UPDATED/No Class: Supreme Court Reverses Ninth Circuit On State Law Over FAA

By Echo K.X. Wang and Russ Bleemer

The U.S. Supreme Court this morning re-affirmed that if parties want class arbitration, they need to contract for it.  Specifically.

The Court today issued a long-anticipated opinion for Lamp Plus Inc. v. Varela, No. 17-988 (April 24) (available on the Court’s website at The decision is available on the Supreme Court website at http://bit.ly/2GxwFbC), holding that as a “fundamental arbitration” question, ambiguity in a contract “cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.”

The 5-4 decision by Chief Justice John G. Roberts Jr. reverses a Ninth U.S. Circuit Court of Appeals decision that used a California state law interpretation to allow a class arbitration.  The divided appellate panel opinion inferred mutual assent to class arbitration from language in the parties’ agreement.

But the statutory interpretation principle deployed by the appeals court, relying on public policy, was rejected. “[C]lass arbitration, to the extent it is manufactured by [state law] rather than consen[t], is inconsistent with the FAA,” wrote Roberts, adding,

We recently reiterated that courts may not rely on state contract principles to ‘reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.’ . . . . But that is precisely what the court below did, requiring class arbitration on the basis of a doctrine that ‘does not help to determine the meaning that the two parties gave to the words, or even the meaning that a reasonable person would have given to the language used.’ 3 Corbin, Contracts §559, at 269–270. Such an approach is flatly inconsistent with “the foundational FAA principle that arbitration is a matter of consent.  . . .

In that key passage, Roberts cited three seminal class arbitration cases to back up his point: AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011) (available at https://bit.ly/2KJc8RE), Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) (available at https://bit.ly/2rWzAE8), and on the last point, the key Court case rejecting class arbitration unless it was permitted in the parties’ contract, Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010) (available at http://bit.ly/2Pp3Jq4).

The chief justice began and ended the opinion emphasizing Stolt-Nielsen.

Today’s Lamps Plus decision demonstrates the court’s profound conservative-liberal split. There are four dissents—the first by Justice Ruth Bader Ginsburg, joined by Justices Stephen G. Breyer and Sonia Sotomayor; two solo dissents by Breyer and Sotomayor, and the last by Justice Elena Kagan, joined by Breyer and Ginsburg, and, for one part of the opinion, Sotomayor.

Kagan’s 14-page opinion, the longest of the dissents, rejects the Court’s Stolt-Nielsen backing and suggests it’s a screen for the majority’s own preferences. She writes that the Lamps Plus holding “is rooted instead in the majority’s belief that class arbitration ‘undermine[s] the central benefits of arbitration itself.’ But that policy view—of a piece with the majority’s ideas about class litigation—cannot justify displacing generally applicable state law about how to interpret ambiguous contracts.” [Citations omitted.]

Kagan writes that the Ninth Circuit applied a neutral interpretation rule in dealing with an ambiguity.

But Roberts rejected her reasoning in the majority opinion, the only dissent discussed beyond the footnotes in his majority opinion.  He cites AT&T Mobility for the principle that the interpretation “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  He states that the same rule applies in Lamps Plus: “[The] rule cannot be applied to impose class arbitration in the absence of the parties’ consent.”

Roberts continues:

Our opinion today is far from the watershed Justice Kagan claims it to be. Rather, it is consistent with a long line of cases holding that the FAA provides the default rule for resolving certain ambiguities in arbitration agreements. For example, we have repeatedly held that ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration. See, e.g., [Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614 (1985 (available at http://bit.ly/2VmubpU); Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1, 24–25 (1983) (available at http://bit.ly/2VhK0OE)%5D. In those cases, we did not seek to resolve the ambiguity by asking who drafted the agreement. Instead, we held that the FAA itself provided the rule. As in those cases, the FAA provides the default rule for resolving ambiguity here.

Justice Clarence Thomas wrote a separate concurrence noting that he remains skeptical of the Court’s use of the Federal Arbitration Act to preempt state law, but concurs in the majority opinion because of its backing of the Epic Systems and AT&T Mobility precedents.

* * *

 

Lamps Plus, the last of three arbitration cases to be decided in the Court’s current term, resolves a circuit splits between the Ninth and the Sixth, Third and Fifth Circuits on whether an arbitration agreement can be read to permit class wide arbitration where the agreement is silent on the matter. Compare, e.g., AlixPartne LLP v. Brewington, 836 F.3d 543, 547 (6th Cir. 2016), with Varela v. Lamps Plus Inc., No. 16-56085, 701 F. App’x 670, 673 (9th Cir. 2017)(unpublished)(available at http://bit.ly/2W66tv1), cert. granted, 138 S. Ct. 1697 (2018).

The case marks a return to a class arbitration issue after the Court’s first two 2018-2019 cases were mostly focused on other Federal Arbitration Act areas.  Both were decided in January:

  • Henry Schein v. Archer & White Sales, 139 S.Ct. 524 (Jan, 8, 2019) (available at https://bit.ly/2CXAgPw), mandating that arbitrators, rather than the courts, decide whether a case should be arbitrated in the face of an allegation that an argument for arbitration is “wholly groundless,” and
  • New Prime v. Oliveira, No. 17–340 (Jan. 15) (available at https://bit.ly/2JnrFWf), which enforced an FAA exclusion from arbitration a pre-dispute agreement with independent contractors who work in interstate transportation.

The Lamps Plus issue was “[w]hether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”

In its statement on the question presented, the Court invoked its best-known class arbitration case, Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., which it noted held that a court could not order arbitration to proceed using class procedures unless there was a “contractual basis” for concluding that the parties have “agreed to” class arbitration. 559 U.S. at 684. The Court’s introduction to the Lamps Plus issue explained that courts may not “presume” such consent from “mere silence on the issue of class arbitration” or “from the fact of the parties’ agreement to arbitrate.” Id. at 685, 687.

That presumption carried today’s opinion, which focused on arbitration agreement ambiguity, rather than silence. The Ninth Circuit majority had inferred mutual assent to class arbitration, according to Lamps Plus’s court papers, from language stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings” and a description of the substantive claims subject to arbitration.

Plaintiff Frank Varela, filed suit in 2016 against his employer, Lamp Plus Inc., a Chatsworth, Calif., home lighting retailer. Varela, who had worked at the company for nine years, has signed documents as a condition of his employment, including an arbitration agreement.  He also provided personal information to Lamp Plus prior to starting his job.

In March 2016, Lamp Plus was subject to a phish scam attack, resulting in sensitive personal information, such as employee tax forms for 1,300 Lamp Plus current and former employees, to be sent to a third party. As a result of the breach, Varela’s 2015 income tax was fraudulently filed with the stolen information.

Varela initiated a class action suit in California’s Central District state court on behalf of current and former employees affected by the breach, asserting both statutory and common law claims for the data breach, negligence, contract breach, and invasion of privacy. Lamp Plus moved to compel individual arbitration.

The court interpreted the contract under California state law and granted Lamp Plus’s motion compel to arbitration. The court, however, found ambiguities about whether class arbitration is permissible under the employer-drafted agreement. Varela v. Lamp Plus Inc., 2016 WL 9110161, at *7 (C.D. Cal. July 7, 2016), aff’d, No. 16-56085, 701 F. App’x 670, 673 (9th Cir. 2017)(unpublished)(available at http://bit.ly/2W66tv1).

Lamp Plus argued that the arbitration should be compelled on an individual basis, because since the agreement does not mention class arbitration, there was “no contractual basis for finding that the parties intended to arbitrate on a class-wide basis.” Id. at *6. Relying on Stolt-Nielsen, Lamp Plus contended that if an arbitration clause is “silent” as to class arbitration, that parties cannot be compelled to submit their disputes to class arbitration. Id.

The district court rejected this argument. The district court distinguished the case from Stolt-Nielsen by interpreting the “silence” in Stolt-Nielsen to mean an “absence of agreement” rather than the absence of language within an agreement that explicitly refers to class arbitration (“The lack of an explicit mention of class arbitration does not constitute the ‘silence’ contemplated in Stolt-Nielsen, as the parties did not affirmatively agree to a waiver of class claims in arbitration.”) Lamp Plus, 2016 WL 9110161, at *7.

The court then found that the arbitration agreement was ambiguous as to the class claim, and interpreted the ambiguity against the contract drafter, noting that “the drafter of an adhesion contract must be held responsible for any ambiguity in the agreement”. Lamp Plus, 2016 WL 9110161, at *7 (citing Jacobs v. Fire Ins. Exch., 36 Cali. App. 4th 1258, 1281 (1995)).  Accordingly, the district court granted Lamp Post’s motion to compel arbitration, but compelled arbitration on a class-wide basis rather than an individual basis.

