It is commonplace today for businesses to include binding arbitration provisions in customer agreements. It is also common for these arbitration agreements to have a “delegation provision,” where the parties agree to delegate to the arbitrator – not the court – questions of whether the arbitration agreement applies to a dispute. But even when the parties agree to a delegation provision, do courts always have to compel disputes to arbitration when the parties disagree over whether the agreement applies? What if one party argues that it would be “wholly groundless” to compel a case to arbitration because the dispute is clearly outside the agreement’s reach? On January 8, 2019, the U.S. Supreme Court unanimously resolved a circuit split in favor of arbitration, once again instructing courts to enforce arbitration agreements as written.
In Schein v. Archer and White Sales, Inc. (opinion here), the litigants were parties to an arbitration agreement that required them to resolve disputes pursuant to the American Arbitration Association’s rules. These rules gave the arbitrator (not the court) the power to resolve questions of arbitrability – i.e., whether the arbitration agreement applies to a particular dispute. When Schein sought to compel arbitration, Archer and White refused, claiming the dispute fell outside the scope of the arbitration agreement. They also argued that the arbitrator should not get to decide the reach of the arbitration agreement because it was “wholly groundless” to even claim the arbitration agreement applied.
This is where the circuit split comes in. Relying on Fifth Circuit precedent, the district court decided that, while it normally would be incapable of resolving questions of arbitrability when the contract delegates that gateway question to the arbitrator, it could do so when it would be “wholly groundless” to find the arbitration agreement applied. In other words, when a litigant argues the “wholly groundless” exception to a delegation provision, the district court could peek behind the curtain to look at the scope of the arbitration agreement. The Fifth Circuit affirmed the district court’s decision in an opinion that ran contrary to several other circuits.
Given the circuit split, the U.S. Supreme Court granted certiorari to decide whether a “wholly groundless” exception to a binding delegation provision is consistent with the Federal Arbitration Act. And it decided that it is not. In the unanimous decision, Justice Kavanaugh explained arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms. “When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract.” According to the Court, this is “true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.”
In sum, the Court unanimously rejected the notion that a court is allowed to decide whether a dispute is subject to arbitration when the contract delegates that question to the arbitrator. Even if the argument for arbitration could be frivolous or unfounded, that is a decision for the arbitrator to make, not the Court. In Justice Kavanaugh’s words, “when the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.”
Ultimately, if an arbitration provision includes a delegation provision, it will be exceedingly difficult for a litigant to argue that the case does not belong in arbitration post-Schein – at least until the arbitrator decides whether the case is arbitrable.
Troutman Sanders has a nationwide defense practice representing companies in many types of class actions and individual claims, including in arbitration. In fact, Troutman Sanders prevailed on this precise issue regarding the “wholly groundless” exception in front of the Eleventh Circuit, prior to the Schein decision. We will continue to monitor these arbitration-related developments in the U.S. Supreme Court and lower courts.