Issues
If a court determines that a claim of arbitrability is “wholly groundless,” may a court refuse enforcement of an agreement conferring the authority to determine questions of arbitrability to an arbitrator under the Federal Arbitration Act?
The Supreme Court will decide how courts should treat agreements delegating gateway questions of arbitrability to arbitrators—questions of whether an arbitrator has the authority to hear a case. Henry Schein, Inc. (“Henry Schein”) argues that, to honor such an agreement, the court must allow the arbitrator to decide gateway questions of arbitrability, even if the case clearly belongs in the court. In support of their argument, Henry Schein contends that under the Federal Arbitration Act (“FAA”), courts must allow arbitrators to decide the merits of claims delegated to arbitrators by contract, even if the merits are not arguable. Archer and White Sales, Inc. (“Archer and White”) counters that if a claim to arbitrability is “wholly groundless,” the court does not have to make the arbitrator evaluate the claim. Archer and White assert that the FAA does not ask courts to compel arbitration when plaintiffs file claims where they clearly belong—in court. From a policy perspective, this case asks the Court to balance the FAA’s strong policy in favor of arbitration with the need to protect the parties to an arbitration clause from arbitration proceedings they did not agree to.
Questions as Framed for the Court by the Parties
Whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is “wholly groundless.”
Facts
On August 31, 2012, Archer and White Sales, Inc. (“Archer and White”) sued Henry Schein, Inc. and Danaher Corp. (“Henry Schein”) in the United States District Court for the Eastern District of Texas. Archer and White is a distributor and seller of dental equipment. Henry Schein also manufactures and distributes dental equipment, and it may be the United States’ largest distributor for dental equipment. Archer and White alleged that Henry Schein and other manufacturers conspired to fix prices and refused to compete with each other in violation of Section 1 of the Sherman Act, Section 16 of the Clayton Act, and the Texas Free Enterprise and Antitrust Act. Archer and White sought damages as well as injunctive relief.
In response, Henry Schein moved to stay all proceedings and to compel arbitration under a clause in a contract (“Dealer Agreement”) between Pelton & Crane—Archer and White’s predecessor-in-interest—and themselves. Under the arbitration clause, “[a]ny dispute arising under or related to th[e Dealer] agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Archer and White]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)].”The magistrate judge first issued a Memorandum Order on May 28, 2013, holding that the antitrust dispute was arbitrable. The magistrate judge reasoned that the dispute was related to the Dealer Agreement, that the carve-out section of the clause was irrelevant because Henry Schein did not seek only injunctive relief, and that the reference to the AAA’s arbitration rules showed the parties’ intent to arbitrate arbitrability. The district court vacated the order on December 7, 2016 and held that the dispute was not arbitrable. The district court reasoned that the arbitration clause excluded disputes relating to injunctive relief, such as the present one, and that the parties did not clearly agree to arbitrate questions of arbitrability.
Henry Schein filed an interlocutory appeal under 9 U.S.C. § 16(a)(1)(C). The United States Court of Appeals, Fifth Circuit affirmed on December 21, 2017. Henry Schein then filed a petition for a writ of certiorari on March 9, 2018. The United States Supreme Court granted certiorari on June 25, 2018.
Analysis
DETERMINING WHAT THE FEDERAL ARBITRATION ACT REQUIRES
Henry Schein contends that the Federal Arbitration Act (“FAA”) requires courts to “rigorously [] enforce” the terms of a contract in which parties agree to have an arbitrator, rather than a court, decide certain issues. Accordingly, Henry Schein asserts that if the parties “clearly agreed” for an arbitrator to decide “gateway” questions of arbitrability—that is, questions of whether the court or arbitrator has the authority to decide a given issue—then the court must allow the arbitrator to decide these questions. In support of this contention, Henry Schein points out that when parties clearly delegate other issues to an arbitrator, the court must allow the arbitrator to rule on the merits of those issues, even if they do not seem “arguable” to the court. Henry Schein argues that gateway questions of arbitrability should not be treated any differently. Moreover, Henry Schein maintains that when parties have given an arbitrator the power to determine arbitrability, the grant of power necessarily includes the authority to decide if the issue in dispute is one that the parties agreed to arbitrate, as well as other gateway questions. Henry Schein contends that only in the event that an agreement does not empower the arbitrator to decide arbitrability and the claim in dispute is not encompassed in the range of issues that the parties agreed to arbitrate does the court address the merits of the claim. Thus, Henry Schein asserts that there is no basis in the FAA for the “wholly groundless” exception to operate.
