Extinguishing Intra-EU Bilateral Investment Treaties: Recent Developments

By Krzysztof Wierzbowski and Aleksander Szostak

In line with the decision of the Court of Justice of the European Union (referred to here as the “CJEU”) in Achmea (formerly Eureko) v. Slovakia (the Achmea Decision) and the political declaration issued by the governments of the European Union member states on Jan. 15, 2019, most of the EU member states, with the exception of Austria, Finland, Sweden and Ireland, have entered into a plurilateral treaty for the termination of bilateral investment treaties between the EU Member States (referred to in this article as “intra-EU BITs” and the Termination Treaty).

The Termination Treaty was signed on May 5, 2020, and entered into force on Aug. 29, 2020. See Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT] (available at http://bit.ly/3iqsTn3).

Portugal, the Netherlands, and Luxembourg have made the following formal declarations concerning the Termination Treaty:

  • “Luxembourg calls upon the European Commission and all member states to start, without any delay, a process with the aim to ensure complete, strong and effective protection of investments within the EU and adequate instruments in this regard.” It requests the  European Commission to create a plan for such a process. Declaration of Luxembourg to the Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].
  • Portugal appears to endorse a view similar to that of Luxembourg and emphasizes its “support to the intensifying of the discussions between the European Commission and Member States with the aim of better ensuring a sound and effective protection of investments within the European Union. To this end, calls to assess the establishment of new or better tools under European Union law and to carry out an assessment of the current dispute settlement mechanisms which are essential to ensure legal certainty and the protection of interests of investors.” Declaration of Portugal to the Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].
  • The Dutch government confirms that although the Achmea Decision does not affect the Caribbean parts of the Netherlands (as Overseas Countries and Territories), BITs concluded with those territories shall also be terminated pursuant to the Termination Treaty. In this sense and irrespective of the Achmea Decision, the effects of the Termination Treaty will extend to all parts of the Kingdom of the Netherlands. Declaration of the Netherlands to the Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].

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So what will be the fate of intra-EU BITs and intra-EU investment arbitration?

The conclusion of the Termination Treaty is a direct consequence of the Achmea Decision, in which the CJEU declared that Investor-State Dispute Settlement (the “ISDS”) clauses in intra-EU BITs are not compatible with the EU law. (The decision is available at http://bit.ly/2Kf8OmM.)

In general, the Termination Treaty is based on the premise that all intra-EU BITs shall be terminated and their sunset clauses, providing for the temporarily continued protection of investments existing prior to the termination of the relevant BIT, shall be terminated together with the respective intra-EU BIT and thereby shall not produce legal effects.

Furthermore, it stipulates that new intra-EU investor-state arbitrations may not be initiated and that pending proceedings shall be subject to the management procedure described below.

Interestingly, the Termination Treaty does not resolve the issue of application and compatibility with the EU law of the Energy Charter Treaty (the “ECT”) in the intra-EU investment protection context. In particular, the Termination Treaty stipulates that it does not cover intra-EU arbitrations initiated based on ECT Article 26 and that this issue will be dealt with at a later stage. Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT] at 2. The ECT is available at http://bit.ly/3nUL2u7.

Considering that in recent years we have witnessed rise of the number of intra-EU ECT arbitrations, the uncertainty introduced by the Termination Treaty may put the parties engaged in pending arbitrations, or anticipating initiation of new proceedings pursuant to ECT Article 26, in an adverse position. See,. e.g., Landesbank Baden-Württemberg and others v. Kingdom of Spain, ICSID Case No. ARB/15/45, Decision on the Intra-EU Jurisdictional Objection [25 February 2019]; Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018]; Masdar Solar & Wind Cooperatief U.A. v Kingdom of Spain, ICSID Case No. ARB/14/1, Award [16 May 2018]; Statistics of ECT Cases (as of Oct. 23, 2019) (available at https://bit.ly/3oGCeJz).

Notably, as argued by the Advocate General Henrik Saugmandsgaard Øe in his recently issued opinion in joined cases C‑798/18 and C‑799/18, the ECT ISDS clause does not apply in the intra-EU context,  and the ECT may be entirely inapplicable to intra-EU proceedings. This indicates that if the CJEU follows the Advocate General’s reasoning, EU investors may be deprived of procedural and substantive protection under the ECT in the intra-EU relations. Joined Cases C 798/18 and C 799/18, Opinion of Advocate General Saugmandsgaard Øe [29 October 2020] (available at http://bit.ly/3bEYEHk).

Management of the pending intra-EU proceedings

Pending proceedings, defined as intra-EU investment arbitration proceedings initiated prior to March 6, 2018—the Achmea Decision linked above–and which have not ended with a settlement agreement or with a final award issued prior to March 6, 2018, where the award was duly executed prior to March 6, 2018, or the award was set aside or annulled before August 29, 2020, shall in principle be subject to the so-called Structured Dialogue, which is a mechanism that aims to assist disputing parties in finding an amicable settlement of a dispute. Art. 1(4) and (5) and Art. 9 Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].

The settlement procedure is overseen by an impartial facilitator who shall find an amicable, lawful, and fair out-of-court and out-of-arbitration settlement of the dispute. Settlement of the dispute shall in principle be reached within six months. Art. 9 (1) – (14) Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT]. It can be observed that the mechanism resembles investor-state mediation.

Going a step further, the Termination Treaty implements an option for investors engaged in pending arbitrations to seek judicial remedies under national law before domestic courts against the host state measure contested in such arbitration proceedings. This option is available to investors under the condition that they withdraw pending arbitration proceedings and waive rights and claims under the relevant intra-EU BIT, or renounce execution of the issued award and commit to refrain from instituting any new arbitration proceedings. Art. 10 Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT]. In such case,  limitation periods would not apply to bringing legal action before domestic courts.

This may have a severe impact on the prospect of lodging a successful claim against a state by the investor, since the legal framework of intra-EU BITs that provided a substantive and procedural legal basis in a pending arbitration will not be applicable in domestic court proceedings.

Doubtful recognition and enforcement of awards

Decisions and/or awards issued in pending, or, as the case may be, new arbitration proceedings may not be effective, because the Termination Treaty stipulates that contracting states shall, in case of domestic court proceedings, request the domestic court, including in any third country, to set the arbitral award aside, annul it, or to refrain from recognizing and enforcing it. Art. 7 (b) Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union [SN/4656/2019/INIT].

This raises a threat to the effectiveness of guarantees provided under, among others, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”).

It can be recalled that ICSID Convention Article 54 stipulates that each contracting state shall recognize an award rendered by an ICSID Tribunal as binding and enforce the pecuniary obligations imposed by that award as if it were a final judgment of a court where recognition is sought. This unique recognition mechanism does not leave room for any ground on which the recognition could be refused.

Considering a rather likely scenario in which a domestic court of an EU member state is faced with a request for recognition of award or decision issued by a tribunal in an intra-EU investment arbitration case, it can be noted that such domestic court will need to resolve uncertain and complex situation concerning the conflict of treaty norms. The domestic court will need to decide whether to recognize the award, or issue a decision in accordance with the ICSID Convention, or to comply with the EU law and refuse recognition and thereby, to undermine the ICSID Convention.

Although not addressed in the Termination Treaty, it appears that the CJEU argument in the Achmea Decision regarding incompatibility of the ISDS clauses in intra-EU BITs with the EU law may potentially extend to extra-EU BITs and arbitrations between EU members states and investors from third states.

Clearly, arbitrations initiated on a basis of ISDS clauses contained in such BITs may concern treatment of investors from third states investing in the EU, and therefore the subject matter of such arbitrations may relate to interpretation and application of the EU law.

Such arbitrations may also pose a risk to the proper interpretation and application of the EU law and have an adverse effect on the autonomy of the EU law. See Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018]. Such reasoning, if followed, which is rather unlikely, would further deepen the crisis concerning European Union investment treaty arbitration.

It might be further noted that the competence of the court where the arbitration is seated to set aside the arbitration award may lead to the situation where such court would be a non-EU court and would not be bound by the Termination Treaty.

Furthermore, the winning investor may seek to have the arbitration award recognized and enforced in a non-EU jurisdiction where the defendant’s assets are located.

Taming the lion: The tendency of arbitral tribunals

to reject intra-EU jurisdictional objections

Despite the Achmea Decision and clear commitment of EU member states on terminating the intra-EU BITs, arbitral tribunals in intra-EU arbitrations generally reject jurisdictional objections asserting incompatibility of intra-EU BITs.vSee, e.g., Strabag SE, Raiffeisen Centrobank AG and Syrena Immobilien Holding AG v. Republic of Poland, ICSID Case No. ADHOC/15/1, Partial Award on Jurisdiction [4 March 2020]; Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Decision on the Achmea issue [31 August 2018]; Masdar Solar & Wind Cooperatief U.A. v Kingdom of Spain, ICSID Case No. ARB/14/1, Award [16 May 2018]; UP (formerly Le Chèque Déjeuner) and C.D Holding Internationale v. Hungary, ICSID Case No. ARB/13/35, Award [9 October 2018]; Addiko Bank AG and Addiko Bank d.d. v. Republic of Croatia, ICSID Case No. ARB/17/37, Decision on Croatia’s Jurisdictional Objection Related to the Alleged Incompatibility of the BIT with the EU Acquis [12 June 2020].

As emphasized by the tribunal in the partial award on jurisdiction in Strabag SE, Raiffeisen Centrobank AG and Syrena Immobilien Holding AG v. Republic of Poland, EU law does not form part of the law applicable to questions of the tribunal’s jurisdiction, and no extrinsic elements of interpretation under Article 31(3) of the Vienna Convention on the Law of Treaties can trump the clear expression of the parties’ common intention to arbitrate. Strabag SE, Raiffeisen Centrobank AG and Syrena Immobilien Holding AG v. Republic of Poland, at par. 8.143. It should be noted, however, that the intention of capital importing states to arbitrate disputes may be considered as no longer existent due to the signing and entry into force of the Termination Treaty.

