United States: Supreme Court Eliminates The "Wholly Groundless" Exception To Arbitration Agreements, Reinforcing The Force Of Delegation Provisions

On January 8, 2019, in a unanimous opinion written by Associate Justice Brett Kavanaugh, the Supreme Court ruled that where parties have agreed to delegate issues of arbitrability to an arbitrator, a court may not override that agreement. The Court explained this is true even where the court believes that a party's argument that the dispute is within the scope of the agreement is frivolous. The Court's decision ends a circuit split about whether, when faced with an enforceable delegation provision, courts could still hear arguments about the scope of an arbitration agreement under the "wholly groundless" exception.

Background

In 2010, the Supreme Court ruled in Rent-A-Center that delegation clauses are presumptively valid.¹ Delegation clauses represent an agreement between parties that an arbitrator, not a court, will determine threshold issues of enforceability and scope of the arbitration agreement. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-69 (2010). In determining the bounds of Rent-A-Center, the Fifth, Sixth and Federal Circuits held that the provision must have its limits. To that end, the "wholly groundless" exception was created to address situations where a delegation provision is enforceable, but the underlying claim is supposedly so attenuated from the parties' agreement, that it would be unlikely any court could conclude the dispute was subject to arbitration.² Put simply, the exception sought to avoid parties compelling arbitration of claims that were obviously not within the scope of the agreement. It is under this framework that the dispute in the present case arose.

Archer and White is a small business that develops dental equipment in Texas. Archer and White entered into an agreement with Henry Schein Inc. to distribute certain types of dental equipment. As part of their distribution agreement, the parties included an arbitration agreement that stated all disputes would be resolved under the American Arbitration Association's (AAA) rules. Included in the AAA's rules is a provision that delegates all questions of arbitrability to an arbitrator. The agreement also provided, as is relevant, that the relevant scope was "[a]ny dispute arising under or related to this agreement (except for actions seeking injunctive relief..."). Ultimately, a dispute arose and Archer and White filed a complaint alleging violations of federal and state antitrust law. As part of its complaint, Archer and White sought both monetary damages and injunctive relief. Schein moved to compel arbitration, arguing that the incorporation of a delegation provision (through AAA's rules) required all issues of arbitrability to be decided by an arbitrator. Archer and White, on the other hand, argued that under the "wholly groundless" exception, the court, not the arbitrator, was tasked with resolving the question of arbitrability. Relying upon Fifth Circuit precedent, the district court agreed with Archer and White and ruled that Schien's argument was wholly groundless. Schien appealed, and the Fifth Circuit affirmed.

The Decision

After analyzing the plain text of the Federal Arbitration Act (FAA), the Supreme Court reversed the Fifth Circuit, holding that the "wholly groundless" exception is inconsistent with the FAA. The FAA requires courts to interpret contracts as written and if "the parties' contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue." In reaching this conclusion, the Court rejected four different arguments by Archer and White that the wholly groundless exception is necessary.

First, the Court considered Archer and White's argument that because the FAA mandates a stay only after a court is "satisfied" that the issue is "referable to arbitration," a court must first determine issues of arbitrability. The Court swiftly rejected this argument, noting that it has consistently held that parties may delegate threshold questions of arbitrability to an arbitrator, so long as they do so with clear and unmistakable language.

Next, the Court considered whether the FAA's provision that allows juridical review of an arbitrator's final decision should permit a court to determine arbitrability as a threshold question. The Court rejected this argument, finding it would fundamentally undermine arbitration agreements by permitting the court to make decisions as to the merits of the dispute prior to arbitration.

The Court then considered Archer and White's argument that as a matter of policy, it would be a waste of the parties' time and money to send an arbitrability question to the arbitrator where the argument for arbitration is groundless or frivolous. Noting that there are a myriad of situations where reasonable minds could differ as to what is "wholly groundless," or the merits of a legal issue, the Court rejected this argument as well. In so doing, the Court explained that allowing the Court to make a wholly groundless determination would inevitably spark additional motions practice and litigation—which is exactly what parties are seeking to avoid through arbitration.

Finally, the Court considered whether the "wholly groundless" exception would be necessary to deter frivolous motions to compel arbitration. The Court did not find this argument persuasive and noted that arbitrators could deter frivolous motions by imposing cost-shifting and fee-shifting sanctions.

Implications

The Court's decision is a win for businesses that have delegation clauses in their arbitration agreements. With this holding, the Supreme Court once again has reinforced its precedent that arbitration agreements should be enforced as written.

Footnotes

1 See Henry Lederman, U.S. Supreme Court Rules Arbitration Clause Delegating Contract Enforceability Issues to Arbitrator Is Enforceable, Littler Insight (June 21, 2010).

2 Douglas v. Regions Bank, 757 F.3d 460, 464 (5th Cir. 2014).

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