Lamp Plus appealed to the Ninth U.S. Circuit Court of Appeals. Before a panel of Senior Circuit Judge Ferdinand F. Fernandez, Circuit Judge Kim M. Wardlaw, and the late Circuit Judge Stephen Reinhardt, Lamps Plus argued that the parties did not intend to permit class arbitration.

In an unpublished opinion, the Circuit court affirmed the district court decision authorizing class proceedings. Varela v. Lamps Plus Inc., No. 16-56085, 701 F. App’x 670, 673 (9th Cir. 2017)(unpublished)(available at http://bit.ly/2W66tv1). Judge Fernandez authored a short dissenting opinion, in which he opined that the majority opinion as a “palpable evasion of Stolt-Nielsen.”  Id.

Lamp Plus then petitioned and was granted certiorari at the Supreme Court. Oral argument was heard on Oct. 29, 2018 (a transcript of the oral argument is available at https://bit.ly/2FukX2d).

Between the grant of certiorari and the oral argument, several organizations filed amicus curiae briefs to the Supreme Court in favor of reversing the Ninth Circuit decision, including the U.S. Chamber of Commerce, the New England Legal Foundation, the Retail Litigation Center, Inc., the Voice of the Defense Bar, and the Center for Workplace Compliance. Friend-of-the-court briefs in favor of Respondent Varela were filed by a group of contract law scholars, and the American Association for Justice. The amicus curiae briefs can be accessed from https://bit.ly/2Ojt44n.

* * *

In his brief 13-page majority opinion, Chief Justice Roberts first disposes of a late-in-the-litigation motion Varela challenging both the Ninth Circuit’s and the Supreme Court’s jurisdiction over the case. The opinion states that the determination of class over individual arbitration affects a fundamental characteristic of arbitration, and the result did not provide the defense what it sought—therefore, a final and appealable decision.

The meat of the majority opinion was reserved for the Ninth Circuit’s examination of California state law, which allowed for the class arbitration determination. It accepted the lower court’s state law “interpretation and application” that the agreement “should be regarded as ambiguous.”

But ambiguity from the state law statute wasn’t enough—“a conclusion,” Roberts writes, “that follows directly from our decision in Stolt-Nielsen.” He continues:

Class arbitration is not only markedly different from the “traditional individualized arbitration” contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration. [Citing Epic Systems and Stolt-Nielsen.] The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.

Roberts notes that in carrying out the parties’ arbitration contracting wishes and intent, courts must “recognize the ‘fundamental’ difference between class arbitration and the individualized form of arbitration envisioned by the FAA,” again citing Epic Systems, AT&T Mobility and Stolt-Nielsen.  Noting that class arbitration lacks the benefits of lower costs, greater efficiency and speed—“‘crucial differences’ between individual and class arbitration”—mutual consent is needed.

The opinion states that Stolt-Nielsen’s reasoning on silence being insufficient to infer class arbitration applies to ambiguity, too. “This conclusion aligns with our refusal to infer consent when it comes to other fundamental arbitration questions,” Roberts writes.

The chief justice explains that the Ninth’s Circuit’s use of the contra proferentem doctrine—construe the ambiguous document against the drafter—produced the result in favor of class arbitration. But the doctrine should only be invoked where “a court determines that it cannot discern the intent of the parties.” (The emphasis is Roberts’.)

Class arbitration provided by state law, explains Roberts, is inconsistent with the Federal Arbitration Act. “The general contra proferentem rule cannot be applied to impose class arbitration in the absence of the parties’ consent,” the chief justice concludes.

* * *

In addition to Justice Thomas’s concurrence, and Justice Kagan’s dissent, Justice Ruth Bader Ginsburg joined Kagan’s opinion but writes separately “to emphasize once again how treacherously the Court has strayed from the principle that ‘arbitration is a matter of consent, not coercion,’” also citing to Stolt-Nielsen at 681.

Decrying the Court’s use of mandatory arbitration in consumer disputes, Ginsburg says that the majority’s Lamps Plus decision “underscores the irony of invoking ‘the first principle’ that “arbitration is strictly a matter of consent,” citing to the majority opinion.

Invoking her own dissents in three cases, among others, Ginsburg concludes that “mandatory individual arbitration continues to thwart ‘effective access to justice’ for those encountering diverse violations of their legal rights,” and repeats her Epic Systems dissent calling on Congress to intervene.

* * *

Justice Stephen G. Breyer joined in the Kagan and Ginsburg dissents, but also provides a nine-page analysis disputing the Court’s quick work on the jurisdiction question.

Breyer writes that the case should be arbitrated as determined by the California courts. “[T]he appellate scheme of the FAA reflects Congress’ policy decision that, if a district court determines that arbitration of a claim is called for, there should be no appellate interference with the arbitral process unless and until that process has run its course,” he writes.

Breyer notes later that Lamps Plus successfully obtained appellate review by “transform[ing]” an interlocutory order in a final decision.

* * *

Justice Sonia Sotomayor also joined Justices Ginsburg’s and Kagan’s separate dissents, but added her view that the Court’s class arbitration view is, at best, highly confused.  She began:

This Court went wrong years ago in concluding that a “shift from bilateral arbitration to class-action arbitration” imposes such “fundamental changes,” Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662, 686 (2010), that class-action arbitration “is not arbitration as envisioned by the” Federal Arbitration Act (FAA), AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 351 (2011). See, e.g., id., at 362–365 (Breyer, J., dissenting). A class action is simply “a procedural device” that allows multiple plaintiffs to aggregate their claims, 1 W. Rubenstein, Newberg on Class Actions § 1:1 (5th ed. 2011), “[f]or convenience . . . and to prevent a failure of justice,” Supreme Tribe of Ben-Hur v. Cauble, 255 U. S. 356, 363 (1921).

Sotomayor says that the FAA should not preempt a “neutral principle of state contract law,” at least not in this instance. She concludes, “[T]he majority today invades California contract law without pausing to address whether its incursion is necessary. Such haste is as ill-advised as the new federal common law of arbitration contracts it has begotten.”

 

* * *

Wang was a Spring 2019 CPR Institute intern, and a student at Brooklyn Law School. Bleemer edits Alternatives, which the CPR Institute publishes. See altnewsletter.com.

 

“Arbitration in America” – A Summary of the Senate Judiciary Committee Meeting

By Echo K.X. Wang 

An April 2 Senate Judiciary Committee hearing, “Arbitration in America,” chaired by North Carolina Republican Lindsey Graham, examined the values of the practice, focusing on mandatory arbitration clauses in consumer contracts.

The Senate is closely divided on the subject. Democrats have pushed strongly against mandatory arbitration clauses in reaction to Supreme Court decisions. In the past two months, several bills limiting or eliminating mandatory arbitration clauses in consumer contracts have been introduced.

In February, Rep. Hank Johnson, D., Ga., joined Sen. Richard Blumenthal, D., Conn., to introduce the Forced Arbitration Injustice Repeal Act–the FAIR Act–in the House (H.R. 1423), which would “prohibit predispute arbitration agreements that force arbitration of future employment, consumer, antitrust, or civil rights dispute.” (Text and information can be found at https://bit.ly/2UTQoeO.)

More recently, on April 10, Sen. Sherrod Brown, D. Ohio, introduced another bill, Arbitration Fairness for Consumers Act (S. 630), which would restrict mandatory arbitration and class action waivers in contracts that relate to a “consumer financial product or service.” (S.630 can be found at https://bit.ly/2UvCuQs).

The bill would reverse last fall’s vote by the Senate to overturn Consumer Financial Protection Bureau rules that barred mandatory pre-dispute arbitration combined with class processes in litigation and arbitration in consumer financial services contracts. The CFPB rule, which had been in the works for more than four years, was rescinded by a 51-50 Senate vote, with Vice President Mike Pence casting the deciding vote.

For more details on these bills and more, see Vincent Sauvet, New Push Coming for Familiar Arbitration Bills? CPR Speaks blog (April 3) (available at https://bit.ly/2UynZeJ).

While the proposals are facing pushbacks from Republicans and business owners, the committee meeting provided a venue for the two sides to engage in discussions. Most important, the fact that Sen. Graham organized and led this meeting signals that there is a bipartisan opening for negotiation on arbitration reform.

In his initial statement, Graham noted that while arbitration has a place in society, everything good for business is not necessarily best for society. The hearing, he said, therefore sought to address the applicability of arbitration where it conflicts with social issues, in matters including sexual harassment and employment disputes.

Sen. Blumenthal followed, noting that “a right without remedy is [a] dead letter.” Throughout the meeting, Chairman Graham repeatedly stated he wanted to find a “middle-ground” solution to allow businesses to thrive while at the same time provide consumer protection.

But during the two-hour hearing, the divergent views clashed more than they found common ground. The Judiciary Committee listened to testimony from a small business owner, a Navy Reservist, practitioners on both sides, and business owners, all focusing on whether there should be a limit or bar to the use of “forced” arbitration agreements.

