In a unanimous decision authored by Justice Kavanaugh, the U.S. Supreme Court held that under the Federal Arbitration Act (“FAA”), “when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract even if the court thinks that the arbitrability claim is wholly groundless.” The decision in Henry Shein, Inc. v. Archer & White Sales, Inc., issued January 8, 2019, addresses a split among the six circuit courts which have heard similar matters and vacates the decision of the Fifth Circuit which held that when a court determines that the request to have the matter arbitrated is “wholly groundless,” the court may deny a motion to allow an arbitrator to determine whether a matter is subject to arbitration.
The Facts:
Archer & White is a distributor of dental equipment. It entered into distribution contract with a manufacturer. When the relationship soured, Archer & White sued, seeking monetary and injunctive relief in Texas federal court. The contract between the parties contained the following language:
Disputes. This Agreement shall be governed by the laws of the State of North Carolina. Any dispute arising under or related to this Agreement (except for
actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Schein]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)]. The place of arbitration shall be in Charlotte, North Carolina.
The defendant asked the district court to refer the matter to arbitration under the FAA. Archer & White objected, as the complaint sought injunctive relief in part, barring arbitration. The district court noted AAA Rules (Rule 7) provide that arbitators have the power to resolve questions of what disputes are subject to arbitration. Archer & White countered that the court may itself answer the threshold question of arbitrability where a defendant’s argument for arbitration is wholly groundless. The district court agreed with Archer & White, relying on Fifth Circuit precedent. The Fifth Circuit affirmed the denial of the motion to compel arbitration. Archer & White appealed to the Supreme Court.
The Decision:
The unanimous Court reminded the parties that under the FAA, arbitration is a matter of contract and courts must enforce the contracts as written, including where the contract allows an arbitrator to determine the “gateway” question of arbitrability, such as whether the parties have agreed to arbitrate or whether the agreement covers the controversy at bar. Addressing the four circuit courts that have held to the “wholly groundless” reasoning, the court said:
We must interpret the Act as written, and the Act in turn requires that we interpret the contract as written. When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue. That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.
The Takeaway:
Courts are not at liberty to decide whether a matter is subject to arbitration where the contract either says that the arbitrator decides jurisdictional issues or the rules referenced in the contract give the arbitrator that power. Under the FAA, the court may not substitute its decision for that of the arbitrator even though it might think the idea that the matter is subject to arbitration is wholly groundless. Only the arbitrator has the power to make that decision. Make sure your arbitration clause declares that the arbitrator decides if the dispute is arbitrable or refers to rules giving the arbitrator that power.
