Congress enacted the Federal Arbitration Act (FAA) in 1925 to ensure the validity and enforcement of arbitration agreements, thereby encouraging resolution of disputes outside of the court system. Under the FAA, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Rent-A-Center, West v. Jackson, 561 U.S. 63, 67 (2010). The Supreme Court has recognized that the FAA reflects a Congressional intent to enact “a national policy favoring arbitration.” Southland Corp. v. Keating, 465 U.S. 1, 10 (1984). New York law is in accord. As the New York Court of Appeals has stated: “the announced policy of [New York] favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties.” Nationwide Gen. Ins. Co. v. Inv'rs Ins. Co. of Am., 37 N.Y.2d 91, 95 (1975).

Appellate courts in the federal system and New York recently issued a string of significant decisions re-affirming their pro-arbitration stance in Henry Schein, Daesang and Spell. Henry Schein v. Archer & White Sales, No. 17-1272 (Jan. 8, 2019); Daesang v. NutraSweet Co., 85 N.Y.S.3d 6 (1st Dep't 2018); NRT New York v. Spell, 88 N.Y.S.3d 34 (1st Dep't 2018). In particular, the Henry Schein case, which was decided by the U.S. Supreme Court in January, reaffirmed the high court's deference to the “front-end” of the arbitration process, by ruling that courts must enforce contracts that delegate to an arbitrator the question whether a dispute is arbitrable in the first place—even if it is claimed that the argument for arbitration is “wholly groundless.” Henry Schein, No. 17-1272 at 1. Mirroring Henry Schein, the Appellate Division, First Department, recently decided Daesang and Spell, both of which reversed trial court rulings vacating arbitration awards because the trial courts inappropriately waded into the merits of the arbitrator's rulings. These decisions signaled the Appellate Division's deference to the “back-end” of the arbitration process.

'Henry Schein'

Henry Schein arose from a complaint filed by Archer & White Sales, a small dental equipment distributor, against Henry Schein, LLC, the successor-in-interest to a dental equipment manufacturer, alleging violations of federal and state antitrust law. Henry Schein invoked the dispute resolution provision in the parties' distribution contract and sought to compel arbitration of the dispute. Archer objected, claiming that the dispute was not subject to arbitration, because the dispute resolution carved out actions seeking injunctive relief, and the complaint sought an injunction. Relying on Fifth Circuit precedent, the district court held that where a party's argument for arbitration is “wholly groundless,” it has authority to resolve the threshold question of arbitrability, notwithstanding that the agreement expressly incorporated AAA rules that empower arbitrators to resolve arbitrability questions. The district court ruled that Henry Schein's argument in favor of arbitration was wholly groundless and declined to compel arbitration. The Fifth Circuit affirmed.

The Supreme Court unanimously reversed and ruled that the “wholly groundless” exception is inconsistent with the FAA and Supreme Court precedent. The court relied on §2 of the FAA, which provides that an arbitration provision “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. §2. Under this provision, the parties may ask the court to enforce not only that an agreement that an arbitrator decide “the merits of a particular dispute but also 'gateway' questions of 'arbitrability,' such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.” Henry Schein at No. 17-1272 at 4.