Update: An Influx of Arbitration Legislation

By Tamia Sutherland

The passage and March 3 signing of H.R. 4445, Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 has inspired the introduction of more than 170 bills involving arbitration.

Sen. Lindsey Graham, R., S.C., called H.R. 4445 the most significant workplace reform since the Occupational Safety and Health Act of 1970, and said he is open to further arbitration law changes, on a bipartisan basis. Lindsay Wise and Jess Bravin, Senate Approves Bill Barring Forced Arbitration in Sexual-Assault, Harassment Claims, Wall Street Journal (Feb. 10)(available at https://on.wsj.com/38tmR3Q).

Of the current arbitration-related proposals, there are some duplicates with House and Senate introductions. Still, many facets of arbitration, in and out of government, are covered by the bills.

Activity on some is possible this year.

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In an April 6 Securities Arbitration Alert blog post, George Friedman, Publisher & Editor-in-Chief, discussed Congress and the rise in arbitration legislation:

The recent pace of legislative activity prompted us to look up how many bills have been introduced in the 117th Congress that in some way, shape, or form, refer to arbitration.

search we conducted using the non-partisan www.govtrack.us Website shows that 171 bills have been introduced so far that contain the term “arbitration” or “arbitrate” – 106 in the House and 65 in the Senate.

Not all bills are anti-arbitration, although the majority would amend the Federal Arbitration Act, other federal laws, or both, to curb pre-dispute arbitration agreement use. Democrats introduced all but four bills.

The Securities Arbitration Alert post can be found here.

A few days after the passage of H.R. 4445, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a March 8 hearing on arbitration’s effects on consumers’ financial services contracts. The purpose was to introduce another arbitration bill.

Chairman Sherrod Brown, D., Ohio, presided over the hearing, and in his opening statement said that:

Big companies should not decide on behalf of Americans how they should pursue justice. Consumers–not corporations–should be able to decide whether they want to go through the public court system, through mediation, or through arbitration. . . . That’s why I introduced the Arbitration Fairness for Consumers Act last week with 21 cosponsors in the Senate, many of whom serve on this Committee.”

The Arbitration Fairness for Consumers Act would prohibit arbitration clauses in consumer financial products by amending the Consumer Financial Protection Act of 2010. Chairman Brown explained that the bill “gives consumers the right to decide how they want to pursue justice.” Brown’s website lists this press release and one-pager regarding the bill.

Following the opening statement, Ranking Member Patrick J. Toomey, R., Pa., provided background on Congressional attempts at arbitration restrictions in consumers’ financial services contracts:

In 2017, the CFPB issued a rule that would’ve banned these agreements for consumer financial products. However, Congress overturned this rule under the Congressional Review Act. Since then, Democrats have introduced bills that would undo Congress’ sensible decision.

Then, witnesses representing consumer interest groups Public Justice and Public Citizen, and the business-backed U.S. Chamber of Commerce, provided opposing testimony regarding the regulation of arbitration clauses in consumers’ financial services contracts.

In addition, law professors Todd J. Zywicki and Myriam Gilles from, respectively, Arlington, Va.’s George Mason University Antonin Scalia School of Law and Yeshiva University’s Benjamin N. Cardozo School of Law in New York also provided expert testimony, with Zywicki anti-legislation and Gilles strongly supporting the proposal.

A video of the March 8 hearing and the witness statements are available here. Since its introduction, no further action has occurred on the Arbitration Fairness for Consumers Act.

There’s more. The Forced Arbitration Injustice Repeal (FAIR) Act of 2022, a broad bill that would void all pre-dispute mandatory arbitration agreements in employment, antitrust, consumer, and civil rights passed the House by a 222-209 vote on March 17. That vote’s margin is much narrower than the 335-97 vote the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act received in the House in February.

The FAIR Act passed the House despite strong opposition. Two reports from the Institute for Legal Reform, a U.S. Chamber of Commerce unit that lobbies for tort reform on behalf of businesses and has long opposed arbitration restrictions, concluded that consumers and workers typically do better in arbitration. A November 2020 Institute for Legal Reform report is available here, updated from 2019, and an even more recent November 2021 update is available here.

