Source: https://loreelawfirm.com/blog/delegation-provisions-scotus-courts-compel-arbitration-wholly-groundless-arbitrability-disputes/
Timestamp: 2019-04-18 22:43:40+00:00

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January 16th, 2019 American Arbitration Association, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Exceeding Powers, Existence of Arbitration Agreement, Federal Arbitration Act Enforcement Litigation Procedure, Stay of Litigation, United States Supreme Court 3 Comments » By Philip J. Loree Jr.
The distributor sued the manufacturer in Federal District Court in Texas, seeking money damages and injunctive relief for alleged state- and federal-antitrust-law violations. The manufacturer moved to stay litigation and compel arbitration under the FAA.
The distributor opposed arbitration, contending that the “dispute was not subject to arbitration because [the Distributor’s] complaint sought injunctive relief, at least in part.” Slip op. at 3. The distributor argued the “parties contract barred arbitration of disputes when the plaintiff sought injunctive relief, if only in part.” Slip op. at 3.
The question before the district court was “[w]ho decides whether the antitrust dispute is subject to arbitration?” Slip op. at 3. The manufacturer argued that the contract expressly incorporated American Arbitration Association rules, those rules—which “provide that arbitrators have the power to resolve arbitrability questions”—clearly and unmistakably delegated arbitrability questions to the arbitrator, and accordingly, an arbitrator must decide whether the parties’ arbitration agreement applied to the antitrust dispute. Slip op. at 3.
The distributor argued that “in cases where the… argument for arbitration is wholly groundless—as [the distributor] argued was the case here—the District Court itself may resolve the threshold question of arbitrability.” Slip op. at 3.
Citing “Fifth Circuit precedent, the [d]istrict [c]ourt agreed with [the distributor] about the existence of a “wholly groundless” exception and ruled that [the manufacturer’s] argument for arbitration was wholly groundless.” Slip op. at 3.
The district court denied the motion to compel arbitration, and the Fifth Circuit affirmed the district court’s decision. The United States Supreme Court granted certiorari, vacated the Fifth Circuit’s decision, and remanded the matter for further proceedings.
A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
Under Section 2, the Court explained, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Slip op. at (citing Rent-A-Center, 561 U. S. at 67) When those contracts delegate arbitrability questions to an arbitrator, “a court may not override the contract[,]” and has “no power to decide the arbitrability issue.” Slip op. at 5. That is so even where a Court “thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Slip op. at 5.
The Court said its conclusion was supported not only by the FAA’s text, but also by precedent.Citing and quoting cases decided under Section 301 of the Labor Management and Relations Act, the Court explained that courts may not “‘rule on the potential merits of the underlying’ claim that is assigned by contract to an arbitrator, ‘even if it appears to the court to be frivolous[,]’” and that “[a] court has “‘no business weighing the merits of the grievance’” because the “‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’” Slip op. at 5 (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649–650 (1986) and Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960)).
This principle, said the Court, “applies with equal force to the threshold issue of arbitrability”—for “[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator.” Slip op. at 5.
The Court then discussed and rejected each of the “four main arguments” the distributor offered in support of the “wholly groundless” exception.
The distributor argued that Sections 3 and 4 of the FAA require Courts to decide arbitrability questions.
Section 3 requires Courts “to stay litigation ‘upon being satisfied that the issue’ is ‘referable to arbitration’ under the ‘agreement.'” Slip op. at 5-6 (quoting 9 U.S.C. § 3). FAA Section 4 provides that “a court, in response to a motion by an aggrieved party, must compel arbitration ‘in accordance with the terms of the agreement’ when the court is ‘satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue.’” Slip op. at 6 (quoting 9 U.S.C. § 4).
The Court rejected that argument because it has “consistently held that parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by ‘clear and unmistakable’ evidence.” Slip op. at 6 (quoting First Options, 514 U.S. at 944 and citing Rent-A-Center, 561 U. S. at 69, n. 1). It noted that “before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists[,]” “[b]ut if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.” Slip op. at 6 (citing 9 U.S.C. § 2).
The distributor’s second argument was that the “back-end judicial review” available if an arbitrator “exceeds his or her powers” impliedly authorizes courts to determine that an arbitrability question is “wholly groundless” and obviates the need to submit the arbitrability question to arbitration. Slip op. at 6. But the Court said “[t]he dispositive answer to [the distributor’s] §10 argument is that Congress designed the Act in a specific way, and it is not our proper role to redesign the statute.” Slip op. at 6.
