January 11, 2019 | Legal News

Supreme Court says Questions of Arbitrability will be Determined by Contract

When the parties disagree, who decides whether a dispute falls within the scope of an arbitration agreement? If the arbitration agreement is silent on this point, a court will decide questions of arbitrability. But if the parties’ agreement delegates arbitrability questions to the arbitrator, the arbitrator will decide them. And this is so, the United States Supreme Court ruled this week, even where the claim that a dispute is arbitrable appears to be “wholly groundless.”

The complaint in Henry Schein, Inc. v. Archer and White Sales, Inc. sought both damages and injunctive relief. But the arbitration provision in the underlying contract carved out claims for injunctive relief.  Although the arbitration agreement delegated arbitrability questions to the arbitrator, the lower court reasoned that it would be a waste of time to compel arbitration only to have an arbitrator determine that the claim for injunctive relief was not arbitrable. In doing so the district court agreed with authority from several circuits holding that courts could refuse to compel arbitration—even in the face of a clause delegating arbitrability questions to the arbitrator—where the claim of arbitrability appeared to be “wholly groundless.” The court of appeals affirmed.

The Supreme Court rejected the “wholly groundless” exception stating that, “when a contract delegates the arbitrability question to an arbitrator, a court may not override the contract.” The Court reaffirmed that arbitration is a matter of contract and that courts must enforce arbitration provisions as written. Accordingly, where the parties have agreed that an arbitrator is to decide arbitrability questions, that agreement must be enforced even if the claim that a dispute is arbitrable appears to be “wholly groundless.”

The Henry Schein decision is a reminder going into renewal season that arbitration agreements should to be reviewed at least annually to make sure they provide franchisors with as much protection as the law allows. Among other things, an arbitration agreement should explicitly delegate arbitrability questions to the arbitrator, which Henry Schein makes clear will be enforced. And it should narrowly carve out only those claims that truly need to be carved out.

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