CALIFORNIA SNAPSHOT: Check those arbitration agreements in light of SCOTUS decision

California employers should make sure the arbitrator decides on arbitrability.

Last week, the U.S. Supreme Court unanimously held that when a valid arbitration agreement allows the arbitrator to decide whether the underlying dispute is arbitrable (that is, whether the dispute must be arbitrated or tried in court), a court may not short-circuit the process and decide that preliminary issue on its own.

This is so even if the court believes the arbitrability claim is wholly groundless.

As most readers know, parties to a contract may agree to arbitrate any disputes arising out of the contract. But there can still be disagreements about whether a particular dispute is subject to the arbitration agreement. In those situations, who decides the question of arbitrability – an arbitrator or a court?

This was the situation in Henry Schein, Inc. v. Archer and White Sales, Inc. After a business relationship soured, Archer and White, a distributor of dental equipment, accused competing distributor Henry Schein of conspiring to limit its sales territories under distribution agreements. Archer and White filed a lawsuit alleging antitrust law violations and seeking both monetary damages and injunctive relief. In response, Henry Schein sought to compel arbitration pursuant to the parties’ contract. The agreement provided that any dispute arising under or relating to the contract, but not including actions seeking injunctive relief, would be resolved by binding arbitration.

The contract also provided that the arbitrator had the authority to determine whether the parties' dispute was arbitrable.

Henry Schein argued that an arbitrator—not the court—should decide whether the arbitration agreement applied. Archer and White argued that the dispute was not subject to arbitration because it was seeking injunctive relief.

A federal district court in Texas agreed with Archer and White, finding the motion to compel arbitration "wholly groundless," and the U.S. Court of Appeals for the Fifth Circuit affirmed that decision. The U.S. Supreme Court agreed to review the case and resolve a split in the circuits over whether a “wholly groundless” exception is consistent with the Federal Arbitration Act, which strongly favors arbitration of disputes.

The Supreme Court’s unanimous decision, written by Justice Brett Kavanaugh, struck down the “wholly groundless” exception as inconsistent with the FAA, finding that parties to an arbitration agreement “may agree to have an arbitrator decide not only the merits of a particular dispute, but also 'gateway' questions of 'arbitrability.’"

Thus, the Court said, "when the parties' contract delegates the arbitrability question to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless."

In tossing the “wholly groundless” doctrine, the Supreme Court added, "[W]e are not at liberty to rewrite the statute passed by Congress and signed by the president."

In summary, the Supreme Court held that it must interpret the Federal Arbitration Act as written, which in turn requires courts to interpret arbitration agreements as written.

The Henry Schein decision is the most recent in a decade-long string of opinions under the FAA, in which the Supreme Court has consistently reversed lower-court decisions refusing to enforce arbitration agreements. A number of those cases were decided by 5-4 majorities, which caused some commentators to wonder whether the Supreme Court, following the departure of Justice Anthony Kennedy, might soften its support for arbitration.

The Court's unanimous decision, written by Justice Kennedy's successor, makes it clear that none of the justices saw any merit in calling for collateral litigation over the gateway question of arbitrability.

For California employers, it is important to remember that courts retain the power to decide generally whether an arbitration agreement is valid. The Henry Schein decision, however, is clear authority that when a valid arbitration agreement exists, courts may not decide the threshold arbitrability question where the agreement clearly delegates this authority to an arbitrator. Accordingly, California employers would be wise to ensure that their arbitration agreements clearly provide that the arbitrability question is to be decided by the arbitrator.

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