By Charlie Delacruz, Senior Vice President, General Counsel and Corporate Secretary
The U.S. Supreme Court on Jan. 8 decided another case strongly in favor of access to arbitration for resolution of disputes involving commercial contracts.
In the case – Henry Schein, Inc. v. Archer & White Sales, Inc., (No. 17-1272) – the Court rejected the “wholly groundless” exception used by some lower courts to preclude arbitration even if the parties had agreed in their contracts to have an arbitrator – not the court – decide whether their arbitration agreement applied to a particular dispute.
In the case, Archer & White Sales Inc. (Archer) sued Henry Schein Inc. (Schein) in federal district court in Texas alleging violations of federal and state antitrust law and seeking money damages and injunctive relief. The contract between the parties involved distribution of dental equipment and provided for arbitration of contract-related disputes, except for, among other things, actions seeking injunctive relief. Schein sought to compel arbitration, but Archer argued the claim was not subject to arbitration because it sought injunctive relief, at least in part. Schein contended that pursuant to the parties’ agreement an arbitrator – not the court – should decide whether their arbitration agreement applied to this dispute. However, the district court agreed with Archer that the arbitration claim was wholly groundless and denied Schein’s motion to compel arbitration. The Fifth Circuit U.S. Court of Appeals affirmed the lower court’s decision. The Supreme Court agreed to hear an appeal in this case because of a disagreement among the Courts of Appeals over the “wholly groundless” exception.
In its unanimous decision – the first opinion authored by its newest justice, Brett Kavanaugh – the U.S Supreme Court vacated the Fifth Circuit’s ruling and held the “wholly groundless” exception was inconsistent with the Federal Arbitration Act and previous Supreme Court decisions. The High Court stated arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms. Therefore, when the parties agree by contract to delegate to an arbitrator the question of whether their arbitration agreement applies to a particular dispute, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless.
The Supreme Court rejected Archer’s arguments that the Act requires that a court must always resolve questions of arbitrability and that because the Act provides for back-end judicial review of an arbitrator’s decision, then the court should be able to provide the same review at the front end. The Supreme Court stated it consistently has held that parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by “clear and unmistakable” evidence. The Supreme Court further stated: “To be sure, before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists. [cites omitted] But if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.”
The Court expressed no opinion on whether the contract at issue in this case in fact delegated the arbitrability question to an arbitrator. The Court of Appeals did not decide that issue, and on remand, it may address that issue in the first instance, as well as other arguments that have been preserved properly.