SCOTUS to Have the Last Word on “Wholly Groundless” Standard for Delegation of Arbitrability

If the parties to an arbitration agreement have agreed that an arbitrator should decide whether a dispute is arbitrable, the question of arbitrability should be decided by an arbitrator. But who should decide arbitrability when the suggestion of arbitrability is so frivolous as to be wholly groundless? Should the party resisting arbitration be required to arbitrate arbitrability before seeking judicial relief? The United States Supreme Court will soon decide.

According to the United States Supreme Court, questions of arbitrability are “undeniably . . . issues for judicial determination”—“unless the parties clearly and unmistakably provide otherwise.” Thus, when contracting parties have clearly and unmistakably agreed that an arbitrator must decide questions of arbitrability, the parties’ dispute should be sent to an arbitrator in the first instance to determine whether the dispute is arbitrable. Some circuits, however, provide exception to this rule where the argument for arbitrability is “wholly groundless.” In such instances, the parties’ dispute can proceed directly to court without a stop at an arbitrator’s desk. The Fifth Circuit initially adopted this rule in Douglas v. Regions Bank, and most recently applied it in Archer and White Sales Inc. v. Henry Schein, Inc.

In Archer, a dental-equipment distributor sued its direct competitor for alleged antitrust violations and sought injunctive relief. Defendants moved to compel arbitration, pointing to the arbitration clause in the parties’ Dealer Agreement, which stated “[a]ny 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 [the predecessor]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.” Because the AAA’s rules provide that arbitrators, not courts, decide arbitrability, the Fifth Circuit, like most circuits, has concluded that the incorporation of AAA rules into an arbitration agreement is clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.

But, the parties disputed whether the carve-out for injunctive relief—which was exactly what the plaintiff sought—applied to the dispute at issue. Rather than deciding whether the incorporation of the AAA rules applied to claims for injunctive relief, in which case an arbitrator would decide whether the claim was arbitrable, the Archer court hung its hat on the “wholly groundless” prong of the Douglas test. Under that test, courts ask whether there is a legitimate argument that the arbitration clause covers the present dispute. If a court can find a plausible argument that the agreement requires arbitration, then the wholly groundless exception will not apply. Applying this principle to the agreement at hand, the Archer court concluded that because the arbitration clause contained a clear carve-out exempting claims of injunctive relief from arbitration, the suggestion that the claim was arbitrable was “wholly groundless,” and thus denied the motion to compel arbitration.

The “wholly groundless” test has sparked much buzz in and disagreement among federal courts of appeals around the country.

The Fourth and Federal Circuits have joined the Fifth Circuit in adopting the “wholly groundless” test, and the Sixth Circuit has adopted a materially identical standard, reasoning that, “even where the parties expressly delegated to the arbitrator the authority to decide the arbitrability of claims related to the parties’ arbitration agreement, this delegation applies only to claims that are at least arguably covered by the agreement.”

But, just last year, the Eleventh and Tenth Circuits explicitly rejected the “wholly groundless” exception, reasoning that, when “parties clearly and unmistakably agree[] to arbitrate gateway issues of arbitrability[,] . . . then the district court is required to give effect to that intent and must compel arbitration.” These Circuits believe that the “wholly groundless” exception is in tension with Supreme Court precedent.

The Supreme Court will soon decide the issue once and for all. On June 25, 2018, the Supreme Court granted the petition for certiorari filed in Archer. Given the Court’s numerous recent pro-arbitration decisions, the smart money is on the Court’s rejecting the “wholly groundless” standard and reversing the Fifth Circuit’s decision in Archer. Check back for updates on this blog.