Martians, Baloney, and Laughter: SCOTUS Hears Oral Argument in Henry Schein. Seems To Us the “Wholly Groundless” Delegation Exception Is on Borrowed Time
Posted on Categories Arbitration, Arbitration Agreements, NewsTags , , ,

Judging by the questions in Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 (always a risky endeavor), it seems like the Court will hold that under the Federal Arbitration Act (“FAA”) there is no delegation carveout for “wholly groundless” assertions of arbitrability. SCOTUS heard this case back-to-back with Lamps Plus v. Varela, No. 17-988, so we’ve covered the cases together as well.

In a raucous, laughter-filled session, replete with references to Martians engaged in arbitration and sliced baloney, the Supreme Court heard oral argument in a case, as described in the Petition for Certiorari, involving: “Whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is ‘wholly groundless.’” 

Case Below

In Archer & White Sales v. Henry Schein, Inc., 878 F.3d 488 (5th Cir. 2017), a case we covered in SAAs 2018-10 (Mar. 7) & -04 (Jan. 24), the Fifth Circuit held that the court, not an arbitrator, should decide whether an assertion of arbitration rights is “wholly groundless,” even though there was a delegation provision by virtue of incorporation of the AAA’s Rules. Why? The arbitration agreement expressly carved out injunctive relief applications, which on its face were involved in the dispute. SCOTUS granted Certiorari to resolve a clear split in the Circuits, with some courts holding that, if there is a clear, unequivocal delegation, all arbitrability issues without exception go to arbitrators. We offer below just a few representative questions posed by the Justices in the transcript, using a page: line number convention in parenthesis.

Martians, Sliced Baloney, and Laughter

Both arguments were at times raucous and laughter-filled, replete with humorous questions from the Justices that at times brought down the house. It started innocently enough with a good question from Justice Sotomayor on sending an issue to the arbitrator where there is no logical basis to do so, and quickly went downhill from there. The Justices seemed, however, to enjoy the levity. 

Justice Sotomayor (15:6): Can -- can you understand the common sense resistance to the idea that, if a party has not agreed to arbitrate a particular issue because it's wholly groundless, there is no way that an arbitrator could in good faith and without error reach a conclusion that arbitration was agreed to, seems counterintuitive to believe that we're sending a party to arbitration, to potentially go through the expense of arbitration when something's wholly groundless, and then potentially not to have an avenue of relief when it comes to enforcing the arbitration award. 

Justice Breyer (21:3): You say when you get to step 2, once we're there, now there is no wholly groundless exception, go send it to the arbitrator. Is that right? 

Mr. Shanmugam (Schein’s counsel): That is correct.

Justice Breyer: Okay. Now suppose it's really weird. I mean, you want to say no exception at all? He says my claim here is a Martian told me to do it. Okay? (Laughter.) …Are you saying no matter what, even if he has to read the word yes in the contract to mean no, never, under no circumstances, is there no exception no matter what? … The arbitrator, by the way, loves Martians.

Mr. Shanmugam: Well, what we contend -- 

Justice Breyer: So -- so what they're worried about is they're going to get a bad decision on this ridiculous claim…. Well, it's never sufficiently clear if the matter that they're deciding to arbitrate is a Martian matter, unless they really said Martians, which I don't think would ever happen. In other words, if it is a totally ridiculous claim, shouldn't you have to find a clear and definite commitment to send a wholly ridiculous matter to the arbitrator? 

Justice Kavanaugh Examines the FAA’s Language

Recall that we published two blog posts this summer on Justice Kavanaugh’s arbitration-related cases, Supreme Court Nominee Kavanaugh Seems to be Pro-Arbitration (or so We Think), Part I, and Part II. We said that he appears to be a stickler for statutory construction. One of the new Justice’s first questions bore that out.

Justice Kavanaugh (52:21): But you -- you seem to agree with Justice Kagan, I think, that [Section 4 of] the statute doesn't, most naturally read, create a “wholly groundless” exception with that language. It may have suggested the court should decide questions of arbitrability. So we've -- the Court's rejected that. So why create -- I guess I'm repeating Justice Kagan's question, but why create this new thing out of language that was not designed to do that? 

Is Manifest Disregard Back on the Table?

Left unanswered by the Court’s decision in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008), is whether “manifest disregard of the law” remains a viable basis to challenge an Award under the FAA. Questions from Justice Sotomayor indicate to us the Court may answer that question in its Henry Schein Opinion, at least in dicta. 

Mr. Shanmugam (12:21): And as this Court is well aware, there is a very live dispute in the lower courts about the extent to which courts can review the merits of arbitrators' decisions and whether they can be reviewed for manifest disregard….

Justice Sotomayor: Basically, you're telling me at least on the express terms of enforcing an arbitration award under the statute, there is no remedy for that … party?

Mr. Shanmugam: Well, there is potentially review … for manifest disregard.

Justice Sotomayor: If we -- if we accept manifest disregard…. We haven't done that yet…. Do you think that it could be the arbitrator exceeding their powers?

Tough Questions for Respondent, Too

The Justices within seconds posed some tough questions for Daniel L. Geyser, Counsel for Archer & White, that to us portend rough sledding for the contention that the decision in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), allows a “wholly groundless” exception under the FAA. 

Justice Sotomayor (31:8): But your position is contrary to Rent-A-Center? 

Mr. Geyser: I don't believe so, Your Honor. 

Justice Sotomayor: So explain it to me, because I think Rent-A-Center said that that language is limited to was there an agreement between the parties and was there a delegation; and if there is, don't look to the merits….I don't see how determining whether something is wholly groundless is anything but a merits determination…. Rent-A-Center didn't say that at all. Rent-A-Center said don't look at the merits at all. It didn't carve out a particular form of the merits. 

Justice Breyer (34:21): Well, that's the problem, isn't it? That's the problem with my prior suggestion. It's really what Justice Sotomayor says. Once you look beyond the first question, did the parties agree to send this kind of dispute to arbitration, and then you start getting to the second question, did they mean this kind, that kind, you're really deciding arbitrability and courts will decide different things. Everybody will start making their arbitration argument. And even though it'll save time in a handful of cases, time will be lost overall. So read it for what it says. It hands the decision to the arbitrator to make the arbitrability decision. What's wrong with that? 

Chief Justice Roberts (40:18): You seem to be just, you know, slicing the baloney a little thin. It's not just groundless, it's wholly groundless. And when you say, well, what's wholly groundless, you say, well, there's no bona fide dispute. You know, the -- the answers about what the content of it is just sort of substitute one adjective for another, which I think highlights the problem, which is that, I mean, do you think there's a difference between groundless and wholly groundless?

Equitable Estoppel

Although the issue consumed the first 10 minutes of oral argument, left for a possible remand is equitable estoppel, which the Court of Appeals did not reach.

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.