Argument analysis: Justices signal opposition to vague exceptions that would limit enforceability of arbitration agreements

The November argument session brought the justices back once again to the Federal Arbitration Act, with a pair of cases on the topic — Henry Schein Inc. v. Archer & White Sales Inc. and Lamps Plus Inc. v. Varela. As these things go, the issue in Henry Schein is straightforward: When one party wants to take a dispute to arbitration but the other party disagrees, how do courts decide whether a particular dispute should be decided by a court or sent to arbitration?

The problem commonly arises when two parties have signed a contract that includes a provision calling for arbitration, but don’t agree whether a particular dispute falls within the provision. In this case, for example, the contract called for arbitration of any “dispute arising under or related to” the contract “except for actions seeking injunctive relief.” The complaint sought tens of millions of dollars in damages for alleged violations of the Sherman Act and various parallel state laws, as well as injunctive relief. Notwithstanding the claim for injunctive relief – which would seem to put the dispute outside the arbitration clause – the defendants sought arbitration, arguing that the primary thrust of the complaint was to seek damages, and that any appropriate injunctive relief could issue after the arbitrator ruled on the merits of the complaint for damages.

The case reaches the Supreme Court against a backdrop of earlier cases in which the court has concluded that the arbitrator has authority to decide “gateway” issues of arbitrability whenever the parties “clearly” and “unmistakably” agree that the arbitrator should do so. In this case, the lower courts held that however clear the agreement of the parties might be, it would be a waste of time to send the case to an arbitrator because the claim of arbitrability was “wholly groundless.” The question before the justices is whether they should recognize this “wholly groundless” exception to the general rule that courts will enforce a “clear” and “unmistakable” agreement to leave arbitrability questions to the arbitrator.

The argument followed a circuitous path, starting with some harsh questioning of Kannon Shanmugam (presenting argument on behalf of Henry Schein, the defendant seeking to enforce arbitration), with several justices deeply skeptical of the idea that courts should send “wholly groundless” claims for arbitration to an arbitrator. By the end of the hour, though, the bench seemed to settle on a consensus that reversal was required.

Justice Ruth Bader Ginsburg was the first to challenge Shanmugam. She emphasized an amicus brief from Professor George Bermann (the reporter for the ALI’s recent Restatement on international arbitration). Ginsburg wanted to hear Shanmugam’s response to Bermann’s argument, with which Ginsburg seemed to agree, that the particular contract used here (a widely used form) did not include the kind of “clear” and “unmistakable” delegation to the arbitrator that would make it appropriate to send the case to the arbitrator.

Justice Sonia Sotomayor raised a different point, trying to explore what would happen to the party who would be pressed into a “wholly groundless” arbitration if the court accepted Shanmugam’s argument. When Shanmugam suggested that the party could challenge an incorrect ruling by the arbitrator under the normal rules for challenging arbitral awards (which require broad deference to the arbitrator), Sotomayor suggested that Shanmugam “[b]asically [was] telling me … there is no remedy for that … party.”

Justice Stephen Breyer followed with one of his typically idiosyncratic hypotheticals, exploring Shanmugam’s position that courts must approve all requests for arbitration founded on an arbitration agreement with an appropriate gateway clause, no matter how ridiculous the claim for arbitration: “Now suppose it’s really weird. … He says my claim here is a Martian told me to [ask for arbitration]. Are you saying no matter what, … never, under no circumstances, is there no exception no matter what? The arbitrator, by the way, loves Martians.”

Shanmugam stuck to his guns, responding that the Supreme Court’s recent cases require courts to assume that arbitrators will act properly, and that the arbitrators well might sanction a party that premised its claim for arbitration on advice from a Martian, leading Justice Samuel Alito to interject: “Well, they may or may not love Martians, but do[n’t] you think it’s fair to say that they love arbitration, so they’re not probably very much inclined to sanction parties who bring … arbitrable disputes to them?”

As it often does, Breyer’s hypothetical led him far from the paths of decision pressed by the parties, as he focused on the difference between the existence of a “clear and unmistakable commitment to have this kind of matter decided in arbitration” – the topic that had interested Ginsburg earlier, but a question not before the Supreme Court – and the implications of finding such a commitment. For Breyer, the answer to his Martian hypothetical plainly was that nobody really would make a clear and unmistakable commitment to send Martian-generated disputes to arbitration: “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?”

The argument continued to spiral away from the question Shanmugam presented, as Justice Elena Kagan weighed in to suggest agreement with Breyer’s perspective. As she put it, “the parties never really considered who was going to decide these groundless claims of arbitrability, or maybe, if they did consider it, they would have thought that it was a pretty strange system to send it to an arbitrator just so that the arbitrator could send it back to the court?”

