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Under the Federal Arbitration Act (FAA), a court must stay litigation once it is “satisfied” that the underlying dispute is subject to arbitration. But what happens when the parties have agreed to let the arbitrator, not the court, decide the arbitrability of a dispute? The answer, according to the Federal Circuit Court of Appeals, is to issue a stay unless the assertion of arbitrability is “wholly groundless.”
In Qualcomm Inc. v. Nokia Corp., No. 2006-1317, 2006 WL 2988322 (Fed. Cir. Oct. 20, 2006), Qualcomm sued Nokia for patent infringement. Nokia filed a motion to stay further proceedings based on the parties’ arbitration agreement. The district court denied the motion, finding the arbitration agreement inapplicable to the underlying dispute.
On appeal, Nokia argued that it was improper for the district court to consider questions of arbitrability because the arbitration agreement incorporated the American Arbitration Association (AAA) rules, which call for arbitrators to decide questions of arbitrability.
The Court recognized the inherent tension between the right to delegate arbitrability decisions to the arbitrator and the FAA requirement that a court not issue a stay unless “satisfied” an issue is arbitrable. The answer, according to the Court, is to inquire whether the assertion of arbitrability is “wholly groundless."
Specifically, the Court set forth a two-part test to be applied when one party claims that an arbitration agreement requires arbitration of a dispute (i.e., “the assertion of arbitrability”), and the other party maintains that the dispute is outside of the arbitration agreement.
Under the first part of the test, the court must determine whether the parties have “clearly and unmistakably” delegated arbitrability decisions to the arbitrator. If not, the court decides questions of arbitrability before issuing a stay.
Alternatively, if the parties have delegated arbitrability decisions to the arbitrator, the court performs a very narrow and limited inquiry to determine whether the assertion of arbitrability is “wholly groundless.” Presumably, the party seeking to avoid arbitration has the burden to establish the “groundless” standard. If the assertion of arbitrability is not wholly groundless, the court must issue a stay. In other words, the “wholly groundless” inquiry satisfies the FAA requirement that a court be “satisfied” of an issue’s arbitrability.
Applying the first part of the test, the Court found that by incorporating the AAA rules into their agreement, the parties clearly delegated arbitrability decisions to the arbitrator. As such, the district court should have issued a stay unless the assertion of arbitrability was “wholly groundless.” The Court remanded the case with instructions to conduct that narrowly limited inquiry.
The Federal Circuit is the second circuit to adopt the “wholly groundless” test. The Fourth Circuit adopted this test in Local No. 358, Bakery and Confectionery Workers Union, AFL-CIO v. Nolde Bros., Inc., 530 F.2d 548, 553 (4th Cir. 1975). Other courts simply issue a stay or order arbitration once satisfied that the parties have clearly delegated arbitrability decisions to the arbitrator. See, e.g., Sadler v. Green Tree Servicing, LLC, No. 05-3850, 2006 WL 2946726 (8th Cir. Oct 17, 2006).
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