Henry Schein, Inc. et al. v. Archer and White Sales, Inc.
Issue Discussed: Arbitrability/Scope of Arbitration
Submitted by Cecilia Froelich Moss, Devin Hisarli
Date Promulgated: January 8, 2019
Henry Schein, Inc. et al. v. Archer and White Sales, Inc.
Issue Discussed: Arbitrability/Scope of Arbitration
Submitted by: Cecilia Froelich Moss and Devin Hisarli[1]
Date Promulgated: January 8, 2019
Henry Schein, Inc. et al. v. Archer and White Sales, Inc., 139 S.Ct. 524 (2019)
Court: U.S. Supreme Court
Issue Decided: Whether a court may decide the threshold issue of arbitrability where the contract provides that the question of arbitrability is a question for the arbitrator if the court finds the arbitrability claim to be “wholly groundless.”
Factual Background
Archer & White Sales. Inc. (“Archer & White”), a distributor of dental equipment, entered into a distribution contract with Pelton & Crane, a dental equipment manufacturer.
The contract’s arbitration clause provided that disputes arising under the parties’ agreement would be resolved by binding arbitration in accordance with the American Arbitration Association (“AAA”) rules. Notably, the contract exempted actions seeking injunctive relief from arbitration.
After the relationship deteriorated, Archer & White sued Pelton & Crane’s successor-in-interest and Henry Schein, Inc. (“Schein”), seeking both monetary damages and injunctive relief. Schein moved to compel arbitration. Archer & White objected, arguing that the contract barred arbitration since the “complaint sought injunctive relief, at least in part.”
Schein maintained that in accordance with the rules of the AAA, which the contract had expressly adopted, the threshold arbitrability question was one for the arbitrator to decide. Archer & White’s response was that in situations where the defendant’s argument for arbitration is “wholly groundless,” an exception allowed the District Court to resolve the threshold question of arbitrability.
Relying on Fifth Circuit precedent, the District Court agreed with Archer & White, and denied the motion to compel arbitration, holding that a “wholly groundless” exception did exist and that Schein’s argument for arbitration was “wholly groundless.” The Fifth Circuit affirmed.
Key Holding
The Supreme Court held that a “wholly groundless” exception is inconsistent with both the Federal Arbitration Act (“FAA”) and Supreme Court precedent. Instead, it held that “when the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.”
The Supreme Court emphasized that under the FAA, “arbitration is a matter of contract,” and that courts must enforce agreements to arbitrate according to their terms, including the delegation of threshold arbitrability questions to an arbitrator. The court noted that this conclusion is consistent with the principle of AT&T Technologies v. Communications Workers in which it held that a court may not rule on the merits of an underlying claim which the contract assigned to an arbitrator, even if the court concludes that the claim is frivolous. 475 U.S. 643, 649-650 (1986).
The Court rejected Archer & White’s contention that FAA §§ 3 and 4 require courts to resolve questions of arbitrability, noting that that argument had been rejected by First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995), which held that parties may delegate threshold arbitrability questions to the arbitrator. The court also rejected the argument that FAA § 10(a)(4)’s provision for “back-end judicial review of an arbitrator’s decision if an arbitrator has exceeded his or her powers,” supported a court’s prospective review as well. The Court reasoned that such an interpretation of the retrospective judicial review provided for in § 10 amounted to an impermissible “redesign of the statute,” and conflicted with the Supreme Court’s ruling in AT&T Technologies.
Finally, the Court rejected Archer & White’s policy argument that a “wholly groundless” exception would eliminate frivolous claims and reduce unnecessary arbitration costs to the parties. Instead, the court was unconvinced that the exception would in fact save time and money because it could “spark collateral litigation … over whether a seemingly unmeritorious argument for arbitration is wholly groundless, as opposed to groundless.” In any event, the Court concluded that it could “not engraft [its] own exceptions onto the statutory text.”
Key Takeaway
A court may not override a contract that delegates the threshold arbitrability question to the arbitrator, even if the court finds that the argument for arbitration is “wholly groundless.”
[1] Cecilia Froelich Moss is a founding partner of Chaffetz Lindsey LLP, where her practice focuses on representing major insurance companies in reinsurance disputes and in coverage litigation. Ms. Moss also handles large scale commercial disputes in court and in international arbitration. Devin Hisarli is a law student at NYU and was a summer associate at Chaffetz Lindsey.