Next, Henry Schein argues that there is no support for finding a “wholly groundless” exception to the FAA. First, Henry Schein asserts that a “wholly groundless” exception would conflict with the text of Sections 3 and 4 of the FAA, which note that a court should be “satisfied that the issue . . . is referable to arbitration under [the] agreement” before staying litigation or compelling arbitration. Specifically, Henry Schein contends that the Court has previously held that, when determining whether it is satisfied, a court can only consider issues related to the making or performance of the agreement to arbitrate under Sections 3 and 4 of the FAA, which the “wholly groundless” exception is unrelated to. Further, Henry Schein also maintains that a party is aggrieved under Section 4 whenever an opposing party refrains from arbitration under a valid arbitration agreement and brings its claim to a court instead—leaving no room for a “wholly groundless” exception to operate. Additionally, Henry Schein asserts that Section 2 of the FAA does not provide any basis for the “wholly groundless” exception because it mandates that courts enforce arbitration agreements, “save upon such grounds as exist at law or in equity for the revocation of any contract,” and the “wholly groundless” exception is not a ground for the “revocation of any contract.” Henry Schein notes that the Court only applies the “wholly groundless” exception in arbitration disputes, not other contractual disagreements.
Archer and White counter that the FAA’s text supports the “wholly groundless” exception. Specifically, Archer and White argue that Section 4 of the FAA, which requires that a court be satisfied that a party failed to comply with the arbitration agreement before it can order arbitration, provides a basis for the “wholly groundless” exception. Archer and White assert that a party does not fail to comply when it files a claim in a court that is not “even ‘arguably’ subject to arbitration.” Archer and White elaborate that when claims of arbitrability are “wholly groundless,” it is clear that the case belongs in court and the Court would not be satisfied that a party failed to comply, making compulsion of arbitration inappropriate. Similarly, Archer and White maintain that a party is not aggrieved under Section 4 when the Court hears a claim that belongs in court.
Next, Archer and White argue that there is no requirement for the parties or the Court to make arbitrators decide gateway questions when it is obvious that the case belongs in court, even if the parties gave arbitrators the authority to decide gateway questions. According to Archer and White, while Henry Schein is correct that the Court must let the arbitrator decide the merits of baseless claims related to any issues the parties delegated to the arbitrator, arbitrability is not an issue “on the merits” of the case. Archer and White also assert that Section 4 of the FAA provides a basis for the “wholly groundless” exception because it relates to both the making and performance of the arbitration agreement. Further, Archer and White maintain that if arbitration demands are “wholly groundless,” then the arbitrator would exceed their power in arbitrating and Section 10(a)(4) would require courts to vacate an award in these instances. According to Archer and White, by giving courts the authority to decide if arbitrators exceeded their powers on the back-end, Section 10(a)(4) indicates that courts should be able to make sure arbitrators do not exceed their powers on the front-end by evaluating the “wholly groundless” exception before compelling arbitration.
THE PURPOSE OF THE FEDERAL ARBITRATION ACT
Henry Schein argues that the “wholly groundless” exception contradicts the FAA’s purpose of promoting arbitration and placing arbitration clauses on equal footing with other contract provisions. Henry Schein contends that when parties delegate authority to an arbitrator through a contract, courts “have no business weighing the merits of the grievance.” Further, Henry Schein maintains that this reasoning extends to instances when the parties agree that an arbitrator should decide gateway questions—in these instances, the court “has no business weighing the merits” of arbitrability, which is what the “wholly groundless” exception would have the court do. Moreover, Henry Schein also argues that where the parties clearly intended for an arbitrator to decide issues of arbitrability, it would contradict the parties’ intent and negate the benefits of choosing to arbitrate if the court could evaluate whether claims of arbitrability are “wholly groundless.” Additionally, Henry Schein maintains that the “wholly groundless” exception creates practical problems. In particular, Henry Schein contends that the process that occurs when courts evaluate the “wholly groundless” exception is much more inefficient than arbitration and that the “wholly groundless” exception is vague as to what claims it applies to, among other problems. Finally, Henry Schein argues that arbitrators can adequately handle situations where the claim of arbitrability is truly meritless.
Archer and White counter that the “wholly groundless” exception advances the FAA’s statutory purpose. Specifically, Archer and White argue that arbitration is grounded in contract law and the “wholly groundless” exception promotes contract-law principles. Archer and White assert that no parties would intend to waste time having an arbitrator decide whether it has the authority to hear a claim that clearly belongs in court, and thus, the “wholly groundless” exception simply recognizes and honors the parties’ intent. Further, Archer and White note that an important principle in contract law is “good faith,” which is violated when parties make a “wholly groundless claim of arbitrability. Similarly, Archer and White contend that the FAA does not try to make arbitration agreements more powerful than other contracts, so basic litigation norms should still apply. Archer and White assert that these basic litigation norms include court policies that attempt to deter abusive practices, such as making arbitrators decide whether they can hear claims that they clearly cannot—the “wholly groundless” exception helps deter such practices. Further, Archer and White maintain that the “wholly groundless” exception promotes the FAA’s overarching policy to resolve cases in a “fair and expeditious” manner because it prevents the arbitrator from having to arbitrate an issue with a known outcome, which adds costs and wastes time.
