Co-authored by Mike Leggieri (Employment & Compensation Partner, SF) and Steven Chasin (Litigation Associate, DC)

To paraphrase Pharaoh Ramses II, so it is written, so it shall be done.

In Schein, Inc. v. Archer and White Sales, Inc., 586 U.S. __ (January 8, 2019), the first opinion by Justice Kavanaugh, a unanimous Supreme Court reiterated this principle of the Federal Arbitration Act. Specifically, the Court confirmed that when an arbitration agreement delegates to an arbitrator the question of whether the agreement applies to a particular dispute, courts have no power to decide this question, even if a court considers the arbitrability argument to be “wholly groundless.”

In the underlying case, a contract between a manufacturer and its distributor provided:

“Any 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 manufacturer]), shall be resolved by binding arbitration . . . .” 

After the relationship between the parties soured, the distributor sued the manufacturer for alleged violations of federal and state antitrust law, and sought both money damages and injunctive relief. The manufacturer invoked the parties’ contract and, under the Federal Arbitration Act, asked the District Court to refer the dispute to arbitration, with the arbitrator to decide whether the arbitration agreement covered the dispute.

The distributor responded that even if the agreement delegated that gateway question to the arbitrator, any argument that the agreement covered the dispute was “wholly groundless” because the arbitration agreement excluded actions seeking injunctive relief. Relying on Fifth Circuit precedent, the District Court agreed with the distributor about the existence of a “wholly groundless” exception, ruled that the manufacturer’s argument for arbitration was “wholly groundless,” and refused to enforce the arbitration agreement.

The Supreme Court reversed, holding that the “wholly groundless” exception is inconsistent with the text of the Federal Arbitration Act, and its own precedent. The Court explained that the FAA “requires that we interpret the contract as written.”

When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract . . . even if [it] thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.”

Indeed, the Court held: “[i]n those circumstances, a court possesses no power to decide the arbitrability issue.”

In addition, the Court affirmed a key drafting point for arbitration agreements: parties seeking to delegate the threshold arbitrability question to an arbitrator must make the delegation “clear and unmistakable” in their agreement. The Court did not decide whether the agreement at issue accomplished this.

Key Takeaways:

  • This decision reaffirms that the Federal Arbitration Act and Supreme Court precedent require courts to enforce arbitration agreements as written.
  • Companies should therefore take care when drafting arbitration agreements, both to make sure that the written agreement captures the parties’ intent, and to avoid potentially unforeseen consequences.
  • If parties intend for an arbitrator to decide the gateway arbitrability question, they must do so with “clear and unmistakable” language.

Please reach out to your Baker McKenzie lawyer for more.