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US Supreme Court: “Wholly Groundless” Doctrine Abolished

Arbitration and how to interpret arbitration agreements continues to be breaking legal news. The US Supreme Court just handed down a unanimous 9-0 decision in Henry Schein Inc. v. Archer & White Sales, Inc., Case No. No. 17-1272 , 586 U.S. __ (2019) holding that:

  • Courts are required to respect the parties’ intent if the arbitration clause/agreement gives the arbitrators the right to decide the question of arbitration (that is, the question of arbitrability)
  • The intent to give the question of arbitrability to the arbitrators must be “clear and unmistakable”
  • If the question of arbitrability is clearly and unmistakably given to the arbitrators, even a “wholly groundless” challenge to arbitration must be given to the arbitrators for resolution

Henry Schein Inc. is yet another case strengthening the use of arbitration as an alternative to the more traditional resolution of legal disputes in the US courts system.

Archer & White Sales, Inc. is in the business of distributing dental equipment. Archer & White signed an agreement with a company called Pelton and Crane (“P&C”) to sell and distribute certain P&C equipment. The agreement contained this arbitration clause:

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 certain other claims]) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.”

The relationship between Archer & White and P&C eventually soured and litigation was begun. Henry Schein, Inc. (“Schein”) became the corporate successor-in-interest to P&C and, thus, is named in the case caption. The main claim made by Archer & White was based on anti-trust law and Archer & White sought both money damages and injunctive relief.

At the trial level, Schein sought to compel arbitration. Archer & White resisted claiming that, by the plain language of the agreement quoted above, its request for injunctive relief took the case out of the ambit of the arbitration clause. Schein countered by arguing that even the question of whether the case was arbitrable had to be sent to arbitration.

The US federal trial court agreed with Archer & White. The trial court held that Schein’s position was “wholly groundless” since the agreement to arbitration clearly excluded causes of action that sought injunctive relief. According to some federal caselaw, a “wholly groundless” argument in favor of arbitration can be decided by the federal courts even if the question of arbitrability is given to the arbitrators. There is, of course, a certain logic to the trial court’s opinion. Why have the extra step of sending the case to arbitration only to have the arbitrators decide the obvious question that the case is not supposed to be resolved by arbitration?

In any event, the trial court refused to send the case to arbitration and this was affirmed by the relevant Court of Appeals. However, the US Supreme Court reversed and sent the case back to the lower courts to decide whether the parties really intended — by clear and unmistakable language — that the issue of arbitrability be resolved by the arbitrators. In so doing, the US Supreme Court abolished the “wholly groundless” doctrine. The court held that the “wholly groundless” exception was inconsistent with the Federal Arbitration Act which requires that courts interpret the arbitration provisions as written.

Corporate lawyers may want to consider adding “wholly groundless” language to arbitration provisions, if desired, particularly where there are carve-outs and issues/legal matters excluded from arbitrability. An example might be a statement like this: “The Arbitrator shall decide questions of arbitrability unless the argument in favor of arbitrability is wholly groundless, in which case a court of competent jurisdiction shall resolve the question of arbitrability.”

Contact San Diego Corporate Law

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email.

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