By Ryan Biel
Justice Brett Kavanaugh issued his first Supreme Court opinion on January 8, 2019, holding that both the Federal Arbitration Act (“FAA”) and Supreme Court precedent allow parties to agree by contract that an arbitrator, rather than a court, will resolve threshold issues of arbitrability-in addition to-the merits of the underlying case.[1] In Henry Schein, Inc. v. Archer & White Sales, Inc., 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.[2] Alleging violations of federal and state antitrust law, Archer and White (“Respondents”) sued Henry Schein (“Petitioner”) for both monetary damages and injunctive relief.[3] Petitioner, relying on the FAA, asked the District Court to refer the matter to arbitration.[4] Because the complaint sought injunctive relief, Respondents argued that Petitioner’s argument for arbitration was “wholly groundless”, therefore the District Court should resolve the threshold question of arbitrability.[5] The District Court agreed with the Respondents about the existence of a “wholly groundless” exception and refused to compel arbitration; the Fifth Circuit affirmed.[6] Writing for a unanimous court, Justice Kavanaugh concluded the FAA does not contain a “wholly groundless” exception; arbitrators, not judges, should decide whether contracts calling for arbitration applied to the disputes before them.[7]
New York Law mandates in the absence of any express conflict between the provisions or congressional intent of the FAA and New York’s arbitration law, the FAA preempts State law to the extent that State law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”[8] Parties are at liberty to include provisions in their arbitration agreement; courts will honor the parties’ freedom to contract and their ultimate agreed-upon provisions unless a conflict arises with the terms of or policies underlying the FAA.[9] Justice Kavanaugh wrote, “courts must respect the parties’ decision as embodied in the contract.”[10] The Supreme Court’s holding in Archer & White Sales, Inc., rests upon the freedom to contract; specifically, when the parties’ contract delegates the arbitrability question to an arbitrator, the courts must abide by the decision to arbitrate, even if the court thinks that the applicability of the arbitration agreement applied to a particular dispute is wholly groundless.[11] Therefore, it is unlikely Justice Kavanaugh’s first opinion will ultimately affect New York Law, except to the extent it conflicts with the FAA.
[1] See Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272, 2019 WL 122164, at *2 (U.S. Jan. 8, 2019)
[2] See id. at 2.
[3] See id. at 2.
[4] See id. at 2-3 (asking the District Court to refer the parties’ antitrust dispute to arbitration, petitioner contended that the contract’s express incorporation of the American Arbitration Association’s rules meant that an arbitrator- not the court- had to decide whether the arbitration agreement applied to this particular dispute; the American Arbitration Association provides that arbitrators have the power to resolve arbitrability questions).
[5] See id. at 3 (examining prior decisions by circuit courts, Justice Kavanaugh noted “even when the parties’ contract delegates the threshold arbitrability question to an arbitrator, the Fifth Circuit and some other Courts of Appeals have determined that the court rather than an arbitrator should decide the threshold arbitrability question if, under the contract, the argument for arbitration is wholly groundless”).
[6] See id. at 3.
[7] See id. at 5 (vacating the judgement of the Court of Appeals, the Supreme court concluded that the “wholly groundless” exception was inconsistent with the text of the Act and with Supreme Court precedent).
[8] Smith Barney, Harris Upham & Co., Inc. v. Luckie, 85 N.Y.2d 193, 204 (N.Y. 1995) (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).
[9] See id. at 201 (manifestly, the New York Court of Appeals noted, arbitration is a matter of contract and the parties to an arbitration agreement, like all contracting parties, are free to select the terms under which they will arbitrate- the policy established by the Act is to ensure that private agreements to arbitrate are enforced according to their terms).
[10] Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272, 2019 WL 122164, at *2 (U.S. Jan. 8, 2019)
[11] See id. at 5 (rejecting the “wholly groundless” exception, Justice Kavanaugh wrote that “when the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract”).
