Landmark SCOTUS Contractual Arbitration Opinion

Justice Kavanugh’s First Opinion Resolves Long-Standing Circuit Split

Justice Brett Kavanaugh has authored his first opinion, holding that courts may not interfere with contractual arbitration provisions that delegate to the arbitrator whether the arbitration agreement applies to dispute. The unanimous, pro-arbitration opinion resolves a long-standing circuit split.

In Henry Schein, Inc. v. Archer & White Sales, Inc. (U.S. Jan. 8, 2019), the plaintiff alleged numerous violations of federal and state law. The controlling contract contained a mandatory arbitration agreement that required them to resolve disputes pursuant to the American Arbitration Association’s rules, with exceptions for injunctive relief and intellectual property disputes. Importantly, the AAA rules provide that arbitrators have the power to resolve arbitrability questions.

Plaintiff sought to compel arbitration. Defendant claimed that the dispute fell outside the scope of the arbitration agreement because Plaintiff’s complaint, in part, sought injunctive relief. Defendant argued that the arbitrator should therefore not decide the scope of the arbitration agreement because it was “wholly groundless” to claim the arbitration agreement applied, in the first place.

A federal court in Texas and – contrary to several other circuits – the Fifth Circuit Court of Appeals ruled in favor of Defendant, that the underlying claims in the case were not arbitrable because they were “wholly groundless.”

The U.S. Supreme Court granted certiorari in order to decide whether the “wholly groundless” exception to a binding delegation provision is consistent with the Federal Arbitration Act. Ultimately, it disagreed with the lower courts.

The Court explained that, under the FAA, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” It characterized the often cited “wholly groundless” doctrine as a method to “short-circuit the process and decide the arbitrability question themselves.”

The Supreme Court “has consistently held that parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by ‘clear and unmistakable’ evidence.” It said, “[w]hen the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract.” “A court has no power to decide the arbitrability issue” even if it believes the argument for arbitration is wholly groundless.”

Read the opinion.

Takeaway: Arbitration agreements, including online terms of use, are typically enforced as written. Parties to a contract should closely scrutinize class action waiver and arbitration provisions, including those that delegate the issue of arbitrability to arbitrators. The intent to delegate the question of whether a dispute is arbitrable to an arbitrator should be expressed clearly and unambiguously.

If you are interested in learning more about this topic, contact the author at rnewman@hinchnewman.com.

Richard B. Newman is a digital marketing attorney at Hinch Newman LLP.

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