Notably, the tribunal further considered the issue of the enforceability of an award issued in intra-EU arbitration and recognized its duty to render an enforceable award. It noted, however, that it is not able to predict the future validity, or enforceability of the award before enforcing courts. Id. at par. 8.140-8.142.

More recently, the tribunal in Addiko Bank v. Croatia raised several interesting points when rejecting Croatia’s jurisdictional objection related to the incompatibility of the Austria-Croatia BIT with the EU acquis.

The tribunal reasoned that in light of Article 2(1)(a) of the Vienna Convention on the Law of Treaties, the law applicable to the Austria-Croatia BIT consists of the terms of that BIT itself and general principles of international law, which are the sources of law not considered by the CJEU as  incompatible with the EU law.

Furthermore, the tribunal noted that contrary to the BIT concluded between the Netherlands and Slovakia, considered by the CJEU in the Achmea Decision as incompatible with the EU law, the Austria-Croatia BIT does not incorporate EU law as part of its applicable law. Addiko Bank AG and Addiko Bank d.d. v. Republic of Croatia, ICSID Case No. ARB/17/37, Decision on Croatia’s Jurisdictional Objection Related to the Alleged Incompatibility of the BIT with the EU Acquis [12 June 2020] par.267. The tribunal concluded that the Austria-Croatia BIT does not give rise to the same functional concerns, which the CJEU found to be present in the context of the Achmea Decision. Id. at par.269.

This indicates that intra-EU BITs whose applicable law is limited to the terms of the intra-EU BIT itself and general principles of international law are not incompatible with the EU law. Following this reasoning, it can be assumed that the tribunal would reach a different conclusion if the Austria-Croatia BIT included a provision expressly or impliedly incorporating EU law as the applicable law.

* * *

Some of the solutions implemented under the Termination Treaty may indeed be considered controversial. This is particularly the case with respect to the mode of termination of legal effects of sunset clauses, or more broadly, the retroactive effect of the Termination Treaty.

Investors may decide to seek protection under existing BITs concluded with non-EU states and, thereby, engage in the treaty shopping practice. It remains an open question whether such BITs will be affected by the Achmea Decision.

While the Achmea Decision argument has become a popular strategy for defendants in investment arbitration proceedings to challenge jurisdiction of arbitral tribunals, jurisprudence indicates that such arguments are generally rejected.

Although developments contained in mega-regional treaties, such as the Comprehensive Economic and Trade Agreement (available at http://bit.ly/2LXjQh3), may provide a model for the creation of standing investment court, which could replace the ISDS mechanism so far in place, the institutional design of the body must comply with the EU law in order to provide an effective alternative to domestic courts. In this regard, it is important to monitor development of the EU’s initiative concerning the so-called Investment Court System, which could be further developed into a Multilateral Investment Court.

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Krzysztof Wierzbowski is a Senior Partner at Eversheds Sutherland Wierzbowski in Warsaw, Poland. Aleksander Szostak LL.M. is a lawyer at Eversheds Sutherland Wierzbowski. This article was produced in cooperation with the CPR European Advisory Board.

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Love’s New Mediation Data: Whither the Joint Session?

By Temitope Akande

New York Law School’s Alternative Dispute Resolution Skills Program kicked off its first 2021 round of biweekly Wednesday lunch conversations yesterday featuring mediator Lela Porter Love, a law professor and director of the Kukin Program for Conflict Resolution at New York’s Benjamin N. Cardozo School of Law.

Love opened by emphatically noting that dialogue is currently dying or impoverished, even on the political scene. Mediation, she said, “is the last bastion,” with mediators trained to promote dialogue. But even in mediation, there is “less and less mandate for mediators to bring parties together into joint sessions.”

Her discussion was mostly based on a 2019 survey of practicing mediators in a professional group, the International Academy of Mediators, to determine the use of joint and caucus sessions. Presenting a PowerPoint, “The Disappearing Joint Session,” based on 129 responses and anecdotal discussions, Love said that the data reflects the title: There is a lessening frequency of the use of joint sessions and more reliance on mediators conducting caucuses with individual parties.

Prof. Love moved to a 2017 survey by the American Bar Association Dispute Resolution Section Task Force on the Relation of Mediator Actions to Mediation Outcomes also on the use of caucus during mediation. The results, she said, were counterintuitive: caucusing had an increased settlement effect in labor-management disputes, but no effect, according to her presentation slide, “in other types of disputes regardless of [the] purpose of caucus (i.e., whether to establish trust or discuss settlement proposals).”

She said that the use of caucus has shown that parties are more likely to file an enforcement action based on their settlement—which indicates that increased caucusing didn’t reduce acrimony. As a result, caucus sessions, while they may increase labor-management case settlement, may have potential for negative effects on the parties’ perceptions and relationships.

Love discussed the caucusing results in a broad Maryland state judiciary ADR evaluation report. Based on the evaluation of caucus sessions, the greater the percentage of time participants spent in caucus, the less likely the parties were satisfied with the outcome, and the less likely the participants report that the issues “were resolved with a fair and implementable outcome.”

“On balance,” said Love, “you don’t see this real, ‘Wow, now I understand why there is this great move to caucusing.’”

The Maryland study showed that when the mediators controlled the sessions, limiting the issues instead of presenting a broad range, parties showed an increase in a desire to better understand the other party. The long-term aftereffects results show that the greater percentage of time participants spent in caucus, the more likely participants will return to court for an enforcement action after mediation, reflecting a lack of durability of those mediation results.

Love further discussed the values that influence mediation style and reasons why mediators use caucus sessions instead of joint sessions, returning to the IAM study. First, mediators who do not use joint sessions primarily do not do so because attorneys do not want joint sessions.

The second reason they lean toward caucus and away from joint sessions is that parties tend to decline joint sessions because they feel more comfortable participating in the mediation process by sharing their stories in caucus sessions with the mediator, rather than facing their adversary. “People in conflict are really angry at each other and they don’t want to see each other,” explained Love.

Love further noted that mediators were mostly trained to use joint sessions, though different schools of mediation also favored caucuses. A more important factor in constructing and conducting mediation sessions is that a significant purpose is to get people together to heal relationships—as opposed to the “war” of adjudication–which orients toward using joint sessions.

Prof. Love concluded by stressing that listening helps settle cases, and it is important in helping people tell their stories. The mediators who seek to identify the parties’ interests perhaps are doing only one aspect of the process, noted NYLS ADR Skills Program Director and moderator F. Peter Phillips, who added that mediation might be better handled if the emphasis was on all parties listening and working to understand one another. Love concurred, and, noting that mediators are witnesses to the participants’ stories, suggested that neutrals provide “respectful-person listening” that enhances the process.

Love’s Jan. 13 NYLS Conversations in Conflict Resolution session is available on YouTube at https://bit.ly/3nOluyK.

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The author, who received a Master of Laws in Alternative Dispute Resolution last May at the University of Southern California Gould School of Law in Los Angeles, is volunteering with the CPR Institute through Spring 2021.

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CPR Files Amicus Brief Asking U.S. Supreme Court to Tackle Foreign Discovery for Arbitration

The International Institute for Conflict Prevention and Resolution has filed an amicus brief requesting that the U.S. Supreme Court grant certiorari to resolve a federal circuit court split on whether 28 U.S.C. § 1782 allows federal district courts to order discovery for private commercial arbitration abroad.

CPR did not take a position on the merits of the case.

Yesterday’s filing in Servotronics Inc. v. Rolls-Royce PLC, et al., No. 20-794, highlights the circuit split underlying the case.  Petitioner Servotronics presents the question,

Whether the discretion granted to district courts in 28 U.S.C. § 1782(a) to render assistance in gathering evidence for use in “a foreign or international tribunal” encompasses private commercial arbitral tribunals, as the U.S. Courts of Appeals for the 4th and 6th Circuits have held, or excludes such tribunals without expressing an exclusionary intent, as the U.S. Courts of Appeals for the 2nd, 5th and, in the case below, the 7th Circuit, have held.

CPR urged the Court to resolve this circuit court split, noting in the brief that “the question of whether United States district courts may entertain applications for judicial assistance in obtaining evidence for presentation in arbitral proceedings before international tribunals is one of great relevance to CPR and its constituents.”

The friend-of-the-Court brief states that the “current existence of opposite rules on whether district courts have jurisdiction to render assistance under Section 1782 in gathering evidence for international arbitral tribunals creates both the opportunity for blatant forum shopping and the likelihood of protracted litigation on the threshold jurisdictional question in each of the seven remaining regional circuits that have not decided the question.”

CPR also argues that the court should set the case for argument this term to avoid the likelihood that it will become moot prior to decision.

Section 1782 authorizes “any interested person” in a proceeding before a “foreign or international tribunal” to ask for and receive discovery from a person in the United States.  But the conflicting federal circuit cases differ on whether the statute’s definition of tribunals would cover arbitration matters. The Servotronics parties have decisions going both ways, one in the Fourth Circuit, and the second, the subject of the cert petition, in the Seventh Circuit.

CPR has created a web page for the brief at http://bit.ly/3nklaYp.

CPR Speaks has addressed the issues in this case as they arose.  John Pinney, counsel to Graydon in Cincinnati who prepared the amicus filing on CPR’s behalf, discusses the case in a video post here.  Updates on the circuit split as it developed in 2020’s second half are available here and here.

You can find the CPR amicus filing, as well as other filings in the case, on the Supreme Docket page, here. Law360 covered the filing here, available with a subscription.

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Schein II: Argument in Review

Alternatives to the High Cost of Litigation Editor Russ Bleemer hosts analysis by Prof. Angela Downes, University of North Texas-Dallas College of Law, and arbitrator-advocate-amicus brief contributors Richard Faulkner, also of Dallas, and Philip J. Loree Jr. in New York.