Consumer organizations, on the other hand, were elated. Following the FAIR Act’s passage Lisa Gilbert, executive vice president of Public Citizen, noted:

“…Today, in an important step forward, the House passed the FAIR Act, a measure that would end the tricks and traps that are endemic in form contracts, including those you enter by clicking ‘I agree’ on the internet.

Hundreds of millions of contracts contain forced arbitration provisions and class-action waivers, denying consumers and workers the ability to file lawsuits in court and preventing them from joining with other similarly situated people to sue together…Today, the House finally stated: No more.”

Gilbert’s full statement is available here.

The FAIR Act was introduced by longtime mandatory arbitration opponent Hank Johnson, D., Ga., who has introduced this legislation in the past. For a discussion of the act’s September 2019 House passage–it later stalled in the Senate–and the controversy over the Institute for Legal Reform’s original 2019 arbitration report, is available at Andrew Garcia, The Fairness Agenda: Arbitration Legislation Advances in the Wake of a Critical Report , 37 Alternatives 157 (November 2019) (available at https://bit.ly/3LSoG93).

The House Committee on the Judiciary published this press release following last month’s passage of the FAIR act.  There has been no action yet on the Senate version, which is before the Judiciary Committee.

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Other arbitration bills have attracted attention, and could gain traction in the wake of H.R. 4445’s passage and signing.  They include:

  • The Justice for Servicemembers Act,
  • Fairness in Nursing Home Arbitration Act, and
  • The Investor Choice Act.

The Justice for Servicemembers Act aims to amend Title 9 of the U.S. Code—the Federal Arbitration Act—to prohibit pre-dispute agreements that require arbitration of certain disputes arising from claims of servicemembers and veterans.  The disputes are claims brought under chapter 43 of U.S.C. Title 38 relating to employment and reemployment rights of members of the uniformed services, and under the Servicemembers Civil Relief Act (50 U.S.C. 3901–4043).

The Fairness in Nursing Home Arbitration Act was introduced to amend titles XVIII and XIX of the Social Security Act “to prohibit skilled nursing facilities and nursing facilities from using pre-dispute arbitration agreements with respect to residents of those facilities under the Medicare and Medicaid programs, and for other purposes.”

The Investor Choice Act attempts to amend the Securities Exchange Act of 1934 to prohibit mandatory pre-dispute arbitration in investment adviser agreements.

Also, H.R. 5974, the Veterans and Consumers Fair Credit Act, was introduced in both the House and Senate to amend the Truth in Lending Act to extend to all consumers the consumer credit protections provided to U.S. Armed Forces members and their dependents under title 10 of the U.S. Code. The bill garnered a joint letter in support signed by 188 civil rights, community, consumer, faith, housing, labor, legal services, senior rights, small business, veterans’ organizations, and academics representing all 50 states and the District of Columbia. Some of the signatories include Main Street Alliance, Minority Veterans of America, the NAACP, National Fair Housing Alliance, and Public Citizen. The joint letter is available at the website of Public Justice, a Washington nonprofit law consumer- and employee-side law firm, here.

Many of these proposals are riding H.R. 4445’s coattails and have the potential to be framed as an extension of the bill ahead of the midterm elections.

For more background information on H.R. 4445, and how it restricts arbitration use for certain employment matters, see Tamia Sutherland & Russ Bleemer, Senate Sends Bill Restricting Arbitration for Workplace Sexual Assault Victims for Biden’s Signature, CPR Speaks (Feb. 10) (available here).

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The author, a second-year law student at the Howard University School of Law, in Washington, D.C., is a CPR 2021-22 intern.

[END]

Airbnb’s Clickwrap Agreement Prevails in Florida’s Top Court, Sending Hidden Camera Dispute to an Arbitrator

By Russ Bleemer

A highly anticipated Florida Supreme Court case on the effect of incorporating arbitration rules into a consumer contract was decided this morning in favor of the app provider, Airbnb, sending a decision about whether a case is arbitrated to an arbitrator, instead of a court.

