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January 08, 2019

Supreme Court Decides Henry Schein, Inc., et al. v. Archer & White Sales, Inc.

On January 8, 2019, the Supreme Court decided Henry Schein, Inc., et al. v. Archer & White Sales, Inc., No. 17-1272. The Federal Arbitration Act allows parties to agree by contract that an arbitrator decide threshold questions of arbitrability, rather than a court. While some federal courts have embraced by a “wholly groundless” exception to resolve arbitrability questions even in the face of such an agreement, a unanimous Court held that lower courts must respect the parties’ choice to delegate arbitrability questions to the arbitrator.

The contract in this dispute provided, in relevant part, that “[a]ny dispute arising under or related to this Agreement (except for actions seeking injunctive relief …) … shall be resolved by binding arbitration in accordance with the arbitration rules of the [AAA].” After a business relationship soured, Archer & White sued Henry Schein, Inc., alleging violations of federal and state antitrust law and seeking money damages and injunctive relief. Schein asked the district court to refer the parties’ antitrust dispute to arbitration. Archer & White opposed, arguing that the parties’ contract barred arbitration here because the complaint sought, in part, injunctive relief. Schein argued that the contract’s incorporation of the AAA rules, which provide arbitrators with the authority to decide arbitrability, meant that the arbitrator would decide whether the arbitration agreement applied to this dispute. Archer & White contended that Schein’s argument for arbitration was “wholly groundless,” and thus the court may decide arbitrability. The district court sided with Archer & White and denied Schein’s motion to compel arbitration on the basis of the “wholly groundless” exception. The Fifth Circuit affirmed.

Resolving a dispute among the circuits, a unanimous Supreme Court rejected the “wholly groundless” exception and remanded the case. Noting that “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms,” the Court referenced prior holdings that this includes “gateway” questions such as whether the arbitration agreement covers a particular controversy. The Court observed that some Courts of Appeal had, nevertheless, determined that courts should decide the arbitrability question if the argument for arbitration is “wholly groundless,” reasoning that doing so enables courts to block frivolous attempts to transfer out of the court system. The Supreme Court disagreed that this approach was proper, concluding “that the ‘wholly groundless’ exception is inconsistent with the text of the Act and with [its] precedent.”

The Court further rejected Archer & White’s four main arguments in favor of the exception. First, the Court concluded that §§ 3 and 4 of the Act do not mean “that a court must always resolve questions of arbitrability and that an arbitrator may never do so.” Under the Court’s existing precedent, “that ship has sailed.” Second, the Court rejected the notion that because § 10 of the Act allows “back-end judicial review” if the arbitrator has exceeded his or her powers, the court should also be able to determine at the outset that the dispute was not arbitrable, reflecting that it is not the Court’s place to “redesign the statute.” Third, the Court rejected the argument that the “wholly groundless” exception saves time and money both because the Act contains no such exception and because the Court saw “no reason to create … a time-consuming sideshow” over whether an argument for arbitration is “wholly groundless” or just groundless. Lastly, Archer and White argued that the exception was necessary to deter frivolous motions to compel arbitration. The Court rejected this policy argument, too, explaining that problem was “overstat[ed],” and, again, the exception is inconsistent with the statutory text.

Justice Kavanaugh delivered the unanimous opinion of the Court.

Download Opinion of the Court.

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