The hearing participants discussed the degree to which mandatory arbitration harms consumers, the effects of class-action waivers, and the way that businesses can be affected by mandatory arbitrations.

Sens. Graham and Blumenthal, as well as Sen. Dianne Feinstein, D., Calif., and Sheldon Whitehouse, D., R.I., spoke in favor of establishing limits to the arbitration use.

Kevin Ziober, a Newport Beach, Calif., Navy reservist and federal employee, spoke about his experience in which he was forced to arbitrate an employment dispute. Ziober worked as a federal employee for six months when he signed a mandatory arbitration agreement as a condition to keep his job.

When Ziober left his job to join the Navy Reserve, he was fired from his position on the last day of work. As a result, he was forced to arbitrate his rights under the Uniformed Services Employment & Reemployment Rights Act. Ziober argued that “no Americans should be denied the choice to enforce their rights.”

In response to a question from Sen. Joni Ernst, R. Iowa, on the impact of being forced into arbitration, Ziober described the anxiety and hardship he faced after being fired, knowing that he would not have a job after serving in the military. Ziober advocated that “an option to go to court should be something all servicemen be allowed.”

Prof. Myriam Gilles, a professor at New York’s Benjamin N. Cardozo School of Law, argued that when the Federal Arbitration Act was enacted in 1925, Congress intended to help ensure businesses so that their “agreements to arbitrate with each other can be enforced.” But, she said, the FAA was never meant to be applied to massive employment arbitrations that strip away individuals’ rights under state and federal law, providing a litigation shield for companies. Nor was it meant to be used in take-it-or-leave-it boilerplate agreements against individuals with no bargaining power, according to Gilles.

In response to a question from Sen. Graham, Gilles clarified that she does not wish to “do away” with arbitration. “We only want to get rid of arbitration clauses that are forced upon consumers and employees who have no choice,” she said.

Prof. Gilles also spoke extensively against class action bans, noting that it is often too expensive and time intensive for each individual to arbitrate their cases alone. As a result, forced arbitration provisions are shielding companies from liability, she said.

Alan Carlson, an owner and chef of Italian Colors Restaurant in Oakland, Calif., described his experiences with arbitration clauses as a small business owner. Carlson said he was forced to arbitrate a claim with the credit card company American Express, which took more than 10 years to conclude, and included a trip to the U.S. Supreme Court that sent him to arbitration. (See American Express Co. v. Italian Colors Restaurant, 559 U.S. 1103 (2010) (available at http://bit.ly/2Zb41FD).)

He said he was “shocked” when he learned that the documents he signed included a mandatory arbitration clause. He noted that small businesses like his have no bargaining power to negotiate contracts with credit card companies, while big companies like Walgreens and Safeway have the power to negotiate and remove mandatory arbitration clauses in their contracts with those same companies.

Carlson stated that “small businesses do not get their day in court because they have no power,” and that it is impossible for small businesses to hold large corporations accountable for their actions.

Carlson’s statement evoked strong empathy in Sen. Blumenthal, who echoed the unfairness that the big companies had their day in court, but Carlson was denied his. In response to questions from Blumenthal and Sen. Amy Klobuchar, D., Minn., Carlson stated that mandatory arbitration handcuffs and prevents small businesses from “getting a fair shot of leveling the playing field.” In addition, Carlson stated that the companies often don’t give contracting parties enough time to get through all the fine print “unless you have an attorney on hand.”

  1. Paul Bland, Jr., executive director of Washington,, D.C., public interest law firm Public Justice, argued that forced arbitration clauses are “rigged and unfair.” He notes that it is getting harder to challenge arbitration clauses, and the clauses are often written to the disadvantage of consumers.

As examples, Bland cited to a Consumer Financial Protection Bureau report that suggests even when a person is directed to read an arbitration provision, only 9% of the people knew it means they cannot go to court.

Furthermore, Bland cited an instance where a rape victim was forced to arbitrate, and was given a choice to select from a list of arbitrators. But, explained Bland, all of the arbitrators were defense attorneys that he said presumptively are pro-corporations.

Previous witnesses Kevin Ziober and Alan Carlson affirmed this point, stating that neither of them had a choice in selecting their arbitrators. Chairman Lindsey Graham expressed concern about this practice, and stated that he will look into the issue.

New Jersey Democratic Sen. Cory Booker spoke passionately against arbitration provisions, arguing that it unfairly stacks the deck against consumers and impedes individuals’ ability to seek redress. Citing a study suggesting that big corporations win 98% of arbitrations, Booker exclaimed, “This is not justice. This is not equal justice. This is corporate favoritism.”

Finally, Sen. Dick Durbin, D. Ill., suggested that mandatory arbitration clauses should be barred from student agreements to attend for-profit college, especially those that guarantee job placement. He said that in these situations, the arbitration clauses especially harm middle-income people.

Durbin noted that that if a student starts with a busboy job, goes to a for-profit school paying tens of thousands of dollars yet still comes out a bus boy, the school considers that a “placement” and can’t be sued for misrepresentation.

Arbitration proponents then had a chance to fire back, demanding that consumer arbitrations be allowed to continue.

Sen. Chuck Grassley, R., Iowa, advocated to have more transparency in arbitration clauses to help bring accountability. He said that “consumers should know what they are agreeing to.” He raised the concern that banning mandatory pre-dispute arbitration clauses may impose extraordinary costs to corporations, which may in turn result in the costs being passed down to consumers.

Alan Kaplinsky, a partner at Ballard Spahr in Philadelphia and longtime business arbitration advocate, argued that arbitration under the FAA is important for companies. He said that the arbitration system is dynamic, and most of the times it works for both companies and individual consumers. He also rejected the argument that arbitration provisions offer no choices for consumers.

When questioned by Sen. Grassley about best practices to enforce transparency in arbitration clauses, Kaplinsky noted that it is important to draft arbitration agreements to “create fundamental fairness, give the consumer or employee the right to reject or opt out of the arbitration within some reasonable period of time.” He notes that these are not practices “required” under existing arbitration rules such as those issued by providers like the American Arbitration Association and JAMs.

Kaplinsky agreed with Sen. Grassley’s point that banning arbitration would create billions of dollars in costs for corporations, in addition to costs in defending against potential influxes of class action suits.

Victor E. Schwartz, a co-chair at the Public Policy Practice Group of Shook, Hardy, & Bacon, and a well-known as a Washington tort reform advocate and a supporter of class-action restrictions, also argued for consumer arbitration. He said that arbitration is generally a cheaper and faster alternative to litigation.

Schwartz also argued that consumers have the duty to read contracts and agreements, even if the clause is buried within the agreement. He rejected the view that consumers lack choice, noting that consumers enter binding arbitrations willingly. “You can choose to go to an employment office that does not require you to sign binding arbitration,” he said.

In addressing the argument that mandatory class action waivers harm the ability to address smaller claims, Schwartz countered that most employees are not eligible for class action anyway, given that the cases are usually factually different, and therefore class action is not a viable alternative.

Finally, Schwartz criticized plaintiffs’ attorneys, noting that since they usually are not paid by the hour, they are unlikely to accept litigation cases to represent employees in small claims cases. Thus, he said, in cases involving claims of $20,000-$30,000, arbitration is likely the only way for employees to get their claims addressed.

* * *

To read further about this committee meeting from a different perspective, see Ellis Kim, “Arbitration Gets the Spotlight at Senate Judiciary Hearing,” Law.com (April 2) (available at https://bit.ly/2Ug7KxU).

A video of the hearing, as well as transcripts of the individuals’ remarks, is available from the Senate Judiciary Committee here: http://bit.ly/2KBiB6c.

* * *

The author is a Spring 2019 CPR Institute intern, and a student at Brooklyn Law School.

 

Prospective Higher Education Reform to Ban Arbitration of Student Claims

By Vincent Sauvet

Another legislative proposal that would curtail arbitration was introduced in Congress on March 26.

The PROTECT Students Act of 2019 (S.867) was introduced on the Senate floor by New Hampshire Democrat Maggie Hassan. The bill, a general higher education reform which includes provisions related to institutions oversight and accountability, student loans and healthcare, would ban arbitration of claims brought by students against their institutions.

This follows up on CPR Speaks’ recent post on recent legislative efforts by congressional Democrats to limit the use of arbitration in various kind of disputes. See “New Push Coming for Familiar Arbitration Bills?” (April 3).

The text of Hassan’s bill would create add an exception to the enforcement of Chapter 1 of U.S. Code Title 9—the Federal Arbitration Act. It would bar enforcement of arbitration agreements in an enrollment agreement made between a student and an institution of higher education.

Combined with a prohibition for the institution to require a student to agree to, and enforce “any limitation or restriction on the ability of a student to pursue a claim, individually or with others, against an institution in court,” the provision would effectively ban even the possibility of arbitration of a claim a student may have against their institution.

