The End of “Wholly Groundless Exception” in Arbitration Agreements

Published on October 31st, 2019

An arbitration agreement is a contract, in which two or more parties agree to settle a dispute outside of court.  Usually, an arbitration agreement is a clause in a larger contract. The arbitration clauses are often subjects to hotly disputed litigation, stemming from the vague verbiage and possible inconsistencies with other parts of the contract.  One of such issues – the admissibility of the “Wholly Groundless Exception” – was decided by the Supreme Court in January in the case of Henry Schein, Inc. v. Archer & White Sales, Inc , 586 U.S. __ (Jan. 8, 2019).  This is a tricky issue for those in the trucking industry who include arbitration clauses in their contracts with drivers.

What Is A Wholly Groundless Exception?

A “wholly groundless exception” was born out of the “delegation clauses” ordinarily found in arbitration agreements.  A delegation clause represents an agreement between parties that an arbitrator, not the court, will determine the threshold issues of enforceability of the arbitration clause and the scope of the arbitration agreement.  In other words, it is up to an arbitrator to decide whether, according to the contract or the rule of law, an issue may be decided by arbitration or needs to be determined by a judge.  These clauses were held to be valid by the Supreme Court in 2010 in Rent-A-Center, West, Inc. v. Jackson, 561 US 63 (2010). Since then, several circuits decided that this provision must be limited; thus creating a so-called “wholly groundless exception” to the delegation clause. This exception lets parties avoid compelling arbitration in cases where the claims are so obviously not within the scope of the agreement, that it would be a waste of time to go through arbitration before filing a lawsuit.

The Supreme Court Eliminates “Wholly Groundless” Exception

SCOTUS has now opined on the validity of the wholly groundless exception in the case of Schein v. Archer & White.   This case began when Archer & White contracted with driver Schein for the distribution of certain dental equipment that it manufactured. Their distribution agreement included an arbitration clause that specified that all disputes arising out of said agreement would be resolved under the American Arbitration Association’s (AAA) rules. Although not specifically stated in the contract, the AAA rules provide that all questions of arbitrability are delegated to an arbitrator.  The contract also provided that the scope of the disputes that could be decided by arbitration included any action arising out of the agreement, except for actions seeking injunctive relief.  When the relationship between the parties ultimately floundered, Archer & White filed a complaint for the violations of federal and state antitrust laws in a federal court.  As part of its complaint, the plaintiff sought both monetary damages and injunctive relief.  Schein moved to compel arbitration, citing the incorporation of the delegation clause from the AAA rules.  Archer & White, on the other hand, maintained that the dispute was not arbitrable because the injunctive relief they sought was an exception to the delegation clause.  They further argued that under the “wholly groundless” exception, it was up to the court, not the arbitrator to resolve the question of arbitrability.

SCOTUS did not agree. In his inaugural opinion, Justice Kavanaugh expressed the unanimous decision of the Court to reject the “wholly groundless” exception.  The Justices concluded that where the parties have agreed to delegate issues of arbitrability to an arbitrator, a court may not override that agreement.  The Court found that the “wholly groundless exception” was inconsistent with the plain text of the Federal Arbitration Act (FAA) that requires the courts to interpret contracts as written. In addition, the Court reasoned that as a matter of policy, it would be a waste of the parties’ time and money to litigate whether an issue is “wholly groundless” or just plain groundless. Spending resources on litigating this issue in court is exactly what the arbitration agreements are trying to avoid.  Therefore, the Court concluded that “[when] the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in that contract.” (Id. at 8)  But wait … there’s more!

Did the Contract Actually Contain the Delegation Clause?

Although the Court did not have to decide whether the contract in Schein actually contain the delegation clause (at least, not yet), the last sentence left the gates open for future litigation – how to determine whether the contract did indeed delegate the issue to an arbitrator.  SCOTUS cautioned the lower court in the 5th Circuit not to assume that the parties agreed to arbitrate the arbitrability unless there is clear and unmistakable evidence to that.  A number of courts have held that the contract’s incorporation of the AAA rules passes this standard. See Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012) (the express incorporation of the AAA rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate the arbitrability). See also Belnap v. Iasis Healthcare, 844 F.3d 1272, 1284 (10th Cir. 2017) (same).

One exception is cases dealing with the authorization of class, and collective arbitration. For example, in Catamaran Corp., V. Towncrest Pharmacy864 F. 3d 966 (8th Cir. 2017) the 8th Circuit found that a mere reference to the AAA rules is insufficient evidence that the parties intended for an arbitrator to decide the questions of class arbitration. Similarly, in Chesapeake Appalachia LLC v. Scout Petroleum LLC, 809 F. 3d 746 (3d Cir, 2018), the 3rd Circuit determined that the mere mention of the AAA Rules was not sufficient to conclude that the contract clearly and unmistakable delegated the question of class arbitrability to the arbitrators.

In light of these decisions, the parties should not rely on simply mentioning the AAA rules to authorize or forbid certain conduct.  Contact your Chicago Business Lawyer – Bellas & Wachowski – to put together a contract that accurately reflects your needs and goals particularly as it relates to arbitration clauses in independent contractor agreements.

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