determine the fate of the “wholly groundless” exception. One might assume that a decision on this issue will be relatively inconsequential, given Archer’s analysis showing that no more than 100 cases have invoked the doctrine since 1991. But it is safe to say that a Supreme Court decision endorsing the doctrine will embolden parties seeking to avoid arbitration to rely on it, and thus will increase the frequency of such arguments. This will give opponents of arbitration a much-needed tool in a toolbox that has been shrinking in recent years (albeit one with limited applicability).
At a deeper level, the case will test the limits of the Court’s commitment to the enforcement of arbitration agreements. As outlined above, previous cases have found that an agreement to arbitrate should trump countervailing state or federal law in a variety of circumstances. This case will determine whether that commitment to arbitration prevails even when a detour to arbitration will be fruitless and wasteful because the case will certainly be returned to court.
The decision thus may provide some indication as to the strength of the Court’s ongoing commitment to enforcing arbitration agreements (particularly with the new personnel on the Court). There is reason to believe, however, that a decision on the applicability of the “wholly groundless” doctrine in this case may not necessarily correlate with the Court’s arbitration jurisprudence more broadly. Many of the Court’s decisions in this area (including, for example, Concepcion, Italian Colors, and most recently Epic Systems) have had a political valence, with the Court’s five conservatives comprising the pro-arbitration majority prevailing over a liberal dissent. But this case may not break down in the same predictable fashion, for two reasons. First, unlike many of the Court’s 5–4 decisions, which featured large corporations seeking to enforce arbitration agreements against an individual consumer or small business, this case features sophisticated business entities on both sides. Second, the lower court decisions addressing the “wholly groundless” exception have not always broken on predictable liberal-conservative lines. (The Fifth Circuit decision adopting the “wholly groundless” exception, for example, was authored by conservative Judge Jerry Smith, over a dissent by liberal Judge James Dennis. Douglas v. Regions Bank, 757 F.3d 460 (5th Cir. 2014).) This suggests that the Court’s views on the “wholly groundless” exception may be sui generis, rather than tracking the ideological divide that runs through much of the Court’s jurisprudence. The case’s value in predicting the outcome of future cases thus may also be limited.
Daniel Thies is a shareholder at Webber & Thies, P.C., in Champaign-Urbana, Illinois, and a member of the Council of the American Bar Association Section of Legal Education and Admissions to the Bar. His practice focuses on commercial litigation, ERISA, insurance, and reinsurance litigation; class action defense; business representation; and estate planning. Previously, Daniel was a litigation associate at Sidley Austin LLP. Daniel has served as a law clerk for Chief Judge James F. Holderman of the United States District Court for the Northern District of Illinois and Judge Jerry E. Smith of the United States Court of Appeals for the Fifth Circuit. He is a 2010 graduate of Harvard Law School, where he served as the Deputy Editor-in-Chief of the Harvard Journal of Law and Public Policy. He can be reached at email@example.com or 217.365.5327.
PREVIEW of United States Supreme Court Cases 46, no. 2 (October 29, 2018): 4–6. © 2018 American Bar Association
For Petitioner Henry Schein, Inc. (Kannon K. Shanmugam, 202.434.5000)
For Respondent Archer and White Sales, Inc. (Lewis T. LeClair, 214.978.4000)
Anthony Michael Sabino (Anthony Michael Sabino, 516.294.3199)
Atlantic Legal Foundation (Martin Sander Kaufman, 914.472.2356)
Chamber of Commerce of the United States of America (Andrew John Pincus, 202.263.3220)
New England Legal Foundation (Benjamin G. Robbins, 857.772.7620)
American Association for Justice (Matthew W. H. Wessler, 202.888.1741)
George A. Bermann (Jack Samuel Tenenbaum, 312.503.4808)
Public Citizen, Inc. (Scott Lawrence Nelson, 202.588.1000)