Although the PROTECT Act is not really focused on arbitration—the name is an acronym for “Preventing Risky Operations from Threatening the Education and Career Trajectories of Students Act of 2019–it nevertheless includes provisions that can be found in other bills specifically targeting arbitration.

In fact, similar provisions are the entire point of the closely related Court Legal Access and Student Support (CLASS) Act of 2019.  The bill, introduced on Feb. 28 as S.608 by Sen. Richard Durbin, D., Ill., and as H.R. 1430 in the House by Rep. Maxine Waters, D., Cal., was part of a flurry of arbitration bills spearheaded by the FAIR Act of 2019, discussed in the previous CPR Speaks post.

Both the PROTECT and CLASS acts have been referred to committees and await further action.

While all of these bills face a tough climb to passage, the inclusion of such provisions in sector- specific reform bills could contribute to a “normalization” of criticism of arbitration.

* * *

The author, an international LLM student at the Benjamin N. Cardozo School of Law in New York, is a 2019 CPR Institute spring intern.

New Push Coming for Familiar Arbitration Bills?

By Vincent Sauvet

Democrats in Congress late last month announced their intention to focus their efforts on passing new legislation to ban mandatory arbitration in several types of disputes. A package of bills, some still awaiting introduction, would target the arbitration of employment, consumer, antitrust and civil rights disputes.

The bills are mostly updates of long-running efforts, some dating back to the 1990s, that seek to limit processes that interfere with consumers’ and workers’ abilities to file suits against product and service providers, and employers—especially those that targeted class actions.

Now, at least some of the bills appear to be gaining more publicity and increasing support in the wake of controversy over mandatory processes.

This legislative effort will be spearheaded by the Forced Arbitration Injustice Repeal, which its sponsors are referring to as the FAIR Act of 2019. It was announced by Sen. Richard Blumenthal, D., Conn., and Rep. Hank Johnson, D., Ga., both longtime opponents of mandatory arbitration, with the bill’s introduction on Feb. 28.

H.R.1423 and S.610 would “amend title 9 of the United States Code with respect to arbitration.” The flagship of the current crop of proposals targeting arbitration, the bill is co-sponsored by 32 Senate Democrats along with independent Vermont Sen. Bernie Sanders.  The number of House Democrats co-sponsoring the legislation has risen to 171 in the month since it was introduced, from 147.

The FAIR Act would ban arbitration in employment, consumer and antitrust disputes, as well as in civil rights disputes. The bill is a rebranding of the previous Congress’s Arbitration Fairness Act of 2018, also by Blumenthal and Johnson, covering the same issues.

In conjunction with the broad FAIR Act, several bills tackling more specific issues have also been announced.

The first is the Ending Forced Arbitration of Sexual Harassment Act of 2019, sponsored by Rep. Cheri Bustos, D., Ill., a reintroduction of her bill from the previous session, which had been co-sponsored by Pramila Jayapal, D., Wash., and, on the Senate side, New York Democrat and presidential candidate Kirsten Gillibrand.  Jayapal is co-sponsoring the new bill, along with—significantly–a New York Republican, Elise Stefanik.

The bill would ban mandatory arbitration of sex discrimination disputes by banning any predispute arbitration agreement between an employer and employee arising out of conduct that would form the basis of a claim based on sex under Title VII of the Civil Rights Act of 1964. Although this would be subject to some limitations, the prohibition would not apply to arbitration provisions contained in a contract between an employer and a labor organization, or between labor organizations.

Another bill, the Restoring Justice for Workers Act, would go even further than ending the arbitration of sexual harassment claims. It would establish an outright ban of mandatory arbitration clauses in employment contracts.

The bill was introduced in the previous 115th Congress, last October, by Rep. Jerrold Nadler, D. N.Y., and Sen. Patty Murray, D., Wash., seeking to make illegal any predispute arbitration agreement when related to an employment dispute, which would include sexual harassment. It also would pose further restrictions on post-dispute arbitration agreements.

The proposal was an immediate Congressional reaction to the U.S. Supreme Court’s Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (May 21, 2018), which it would have overturned. But the bill had trouble getting bipartisan support, and likely will suffer the same issues in the current Congress, where it has not yet been introduced.

A bill announced and introduced with the FAIR Act included the Arbitration Fairness for Consumers Act, S.630, sponsored by Ohio Democratic Sen. Sherrod Brown, which would tackle the specific issue of mandatory arbitration in financial adviser and broker contracts.

While Brown has focused primarily on student loans and credit card agreements, the bill is in fact broader in scope.  It would prohibit any predispute arbitration agreement and joint-action waivers related to any consumer financial product or service dispute.

Another bill introduced with the FAIR Act, the Safety Over Arbitration Act would render void any predispute agreement compelling the arbitration of claims alleging facts relevant to a public health or safety hazard. The bill, S.620, was introduced by Rhode Island Democratic Sen. Sheldon Whitehouse.

As an interesting side note, the bill would also compel the arbitrator of such a claim to provide to the parties a written explanation of the factual and legal basis for his decision. While most arbitrators provide such explanation already, there is no legal requirement to do so.

Under the sponsorship of Sen. Patrick Leahy, D., Vt., the Restoring Statutory Rights and Interests of the State Act, S.635, was also reintroduced. The bill would prohibit any predispute arbitration agreement providing for the arbitration of claims brought by an individual or small business concern and arising from the alleged violation of a state or federal statutory or constitutional provision. The bill is nearly identical to its previous iterations, which were introduced but ultimately died in the 114th and 115th Congresses, and is most likely to suffer the same fate.

The Justice for Servicemembers Act also should be reintroduced soon by Reps. David Cicilline, D., R.I., and Connecticut’s Sen. Blumenthal. Like the versions in the previous three Congressional sessions, the bill aims to end the use of arbitration in cases under the Uniform Services Employment Rights Act.

Finally, the Fairness in Long-Term Care Arbitration Act was also announced by Rep. Linda Sanchez, D., Calif. While there is no text available yet, the bill would end the use of arbitration clauses in nursing home agreements.

These announced attempts at legislative change regarding arbitration use come up at a time when arbitration has suffered from bad press. The #MeToo movement made arbitration, which usually is conducted out of the public’s view, appear as a tool to silence victims. Although the broader controversy over mandatory arbitration in employment and labor disputes traditionally has been the legislative target of Democrats, the specific issue of sexual harassment moved the subject into broader view, drawing attention from a larger section of the political spectrum.

Still, the broader bills, such as the FAIR Act, the Restoring Justice for Workers Act and the Arbitration Fairness for Consumers Act are unlikely to gather enough support in order to pass in the current Congress. They will, for the most part, face the same Republican opposition that have defeated similar proposals.

But new, more-specific bills–those providing small incremental changes that exhibit more potential for bipartisan support–are more likely to succeed. Given the current political climate, the Ending Forced Arbitration of Sexual Harassment stands a good chance of advancing. Several businesses such as Google, Microsoft, Uber and Lyft have effectively banned the arbitration of sexual harassment claims and sometimes other employment matters.

Though there are only three co-sponsors, the early appearance of a House Republican could indicate the bill’s broader appeal.

These moves, collectively, provide at least some momentum. “I’m encouraged that some of the leading companies are voluntarily changing their practices… but we can’t rely on everyone to do the right thing voluntarily” Sen. Blumenthal said.

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The author, an international LLM student at the Benjamin N. Cardozo School of Law in New York, is a 2019 CPR Institute spring intern.

Notes from AM 19/ Preparing For the Robo-Revolution: Arbitrating Smart Contract Disputes

By Shannon Collins

Following up on last week’s CPR Speaks post on the CPR Institute’s 2019 Annual Meeting—see “The ‘Risky Business’ of NAFTA, BITs, ITAs and Global Trade” (March 21)–blockchain, artificial intelligence and “smart” contracts were the focal points of CPR AM19’s Session 7, “Preparing for the Robo-Revolution: Arbitrating Smart Contract Disputes.”

On Friday, March 1, panelists Daniel E. Gonzalez, a Miami partner in Hogan Lovells; Andrew James Lom, a partner in the New York office of Norton Rose Fulbright; Lee Schneider, a New York-based general counsel at block.one, a Grand Caymans company that publishes protocols enabling blockchain transactions; and moderator David L. Earnest, Shearman & Sterling partner in Washington alerted attendees to the increasing use and necessity of technology in arbitration, as well as the legal professional overall.

The session’s topics included the use of technology in arbitration today, an overview of blockchain and an introduction to Ricardian contracts.

Daniel Gonzalez started the panel off by discussing the arbitration technology. He noted that general counsels are pushing for more use of technology because they strongly believe it will increase efficiency. Software can be used to help appoint arbitrators, conduct document review, aid in document production, manage costs and assist with research.

Picking arbitrators with artificial technology poses several issues, Gonzalez explained. While it can assess a likely outcome of a case using algorithms, these algorithms rely on correlation on a purely mathematical level, while legal disputes are based on causation.

