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Elimination of Wholly Groundless Exception to Arbitrability

Henry Schein Inc. v. Archer and White Sales Inc., 139 S. Ct. 524 (2019). Available at: https://www.supremecourt.gov/opinions/18pdf/17-1272_7l48.pdf

 

(June 28, 2019) Christina Araviakis, Summer Associate.

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Archer & White, a business that distributes dental equipment, contracted with Pelton & Crane, a manufacturer of dental equipment, to distribute Pelton & Crane’s equipment. Their contract stated 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 American Arbitration Association.” (emphasis added).

The relationship between the two went south and Archer & White ended up suing Pelton & Crane’s successor, Henry Schein Inc., in Federal District Court in Texas, for violations of federal and state antitrust law. Archer & White sought money damages and injunctive relief. Schein asked the District Court to refer the dispute to arbitration, but Archer & White objected. Archer & White argued that the terms of the contract barred arbitration when the plaintiff sought injunctive relief, even in part. Schein argued that the rules governing the contract state that an arbitrator, not the court, decides questions of arbitrability. The District Court agreed with Archer & White, and the Fifth Circuit affirmed. The question before the Supreme Court became: Who decides whether the antitrust dispute is subject to arbitration?

The Court examined the language in the Federal Arbitration Act (hereinafter “FAA”), which states that arbitration is a matter of contract that the courts must enforce. The Court has previously interpreted the FAA to allow parties to agree to have an arbitrator decide any gateway questions of arbitrability. The Court also noted that the American Arbitration Association states that arbitrators resolve arbitrability questions. However, lower courts have begun acknowledging a “wholly groundless” exception to stop frivolous lawsuits from going to arbitration when an argument for arbitration is wholly groundless.

The Court here rejected and eliminated the wholly groundless exception, holding that the exception is inconsistent with the FAA because a court may not override a contract. In circumstances where the parties’ contract delegates arbitrability questions to an arbitrator, a court has no power to decide the issue. Archer & White argued that having an arbitrator decide an arbitrability question that is wholly groundless wastes time and money. The Court disagreed, stating that arbitrators can more efficiently dispose of a case than the court, and that the wholly groundless exception can result in costly collateral litigation over whether an argument for arbitration is wholly groundless, or just groundless. The Court recognized that Congress drafted the Act in a specific way and that it was not within the powers of the Supreme Court to write the Act to add a wholly groundless exception.