Court’s Rejected Cert Request Is Argued Anyway

By Russ Bleemer

Was the U.S. Supreme Court having second thoughts about how it has approached Tuesday’s arbitration case?

Back for its second round of arguments at the Court after a decision just last year, Archer and White Sales Inc. v. Henry Schein Inc., No. 19-963, returned to explore the issue, “Whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”

Schein’s attorney, Kannon K. Shanmugam, a partner in the Washington, D.C., office of Paul Weiss, Rifkind, Wharton & Garrison, argued that the Fifth U.S. Circuit Court of Appeals, in deciding not to compel arbitration in the case, misapplied the historical presumption of arbitrability. 

He also emphasized that “clear and unmistakable” evidence that the parties delegated the matter to arbitration puts the initial question of arbitrability to an arbitrator, even with the carveout for injunctions. 

The appeals court had said that clear and unmistakable evidence that the parties wanted to arbitrate existed, but not to arbitrate the injunctive relief—a drafting issue that justified sending the case to the courts.

In his counterargument, respondent attorney Daniel L. Geyser, of Dallas’s Alexander Dubose & Jefferson, countered with, among other things, a focus on the delegation to arbitration by the parties.

That focus produced an usual argument.  It wasn’t because many of the justices also focused on the particulars of the clause delegating the matter to arbitration.  In fact, Geyser and Archer and White had cross-petitioned the Court to take on the issue of the delegation clause’s incorporation by reference of arbitration rules.

The Court granted certiorari on June 15 on Shanmugam and Henry Schein’s issue on the sweep of the injunction carveout. But the Court rejected the cross petition on delegation and incorporation of rules. 

Yet at times, the rejected clause delegation issue was the argument’s primary focus.

“I want you to assume that we are not going to decide the question that you wanted us to decide in the cross-petition,” said Justice Samuel A. Alito Jr. during Geyser’s argument. “And if we make that assumption, I really don’t know how to answer the question that we granted review on because it does seem to turn on the degree of the delegation to the arbitrator of the power to decide whether the arbitrator can decide.”

Alito wasn’t the only one. 

Archer and White had persisted with the question in its brief in the case even after the cert denial. More significantly, the failed cross-petition or the delegation clause itself was raised directly or in passing by nearly every one of the nine justices, who argued the case in an online broadcast, as has become the custom in the pandemic since May.

The cert grant, and simultaneous cert denial, made sense on paper.  The Fifth Circuit had said the delegation was valid, putting the focus on the appellate court’s interpretation that the carveout for injunctions preceded the arbitrator’s work and had to be decided by a court.

But even Shanmugam’s argument on behalf of the petitioner anticipated the presence of his adversaries’ rejected issue. Before facing a single question, Shanmugam took on the cert denial himself, noting that 12 circuit courts agree that a delegation clause incorporating rules is sufficient.

The contract in the matter incorporated American Arbitration Association rules that give arbitrability decisions to the arbitrator.

Shanmugam opened his argument on behalf of petitioners Henry Schein stating that the Fifth Circuit review hierarchy was wrong for two reasons.  “First, a delegation is simply an antecedent agreement that is subject to the rules governing arbitration agreements more generally,” he said, continuing, “Second,  any doubts concerning the scope of arbitration agreements are resolved in favor of arbitration.”

If that arbitration presumption had been applied correctly, he argued, a carveout that doesn’t speak specifically to the delegation to an arbitrator cannot interfere with the overall delegation of a case to an arbitrator.  “The Court should stick to the question it agreed to decide,” advised Shanmugam on behalf of Henry Schein, “and it should decide that question in petitioner’s favor.”

The argument highlights below are based on the audio feed of the case, available on the Supreme Court’s webpage at https://bit.ly/3m2RCxz, and the transcript, also on the Court’s site at https://bit.ly/3a6xDMv. For background on the case, including links to key documents and the 2019 Supreme Court decision in the same matter, see “Supreme Court Argument Preview: Looking Ahead to Round 2 on Schein and Arbitrability,” CPR Speaks blog (Dec. 3)  (available at https://bit.ly/2VyD1z6) (The CPR Speaks link also contains information on the participants in the accompanying YouTube video discussion, conducted on Tuesday, Dec. 8.).

* * *

The Supreme Court generally seemed to agree with Kannon Shanmugam’s opening words, but still returned to the delegation and rules’ incorporation questions almost as much as the Fifth Circuit’s denial of arbitration.

“They don’t want arbitrators deciding this,” said  Chief Justice John G. Roberts Jr. in opening the questioning, referring to the presence of the contract clause carveout sending injunctions to court, adding, “Why would they want arbitrators to decide who gets to decide it?”

Shanmugam said that the Fifth Circuit divided the responsibility of who decides between the court and the arbitrator, while the contract was a clear delegation of the case to arbitration.  The result of the appeals court opinion was negating that arbitration intention because of the carveout sending the case to court instead.

He returned repeatedly to a need to assert the presumption of arbitrability in viewing the parties’ arbitration clause and the context for the carveout.

The contract clause states, “Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property . . .), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [the “AAA”].”

Justice Clarence Thomas focused on the delegation clause, asking Shanmugam to walk the Court through its use in the case.  “I don’t see the word ‘delegation’ at all or a verb ‘delegate’ at all,” said Thomas.

Shanmugam replied that the Supreme Court “has never required magic words on the face of the agreement. Instead, all that the Court has said is that you have to have clear and unmistakable evidence. And under ordinary objective principles of contract formation, the incorporation of a document [referring to the arbitration agreement’s AAA rules referral] suffices in order to render that document part of the contract.”

Borrowing from labor law and referencing key Supreme Court precedents, Justice Stephen G. Breyer said that the presumption of arbitration still requires a deciding court to judge the scope of that arbitration.  Shanmugam said that the delegation is “a kind of miniature contract formation,” that contemplates whether there was “a meeting of the minds that the arbitrator should decide questions concerning the scope of the arbitration agreement.” 

The incorporation of the AAA rules, he said, was sufficient under ordinary contract formation principles.

Justice Samuel A. Alito Jr. asked Henry Schein’s attorney about the basis for the presumption for arbitration.  Shanmugam replied it rested in the Federal Arbitration Act’s Section 2, as well as “flowing from the policy underlying the arbitration act as a whole.” He added, “if I were pressed, I would say it’s probably ultimately a matter of federal common law” as well as emanating from statute.

Justice Sonia Sotomayor returned immediately to the cross-petition on the delegation agreement’s incorporation of rules by reference, and said that the Henry Schein brief conceded that the Court could reach the issue to decide the case. She questioned whether the delegation to arbitration was clear for the injunction and all other issues.

Echoing the Fifth Circuit, Sotomayor agreed there was a clear delegation, but suggested she found ambiguity on the injunction’s decision maker. Shanmugam said that the appeals court incorrectly considered the presumption for arbitrability.  Even with an unclear scope of arbitration, he explained, the Fifth Circuit should have applied a presumption that the case was to be arbitrated once it found that valid delegation.

Justice Elena Kagan was focused on the injunction carveout, posing a hypothetical change in the contract wording, and concluding, “if you have something which at least arguably seeks injunctive relief, the court should deal with the question of whether it does and then should go on to decide the issue.”

Justice Neil Gorsuch pressed Shanmugam on the point discussed with Alito on a statutory basis for the presumption for arbitration. The Henry Schein attorney stuck to FAA Section 2.

Justice Brett Kavanaugh retraced Shanmugam’s argument points with the attorney, and asked about “real world” contracting situations–“how people draft these contracts, what they expect, my understanding was that the question of who decides arbitrability, the who-decides question, is almost never divided between a court and an arbitrator because that would be almost nonsensical in the real world because you need one person to decide, and it’s either going to be the court or the arbitrator, not both the court and the arbitrator.”

Though the question initially ignored the existence of the injunction carveout, Shanmugam quickly agreed. “That’s correct. And I’m aware of no examples of such a division.” Kavanaugh responded, “Right. Nor am I.”

Then, Kavanaugh tackled the contract carveout in the case sending the injunction to the court, noting that every contract has them. “And so, if that alone means the Court decides what is arbitrable, then the Court will always decide arbitrability and really eradicate the idea that arbitrators can ever decide arbitrability,” he said.

Justice Amy Coney Barrett also restated Shanmugam’s argument, acknowledging the cross-petition issue’s denial and accepting the delegation to the AAA rules as sending arbitrability to the arbitrator. But echoing Shanmugam, she indicated that it would be nonsensical “to carve up arbitrability questions.” She continued, “If that’s true, why isn’t that reason to interpret this clause as not being a clear and unmistakable delegation of all questions of arbitrability?”

“As a matter of contract formation,” concluded Shanmugam, focusing on the presumption of arbitration,  “there is an agreement to arbitrate arbitrability. At that point, Justice Barrett, everything else that we’re talking about is a question of interpretation. It’s a question of the scope of the delegation.”

Shanmugam summarized his argument for the Court, once again directing his attack on the delegation argument incorporating the AAA rules.  He noted that the “[r]espondent is really asking the Court to decide this case based on a different question, the incorporation question. And that would be a bold strategy in any case, but I would submit it’s a particularly bold strategy here because Respondent asked the Court to decide that question at the cert stage, and the Court seemingly consciously made the decision not to add it.”

He again asked the Court to avoid the issue it already declined to hear, noting, “All that the Court need do in this case is to hold that the court of appeals’ actual reasoning is inconsistent with this Court’s decisions applying familiar Federal Arbitration Act principles.”