These algorithms can also be biased, which seems counterintuitive, but they are programmed by people. People are inherently biased and the data sets that they use as a base for the algorithm may reflect those biases, which in turn can affect the outcomes.

Lee Schneider echoed this concern, noting that people working in artificial intelligence are grappling with getting the right data set because if the data is skewed, then it can result in biases. Programmers must be careful and judicious about the elements of the data sets.

The discussion noted that even if they are carefully coded, algorithms can still fail to see the human factor in disputes that an arbitrator may see. An arbitrator could be swayed on a deeply personal level by an argument and rule in a way that is inconsistent with their history. The algorithms cannot account for this. In arbitration, this means there will be accurate data available for the arbitrator to consider when ruling on a case.

Gonzalez brought up questions of “robo-arbitrators,” which are not yet replacing arbitrators, but that Gonzalez says will play an increasing role in the process and is something we should all embrace. Not many institutions have rules specifically requiring “natural persons,” Gonzalez informed the room, which brings interesting determinations of whether Due Process is satisfied with the use of a robot as arbitrator. Another concern with robo-arbitrators is their inability to provide reason for a decision. They purely provide an outcome.

Gonzalez also discussed technology specifically in the context of construction disputes. Drone technology collects data that can be useful for monitoring tagging of each piece of equipment or material as well as tagging workers. By using a tagging system, the supply chain and the project’s progress can be tracked entirely from inception to construction, thereby ensuring transparency and efficiency.

The tagging systems are an example of the kind of data that can benefit by storage on a blockchain. As explained by Andrew Lom, the blockchain is a database where data lives in blocks. The chain links these blocks together through a crypto-relationship. These blocks are sealed once a new block is added to the chain and it is incredibly difficult to alter a block once the new block is added, because additions are conspicuous and documented.

Lom emphasized that the blockchain is not automated or perpetual. You need people to pay attention to the database, he said. This doesn’t mean that it would always need to be monitored, but without attention, then it could fall apart, because alterations in blocks of data could go unnoticed.

The blockchain serves as a useful tool on which smart contracts can be stored. A smart contract is a self-executing contract. Lom equates it to when a bank is authorized to automatically pay the minimum on a credit card. It is done automatically without the debtor’s need for immediate implementation.

Smart contracts are written in code like a computer program. Ricardian smart contracts are contracts that are written partially in computer code and partially in human-readable language. (A smart contract usually describes the terms and contains codes that execute electronically under the contract’s terms, while a Ricardian contract is similarly linked to code, but is usually fully realized whether executed or not.) According to Lee Schneider, this introduces the human element into drafting smart contracts. Humans serve as a check for the execution of the contract. They can discover when something goes wrong and resolve the issue.

Andrew Lom posed the problem of bugs in the code. If the code is flawed, could that constitute a drafting error? A person would have to catch it and correct it. Could that correction potentially be modifying the substance of the contract?

These are questions and problems that will be answered only in time. As for now, Schneider noted, we are all participating in a digital world.

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The author is a CPR Institute Spring 2019 intern.

Notes from AM19: The “Risky Business” of NAFTA, BITs, ITAs and Global Trade

By Evan Drake

The CPR Institute’s 2019 Annual Meeting was held at the Fairmont Hotel in Washington, D.C., Feb. 28-March 2.  The event featured more than 50 speakers on 16 panels addressing the most pressing issues in commercial conflict resolution.

One of the many CPR AM19 highlights was a lively panel discussion of international investment arbitration, Navigating Risky Business: NAFTA, BITs, ITAs and Global Trade.  The panel included international investment arbitration experts Arif H. Ali, a partner who co-chairs Dechert LLP’s international arbitration practice in Washington and London; Mélida Hodgson, a partner in the New York office of Foley Hoag; Mark Luz, senior counsel and deputy director of the Trade Law Bureau of Global Affairs Canada in Ottawa, a Canada government agency; and moderator Ank Santens, a partner in the New York office of White & Case and a CPR Institute board member.

The panel discussed the potential impact of the recent United States–Mexico–Canada free trade agreement, best known as the USMCA.  The agreement, which is awaiting ratification by each of the nations, regulates both trade and investment. Once ratified, it will replace the NAFTA.

The panel focused on international investment arbitration.

Moderator Santens began by introducing the panel members and providing an outline of modern investor-state dispute settlement, or ISDS.  Santens, who has served as both counsel and arbitrator in investment disputes under all major international arbitration rules, highlighted that bilateral and multilateral investment treaties, or BITs, play an important role in the global economy by increasing investment-system stability.

The typical ISDS claim is brought by an investor against a state, typically for breach of a substantive standard of protection contained in a BIT.  These standards vary treaty by treaty, but usually include at minimum protections against expropriation and guarantees of fair and equitable treatment. NAFTA, a multilateral trade and investment treaty, grants similar protections to U.S., Canadian and Mexican investors.

The reciprocal protections created by these treaties, Santens continued, allow investors to bring claims against states that would otherwise lack privity, and the number of these claims has increased substantially over the past 10 years.  The bulk of these claims have been arbitrated through ICSID–the International Centre for Settlement of Investment Disputes, which is part of the World Bank and based in Washington, D.C.

But other forums, including the Permanent Court of Arbitration in The Hague, Netherlands, the International Chamber of Commerce and the Stockholm Chamber of Commerce may be available to claimants. The United Nations Commission for International Trade Law, or UNCITRAL, among others, provides frequently-used ISDS rules.  (Private and nonprofit providers, including the CPR Institute, which publishes this blog, also have adaptable rules.)

The panel then shifted its focus to ISDS history and development. Panelist Mark Luz, who works in the Canadian Department of Foreign Affairs and International Trade, began the discussion with the tongue-in-cheek goal of “explaining 120 years of investment law history in ten minutes.”

Luz, who has represented the Canadian government in NAFTA and other investment arbitration proceedings, described how the “gunboat diplomacy” of the early 20th century was gradually displaced by a system of treaties providing for protection of foreign investments, and how this system has developed rapidly in the past 20 years.

Prior to the advent of inter-state investment treaties, he explained, states defended the interests of their investors abroad in the same way they defended their nationals–through diplomatic protection. For capital-exporting European powers, this might even entail dispatching warships to pressure foreign governments into honoring their commitments to investors.

Evidence of this practice can be seen in the Hague Convention of 1907, on the law of war, in which states undertook not to use armed force for the recovery of debts owed to themselves or their nationals—provided, however, that the debtor states agreed to submit to arbitration.

Diplomatic protection, said Luz, was a poor system for resolving investment disputes.  Under this system, investors would generally need to exhaust local legal remedies before applying to their home states for diplomatic protection—a time-consuming and potentially expensive endeavor.

Furthermore, states were under no obligation to grant protection to their nationals, even in the event of a meritorious claim.  If political considerations weighed against damaging a sensitive relationship, a state might simply decline to exercise this protection, and an investor would have no way of seeking redress individually.

During the early-to-mid 20th century, certain customary protections began to gain expression through treaties; interstate bodies such as the U.S,-Mexico Claims Commission (1924) were created to adjudicate investment-related disputes.  But it was not until the NAFTA’s 1994 passage that investment arbitration “exploded” into the broad-reaching network of substantive protections for individual investors that characterizes modern ISDS.

Luz also noted that ISDS is not without its critics, and that many consider the system to be in the midst of a “legitimacy crisis.”  He recalled that during one NAFTA negotiation over an oil and gas project, protesters floated a blimp with the slogan “Frack Off NAFTA Chapter 11” outside the window of the conference room.  Chapter 11 is the NAFTA’s investment section.

Although many states have become increasingly critical of investment arbitration, Mark Luz believes that ISDS is more likely to adapt than to perish.  Pointing out the varied approaches that different actors have taken toward reforming the system—including NAFTA’s renegotiation, and the development of an international investment court at the United Nations—he emphasized that most states will seek to preserve the stability created by ISDS, even as they act to transform it.

Panelist Mélida Hodgson, of Foley Hoag, who has been both arbitrator and counsel representing the United States in NAFTA and World Trade Organization disputes, cited the USMCA’s transformative potential, but cautioned that the system isn’t changing just yet.

Until the new rules are ratified, Ms. Hodgson said, NAFTA is still the law.  Although the so-called “legitimacy crisis” facing ISDS may result in significant future changes, the USMCA represents a discreet set of reforms in both trade and investment law, which should be considered in the context of specific political factors.

Canada and Mexico, for example, have fared far worse in NAFTA disputes than the United States, and yet current U.S. Trade Representative Robert E. Lighthizer and his office has sought to reduce the scope of protections for North American investors.  While Mexico may want to re-assert government prerogatives in the energy sector, Canada appears more concerned with the USMCA’s trade provisions than its investment protections.

The result of these negotiations seems to be a two-tiered system, where investments in certain “special sectors”—e.g., oil and gas—will receive greater protection than other investments.