Today’s opinion in Airbnb v. Doe, No. SC 20-1167, means that the inclusion of the American Arbitration Association rules, which are referenced in Airbnb’s “clickwrap” agreement—linked and behind the box that is checked before purchasing access to one of the company’s rental accommodations listings—are considered a part of the customer’s obligations under their contract with Airbnb.

The decision is posted on the Court’s website here.

The Florida case is important because the U.S. Supreme Court last year balked at addressing the incorporation question.  Today’s 6-1 opinion by Florida Supreme Court Justice Ricky Polston notes that in endorsing the incorporation concept, it is following every U.S Circuit Court opinion on the subject.

The opinion reverses a detailed decision on the effects of clickwrap agreements and ambiguities in incorporating arbitration rules. The 2-1 Second Florida District Court of Appeals found the reference vague and not in line with Supreme Court caselaw that requires the reference to an arbitration rule to be clear and unmistakable. John Doe & Jane Doe v. Natt & Airbnb Inc., 299 So. 3d 599 (Fla. 2d DCA 2020) (available at https://bit.ly/3BPYPcu).

* * *

In June 2020, the nation’s top Court agreed to hear a case on the effect of a carve-out from arbitration in a sales contract between two medical devices companies.  At the same time, the Court denied a separate cross-petition in the same case on challenging the determination of arbitrability of the case on a question of incorporation by reference of AAA rules.

When the December 2020 argument in Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963, was held, the Court got stuck, repeatedly, on the incorporation by reference point.  It appeared that the effect of the delegation of the arbitrability question—whether the incorporation of the rules was effective to put the decision of arbitrability, as well as the decision about the carve-out, in the arbitrator’s hands–depended on an analysis of whether that delegation was “clear and unmistakable,” the issue the Court had rejected.

A month later, the U.S. Supreme Court dismissed the case as improvidently granted. See Russ Bleemer, “Scotus’s Henry Schein No-Decision,” CPR Speaks (Jan. 25) (available here).

So this morning’s Florida Supreme Court decision will be seen as a reaffirmation of what many drafters consider standard drafting practice in incorporating a set of rules into their arbitration contracts–though after the Florida Second District fairness opinion associated with the app and the delegation, drafters likely will proceed with heightened awareness that the arbitrability provisions will be a potential target for parties who don’t want to arbitrate. Today’s case provides guidance for the U.S. Supreme Court’s “clear and unmistakable” arbitration delegation requirement.

* * *

Justice Polston signaled his strong support of the effectiveness of Airbnb’s contractual incorporation by reference of the AAA rules at the Nov. 2 oral arguments in the case.  See Arjan Bir Singh Sodhi, “Florida’s Top Court Takes on ‘Who Decides?’ in Airbnb Arbitration Case,” CPR Speaks (Nov. 5) (available here).

Today, he followed up with a majority opinion that eviscerated the state appeals court decision, relying instead on the reasoning in the dissent by Florida Second District Court of Appeal Judge Craig C. Villanti. (See appeals court opinion link above.)  “Here,” Polston wrote, “Airbnb and the Does clearly and unmistakably agreed that an arbitrator decides questions of arbitrability.”  He continued:

Airbnb’s Terms of Service explicitly incorporate by reference the AAA Rules: “The arbitration will be administered by the American Arbitration Association (‘AAA’) in accordance with the Commercial Arbitration Rules and the Supplementary Procedures for Consumer Related Disputes (the ‘AAA Rules’) then in effect.” The Terms of Service also provide a hyperlink to the AAA Rules and a phone number for the AAA. Further, the incorporated AAA Rules specifically provide that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” (Emphasis added.) The Terms of Service incorporate the AAA Rules, and the express language in the AAA Rules empowers the arbitrator to decide arbitrability. Accordingly, consistent with the persuasive and unanimous federal circuit court precedent, we conclude that incorporation by reference of the AAA Rules that expressly delegate arbitrability determinations to an arbitrator clearly and unmistakably evidences the parties’ intent to empower an arbitrator to resolve questions of arbitrability.