* * *

Respondent attorney Daniel Geyser immediately attacked the delegation and incorporation points on behalf of his client Archer and White in his opening statement.  “It is simply not plausible that anyone would recognize this issue and choose to resolve it by relying on an oblique reference to the AAA rules rather than a simple, explicit sentence delegating the gateway issue,” he told the justices in his opening statement.  

He added that the injunction falls within the carveout from arbitration, and therefore isn’t subject to arbitration under the American Arbitration Association rules.  “It makes no difference what those rules say because the condition for activating them is unmet,” he said.

Using a hypothetical and invoking Justice Kavanaugh’s discussion, Chief Justice Roberts began questioning Daniel Geyser by asking why the carveout’s arbitrability should be treated differently than arbitrability issues in an arbitration contract with no express carveout.

“[N]ormally,” replied Geyser, “when parties include an express delegation provision, it’s unconditional and it’s categorical.  It’s not like what you have here.”

Roberts asked Geyser to leave the AAA rules’ delegation out of his answer.  “I think that’s what we tried to do when we denied cert on that question,” said the chief justice.

Geyser countered that the default is that the court decides the arbitrability issue.  He said, “The only time an arbitrator decides whether a dispute falls within the scope of the agreement is if there is, in fact, a delegation provision.”

Geyser suggested the problem was drafting:  “We absolutely concede that if the exception is limited solely to the scope of arbitration and there is a separate unconditional delegation provision, that the arbitrator gets to make that determination. “

He continued on the theme, telling Justice Thomas that phrasing matters, and the Court should focus on the delegation and the wording of exceptions. He said Archer and White would lose if there was a second sentence that said that arbitrator shall decide arbitrability—“an express unconditional delegation of the issue of arbitrability to the arbitrator.”

Geyser continued: “[U]nless there’s clear and unmistakable evidence that the parties wanted the arbitrator to decide arbitrability, then the default is with the court, and the court has to first identify a delegation agreement and identify any limits to that delegation agreement. “

Thomas was skeptical.  He noted that Geyser’s construction limits an arbitrator’s authority  on arbitrability after it had been granted by the contract.  “I don’t know how you can have it both ways,” said Thomas, “You [can’t] say he has the authority, and in these limited circumstances, he doesn’t.”

Geyser countered that the Court has “never” issued a “binary rule.” He said, “Parties are perfectly free under the Federal Arbitration Act to delegate some issues to arbitration and to delegate some arbitrability issues to arbitration.”

Facing Justice Alito’s concerns about the posture of the case, Geyser said the Court, in the face of the question of whether there was a clear and unmistakable delegation to arbitration of arbitrability, “could dismiss the case as improvidently granted,” or request additional briefing, though he quickly added that he thought the case was fully briefed.

But he also explained to Alito that he believed even in the face of a clear delegation, a plain-text reading of the agreement shows that the carveout for injunctions removes the case from the arbitrator. “[It’s] the most straightforward way to affirm in this case,” he said.

Justice Sotomayor said that Geyser’s argument falls short because of a clear delegation to the AAA rule for arbitrability matters. Geyser countered that the delegation was limited by the injunction carveout.

In response to Justice Kagan’s questioning, Dan Geyser said that court decision for the gateway-to-arbitration issues is “traditionally what parties expect.” He continued, “It provides a critical judicial safeguard and it avoids the situation where the arbitrator is deciding the scope of his or her own jurisdiction.”

He added that the FAA backed delegating “certain issues but not others to the arbitrator.”  He urged the Court to support the requirement that “unless parties clearly and unmistakably override the strong presumption in favor of courts acting as gatekeepers, that Congress imagined in the Federal Arbitration Act, in Sections 3 and 4, that, in fact, the courts keep that gateway role.”

Justice Kavanaugh returned to the purpose of contracting, saying he had a problem with Geyser’s conception that contracting parties divvy up arbitrable matters and court matters. “[T]hat’s just not how it works in the real world, nor could it [realistically] work that way in the real world,” he said.

Kavanaugh asked Geyser if the justice’s interpretation was wrong.  “In the real world,” Geyser replied, “parties sometimes do limit a delegation.  They might say that the court decides whether class arbitration is appropriate. And parties are perfectly free to do that.”

He told Cavanaugh, “I don’t see any way to read the actual text of this agreement to say that the carveout wouldn’t include a carveout to the AAA rules.”

Geyser conceded to Justice Barrett that his client would lose if the Court does not agree that there was no clear and unmistakable delegation to arbitration and declines “to get into the question that we denied cert on, [and instead] assume[s] that incorporating the AAA rules by reference is enough to constitute a clear and unmistakable delegation.  . . .”

* * *

Dan Geyser began his summation on behalf of respondent Archer and White noting, “[W]e apologize for trying to get the Court back into an issue that maybe it doesn’t wish to address.” He warned against “a profoundly atextual construction of the plain text of this agreement,” and said, “I think it would be very difficult to construe this language in a sensible way without getting into the delegation.”

In his rebuttal, Henry Schein attorney Kannon Shanmugam urged the Court to reverse the Fifth Circuit, noting, “[I]t’s one thing to say that parties may want to divide up responsibility for different types of questions of arbitrability such as who is subject to the arbitration agreement or whether a class action waiver is valid, but as I’ve pointed out in my earlier colloquy with Justice Kavanaugh, we are not aware of any actual agreement in the real world that divides up responsibility for a particular question of arbitrability and in particular the paramount question of the scope of the arbitration agreement.”

* * *

The author edits Alternatives to the High Cost of Litigation for the CPR Institute.

[END]

Supreme Court Declines Insurance Arbitration Matter from Oklahoma

The U.S. Supreme Court this morning declined to hear an insurance coverage case in which a consumer contract mandated arbitration.

The case, Old Republic Home Protection Co. v. Sparks, No. 20-237, involves a mandatory arbitration requirement in a consumer contract for home services repairs.

It examines a clash between the McCarran–Ferguson Act, 15 U.S.C. 1012(b), a 1945 law that gives insurance regulation to the states; the Federal Arbitration Act, and the Oklahoma Arbitration Act, which states, “The [Oklahoma] Arbitration Act shall not apply to collective bargaining  agreements and contracts which reference insurance, except for those contracts between insurance companies.” Okla. Stat. Ann. tit. 12, § 1855(D).

The law, notes the Oklahoma Supreme Court case that was the subject of the home service company’s petition for certiorari, provides a “reverse preemption,” taking Oklahoma insurance contracts out from under the FAA’s auspices. 

Oklahoma’s top Court agreed with the plaintiffs, noting that they “argued that the federal McCarran-Ferguson Act authorized the ‘reverse preemption’ of the FAA in this instance. Because the FAA did not preempt relevant Oklahoma state law involving the regulation of insurance, [the plaintiffs] replied that the Court of Civil Appeals did not err in holding that § 1855 of the Oklahoma Uniform Arbitration Act barred the enforcement of arbitration in this matter.” Sparks v. Old Republic Home Protection Co., 467 P.3d 680 (Okla. S.Ct. 2020) (available at https://bit.ly/3omxDvA).

The decision stands, and the case appears headed for a trial court for resolution.

The plaintiffs are a Moore, Okla., married couple, that had filed suit against Old Republic Home Protection Co., of San Ramon, Calif., under a home service contract that they charged provided faulty repairs to their air conditioning system which damaged their home.

The issue officially presented by Old Republic and rejected by the Court today was

Whether, in a case involving interstate commerce and a written contract with an arbitration provision that expressly requires application of the Federal Arbitration Act, a state arbitration statute that by its terms “shall not apply to . . . contracts which reference insurance” (a) qualifies as a “law enacted by [a] State for the purpose of regulating the business of insurance” under the McCarran–Ferguson Act, and (b) can support reverse preemption of the FAA based on an asserted impairment of such a state law.

Scotusblog has the papers in the case, including the Oklahoma opinion, at https://bit.ly/39NaXR3.

[END]

What the U.S. Election Will Mean for Arbitration

By Mark Kantor

I have received questions as to how, if at all, the results of the recent U.S. elections will affect the environment for arbitration in the U.S.  Being a lazy person, it occurred to me that sharing updated bullet points for a presentation I made on that topic at Dublin Arbitration Day might be an easy way to answer.  I offer the below idiosyncratic opinions and invite any comments, corrections, criticisms or witticisms you may wish to offer in response.

In short, not much new.