Further, the Court explained, acceptance of the distributor’s “argument would mean. . . that courts presumably also should decide frivolous merits questions that have been delegated to an arbitrator.” But, said the Court, “[we] have already rejected that argument: When the parties’ contract assigns a matter to arbitration, a court may not resolve the merits of the dispute even if the court thinks that a party’s claim on the merits is frivolous. So, too, with arbitrability.” Slip op. at 6-7 (citation omitted).
The distributor argued that it would, “as a practical and policy matter,” “be a waste of the parties’ time and money to send the arbitrability question to an arbitrator if the argument for arbitration is wholly groundless.” Slip op. at 7.
The distributor argued that, “[i]n cases like this[,]” “the arbitrator will inevitably conclude that the dispute is not arbitrable and then send the case back to the district court. So why waste the time and money?” Slip op. at 7.
But the Court said the “Act contains no ‘wholly groundless’ exception, and we may not engraft our own exceptions onto the statutory text.” Slip op. at 7 (citing Exxon Mobil Corp. v. Allapattah Services, Inc., 545 U.S. 546, 556-57 (2005)).
In any event the Court was very skeptical about the efficacy of a “wholly groundless” exception. It expressed doubt that “the wholly groundless’ exception would save time and money systematically even if it might do so in some individual cases.” Slip op. at 7.
It also doubted the validity of the exception’s underlying premise: that it would be “easy to tell when an argument for arbitration of a particular dispute is wholly groundless.” Slip op. at 7. “The exception,” said the Court, “would inevitably spark collateral litigation (with briefing, argument and opinion writing) over whether a seemingly unmeritorious argument for arbitration is wholly groundless, as opposed to groundless. We see no reason to create such a time-consuming sideshow.” Slip op. at 7 (emphasis in original).
Further, the distributor’s argument “assumes that an arbitrator would inevitably reject arbitration in those cases where a judge would conclude that the argument for arbitration is wholly groundless.” But “an arbitrator might hold a different view of the arbitrability issue than a court does, even if the court finds the answer obvious[,]” and “[i] t is not unheard-of for one fair-minded adjudicator to think a decision is obvious in one direction but for another fair- minded adjudicator to decide the matter the other way.” Slip op. at 7.
The distributor contended that the “‘wholly groundless’ exception [was] necessary to deter frivolous motions to compel arbitration.” The Court summarily rejected this argument, explaining that “we may not rewrite the statute simply to accommodate that policy concern.” Slip op. at 8. It also said that the distributor “overstat[ed] the problem, for “[a]rbitrators can efficiently dispose of frivolous cases by quickly ruling that a claim is not in fact arbitrable[,]” and in “certain circumstances, arbitrators may be able to respond to frivolous arguments for arbitration by imposing fee-shifting and cost-shifting sanctions, which in turn will help deter and remedy frivolous motions to compel arbitration.” Slip op. at 8.
The issue of whether the incorporation of AAA rules constitutes a clear and unmistakable delegation of arbitrability questions to arbitration was not before the Court, because the Fifth Circuit did not decide that issue. The Court therefore expressed no opinion on it, and directed the Fifth Circuit to decide it on remand. Slip op. at 8.
Schein is a straightforward, well-reasoned, and relatively uncontroversial decision, which, perhaps not surprisingly, received the support of all nine Justices. It was therefore well-suited for the first opinion of a new Associate Justice.
But that doesn’t mean it will not influence arbitration-law practice, particularly in jurisdictions that previously had recognized the “wholly groundless” exception.
A judicial referral of the arbitrability question to arbitration could prove to be a pyrrhic victory for the class arbitration proponent, whose efforts could result in an adverse decision by the arbitrator (possibly including a order requiring the proponent to pay some or all of the other party’s attorney fees, arbitration fees, and costs), or in a favorable decision that cannot withstand even the exceedingly deferential judicial review authorized by FAA Section 10(a)(4).
Alternatively, depending on the class waiver and the other pertinent facts, a clever arbitrator with an institutional preference for class arbitration might be able devise an award in favor of the class arbitration proponent that might have at least a barely colorable basis in the parties’ contract, even though a court would not likely make such an award. Such an award would presumably survive a Section 10(a)(4) motion to vacate.
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