In any event, as members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), both Canada and Mexico have already committed to a limited set of obligations toward foreign investors. The CPTPP, like much of the USMCA, includes a higher bar than NAFTA for demonstrating discriminatory treatment against an investor, as well as reduced protections against expropriations. President Trump withdrew the United States from the agreement 2017.

Shifting the discussion to Europe, Dechert’s Arif Ali agreed with Mélida Hodgson that any USMCA impact will come only after the agreement is ratified. Ali stressed that modern ISDS development represented a historical shift from a “power-based system to a rules-based system,” and that European and other states are unlikely to abandon this useful framework for depoliticizing investment disputes.

Ali first took issue with the oft-repeated criticism that arbitrators in investment cases are, in effect, deciding public policy.  Issues of public policy often arise in cases of expropriation, in which states seek to regulate foreign investments for the public good, creating situations where arbitrators may determine that a state’s regulations are impermissible under an investment treaty.  Far from rejecting the system, however, he highlighted that states are more likely to use public policy as a litigation tool within ISDS, developing new procedural and substantive rights in the process.

Drawing a parallel with the USMCA, Ali cited the controversial Achmea decision of the Court of Justice of the European Union as an exaggerated threat to investment arbitration.  In its landmark 2018 opinion in Achmea, the CJEU declared that a Netherlands-Slovakia BIT–and by extension all inter-EU BITs–were incompatible with EU law.  The EC has supported this position by submitting amicus briefs in EU investment disputes. (For information on the case, see CPR Speaks here.)

Nevertheless, European states continue to refer their investment disputes to arbitration, and it is unclear to what extent the Achmea decision will actually affect the practice of arbitral tribunals.  As Arif Ali pointed out at the CPR AM19 panel discussion, the applicability of the Achmea decision to intra-EU treaties such as the Energy Charter Treaty, to which the EU itself is a part, is unclear, and already has sparked conflicting interpretations.  In Vattenfall v. Germany, for example, an ICSID tribunal determined that the ECT was unaffected by Achmea, despite the issuance of a “guidance note” by the European Commission to the opposite effect.

Ali looked at the proposed EU multilateral investment court as another possible evolution of European ISDS, rather than a departure from the system.  Considering the greater focus in more recent BITs on public policy, he said he felt that the development of such an institution would be “in principle, not a bad thing.”

Collectively, the panelists seemed to agree that NAFTA’s renegotiation should be seen as part of a systemic evolution in international investment arbitration.  In Europe, North America, and around the world, the panel members indicated that they believed that states are acting to reform ISDS to suit their changing interests. The USMCA, like the Trans-Pacific Partnership and Achmea, represents one piece of a continuing process.

The author is a CPR Institute Spring 2019 intern from Brooklyn Law School.

Mandatory Shareholder Arbitration: J&J View Passes SEC’s Test

By Shannon Collins

A no-action letter last month put the U.S. Securities and Exchange Commission’s stamp of approval on Johnson & Johnson’s move to bar a shareholder vote at its annual meeting on the use of mandatory arbitration for securities disputes between the company and its shareholders.

Last spring, U.S. Securities and Exchange Commission chairman Jay Clayton discussed the possibility of supporting a mandatory arbitration provision that would bar class actions as part of an initial public offering, according to two Reuters articles. See Alison Frankel, “SEC chair Clayton is in no rush for mandatory shareholder arbitration,” Reuters (April 27, 2018) (available at https://reut.rs/2EJlRX4), and Alison Frankel, “The case against mandatory shareholder arbitration,” Reuters (Aug. 22, 2018) (available at https://reut.rs/2Tmptby).

While arbitration is an invaluable dispute resolution tool, the use of mandatory processes in consumer and employment cases with class-action waivers generated controversy before the Supreme Court signed off on permitting them last year in employment cases, and in 2011 in consumer contracts.

In IPOs, mandatory individual arbitration would eliminate shareholder class actions, which is a mechanism frequently used to prosecute securities fraud suits—often after share price fluctuations following the initial offerings.

The class-action model allows for more shareholders to participate in litigation against fraud and have their voices heard, while individual arbitration may remain confidential and result in varying terms and decisions, according to a coalition of organizations seeking to bar mandatory shareholder arbitration under the securities laws.  See Letter to SEC Chairman Jay Clayton, (Jan. 16, 2018) (available at http://bit.ly/2NJdRJs).

Clayton’s comments caused an uproar from several organizations and resulted in the formation of a consumer-group coalition, Secure Our Savings. SOS comprises the Consumer Federation of America and the Consumers Union, along with attorneys from the American Association for Justice, Public Justice, and Public Citizen, among many others.

Johnson & Johnson has been the center of attention of mandatory shareholder arbitration news. Hal Scott, a Harvard Law professor who represents a trust that owns J&J shares, issued an open letter to the health care giant on behalf of the trust encouraging a shareholder proposal for mandatory dispute arbitration, including disputes involving securities fraud.

Micah Hauptman, financial services counsel at Washington, D.C.’s Consumer Federation of America, wrote in response to an email inquiry that he believes such clauses “would violate the federal securities laws and would be inconsistent with longstanding SEC policy on the matter. In addition, such clauses would violate state law because they would exceed the bounds of the internal affairs doctrine.” See also Barbara Roper and Micah Hauptman, “A Settled Matter: Mandatory Shareholder Arbitration Is against the Law and the Public Interest,” Consumer Federation of America (Aug. 15, 2018) (available at http://bit.ly/2UpR1ZR).

In response to Scott’s proposal, New Brunswick, N.J.-based J&J submitted a request to the SEC asking for a no-action letter that would allow the company to exclude the mandatory arbitration proposal from J&J’s annual meeting proxy statement.

The basis of J&J’s exclusion is 1934 Securities Exchange Act Rule 14a-8(i)(2), which allows for companies to exclude shareholder proposals “if the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject.” J&J said it believed that the proposal would cause it to violate federal securities law, as well as New Jersey state law.

J&J claimed in its letter to the SEC that the proposal violates Exchange Act Section 29(a), which voids provisions that “bind[] any person to waive compliance with any [part of the act] . . . or of any rule or regulation thereunder.”

The U.S. Supreme Court has held that Section 29 applies only to waivers of substantive provisions, not procedural provisions. Shearson/American Express v. McMahon, 482 U.S. 220 (1987) (available at http://bit.ly/2ECOyVh). Therefore, J&J could not claim that mandatory arbitration violates Exchange Act Section 27 (granting exclusive jurisdiction of claims under the act to U.S. District Courts).  J&J instead argued that mandatory arbitration would violate Exchange Act Rules 10b and 10b-5 prohibiting securities fraud.

Though J&J noted that the Supreme Court has held that arbitration provisions do not cause a waiver of compliance with substantive Exchange Act provisions, the SEC has allowed for exclusion of arbitration proposals based partially on arguments of Section 29(a) violations. J&J relied on those exclusions as precedent.

J&J also raised public policy concerns, arguing that arbitration agreements should be made on an individual basis rather than by corporate organizational documents.

In contrast, Hal Scott assured in his supporting statement that his proposal in no way violates state or federal law. (See the link above to the J&J letter on the SEC’s website; Scott’s proposal and supporting statement are exhibits.)

He wrote that the Supreme Court has held that mandatory individual arbitration provisions aren’t in conflict with the federal securities laws, and that New Jersey law allows for the provision because the state views corporate bylaws as a contract between corporations and stockholders.

Scott supported his proposal by highlighting the billions of dollars companies can spend on shareholder lawsuits. “We believe arbitration is an effective alternative to class actions,” he wrote. These suits also can be frivolous and result in a waste of both time and money for all parties involved, according to Scott.

After evaluating the parties’ arguments on the complex securities laws, Commissioner Clayton released a Feb. 11 statement backing the J&J request. The SEC response assured that, should J&J exclude Scott’s shareholder proposal, the SEC would not seek enforcement action.

Clayton’s statement emphasized that the no-action response is neither an acknowledgment nor a denial that Scott’s proposal violates Rule 14a-8(i)(2), but rather is just a statement that the proposal will not be enforced.

The New Jersey laws carried the no-action determination. Clayton states that no New Jersey precedent applies to the matter perfectly, but he seemed to be more inclined to believe that the proposal could violate state law.

That view was reinforced by a determination by N.J. Attorney General Gurbir Grewal, who advised the SEC in January that the proposal violates New Jersey law. “We view this submission as a legally authoritative statement that we are not in a position to question,” wrote SEC Corporation Finance Division attorney-adviser Jacqueline Kaufman in the agency’s no action letter.

In a Wall Street Journal article, Clayton indicated that he “wants to avoid a brawl” for now over a topic as divisive as this one, choosing instead to toe the line rather than spark a political fight.

