SCOTUS Decision Applies FAA to Empower Businesses and Arbitrators, 0919 COBJ, Vol. 48, No. 8 Pg. 30
| Author | BY GENE COMMANDER |
| Position | Vol. 48, 8 [Page 30] |
August, 2019
ALTERNATIVE DISPUTE RESOLUTION
BY GENE COMMANDER
There has been a longstanding debate over whether a trial court should decide gateway arbitrability issues. The U.S. Supreme Court's opinion in Henry Schein, Inc. v. Archer and White Sales, Inc. should put an end to it.
This article addresses whether a trial court has jurisdiction to determine threshold arbitrability issues in disputes governed by the Federal Arbitration Act (FAA), where the contracting parties' arbitration agreement expressly delegates that authority to an arbitrator.1
This jurisdictional question arose from numerous conflicting federal court of appeals decisions regarding the legitimacy of a judicially created "wholly groundless" exception to the arbitrator's contractual authority to enforce the parties' binding arbitration agreement.2
The U.S. Supreme Court opinion issued on January 8, 2019, in Henry Schein, Inc. v. Archer and White Sales, Inc., should put an end to the longstanding debate over whether a trial court—rather than a duly appointed and authorized arbitrator—should decide gateway arbitrability issues. Schein had gone before the U.S. Court of Appeals for the Fifth Circuit on a writ of certiorari. In a unanimous decision authored by Justice Kavanaugh, the U.S. Supreme Court vacated the lower court's decision, which it decided had erroneously upheld the authority of the U.S. District Court in Texas to reject a contracting party's arguments in support of the enforceability of a written arbitration agreement by relying on what the circuit court characterized as the FAA's "wholly groundless" exception.
The Schein Arbitration Agreement
The parties' arbitration agreement in Schein (the Agreement) contained a provision stating:
Disputes. This Agreement shall be governed by the laws of the State of North Carolina. Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Schein]), shall he resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association. The place of arbitration shall be in Charlotte, North Carolina.[3]
The Dispute
The underlying dispute in Schein was between two businesses involved in the manufacture (Henry Schein, Inc.) (Schein) and distribution (Archer and White, Inc.) (Archer and White) of dental equipment. Their contractual business relationship had deteriorated over time.
Rather than demanding arbitration pursuant to the Agreement, Archer and White filed a civil complaint against Schein in U.S. District Court asserting federal and state antitrust violations and seeking monetary damages and injunctive relief.
In response to the complaint, Schein asked the court to apply the FAA and compel arbitration for the antitrust claims. Archer and White objected to the motion because the complaint also sought injunctive relief, which was specifically excluded from the scope of the Agreement. Archer and White also urged the court to decide these threshold arbitrability questions—rather than refer them to an arbitrator—because Schein's arguments in support of its motion were wholly groundless.
The court accepted Archer and White's arguments and found that Schein's motion to compel was wholly groundless. Consequently, the court denied the motion. Schein appealed, and the Fifth Circuit affirmed the U.S. District Court's decision. The U.S. Supreme Court then granted certiorari to resolve the appellate courts' conflicting decisions.4
The Arguments
To avoid the consequences of application of the FAA, Archer and White offered several public policy arguments to support its position, all of which were rejected by the Supreme Court.
First, Archer and White contended that the elimination of the "wholly groundless" exception would waste the parties' time and resources if a trial court is required to send threshold arbitrability questions to an arbitrator, when the arguments in favor of arbitration are "wholly groundless" in the eyes of the court. In response, the Court emphasized that no "wholly groundless" exception exists in the text of the FAA, and courts do not have the liberty to override the parties' contractual decisions and short-circuit an arbitration proceeding when Congress elected not to do so in the FAA.5
The Court also observed that the exception would undoubtedly encourage further traditional civil litigation between the contracting parties and thus contribute to the unavoidable costs and additional time associated with the adjudication of a dispute over seemingly unmeritorious arguments to determine whether they are "wholly groundless" o r simply "groundless" as a matter of law. While the Court recognized the possibility that the exception might save some time and expense in an individual case, it cast understandable doubt on any suggestion that enforcement of the exception would produce appreciable systemic efficiencies and cost savings for the contracting parties.[6]
Second, Archer and White asserted that the elimination of the judicial exception would encourage frivolous motions to comp el arbitration. The Court found that argument to be overstated, recognizing that qualified arbitrators are more than capable of fairly and efficiently spotting frivolous arguments and promptly determining when claims are outside the intended scope of the parties' arbitration agreement.7
Schein argued, and the Court agreed, that the express terms of the Agreement should be enforced and an arbitrator appointed by the American Arbitration Association (AAA), not the U.S. District Court, should determine the gateway arbitrability issues raised by its motion to compel.8
The Result
Since arbitration is a matter of contract, the Supreme Court reasoned that the judicially created "wholly groundless" exception to arbitration is inconsistent with both the FAA and Supreme Court precedent cited in the Schein opinion.9 Therefore, courts must respect the parties' contractual alternative dispute resolution decisions.10
The Court reversed the Fifth Circuit's decision and remanded the case for further proceedings consistent with its opinion.
Lessons Learned
Schein confirms that businesses can agree in advance to delegate authority to an arbitrator to...
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