However frustrated the justices appeared during Shanmugam’s presentation by the idea of sending “wholly groundless” claims for arbitration to an arbitrator, those concerns seemed to evaporate entirely once Daniel Geyser rose to present arguments on behalf of Archer and White (the plaintiff trying to avoid arbitration). Sotomayor (who had decried the practical consequences of the bright-line rule Shanmugam sought) immediately challenged Geyser’s argument that courts should consider whether claims for arbitration are groundless, explaining that she read the court’s earlier cases as saying that the trial court’s task “is limited to [determining] was there an agreement between the parties and was there a delegation.” As she read the existing case law, “if there is [an agreement and a delegation], don’t look to the merits. I don’t see how determining whether something is wholly groundless is anything but a merits determination.”

Piling on, Breyer embraced Sotomayor’s perspective:

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 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?

When Geyser started to respond that sending a case like this one to an arbitrator is inconsistent with the parties’ intent, Alito jumped in with a telling question: “But doesn’t that depend on the nature of the agreement as to arbitrability? … Suppose you have an agreement that says the arbitrator has exclusive authority to decide all questions of arbitrability, regardless of whether the claim of arbitrability has any merit whatsoever. What would you say then?” Geyser’s response that the ultimate question would be whether the contract was clear and unmistakable seemed to suggest that he could win only if the contract was not clear and unmistakable.

The argument quickly went downhill from there, as Alito quickly cut him off, noting that he “thought the question we agreed to take was whether there’s a wholly groundless exception when the parties have agreed that arbitrability will be decided by the arbitrator.” Sotomayor then weighed in with her view that “the other side makes a very compelling argument” for reading the agreement to call for arbitration, given the difficulty in dividing responsibility over cases that mix questions of damages and injunctive relief. “And if there’s been a true delegation, why shouldn’t that go to the arbitrator? Don’t go to the facts of this case. Let’s assume a clear delegation. Because I know you’re making arguments about th[e Restatement rule on unmistakability], but we didn’t grant cert on that.” Not finished, Sotomayor went on to make her view quite clear, noting that she’d “actually gone and had the library do research,” that she was convinced that the “number of wholly groundless cases is very small,” and that she didn’t find it all that worrisome to send such a small group of cases to arbitrators.

In the next turn of the argument, Ginsburg, Chief Justice John Roberts, and Justice Neil Gorsuch squared off against Geyser. Pressing the idea that it is “slicing the baloney just a little thin” (as Roberts put it), the group suggested that courts would struggle to no useful end to distinguish among claims for arbitration that are “merely incorrect, groundless, and wholly groundless.” Gorsuch seemed to speak for the group when he concluded that “the whole point of arbitration … is to … streamline things. And having litigation all the way up and down the federal system over wholly groundless, only to wind up in arbitration, ultimately seems highly inefficient.”

For Gorsuch at least, Breyer’s analysis seemed to lead the way to a suitable resolution: “Isn’t your real complaint … that there’s just maybe a good argument that clear and unmistakable proof doesn’t exist in this case of a desire to go to arbitration and have the arbitrator decide arbitrability. And why doesn’t that take care of 90 percent of these kinds of cases?”

As the argument wound down, Justice Brett Kavanaugh and Kagan seemed to turn their attention to the task of crafting an opinion. For Kavanaugh and Kagan, the textual question came from the provision of the FAA calling for an order to compel arbitration only when there is a “failure to comply” with an arbitration agreement. Kavanaugh had challenged Shanmugam to offer a reading of that provision. When Shanmugam had suggested that the provision simply asked the court to consider whether a party had sought arbitration, Kavanaugh retorted that Shanmugam’s reading would mean, “in essence, that that language in the statute does no work.” When Kavanaugh raised the same topic with Keyser, Kagan intervened to offer her analysis of the statute. In her view:

[W]hen I stare at the language, … I can read it two ways, neither of which is yours. So the first way is Mr. Shanmugam’s minimalist way. It doesn’t mean very much of anything at all. The second way suggests that we’ve gone wrong in prior cases. It’s the maximalist approach, which is what this language was meant to do was assign arbitrability issues to the courts, but we’ve pretty much gone by that understanding of the language. What I can’t understand is how you can read the language to create this halfway house position.

When Geyser tried to reply that the courts should assess the credibility of the party’s request for arbitration, Kagan responded that the “ship has sailed. We’re agreeing that the ship has sailed.”

It is awfully hard for an advocate opposing arbitration to find five votes in support of his position when Breyer, Ginsburg, Kagan and Sotomayor all seem to disagree with him. The outcome may not be everything that Shanmugam could want – we can expect, for example, that the opinion will include a discussion (echoing Breyer’s comments) suggesting that the case does not include a “clear” and “unmistakable” agreement. But on the question presented, the justices seem to have little interest in validating the “wholly groundless” exception that brought the case to them.