With news of this SEC decision, Hal Scott remains optimistic about the possible future of mandatory shareholder arbitration. He spoke to Reuters about plans to appeal the SEC’s recommendation and discussed his reaction to the filing.

While he is unconvinced the appeal will succeed, he sees opportunity for future proposals like the one he submitted to J&J in the SEC’s deliberate omission of an affirmative statement regarding the legality of mandatory shareholder arbitration in the no-action letter.

This, according to Scott, is the most significant development so far. According to the Reuters article, the move “leaves open the prospect of mandatory shareholder arbitration for corporations based in states whose corporate codes would permit it.”

With the SEC permitting exclusion of shareholder proposals for mandatory arbitration, it raises a question of whether any company undertaking an IPO will be able to implement such a proposal.

The SEC at least appears hesitant to make a ruling on whether it believes mandatory arbitration violates any state or federal laws. If the SEC continues to allow exclusions like J&J’s, however, it may effectively result in the SEC taking the position that these arbitration provisions likely violate state or federal law.

A determination like this may be best left for Congress, rather than the SEC—though Clayton, according to Reuters, has vowed to have the full commission decide the issue of shareholder arbitration and the FAA, rather than piecemeal Corporation Finance Division opinions, when the time is ripe.

Regardless, this is an unsettled area of law that, once resolved, potentially will have immense impact on the landscape of public offerings, corporate governance, litigation and ADR.

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The author, a CPR Institute Spring 2019 intern, is a student at the Benjamin N. Cardozo School of Law in New York.

US District Court Grants Appellate Arbitration Panel Award the Same Deference under FAA Jurisprudence

By Mark Kantor

Kantor Photo (8-2012)

There are very few court decisions addressing the impact of an appellate review process administered by the arbitral institution that administered the underlying arbitration.  On February 14, Judge Paul Crotty of the U.S. District Court for the Southern District of New York issued an opinion in a case in which an American Arbitration Association (AAA) appellate arbitration panel had reversed the decision of the AAA original arbitrator, Hamilton v. Navient Solutions, LLC., No. 18 Civ. 5432 (PAC) (S.D.N.Y. February 14, 2019), available on TDM at https://www.transnational-dispute-management.com/legal-and-regulatory-detail.asp?key=21638 (subscription required).  Judge Crotty upheld the decision of the appellate arbitral panel, giving it the same deference as is customary for arbitration awards generally under the Federal Arbitration Act.

The underlying dispute involved a situation in which Ms. Hamilton, a student loan borrower, claimed that Navient, a collection company, had breached a U.S. Federal statute limiting collection calls relating to unpaid loans (the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227).  After Ms. Hamilton had expressly sought to revoke her consent to such calls, Navient nevertheless made an additional 237 calls to her (yikes!) using autodialer technology.

Ms. Hamilton brought an arbitration claim against Navient for harassment under the AAA arbitration agreement in her student loan documents.  That arbitration agreement included a reference to the AAA’s Optional Appellate Arbitration Rules (available at https://www.adr.org/sites/default/files/AAA%20ICDR%20Optional%20Appellate%20Arbitration%20Rules.pdf).

Ms. Hamilton had apparently consented in her student loan documents to being called by a collection company.  After she defaulted on her loan payments, Navient then began using an autodialer to call her repeatedly as part of its collection efforts.  However, after being called a number of times, Ms. Hamilton contacted Navient and sought to revoke her consent to be called.  Navient [here, NSL] and Ms. Hamilton stipulated as follows.

  1. On April 21, 2016, Ms. Hamilton instructed one of NSL’s call-center agents to stop calling her on her cellular telephone.  She was advised that she would be “taken off the autodialer.”
  2. On April 21, 2016, NSL’s call-center agent updated NSL’s system of record to update Ms. Hamilton’s autodial consent permission from “Y” to “N.”
  3. After the conversation on April 21, 2016 NSL no longer possessed Ms. Hamilton’s consent to place calls to her cellular telephone using an automatic telephone dialing system.
  4. NSL called Ms. Hamilton’s cellular telephone number two hundred thirty-seven (237) times after April 21, 2016.

In reliance on that stipulation, the sole arbitrator in the arbitration decided that Ms. Hamilton had properly revoked her consent for Navient to call, consistent with the TCPA.  The arbitrator therefore held Navient liable for damages on that basis.  However, after the hearing in the arbitration but before the arbitrator had issued the award, the U.S. Court of Appeals for the Second Circuit issued an opinion concluding that the TCPA did not permit unilateral revocation of a prior consent to be called.

On June 22, 2017, the U.S. Court of Appeals for the Second Circuit held in Reyes v. Lincoln Automotive Financial Services, 861 F.3d 51 (2d Cir. 2017), that the TCPA does not permit a party to unilaterally revoke consent that was made as part of a bargained-for exchange, rather than gratuitously.

Promptly after the Reyes decision was released, Navient emailed the arbitrator, asking that the record in the arbitration be reopened to consider the potentially dispositive effect of Reyes on Ms. Hamilton’s claim.  The arbitrator, though, denied Navient’s request and, the next day, issued the award in favor of Ms. Hamilton.

On June 27, 2017, the arbitrator denied Navient’s request to reopen the record because Navient had stipulated that it “no longer possessed Ms. Hamilton’s consent to place calls to her cellular telephone using an automatic telephone dialing system” and “[r]evocation of consent by [Hamilton] [wa]s . . . not an issue presented for decision in this arbitration.”

Navient appealed under the AAA Optional Appellate Procedure.  Considering the impact of Reyes on the stipulation, the 3-person appellate arbitration panel held that Ms. Hamilton’s consent was, by operation of the Reyes decision, not unilaterally revocable.  The appellate panel therefore overturned the part of the initial arbitrator’s award giving effect to that revocation of consent, and awarded in favor of Navient.

On July 5, 2017, Navient filed a Notice of Appeal of the award to a three-judge arbitration panel, and on November 17, 2017, the arbitration panel denied Hamilton’s motion to dismiss the appeal. …  The arbitration panel issued a final award on March 19, 2018, finding that under Reyes, Hamilton’s “consent was not revocable, and her withdrawal of consent was null and void,” reversing and vacating the portion of the initial award ruling in Hamilton’s favor, and affirming the initial award ruling in favor of Navient the outstanding balance of the Loan — $12,512.72.

Ms. Hamilton then turned to the District Court seeking to vacate the appellate award, arguing that the appellate arbitration panel had exceeded its powers and manifestly disregarded the law by vacating the initial award in her favor and awarding instead in Navient’s favor.  Judge Crotty, however, applied the traditional test under Federal Arbitration jurisprudence, that “a district court’s role in reviewing an arbitral award is “narrowly limited,” and requires “great deference” to arbitrators’ determinations.”  He declined to vacate the appellate arbitration award.

Navient did not believe or agree that Hamilton was permitted to unilaterally revoke the consent she gave in her student loan agreement.  The arbitration panel did not exceed its powers or act improperly in applying Reyes.

The arbitration panel also did not manifestly disregard the law in this case.  To the contrary, rather than “willfully flout[ing] the governing law by refusing to apply it,” …, the arbitration panel applied a Second Circuit holding to conclude that the factual stipulation regarding withdrawal of consent had no legal impact.   The arbitration panel did not ignore a clear law, but rather obeyed one. ….   Moreover, even if the Court believed that Reyes was ambiguous (it does not), application of an ambiguous legal standard would still not constitute manifest disregard.

(Citations and footnotes omitted.)

The District Court therefore confirmed the award as modified by the appellate arbitration panel.

The noteworthy aspect of Hamilton v. Navient for us is that the District Court made no distinction for purposes of judicial review between an initial arbitration award and an award as modified by an appellate arbitration panel.  The appellate panel had the last word under the AAA’s Optional Appellate Arbitration Rules, and the Court gave effect to that structure without a second thought.

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Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. 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). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

US Ct of Appeals Relies on Baseball Arbitration Structure to Reject DOJ Antitrust Attack on AT&T/Time Warner Merger

By Mark Kantor

Kantor Photo (8-2012)

The antitrust/competition law battle between the US Department of Justice (DOJ) and AT&T over AT&T’s acquisition of Time Warner involves a “baseball arbitration” issue that played a prominent role in today’s US Court of Appeals decision denying the DOJ’s request to block the acquisition.  In a unanimous opinion, a three-person panel of the US Court of Appeals for the District of Columbia, in the course of upholding the District Court’s approval of the acquisition, rejected DOJ’s arguments that the acquisition would create anti-competitive incentives for A&T to block “content” competitors by denying them non-discriminatory access to popular channels owned by Time Warner such as CNN.  As summarized by CNN (https://www.cnn.com/2019/02/26/media/att-time-warner-merger-ruling/index.html):

AT&T, the Justice Department claimed, would have greater bargaining leverage over rival TV distributors because the company would have valuable live content from Turner’s networks, like the sports that TNT carries and CNN’s news coverage.  The Justice Department contended that AT&T could during negotiations threaten to “black out” Turner’s channels — that is, pull them from the rivals’ lineups — tempting customers to drop their current providers and switch to AT&T services like DirecTV.  The Justice Department alleged that AT&T would also have the power to raise the prices its competitors pay for their content.

