The Supreme Court just released its decision in Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 (Jan. 8, 2018) (click here for a copy of the decision). As to the narrow, technical legal issue in this case, the Court held that the “wholly groundless” exception to the delegation doctrine does not exist and is inconsistent with the Federal Arbitration Act. Under the delegation doctrine, parties can send threshold arbitrability questions to the arbitrator. For example, if there is a dispute about the scope of an arbitration clause, the court normally decides this dispute, but the parties can reverse this presumption and have an arbitrator decide this dispute about the scope of the clause. Lower courts had created a “wholly groundless” exception, under which courts would not have to send threshold arbitrability questions to the arbitrator if the arbitrability question is groundless. In today’s Henry Schein decision, the Supreme Court rejected the wholly groundless exception.
Consider this hypothetical: suppose a clause requires arbitration of all contract claims, but not tort claims, and the clause clearly states that an arbitrator decides all threshold questions of arbitrability. Suppose that one party then files a lawsuit in court for a tort claim, and the other party seeks to compel arbitration, arguing that the arbitrator must decide whether the claims are arbitrable. Prior to this recent Supreme Court decision, a court could say the arbitrability issue is wholly groundless because the contract only requires arbitration of contract claims, not tort claims. After today’s Henry Schein decision, an arbitrator would presumably have to rule on this baseless argument. But what about Rule 11 and a federal court’s inherent power to sanction? Can’t the court sanction a party under Rule 11 for filing a frivolous motion to compel arbitration? The Henry Schein opinion appears to suggest that if you agreed to arbitrate, thou shalt arbitrate, even baseless arguments.
The Court stresses at the very end that “We express NO VIEW about whether the contract at issue in this case in fact delegated the arbitrability question to an arbitrator.” (emphasis added). I don’t think it is appropriate to conclude, based on this recent decision, that an arbitration clause adopting the AAA rules counts as sufficient, clear, unmistakable evidence that jurisdictional issues should be resolved by the arbitrator. What counts as a clear, unmistakable delegation of jurisdictional questions is still an open issue; the jury is still out. Some lower courts have said that mere incorporation of AAA rules is not an appropriate delegation, particularly where unsophisticated parties are involved. I read this new Henry Schein decision narrowly to hold that the judicially-created “wholly groundless” exception to the delegation doctrine simply does not exist and is inconsistent with the FAA. In light of the caution at the end of the decision, the Court was not expressing an opinion as to the particular contract at issue in this case or holding that adoption of arbitral rules will automatically send jurisdictional issues to the arbitrator. It is still an open issue as to what counts as a clear and unmistakable delegation of threshold questions to an arbitrator.
Another interesting aspect to this decision: The decision was written by Justice Kavanaugh. Maybe I’m reading way too much into the opinion, and maybe this is more of my wishful thinking that the Court will someday overrule Southland and cut back on its overly expansive interpretations of the FAA from the last few decades. Justice Kavanaugh’s language struck me. For example, he carefully states that “some FEDERAL courts” have adopted the wholly groundless exception. But state courts have also adopted the wholly groundless exception. Is Justice Kavanaugh signalling that the FAA only applies in federal court? Elsewhere, Justice Kavanaugh cautions that “we are not at liberty to rewrite the statute passed by Congress and signed by the President.” If we take him at his word, I wish Justice Kavanaugh would have been on the Court back when Southland, Mitsubishi, Gilmer, Circuit City, and so many other arbitration cases were wrongly decided. If we take a close textual look at the FAA, much of the Supreme Court’s interpretations collapse. Also, when Justice Kavanaugh quotes from section 4 of the FAA, he carefully omits the statutory reference to “United States district courts,” and I am wondering whether he is recognizing the flaws and misreadings of earlier Supreme Court opinions. In the back of his mind, he must also be thinking about the pending case of New Prime v. Oliveira, which should come out any day now. Based on some signals from this new Henry Schein case, I am expecting the New Prime case will involve a close textual reading of the statute, and we may see for the first time that the Supreme Court is cutting back on its expansive interpretations of the FAA.