  • The controversial hot-seat substantive public policy proposals seeking to limit pre-dispute mandatory arbitration agreements in the U.S. (supported by the voices surrounding the forthcoming Biden Administration) relate to consumer arbitration, employment/civil rights arbitration, the use of arbitration to limit class actions and securities arbitration – some but not much overlap with international arbitration.  There is no appetite in political circles (i.e., outside the scholarly world and some practitioners) for technical reforms to modernize the Federal Arbitration Act (FAA).
  • Major legislative action on the above hot-seat arbitration issues is in any event highly unlikely in a deeply divided Congress during the two years before mid-term Congressional elections occur in 2022, regardless of who has control of the U.S. Senate after the Georgia Senate run-off elections in early January.  If Republicans control the Senate, they will not support such legislation.  Most Democrats would support that legislation, but a small number of conservative Democratic Senators (principally Sens. Joe Manchin, D., W.Va., and Jon Tester, D., Mt.), may not.  Moreover, substantive legislation in Congress still requires a successful 60-vote on a cloture motion in the Senate to stop a filibuster.  [Under existing Senate rules, final passage of substantive legislation only requires a majority of the votes (50 + Vice President Kamala Harris if the Democrats secure the two Georgia seats); but that vote can be prevented from happening unless a “cloture” motion passes with 60 votes.]  A successful cloture vote would require 10 Republicans to join all 50 Democrats [in the event of a Democratic majority] in voting for cloture.  Due to inter alia opposition to removing the 60-vote requirement by a number of senior Senators in both parties and the impact of a divided Senate, the prospects for the Senate to remove the 60-vote requirement to halt a filibuster of substantive legislation are extremely dim even if the Democrats win both Georgia Senate seats and reach 50-50 equality in the Senate with ties broken by Vice President Harris.  As one law firm put it, “with the Senate in its apparent 2021 configuration, any attempt to abolish the filibuster as it applies to [substantive] legislation appears to be shelved.”
  • Existing legislative proposals from Democrats like the “Forced Arbitration Injustice Repeal Act” (AKA the “FAIR Act”) are written so broadly they might bleed over from consumer/employment/civil rights/securities/class action disputes into B2B or ISDS arbitrations.  Those proposals are, however, highly unlikely to move forward in the divided Senate during the next two years.
  • The approach of protectors of B2B arbitration (domestic and international) is to aim to limit any such legislation (if it moves forward notwithstanding) to a new Chapter of the FAA to avoid bleeding over of new legislative restrictions (if any) from consumer/employment/civil rights/class action issues into B2B or ISDS. 
  • If any Congressional action does move forward, it will instead likely be (1) specific to subject-matters that secure bipartisan support (e.g., perhaps barring pre-dispute arbitration agreements covering nursing home or workplace/sexual harassment disputes) or (2) embedded inside “must-pass” legislation.  That has been the pattern in Congress for many years now.  Still, even that type of legislation remains highly unlikely in a divided Congress.
  • The ability of a new Administration to introduce unilateral administrative regulations limiting or prohibiting arbitration (the practice in the Obama and Trump Administrations) has been greatly reduced by the 2018 U.S. Supreme Court decision in Epic Systems v. Lewis, 138 S. Ct. 1612 (2018).  Epic Systems held that authority to override by administrative regulation the impact of the FAA provisions requiring enforcement of arbitration agreements must be found in specific legislative authority to limit or prohibit mandatory arbitration agreements, not pre-existing general legislative grants of overall regulatory authority.  I speculate without evidence that administrative regulatory proposals in the Biden Administration might focus on banning enforcement of pre-dispute waivers of class actions, in both arbitrations and courts, to try to avoid the impact of the principle from Epic Systems that arbitration cannot be singled out for restrictions in the absence of specific legislative authorization.
  • International economic policies under the Biden Administration will surely differ from those under the Trump Administration.  However, Democrats have further retreated from supporting ISDS since the Obama Administration while Trump has split the previous Republican de facto unanimity in support.  Those trends may continue in Congress, while the position of the Biden Administration awaits further appointments to Biden’s economic and trade team.  During the election campaign, Biden stated only “I oppose the ability of private corporations to attack labor, health, and environmental policies through the Investor-State Dispute Settlement (ISDS) process and I oppose the inclusion of such provisions in future trade agreements.”  [See Biden’s answers to questions from the United Steelworkers Political Action fund at https://bit.ly/3opEZyp.] That statement fails to clarify whether Biden supports or opposes ISDS when labor, health or environmental policies are not at stake.  Trade Promotion Act Authority to negotiate international trade agreements will be up for renewal in 2021–that will be the first true test of the appetite in the Biden Administration and the new Congress for reform or elimination of ISDS.  A return to the ISDS format found in the Trans-Pacific Partnership negotiated by the Obama Administration, contrasted with the form found in the United States-Mexico-Canada Agreement, seems unlikely regardless.
  • The replacement of Justice Ruth Bader Ginsburg on the U.S. Supreme Court with Justice Amy Coney Barrett likely signals no change in the Supreme Court’s recent pro-arbitration jurisprudence.  Justice Ginsburg was a critic of some of that jurisprudence, but in dissent.  We will see how Justice Barrett resolves arbitration-related disputes when the Supreme Court issues its decision in Henry Schein II sometime next year (oral argument to be heard on Dec. 8–if you are a subscriber to OGEMID/Young OGEMID, there will live reports those listserv’s covering that argument) [For more on Henry Schein II, see “Supreme Court Argument Preview: Looking Ahead to Round 2 on Schein and Arbitrability,” CPR Speaks (Dec 3) (available at https://bit.ly/2VyD1z6)]. However, many observers feel that Justice Barrett is not likely to follow Justice Ginsburg’s dissents rather than the majority’s approach toward  hot-button issues such as consumer and employment arbitration.  Henry Schein II does not, though, involve the hot-button issues that have divided the Court into majority and minority positions in recent years.  Instead, it involves issues of arbitrability in the face of a carve-out in an arbitration clause allocating mandatory jurisdiction for injunctive relief and certain IP issues to the courts rather than an arbitral tribunal.  Consequently, Henry Schein II may not be the best test of Justice Barrett’s views on the sensitive public policy issues.  It may, though, offer a good measure of her adherence to the general pro-arbitration stance found in the Supreme Court’s recent jurisprudence. 
  • There is, however, some non-zero possibility that, due to Epic Systems, a future court might overturn the current informal U.S. Securities and Exchange Commission policy refusing to register equity securities offerings for public sale where the underlying corporate organic documents provide for arbitral jurisdiction (with class waivers) rather than court proceedings for shareholder disputes with the issuing company.  Several such cases are wending their way through the lower federal courts at this time.  The Trump Administration and the SEC largely stayed out of that issue, to the frustration of corporate advocates and the approval of shareholder advocates.  If the Biden Administration or an SEC controlled by a Biden-appointed chair chooses to become involved, it would likely intervene in support of the existing informal SEC policy.

I hope this is useful.

_______________________________________________

Mark Kantor is a member of CPR-DR’s Panels of Distinguished Neutrals. Until he retired from Milbank, Tweed, Hadley & McCloy, he was a partner in the firm’s Corporate and Project Finance Groups. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). He also is Editor-in-Chief of the online journal Transnational Dispute Management. This CPR Speaks post originally was circulated to a private list serv and adapted with the author’s permission.

[END]

Supreme Court Argument Preview: Looking Ahead to Round 2 on Schein and Arbitrability

Can a contract clause delegating a case to an arbitrator be preempted and sent to a court by words that exempt the consideration of specific issues, like injunctions, from the arbitrator?

That’s the question the U.S. Supreme Court will hear discussed in the Tuesday, Dec. 8 arguments in Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963 (Supreme Court case page is at https://bit.ly/2EvKPx3).  So far, it’s the only arbitration case the U.S. Supreme Court has agreed to hear in the 2021 term.

It’s the case’s second trip to the nation’s top Court in under two years.  In Henry Schein Inc. v. Archer and White Sales Inc., 139 S. Ct. 524 (Jan. 19, 2019) (available at https://bit.ly/338gdLT), the Court held that the “wholly groundless” exception to arbitrability is inconsistent with the Federal Arbitration Act and the Court’s precedent. But it declined to determine “whether the parties agreed to arbitrate arbitrability” as indicated by “clear and unmistakable evidence” in a unanimous opinion by Associate Justice Brett Kavanaugh.

On remand the Fifth Circuit found that a clause delegated the arbitration to the arbitrator via the incorporation of American Arbitration Association rules to that effect. But the Court didn’t compel arbitration.  It said that the way the clause was drafted, the carve out for injunctions still applied, and once again refused to enforce arbitration. 

Henry Schein asked the Court to hear the case between the two medical equipment supply companies a second time, contending that the delegation should have sent the question of arbitrability to the arbitrator, not a court.

On June 15, the Court agreed to hear the case again, this time on the issue of “[w]hether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”

At the same time, the Court declined to accept Archer and White’s cross petition on two issues that could eventually be before the Court—possibly in a guest appearance as soon as Tuesday’s oral argument:

(1) Whether an arbitration agreement that identifies a set of arbitration rules to apply if there is arbitration clearly and unmistakably delegates to the arbitrator disputes about whether the parties agreed to arbitrate in the first place; and

(2) whether an arbitrator or a court decides whether a nonsignatory to an arbitration agreement can enforce the arbitration agreement through equitable estoppel.

For background on Tuesday’s argument, see Heather Cameron, “Decided, Granted, Denied: A Look At 2020’s Supreme Court Arbitration Cases,” 38 Alternatives to the High Cost of Litigation 118 (September 2020) (available at https://doi.org/10.1002/alt.21852); Russ Bleemer & Heather Cameron, “Supreme Court Returns Schein to Its Docket, With a Focus on Arbitrability,” CPR Speaks (June 15, 2020) (available at https://bit.ly/3d4HOPt); Philip J. Loree Jr., “Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court, CPR Speaks (Feb. 19, 2020) (available at http://bit.ly/3bQXQgl); Mark Kantor, “Henry Schein Redux – The Appeals Court Decides ‘The Placement of the Carve-Out is Dispositive,’” CPR Speaks (Aug. 15, 2019) (available at http://bit.ly/2IZ3MqQ).

Linked above, Alternatives editor Russ Bleemer is joined for a preview of the second Henry Schein Supreme Court arguments by Angela Downes, Professor of Practice and Assistant Director of Experiential Education, of the University of North Texas-Dallas College of Law in Dallas, and arbitrator-advocates Philip J. Loree Jr., of New York (see his Arbitration Law Forum blog and website at https://loreelawfirm.com/blog/), and Richard Faulkner, of Dallas (see his LinkedIn page at https://bit.ly/3qh5U13).

Loree and Faulkner worked on an amicus brief that has been filed in this case, and is discussed at length in the video.  It is posted on the Supreme Court’s website here.

[END]

Supreme Court Rejects an International Arbitration Case

By Russ Bleemer

The U.S. Supreme Court this morning declined to hear the international arbitration case of Big Port Service DMCC v. China Shipping Container Lines, No. 20-128.

The issue in the case was the standard for issuing an injunction related to arbitration–specifically, “Whether the U.S. Court of Appeals for the 2nd Circuit erred in recognizing a cause of action for a party seeking to avoid arbitration and in concluding that courts have remedial power — untethered to any federal statute and unconstrained by the Supreme Court’s precedents governing the grant of injunctive relief — to issue injunctions against arbitration.”

