United States Supreme Court Eliminates "Wholly Groundless" Exception by William L. Burner

By: William L. Burner
Bowles Rice e-Alert
January 11, 2019

On January 8, 2019, the Supreme Court of the United States issued an Opinion with positive implications for businesses and employers who rely upon arbitration clauses in their contracts. The Court's decision in Henry Schein, Inc. v. Archer and White Sales, Inc., 586 U.S.___ (2019), affects how courts must interpret arbitration agreements under the Federal Arbitration Act. The Supreme Court was asked to consider a familiar scenario: who decides the outcome when parties dispute the threshold arbitrability question? The Court held that "[w]hen the parties' contract delegates the arbitrability question to an arbitrator, the courts must respect the parties' decision as embodied in the contract." Id. at 8.

The specific legal issue before the Court was whether the judicially created "wholly groundless" exception, which was also recognized in the Fourth Circuit, is consistent with the Federal Arbitration Act. In his first Opinion, Justice Kavanaugh wrote for a unanimous Supreme Court, rejecting the "wholly groundless" exception because it is inconsistent with the Act and the Court's precedent. Schein, at 8.

The case began as a dispute between two businesses dealing in dental equipment. Archer and White sued Henry Schein in a Federal District Court in Texas seeking both monetary damages and injunctive relief. Henry Schein "invoked the Federal Arbitration Act and asked the District Court to refer the parties' antitrust dispute to arbitration." Schein, at 3. Archer and White opposed the motion, arguing that the dispute was not subject to arbitration because it sought injunctive relief—presumably in an attempt to avoid triggering the arbitration requirement. Archer and White argued that the contract precluded arbitration if a plaintiff was seeking injunctive relief, even if only in part.

The District Court was presented with the issue of determining who should decide whether the parties' dispute is subject to arbitration. Following Fifth Circuit precedent, the District Court determined that the "wholly groundless" exception applied and denied Schein's motion to compel arbitration. The Fifth Circuit affirmed.

The Fourth Circuit recently discussed the "wholly groundless" exception:

 [T]his Court explained that a district court must give effect to a contractual provision clearly and unmistakably delegating questions of arbitrability to an arbitrator, unless it is clear that the claim of arbitrability is wholly groundless. This so-called "wholly groundless" exception accords with the principles set forth in Federal Rule of Civil Procedure 11(b) that parties should not file a motion with a court—such as a motion to compel arbitration—that is being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation, or that is based on frivolous claims, defenses, or other legal contentions.         

Simply Wireless, Inc v. T-Mobile US, Inc, 877 F.3d 522, 528-29 (4th Cir. 2017), abrogated by Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272, 2019 WL 122164 (U.S. Jan. 8, 2019) (internal quotations and citations omitted).

The Schein Court found that the "wholly groundless" exception was inconsistent with the Act and the Supreme Court's precedent. Archer and White argued that §§ 3, 4, and 10 of the Act support courts' use of the "wholly groundless" exception. The Court flatly rejected this notion, explaining that courts determine whether a valid arbitration agreement exists, "[b]ut if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue." Schein, at 6 (citing 9 U.S.C. §2). Accordingly, the Schein Court held that "[w]hen the parties' contract delegates the arbitrability question to an arbitrator, the courts must respect the parties' decision as embodied in the contract." Id. at 8.

The Supreme Court's unanimous decision should encourage parties seeking to take advantage of the numerous benefits of arbitration. Because Schein altered the way courts will consider arbitration clauses in many jurisdictions, including the Fourth Circuit, it is important for businesses, employers, and others to review their contracts so they can fully take advantage of the Court's holding in Schein and avoid unnecessary litigation.