The U.S. Supreme Court (Court) recently ruled that arbitrators, rather than judges, should decide whether contracts providing for arbitration applied to the disputes before them. Resolving a dispute among the federal circuit courts, the Court unanimously held that the “wholly groundless” exception to arbitrability is inconsistent with the Federal Arbitration Act and Court precedent.
Under the Federal Arbitration Act (Act), parties to a contract may agree that an arbitrator, rather than a court, will resolve disputes arising out of the contract. When parties disagree over the “threshold arbitrability question” of whether their arbitration agreement applies to the particular dispute, the question of who decides arbitrability is itself a matter of contract. The Act allows parties to agree by contract that an arbitrator, rather than a court, will resolve threshold arbitrability questions as well as underlying merits disputes. Even when a contract delegates the arbitrability question to an arbitrator, however, some federal circuit courts have decided the arbitrability question themselves if (in their view) the argument that the arbitration agreement applied to the particular dispute was “wholly groundless.” The question at issue in the Court’s case was whether the “wholly groundless” exception is consistent with the Act.
The case arose from an arbitration contract between a firm that made dental equipment and a firm that distributed it. The relevant contract between the parties provided for arbitration of any dispute arising under or related to the agreement, except for, among other things, actions seeking injunctive relief. After the business relationship soured, the distributor sued the manufacturer, alleging violations of federal and state antitrust law and seeking money damages and injunctive relief. When the manufacturer requested that the District Court refer the dispute to arbitration, the distributor argued that the dispute was not subject to arbitration because its complaint sought injunctive relief, at least in part. The distributor claimed that the manufacturer’s argument for arbitration was “wholly groundless,” and that the court may therefore decide arbitrability. The District Court agreed with the distributor and denied the manufacturer’s motion to compel arbitration on the basis of the “wholly groundless” exception. The Fifth Circuit affirmed the District Court’s decision.
On appeal, the Court rejected the “wholly groundless” exception and remanded the case to the Fifth Circuit. In its opinion, the Court held that the “wholly groundless” exception to arbitrability is inconsistent with the Act and Court precedent. Indeed, under the Act, arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms. The Court stated that when the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract. Therefore, the Court held, 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.