The Second Circuit’s March 5 unpublished summary order (available at https://bit.ly/3lD1IpA) stands. It affirmed a U.S. District Court order barring U.S. arbitration in the case, deferring instead to the Singapore High Court which had determined that there was no agreement to arbitrate, according to court decisions and papers filed in the case.

The case is six years old. While Big Port took the matter to the nation’s top Court, the parties continued to litigate the costs incurred while the U.S. actions were stayed and the case proceeded in Singapore. 

China Shipping’s request for attorneys fees went to a report and recommendation by a federal judge, which was adopted in August by another New York Southern District federal court judge.  China Shipping sought more than $45,000 in attorneys fees against Big Port, but was awarded just $43.20 in copying and other administrative fees by the report, and the case. See China Shipping Container Lines Co. v. Big Port Service DMCC, 15 Civ. 2006 (AT) (DF) (S.D.N.Y. Aug. 19, 2020) (available at https://bit.ly/36A2Jsi).

The Supreme Court’s Big Port case page, with the cert petition and briefs in the case, is available at https://bit.ly/36yOfJ2.

* * *

The author edits Alternatives to the High Cost of Litigation for CPR.

[END]

Section 1782 Circuit Split Update: 7th Circuit says Law Doesn’t Include Arbitration, as 9th Circuit Hears Arguments

By Joseph Famulari

As the new Supreme Court year has commenced and confirmation hearings for a new justice dominate the legal news this month, federal circuit courts have continued to discuss an arbitration issue getting closer to a Court hearing: Does 28 U.S.C. §1782(a), authorizing “any interested person” in a proceeding before a “foreign or international tribunal” to ask for and receive discovery from a person in the United States, cover private international arbitration tribunals?

There is a lot of activity in this area, including a recently issued Seventh U.S. Circuit Court of Appeals decision; completed arguments in the Ninth Circuit now awaiting decision, and a long-pending Third Circuit appeal.  These are latest additions to the saga concerning an issue once thought to be settled upon more than two decades ago in National Broadcasting Co. v. Bear Stearns & Co., 165 F.3d 184 (2nd Cir. 1999) and reaffirmed in the Fifth Circuit Republic of Kazakhstan v. Biedermann Int’ l, 168 F.3d 880 (5th Cir. 1999).

These cases excluded private arbitration tribunals from §1782 discovery, indicating that a private international arbitration tribunal was not a “foreign or international tribunal” within the statutory framework.

The current state of the §1782 law has produced a federal circuit court split. The Sixth Circuit and Fourth Circuit have issued opposing decisions finding that discovery for foreign arbitral tribunals was permitted in, respectively, In re Application to Obtain Discovery for Use in Foreign Proceedings (Abdul Latif Jameel Transp. Co. v. FedEx Corp.), 939 F.3d 710 (6th Cir. 2019) (available at https://bit.ly/2AFPIB9), and Servotronics Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020) (available at https://bit.ly/3h7s0P8), using the only §1782 case considered by the Supreme Court, Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004) as guidance.

While Intel did not expressly state whether a private international arbitration tribunal would fall under §1782, the late Justice Ruth Bader Ginsberg cited a 1965 Columbia Law Review article written by her former Columbia Law School colleague, Prof. Hans Smit, who participated in the creation of the 1964 update to the law.

The article noted an expanded view of the term “tribunal” in the context of the U.S. Code: “the term ‘tribunal’ includes investigating magistrates, administrative and arbitral tribunals,and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts.” Id. at 248-49 (citing Hans Smit, International Litigation Under the United States Code, 65 Colum. L. Rev. 1015, 1026, n.71 (1965)). For a full discussion, see John B. Pinney, “Will the Supreme Court Take Up Allowing Discovery Under Section 1782 for Private International Arbitrations?” 38 Alternatives 103 (July/August 2020) (available at https://bit.ly/38PDOSk).

More recently after Abdul Latif Jameel and Servotronics, in July, Circuit Judge Debra A. Livingston, writing for a Second Circuit panel, reaffirmed its prior decision that foreign arbitration tribunals do not fall under §1782. In re Application and Petition of Hanwei Gup for an Order to take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. 1782 (Guo v. Deutsche Bank Securities Inc.), No. 19-781, 2020 WL 3816098 (2d Cir. July 8, 2020), as amended (July 9, 2020) (available at https://bit.ly/3j5dUxx);  See also Yixian Sun, “Second Circuit: No U.S. Discovery for Private International Arbitration,” CPR Speaks blog (July 14) (available at https://bit.ly/2PtNSra)  for more on the Second Circuit decision.

Event more recently, the Seventh Circuit provided further guidance in another Servotronics case involving the same parties as the Fourth Circuit. Chief Judge Diane S. Sykes, writing for a unanimous panel, wrote that §1782 does not authorize the district court to compel discovery for use in a private foreign arbitration. Servotronics Inc. v. Rolls Royce PLC, No. 19-1847 2020 U.S. App. (7th Cir. Sept. 22, 2020) (available at https://bit.ly/3dpNyF4).  

As noted, it’s the second federal circuit court decision in the same case in six months—again, Servotronics Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020) (available at https://bit.ly/3h7s0P8)–which held that §1782’s phrase “foreign and international tribunals” included private international arbitral tribunals. Last month’s Seventh Circuit decision reached the opposite conclusion.

In the Seventh Circuit case, after a $12 million settlement between Rolls-Royce and Boeing, arising from damages due to a faulty valve, Rolls-Royce sought indemnification from Servotronics Inc., the valve manufacturer. Id.at 2. Due to an agreement between the companies, the dispute was set for arbitration in Birmingham, England, under the rules of the Chartered Institute of Arbiters. 

During the proceedings, Servotronics invoked §1782 and filed an ex parte application in the Illinois Northern U.S. District Court, asking the court to issue a subpoena compelling Boeing to produce documents for use in the arbitration. Rolls-Royce and Boeing intervened to quash the initially granted subpoena; Servotronics appealed, prompting review from the court. Id.

Chief Judge Sykes laid out multiple reasons for the court’s conclusion. First, the panel assessed whether looking at the various definitions of the word “tribunal” could guide the understanding of the phrase “foreign or international tribunal” as meaning only state-sponsored tribunals, or also include private arbitration panels. Id. at 9. Due to the plausibility of both interpretations, however, the court found assessing dictionary definitions inconclusive. 

Sykes then assessed the word “tribunal” within its statutory §1782 context and noted that the term’s more expansive reading “becomes far less plausible.”  The court looked at the 1958 statutory charge from the Commission on International Rules of Judicial Procedure, the proposal that sparked the 1964 change in §1782. Chief Judge Sykes noted the absence of any instruction to study and recommend improvements in judicial assistance to private arbitration. 

Additionally, when looking at the statutory context, the court assessed the other statutes the 1964 legislation revised besides §1782: 28 U.S.C. §1696, on service of process in foreign litigation and §1781, regarding letters rogatory. The court looked at the phrase “foreign or international tribunal” within those other statutes, which address comity matters between governments.  The opinion states that in the context of those laws, the phrase “means state-sponsored tribunals and does not include private arbitration panels.” Id.at 12.

When looking at the phrase, it appears three times during §1782:

  1. authorizing the district court to order discovery “for use in a proceeding in a foreign or international tribunal.”
  2. Authorizing the court to act on a letter rogatory issued by “a foreign or international tribunal,” and
  3. Where the statute provides that the court’s discovery order “may prescribe the practice and procedure, which may be in whole or part the practice and procedure of the foreign country or international tribunal.” [Emphasis is the court’s.]

The court uses this context to conclude that a limited, governmental-based definition of “foreign tribunal” is likely the intended meaning.

Next, the court addressed how a narrow understanding of the word “tribunal” avoids a severe conflict with the Federal Arbitration Act. The FAA permits the arbitration panel, but not the parties, to summon witnesses before the panel to testify and produce documents and petition the district court to enforce the summons. The opinion lays out how if §1782 were construed to permit federal courts to provide discovery assistance in private foreign arbitrations, then litigants in foreign arbitrations would have access to much more expansive discovery than litigants in domestic arbitrations. 

Finally, Chief Judge Sykes discussed the Intel and the Servotronics courts’ reliance on the reference to Hans Smit’s law review article. She explains that there is no indication that the phrase “arbitral tribunals” includes private tribunals, but even if there were, there is “no reason to believe” that the Supreme Court, “by quoting a law-review article in a passing parenthetical, was signaling its view that §1782(a) authorizes district courts to provide discovery assistance in private foreign arbitrations.” 

* * *

In a recent article, author John Pinney, a senior trial lawyer at Cincinnati’s Graydon law firm, noted that he believes a Seventh Circuit decision in line with the Second and Fifth Circuit courts would increase the likelihood of Supreme Court review for two reasons:

  1. It would create a direct circuit split between the Fourth and Seventh Circuits in the very same case; and
  2. It would mean that Servotronics, as the loser in the Seventh Circuit case, likely would then take that case to the Supreme Court even if the South Carolina district court in the Fourth Circuit dismissed its §1782 proceeding.

John B. Pinney, “Update: The Section 1782 Conflict Intensifies as the International Arbitration Issue Goes to the Supreme Court.” 38 Alternatives 125 (September 2020) (available at https://bit.ly/3k0eNIR).

Servotronics is considering a rehearing or appeal to the U.S. Supreme Court. In an email, Pinney explains that time for filing a certiorari petition for the Second Circuit’s Guo case and the Seventh Circuit version of the Servotronics case “remains open.”