The AT&T acquisition offer ultimately included a “baseball arbitration” provision found in many Consent Orders and Consent Judgments from the DOJ and the US Federal Communications Commission intended to provide for “final offer” baseball arbitration of a competitor’s claim that the merged company was not offering non-discriminatory terms for use by the competitor on the competitor’s own network of content owned by the merged company.  The arbitration would resolve the terms and conditions, including the economic terms, on which the competitor would be allowed to license for its own use content owned by the merged AT&/Time Warner company.

A week after the government filed suit to stop the proposed merger, Turner Broadcasting [which is owned by Time Warner] sent letters to approximately 1,000 distributors “irrevocably offering” to engage in “baseball style” arbitration at any time within a seven-year period, subject to certain conditions not relevant here.  According to President of Turner Content Distribution Richard Warren, the offer of arbitration agreements was designed to “address the government’s concern that as a result of being . . . commonly owned by AT&T, [Turner Broadcasting] would have an incentive to drive prices higher and go dark with [its] affiliates,” ….  In the event of a failure to agree on renewal terms, Turner Broadcasting agreed that the distributor would have the right to continue carrying Turner networks pending arbitration, subject to the same terms and conditions in the distributor’s existing contract.

Like the lower District Court ruling before, the Court of Appeals opinion (available at https://www.cadc.uscourts.gov/internet/opinions.nsf/390E66D6D58F426B852583AD00546ED6/%24file/18-5214.pdf) noted the impact of this arbitration structure on the DOJ’s arguments regarding the anti-competitive nature of the acquisition.

The post-merger arbitration agreements would prevent the blackout of Turner Broadcasting content while arbitration is pending. ….  As mentioned, Turner Broadcasting “irrevocably offer[ed]” approximately 1,000 distributors agreements to engage in baseball style arbitration in the event the parties fail to reach a renewal agreement, and the offered agreement guarantees no blackout of Turner Broadcasting content once arbitration is invoked.  AT&T’s counsel represented the no-blackout commitment is “legally enforceable,” …, and AT&T “will honor” the arbitration agreement offers ….  Consequently, the government’s challenges to the district court’s treatment of its economic theories becomes largely irrelevant, at least during the seven-year period.  Counsel for Amici Curiae 27 Antitrust Scholars explained that arbitration agreements make the Nash bargaining model premised on two-party negotiations “substantially more complicated,” …, and Professor Shapiro [DOJ’s expert witness] acknowledged that taking the arbitration agreements into account would require “a completely different model.”

Moreover, the appeals panel quoted with apparent approval the lower court’s earlier acknowledgment that this arbitration structure would have “real world effects” on negotiations between AT&T/Time Warner, on the one hand, and its competitors, on the other hand, over renewal of  licenses from Time Warner/Turner Broadcasting of content for use on a competitor’s networks.

Neither the model nor Professor Shapiro’s opinion [the report from DOJ’s expert witness] accounted for the effect of the irrevocably-offered arbitration agreements, which the district court stated would have “real world effects” on negotiations and characterized “as extra icing on a cake already frosted,” … another reason the government had not met its first-level burden of proof.

The bottom line here is that the “baseball arbitration” structure employed in the AT&T/Time Warner acquisition, as well as in earlier media transactions such as the Comcast-NBCU merger, has received a blessing from the DC Circuit Court of Appeals as a “real world” means of mitigating anti-competitive incentives arising when one party controls access to assets that a competitor must rely upon to remain competitive.  Other industry examples of such a potentially anti-competitive situation include control by an oil & gas producer of crucial pipelines and and control a by power producer of crucial electricity transmission or distribution systems.

We shall have to see if the DOJ will seek US Supreme Court review of its defeat in this antitrust dispute.

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Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. 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). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

CPR Delegation Participates in the 69th Session of the UNCITRAL Working Group II on Expedited Arbitration

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In the picture (from left to right): Franco Gevaerd, Olivier P. André, and Piotr S. Wójtowicz.

By Franco Gevaerd

From Feb. 4-8, 2019, the United Nations Commission on International Trade Law Working Group II held its 69th session at the United Nations headquarters in New York. At this session, as set forth by the UNCITRAL during its 51st session, Working Group II commenced its deliberations on issues relating to expedited arbitration (see the Report of the UNCITRAL on the 51st session).

Given the CPR Institute’s international experience and expertise in international arbitration, the UNCITRAL Secretariat invited CPR to participate in the session as an observer delegation representing its views on expedited arbitration to facilitate Working Group II’s deliberations.

CPR sent a five-member delegation: Noah J. Hanft, President & CEO; Olivier P. André, Senior Vice President, International; Anna M. Hershenberg, Vice President, Programs and Public Policy & Corporate Counsel; Franco Gevaerd, International Consultant/Legal Intern; and Piotr S. Wójtowicz, Legal Intern.

Established in 1966 by the U.N. General Assembly, UNCITRAL plays an important role in developing an improved legal framework for international trade and investment, and in harmonizing and modernizing the law of these fields. The substantive preparatory work involved in doing that is typically assigned to UNCITRAL’s working groups (see the U.N.’s “A Guide to UNCITRAL”).

The UNCITRAL Working Group II is composed of UNCITRAL’s 60 member States and has been developing work focused on arbitration, conciliation and mediation, and dispute settlement. The group’s most recent project is the Singapore Convention. A signing ceremony for the convention is scheduled for Aug. 7, 2019.  Now, as mentioned above, the group’s attention has turned to the topic of expedited arbitration.

Expedited arbitration aims to streamline the process to reduce its time and cost. This topic has long been discussed by the international arbitration community and explored by arbitration institutions, mostly due to concerns with the length, cost and undue formality in the process, especially in less complex cases.

At the beginning of the group’s deliberations, it was generally agreed that this session’s work should “focus on establishing an international framework on expedited arbitration, without prejudice to the form that such work might take.” After that, the work should then proceed to analyze aspects relating to emergency arbitrators, adjudication, early dismissal of claims, and preliminary determinations by arbitral tribunals.

During the session, Working Group II participants discussed in depth many issues related to key aspects of expedited arbitration, including how to foster efficiency while preserving quality, due process and fairness; enforcement of awards resulting from expedited arbitration; application of the expedited procedure, and management of the proceedings.

CPR’s contributed substantially to the discussion throughout the week. In the Working Group II session’s first day, Anna Hershenberg pointed out that since its foundation, CPR has focused on creating rules that aim at efficient dispute resolution and users’ autonomy. She noted that in order to foster efficiency, CPR has built into its domestic and international arbitration rules quick time frames. Consequently, CPR’s international and domestic arbitration cases historically take an average of slightly more than 11 months from commencement of the proceedings to the arbitral award.

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Anna M. Hershenberg making her remarks during the session.

Later in the week, addressing the Working Group’s request to arbitral institutions to provide input on their experiences handling expedited arbitration proceedings, Olivier André pointed out:

CPR administered and non-administered arbitration rules already provide for time requirements which limit the length of proceedings. Users of CPR arbitration often customize their arbitration clauses to further limit these time requirements. In 2006, CPR also promulgated a fast-track procedure to supplement the non-administered arbitration rules. Parties can agree to this procedure to shorten the time requirements provided for under the rules and limit certain other procedural aspects, such as disclosure and the number of arbitrators, to expedite their proceeding.

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Olivier P. André making his remarks during the session.

Besides the CPR’s Fast Track Arbitration Rules, CPR also offers to users two other set of rules that provide for expedited arbitration procedures: The CPR Rules for Expedited Arbitration of Construction Disputes, and the CPR’s Global Rules for Accelerated Commercial Arbitration. In addition, CPR’s committees, which are composed of representatives from different stakeholders involved in the arbitration process, often discuss ways to improve the arbitration process in general and in specific industries.

By the end of the week’s discussion, Working Group II was able to find a consensus in many of the key aspects of expedited arbitration discussed, such as reasoned vs. unreasoned awards, monetary thresholds, and number of arbitrators for expedited arbitration.

Several questions, however, are still open to discussion for the next Working Group II session. For example, what will be the form of the group’s work? And will this international framework be applied to arbitration in general, or specific to international commercial arbitration?

The next session of the UNCITRAL Working Group II is preliminarily scheduled to take place from Sept. 30 to Oct. 4, 2019, at the United Nations in Vienna. CPR is looking forward to continuing to contribute to the efforts.

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The author is CPR’s International Consultant/Legal Intern. He holds a LL.B. from Pontifical Catholic University of Paraná (Brazil) and a LL.M. in International Commercial Law and Dispute Resolution from Pepperdine Law/Straus Institute for Dispute Resolution.