The Franchise Memorandum

The Supreme Court has resolved a split in the federal circuit courts of appeals, holding that the Federal Arbitration Act does not allow a federal court to deny a motion to compel arbitration on the basis that the claim of arbitrability is “wholly groundless.” Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019). Archer and White, a dental equipment distributor, sued an equipment manufacturer and Henry Schein, Inc. for various remedies including injunctive relief. Archer and White’s distribution agreement provided that “[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 [Schein]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.” The AAA’s rules require that questions of arbitrability be decided by the arbitrator. Schein moved to compel arbitration, and Archer and White responded that the motion should be denied as “wholly groundless.”

The district court and the Fifth Circuit agreed with Archer and White. In vacating that decision, the Supreme Court observed that the FAA allows parties to agree that an arbitrator will resolve threshold arbitrability questions. The Court found that the parties had delegated that authority to the arbitrator in this case by choosing the AAA’s rules. Although a court has the authority to determine whether parties have entered into a valid arbitration agreement, the Supreme Court held that a district court may not override a valid agreement that delegates to the arbitrator the authority to decide arbitrability — even if the court would find the claim of arbitrability to be “wholly groundless.” Rather, the Court concluded, a “wholly groundless” exception to the FAA would be inconsistent with the Act and with Supreme Court precedent.

The Court’s unanimous decision makes no mention of the similar “manifest disregard of the law” doctrine that has been entertained by some federal circuits in connection with motions to vacate final awards rendered in arbitration. Nevertheless, the reasoning of this decision does not bode well for the future viability of the “manifest disregard of the law” doctrine.