Pinney notes that under the Supreme Court’s Covid-19 order, the deadline for all certiorari petitions has been extended to 150 days from 90 days. It is unknown how long this extension will last but, Pinney notes, for the purposes of the current rule, the Second Circuit’s Guo decision was issued on July 8 and was revised a day later. “Accordingly,” notes Pinney, “the last date for the filing for certiorari is Monday, Dec. 7, 2020.”

Pinney adds that an arbitration award was expected to be issued in August, and it’s likely the case is moot, dampening cert prospects.

With similar math, Pinney says that the Seventh Circuit’s Servotronics case deadline for a cert filing is Feb. 19, 2021. 

* * *

While the Seventh Circuit joined the Fifth and Second Circuits, the Ninth Circuit is still making its determination on §1782 after hearing arguments on Sept. 14 in HRC-Hainan Holding Co. L.L.C. v. Yihan Hu, No. 20-15371 (video of the arguments is available at https://bit.ly/34V2p6A).

During the arguments last month, both parties explained the importance of the Ninth Circuit ruling on this issue given the circuit split and the likelihood of the issue coming up again in a similar suit between the parties.

Katherine Burghardt Kramer, arguing for the appellant, Yihan Hu, claimed that the phrase “foreign and international tribunal” is ambiguous within the context of §1782. She argued that while the phrase “tribunal” could be interpreted as including arbitration, it also could be interpreted as excluding it. 

Circuit Judge Michelle T. Friedland inquired whether the legislative history should be looked at by the panel. Kramer, a partner in New York’s DGW Kramer LLP, responded that inference from silence could be drawn. She asked that if Congress had intended the 1964 amendment to expand the scope to private arbitration, why wasn’t it mentioned? 

Circuit Judge Paul J. Watford asked why the statute should not include private arbitration. Katherine Kramer explained that the mandate told Congress to look at courts and quasi-judicial agencies. Because arbitration is a “privately constituted body that hears your disputes and then disbands,” it is different from a government-sanctioned court or quasi-judicial agency, she argued.

Watford asked why the court should not view these arbitrations as adjuncts of the countries’ established court systems. He acknowledged it was not a direct relationship, but that these arbitrations provide an auxiliary role, and that he assumes that China, the international venue in question, likely has similar mechanisms.

Attorney Kramer disagreed with linking arbitration to judicial systems, and discussed the finality of arbitrations–that there is no way to remedy a bad decision on the merits within the court system.

Circuit Judge Eric D. Miller also highlighted the relevance of §1781, where, according to Katherine Kramer, the phrase “foreign or international tribunal . . . would not make sense” if it included private arbitrations, creating an implication of governmental involvement. 

Grant Kim, arguing for the appellee, HRC-Hainan Holding, looked at the historical context of the 1964 amendment. He said that in 1958, when the international commission mandate came out, the United States “was just entering the world stage,” coupled with an increase in businesses investing overseas. Kim claims that the government had an incentive to modernize its ability to cope with this expansion of international business activity.

He said that the mandate focused on the private activities of U.S. citizens doing business abroad and that there should be no doubt international arbitrations are a part of this. People would not be investing in China if there was no sound system like CIETAC to handle disputes, highlighting the importance of private arbitrations. 

CIETAC is the China International Economic and Trade Arbitration Commission, which was conducting the arbitration in the case.

While Kim, a partner in the LimNexus law firm in San Francisco, admitted that the statute does not expressly include or exclude private international arbitrations as a “foreign or international tribunal,” he notes the old version of §1782 had language that said, “that is established pursuant to an agreement between the United States and a foreign government.” Kim explained that the statute already had an exemplar but dropped it. He claimed this is the most compelling piece of legislative history there is. 

Judge Watford asked Kim about the context of “foreign or international tribunal” within §1781. Kim noted that terms may have different meanings within different statutes. He also noted the judicial usage of the phrase has not suggested that tribunal can only mean court. 

When speaking on policy, Kim argued it would be a strong position to promote arbitration in this way. He explained that §1782 is typically used for third parties outside of the United States, and the tribunal will likely not have jurisdiction, so assisting in discovery with the U.S. statute would be especially crucial to fair results and efficiency. Ultimately, Kim argued that judges and arbitral tribunals’ discretion should be trusted to handle the process and streamline where they can. 

Both arguments make excellent points, and time will tell where the Ninth Circuit court falls on this issue. A few things are clear beyond the ambiguities in the term “tribunal,” including its context within §1782, and what Intel sought to achieve by referencing Smit’s article, which has been interpreted differently between the Circuit Courts.  Supreme Court clarification on §1782 is much needed, so neutrals, stakeholders, and parties within arbitrations can best prepare themselves and adapt to potential changes in the discovery process that may be looming. 

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Finally, another §1782 case, EWG Gasspeicher GMBH v. Halliburton Co., Case No. 20‐1830, is on appeal but has not yet been taken up by the Third Circuit.  A Notice of Appeal was filed on April 16, 2020, after a March 17 decision (available at https://bit.ly/309GCYb), by Delaware U.S. District Court Judge Richard G. Andrews, who denied §1782 application for use in an arbitration under the German Arbitration Institute (DIA) rules.

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The author, a CPR Institute Fall 2020 intern, is a second-year law student at Brooklyn Law School.

[END]

The Nominee and ADR: Circuit Judge Barrett on Arbitration

By Alice Albl

Seventh U.S. Circuit Court of Appeals Judge Amy Coney Barrett, whose nomination hearings before the Senate Judiciary Committee concluded last week, was on the federal circuit court based in South Bend, Ind., for less than three years before being nominated by President Trump for the Supreme Court on Sept. 26.

This small window has not allowed much time for alternative dispute resolution decisions. There are five opinions involving ADR in which Circuit Judge Barrett participated, four authored by the nominee and one on which she served as a panelist. The cases primarily are centered around employment law.

Barrett is a prolific academic, having written extensively about civil procedure, legal construction, evidence rules, and constitutional originalism over her 23-year career. She has taught at her alma mater, Notre Dame Law School, since 2002. See her University of Notre Dame Faculty Directory page at https://bit.ly/34WMa9h.

Barrett did not mention any work focused on ADR in her self-reported “Questionnaire for Nominee to the Supreme Court” to the U.S. Senate. The questionnaire is posted on the Senate Judiciary Committee’s website at https://bit.ly/3jdqBX1.  

Barrett has given several presentations on her time clerking for the late Justice Antonin Scalia. Her style echoes Scalia’s by favoring a narrow, textualist interpretation of the law. See Imre Szalai, “Judge Amy Coney Barrett & the FAA – A Disciple of Scalia,” Outsourcing Justice blog (Setp. 27) (available at https://bit.ly/2H2hb3K). 

On ADR issues, Barrett also has followed in Scalia’s footsteps by demonstrating a distaste for class actions. But she apparently does not share Justice Scalia’s strong views on the progress of ADR. See George H. Friedman, Securities Arbitration Alert blog (Oct. 1) (available at https://bit.ly/3k8QKYc) (in which Friedman covers the cases here and adds discussion of a Legaspy v. FINRA, No. 1:20-cv-04700, in which Barrett joined a panel denying a motion for a temporary restraining order to stop a pandemic-era video arbitration.)

Apart from her ruling in Herrington v. Waterstone Mortgage Corp. (see below), mirroring Scalia’s perspective on class-action suits, Circuit Judge Barrett’s ADR opinions have been filtered through analyses of civil procedure, textualism, and the rules of evidence. Id. All three are topics heavily present in Barrett’s academic writing. See the Senate link above.

The following is an overview of the five ADR-related decisions in which Circuit Judge Amy Coney Barrett participated, four written by the nominee, and one for which she served as a panelist:

  1. Wallace v. Grubhub Holdings Inc., 970 F.3d 798 (7th Cir. 2020) (available at https://bit.ly/33MvFwX).   

In organizing a class-action suit against defendant Grubhub for an alleged violation of the Fair Labor Standards Act–referred to in this post as the FLSA–plaintiff Wallace had to contend with the fact that all members of the class had signed an agreement to settle disputes with the defendant through arbitration.

Wallace requested to have the class recognized as exempt from arbitration under FAA Section 1, normally reserved for interstate transportation workers, because the class members transported food that generally included ingredients brought across state lines. The plaintiff said that the residual clause in the Section 1 exception, “any other class of workers engaged in foreign or interstate commerce,” applied.

The plaintiff’s request was denied by the lower court. In her Seventh Circuit opinion, Barrett similarly rejected the designation. This firmly placed the Seventh Circuit on one side of a debate about the scope of Section 1 as it applies to workers and interstate commerce. See, e.g., Michael S. Kun, “Ninth Circuit Conclusion that Amazon Delivery Drivers Don’t Need to Arbitrate their Claims under FAA’s ‘Transportation Worker’ Exemption Highlights Conflict among Courts,” Wage and Hour Defense Blog Epstein Becker Green (Aug. 24) (available at https://bit.ly/37hpza1), and Kris Olson, “FAA exemption extend to ‘last mile’ drivers,” New England In-House blog (Aug. 24) (available at https://bit.ly/3lZLYNm).

This issue involves the Supreme Court’s decision in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) (available at https://bit.ly/2HhwYLu), which stated that the Section 1 phrasing—“…nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce”–should only be applicable for “transportation workers,” but left the meaning of “transportation workers” open to interpretation.

The Grubhub delivery workers in the case contested that they were independent contractors, and contended they are employees, in suits around the country.

Some courts have allowed the breadth of “transportation workers” to expand through comparison with the FLSA’s use of the term, or a historical analysis.  See, e.g., Waithaka v. Amazon.com, Inc., 966 F.3d 10 (1st Cir. 2020); Rittman v. Amazon.com, Inc., 971 F.3d 904 (9th Cir. 2020). Circuit Judge Barrett wielded textualism to create a test featuring a narrower version of the term.