Discussion
PROTECTING THE FEDERAL POLICIES UNDERLYING ARBITRATION
The Atlantic Legal Foundation (“ALF”), the Chamber of Commerce of the United States of America (“the Chamber”), and Anthony Michael Sabino (“Sabino”), in support of Henry Schein, argue that the FAA furthers a strong policy in favor of arbitration and protects parties who agreed on arbitration from the intervention of a judge. The “wholly groundless” doctrine, Sabino asserts, contradicts the FAA’s policy, and courts should respect the parties’ wish to have their dispute resolved by an arbitrator. ALF further contends that courts should not intervene at all once the parties have assigned their dispute to an arbitrator under a valid arbitration clause. Moreover, according to the Chamber, courts cannot refuse to allow parties to arbitrate a claim merely because the claim is not meritorious. ALF maintains that, if the Court upholds the “wholly groundless” exception, courts will be able to assess arbitrability based on the merits of the claim. This result, ALF argues, thwarts the purpose of an arbitration clause because it will lead to a judicial proceeding every time a party finds that the opposing party’s claim of arbitrability is baseless. ALF and the Chamber assert that such a result delays the resolution of the case and increases the complexity and cost of the dispute, which frustrates the benefits of arbitration—namely, avoiding civil litigation, time-saving procedures, and the informality of arbitration.
Public Citizen Inc. (“Public Citizen”), in support of Archer and White, asserts that a rule creating a presumption that the parties consented to arbitrate arbitrability violates the federal policies underlying arbitration. The federal policy in favor of arbitration, Public Citizen asserts, rests on the parties’ consent to arbitration. Public Citizen contends that “wholly groundless” claims of arbitrability must be resolved by a court because the question of arbitrability is only arbitrable if the parties agreed to it. Otherwise, Public Citizen argues that the parties could be forced into an arbitration they did not wish to enter, and courts would have to overturn the decision of the arbitrator for abuse of power. The American Association for Justice (“AAJ”) and Professor George A. Bermann (“Professor Bermann”), in support of Archer and White, further argues that, in order to protect the integrity and legitimacy of arbitration, courts must be the ones deciding whether the parties agreed on arbitration. Otherwise, AAJ explains, any arbitration clause between the parties, related to the current dispute or not, would trigger arbitration and force parties to ask an arbitrator to go to court.
CONTRAVENING THE PARTIES’ INTENTIONS
The New England Legal Foundation (“NELF”), in support of Henry Schein, and the Chamber assert that an arbitration clause is a contract, and the parties are free to shape it and decide whether the judge or the arbitrator decides upon the arbitrability of the dispute. According to the Chamber and Sabino, the “wholly groundless” doctrine undermines the parties’ choice to avoid judicial intervention to resolve their dispute and should therefore be as narrow as possible so as to limit the judge’s intervention. Moreover, Henry Schein maintains that the judge must respect the parties’ decision to resort to an arbitrator to resolve their dispute. Questions about the arbitrability of the dispute, Sabino adds, may only be submitted to a judge to avoid forcing arbitration on a party that did not agree to it. ALF asserts that when deciding whether the parties intended to arbitrate arbitrability, the court must interpret the agreement but cannot look at the merits of the claim at issue. Courts are presumably competent to determine disputes of arbitrability, ALF explains, but this presumption ends where the parties’ intent to arbitrate arbitrability is clear.
Archer and White counter that the “wholly groundless” exception is necessary to protect parties from frivolous or implausible claims. Specifically, Archer and White contend that the parties to an arbitration clause only agree to arbitrate legitimate disputes, including legitimate questions of arbitrability. AAJ further argues that the “wholly groundless” doctrine allows courts to look at the parties’ arbitration clause to interpret their intent and expectations, as well as to ask whether the parties’ dispute is related to the arbitration clause they agreed to. Additionally, Professor Bermann asserts that the parties can chose to resort to arbitration for their question of arbitrability. However, Professor Bermann contends that the Court should require “unmistakable evidence” that the parties wanted the arbitrator to decide arbitrability. For example, Professor Bermann asserts that a reference to AAA’s rules, which provide that arbitrability is a question for the arbitrator, is not clear and “unmistakable” enough because such general formulations have become so common that they do not show the parties’ intent to delegate the question of arbitrability to the arbitrator. Professor Bermann maintains that arbitrability rests on the parties’ willingness to arbitrate and violating the parties’ intent violates the legitimacy of the arbitration.
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Edited by
Acknowledgments
Additional Resources
- Gibbons P.C., SCOTUS to Have the Last Word on “Wholly Groundless” Standard for Delegation of Arbitrability, Commercial Litigation Alert (July 6, 2018).
- Shayna Posses, Dental Co. Claims Must Go To Arbitrator, High Court Told, Law 360 (October 15, 2018).