Her analysis began with the interpretative canon ejusdem generis as defined by Justice Scalia in his book on statutory interpretation. Antonin Scalia, Reading Law: The Interpretation of Legal Texts 199 (2012) (“Where general words follow an enumeration of two or more things, they apply only to persons or things of the same general kind or class specifically mentioned.”) The canon states that generic terms at the end of lists including specific items should be interpreted to only include things similar to the specific items.

While other courts used ejusdem generis to allow FAA Sec. 1 language to include any workers involved in the “flow” of interstate commerce (see Rittman above), Circuit Judge Barrett tested for whether interstate commerce was a “central part of the class members’ job description.”

The plaintiff’s class did not pass the test, and the exception to arbitration under the FAA did not apply. According to Barrett, even though GrubHub workers delivered goods from other states, or even countries, that interstate aspect was characteristic of the goods and not the role served by the worker. This made them unlike railroad workers and seamen whose jobs focused on “the channels of commerce.”

Barrett distinguished the earlier New Prime Inc. v. Oliveira, 139 S.Ct. 532 (2019) (holding that an independent contractor’s contract is a “’contract of employment’ within the FAA Sec. 1 language that excepts such contracts from FAA application), which involved goods in interstate commerce. She wrote that the New Prime distinction between independent contractors and employees wasn’t a part of the case.

Author George Friedman noted last week that Wallace came up at Circuit Judge Barrett’s confirmation hearings.  See his account at “No Surprise Here: Arbitration Comes Up At Coney Barrett Confirmation Hearings,” Securities Arbitration Alert (Oct. 16) (available at https://bit.ly/37gsm3d).

Barrett sat on a panel that issued an opinion on giving notice to employees for a collective-action suit under the FLSA. The panel wrote that when a court considered allowing employees to opt-in to a collective-action FLSA suit, it was the defendant employer’s burden to prove whether those employees were ineligible or already bound to arbitration.

In this case, the plaintiff-employee Bigger brought an action against the defendant-employer Facebook. She alleged that the company should have paid overtime to her position and another, similar role. The plaintiff asked the lower court for authorization to form a collective-action suit. Notice of the suit was to be sent to every individual in the United States who worked in either of the roles. The lower court granted this authorization.

Facebook appealed to the Seventh Circuit, saying the court had erred because most would-be plaintiff employees had already entered arbitration agreements precluding litigation, so giving them notice about the suit would be misinformation. The defendant further argued that an inflated number of employees attempting to enter the collective-action suit would create undue pressure for a settlement.

The Seventh Circuit panel acknowledged the logic of the defendant’s argument but declined its request to deny plaintiff Bigger authorization for the formation of a collective action. Instead, the panel created a set of instructions. After a plaintiff had contested the existence of applicable arbitration agreements, it was the defendant’s responsibility to demonstrate that these agreements not only existed but precluded entrance into the collective action. Proof had to be given for every individual who would be precluded and not receive notice about the collective-action suit.

“Specifically, the court on remand should allow the parties to submit additional evidence on the existence of valid arbitration agreements between Facebook and proposed notice recipients,” wrote Circuit Judge Michael S. Kanne, joined by Supreme Court nominee Barrett and Seventh Circuit Chief Judge Diane P. Wood, adding, “If Facebook proves that certain proposed recipients entered valid arbitration agreements waiving their right to join the action, or if Bigger does not contest that those employees entered such agreements, the court may not authorize notice to those employees.”

In reviewing the enforcement order of a $10 million-plus arbitration award for employees, Circuit Judge Barrett vacated the award entirely. She held for a unanimous panel that “the availability of class or collective arbitration is a threshold question of arbitrability” and therefore, goes to the court, not the arbitrator. In the case, the arbitrator had allowed the plaintiff to pursue a collective action but, as stated in Barrett’s opinion, only the court had the authority to make such a decision.

The defendant argued that, even with the waiver struck, it only agreed to bilateral arbitration, with no consent given to class- or collective-action. Instead, the arbitrator used the rules chosen by the parties to control their arbitration proceedings to justify permitting the plaintiff’s class/collective-action suit. 

Plaintiff Harrington contested the validity of the agreement to arbitrate that she had signed with defendant Waterstone. While the lower court determined that the agreement was valid, it struck a waiver in the contract that barred others from joining the suit. The court gave an order to the arbitrator that the plaintiff “must be allowed to join other employees to her case.” The arbitrator then allowed the plaintiff to proceed with a collective action, in which employees could opt into the matter.

Barrett disagreed with the move. Allowing a class/collective-action was a question of “arbitrability” that bore upon the fundamental terms and legal validity of the arbitration, and was reserved for the court. Although the Seventh Circuit had not previously recognized the authorization of collective action as a question of arbitrability, identifying it this way fell in line with every other circuit court to decide on the matter. See, e.g., Del Webb Communities Inc. v. Carlson, 817 F.3d 867, 877 (4th Cir. 2016), and  Reed Elsevier, Inc. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013), among others Barrett cites. 

According to Circuit Judge Barrett, “The availability of class or collective arbitration involves a foundational question of arbitrability: whether the potential parties to the arbitration agreed to arbitrate.” She noted that decisions on class/collective-action suits were questions of arbitrability in three different ways. First, they affected who would participate in an arbitration. Second, they affected the scope of an arbitration. Third, these decisions affected the structure of an arbitration. 

The late Justice Antonin Scalia had strong opinions on how class-collective-suits affect the structure of an arbitration, and Barrett devoted most of her attention to this factor. Citing heavily Scalia’s AT&T Mobility LLC v. Concepcion opinion, Barrett reiterated her mentor’s viewpoint, stating that the structural shifts caused by switching to class/collective-action gives up the advantage of informality in an arbitration. AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). She described this as “reduced efficiency.” 

Barrett concluded her analysis of the structural aspect of class/collective-action arbitration by referencing another Scalia misgiving, that the finality of arbitration increases the risk for defendants when facing potentially thousands of plaintiffs in class/collective-suits. Barrett projected the risk of this finality onto arbitration as a whole, an association that Prof. Szalai of Loyola Law School found contentious.

In his blog, “Outsourcing Justice,” linked above, Szalai wrote that Barrett’s arbitration view would be in good company among the conservative justices of the Supreme Court, saying that, overall, the Court’s arbitration decisions have been critiqued as reflecting “an overly-simplistic manner [that] tend to conceptualize arbitration as a homogeneous process, and they sometimes have flawed assumptions or preconceived notions regarding arbitration.“

Nevertheless, plaintiff Herrington’s case was allowed to continue.  Barrett remanded the case on behalf of the appellate panel to the district court, rather than the arbitrator, to evaluate whether Herrington’s contract with Waterstone permitted class or collective arbitration.

  • Webb v. Financial Industry Regulatory Authority Inc., 889 F.3d 853 (7th Cir. 2018), (available at https://bit.ly/3iNuh1l).

In writing for the court, Barrett declined to consider the applicability of arbitral immunity. Instead, she determined that the lower court had erred in allowing the case to be heard at all, because it was not within federal jurisdiction.

Plaintiff Webb and a colleague filed suit when a dispute with their former employer could not be resolved in defendant FINRA’s arbitration forum after two-and-a-half years.

The plaintiffs sought damages “in excess of $50,000” in Illinois state court, alleging that the defendant had mismanaged the arbitration—”including failing  to  properly  train  arbitrators,  failing  to  provide  arbitrators  with  appropriate  procedural  mechanisms,  interfering  with  the  arbitrators’  discretion,  and  failing  to  permit  reasonable  discovery.”

The defendant responded by removing to federal court, then moving to have the case dismissed on multiple grounds, including arbitral immunity. This doctrine protects arbitrators from civil liability when performing their duties as neutrals. The lower court decided that the doctrine was applicable and granted the defendant’s motion. Webb v. Fin. Indus. Regulatory Auth., Inc., No. 16-CV-04664 (N.D. Ill.  2017), vacated, 889 F.3d 853 (7th Cir. 2018). The plaintiffs appealed to the Seventh Circuit.

Barrett declined to apply arbitral immunity, but found that the lower court had erred in allowing the case to be heard at all. The damages the plaintiffs sought either could not be recovered under controlling Illinois law, or did not meet the $75,000 minimum amount necessary to grant federal jurisdiction.

The defendant argued that federal jurisdiction was valid because its U.S. Securities and Exchange Commission-approved Code of Arbitration Procedure was involved in the suit. Barrett rebuffed this by echoing the Supreme Court’s rulings in Grable & Sons Metal Products, Inc. v. Darue Engineering  &  Manufacturing,  545  U.S.  308  (2005) and Merrill  Lynch,  Pierce,  Fenner  &  Smith  v.  Manning,  136  S.  Ct.  1562,  1566  (2016), noting that one party having a “federal role” did not necessarily make a case eligible for federal court consideration.

Defendant WeConnect appealed after the lower court stated that it was not a party to plaintiff Goplin’s arbitration agreement. The agreement compelled the plaintiff to arbitrate with another entity, AEI, and not the defendant.

Although defendant WeConnect’s website stated that AEI was a separate entity, it claimed through an employee affidavit that AEI was actually the defendant’s former name. It further asserted that the lower court was mistaken in considering the website, violating rules of judicial notice by performing its own research.

With a short opinion focused on this evidence issue, Circuit Judge Barrett affirmed the lower court determination. The plaintiff had referenced the website in a brief to the court along with several other examples that provided a more convincing case than the defendant’s single affidavit about a human resources document. The defendant had conclusively portrayed itself as separate from the entity mentioned in plaintiff Goplin’s arbitration agreement.

In reporting Goplin, George Friedman of the Securities Arbitration Alert blog noted that Circuit Judge Barrett maintained a narrow focus on the evidentiary issue, and not on arbitration law. See Friedman’s Oct. 1 blog post linked above.

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The author, a CPR Institute Fall 2020 intern, is a second-year student at Brooklyn Law School in New York.