Florida Supreme Court Justice Jorge LaBarga dissented. He wrote,

Because the arbitrability provisions relied upon by the majority to reach its decision in this case were buried within voluminous pages of rules and policies incorporated only by reference in a clickwrap agreement, the parties’ agreement to defer the consequential decision of arbitrability to the arbitrator was anything but clear and unmistakable.

Agreeing with and quoting heavily from the now-quashed appeals court decision, LaBarga wrote, “Unsuspecting consumers should not be expected to find the proverbial needle in the haystack in order to make a clear and unmistakable decision about arbitrability—that choice should be conspicuously located in the clickwrap agreement for the consumer to consider.

The case began when an anonymous Texas couple filed a complaint against Airbnb and the condominium owner who had listed the Florida property on the Airbnb platform. The complaint included intrusion against the condominium owner, and constructive intrusion against Airbnb, as well as loss of consortium against both the condominium owner and Airbnb. The plaintiffs had rented the condominium for three days in May 2016 from the Airbnb website, and later learned that the owner had installed hidden cameras and recorded the couple without their knowledge.

The plaintiffs filed their complaint in the Manatee County, Fla., circuit court. Airbnb moved to compel to settle the dispute through an arbitration proceeding. Airbnb claimed that the Does are bound to an arbitration proceeding under the signed terms and conditions when they accepted the app’s clickwrap agreement—that is, the legal contract in the Airbnb online software in which the customer indicates acceptance by typing in yes, or selecting a particular icon or link before they may use the service.

Today, the Florida Supreme sent the decision on how their case will proceed to an AAA arbitrator.

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

[END]

Supreme Court Rejects Federal FAA Jurisdiction for Arbitration Award Enforcement and Challenges

By Russ Bleemer & Andrew Ling

The Supreme Court embraced a narrow construction of subject-matter jurisdiction in arbitration matters today, reversing a Fifth U.S. Circuit Court of Appeals decision that a federal trial court had jurisdiction under Sections 9 and 10 of the Federal Arbitration Act to confirm and overturn arbitration awards.

Badgerow v. Walters, No. 20-1143 (today’s decision available here), means that award enforcement processes and efforts to overturn tribunal decisions will continue to be directed state courts as a matter of state contractual law. In other words, FAA Sections 9 and 10 jurisdiction is in state court, and the “look through” federal court jurisdiction analysis steps accorded to FAA Sec. 4–which provides federal courts jurisdiction on getting parties into arbitration–will not apply.

The Fifth Circuit had said that federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under FAA Sections 9 and 10 when the underlying dispute was on a federal question.  The opinion, now reversed, was based on Vaden v. Discover Bank, 556 U. S. 49 (2009) (available at https://bit.ly/3Ca42MA), where the Supreme Court assessed whether there was a jurisdictional basis to decide an FAA Section 4 petition to compel arbitration.

Today’s decision on the arcane subject of jurisdiction clarifies Vaden‘s application with a textual analysis on how FAA Sec. 4 differs from Sections 9 and 10.

The decision comes amidst an unprecedented time for arbitration at the Court. While Court watchers’ eyes have been on the confirmation process for Judge Ketanji Brown Jackson to succeed retiring Justice Stephen G. Breyer, over the past 10 days, the Court has heard four oral arguments covering five arbitration cases.  Highlights of the cases can be found on CPR Speaks, here. The March arbitration cases are expected to be decided before the current Supreme Court term ends in June.

This morning’s 8-1 decision, written by Justice Elena Kagan, declines to extend Vaden to the FAA’s award enforcement and challenge sections. It states, “The question presented here is whether that same ‘look-through’ approach to jurisdiction applies to requests to confirm or vacate arbitral awards under the FAA’s Sections 9 and 10. We hold it does not. Those sections lack Section 4’s distinctive language directing a look-through, on which Vaden rested. Without that statutory instruction, a court may look only to the application actually submitted to it in assessing its jurisdiction.”

Badgerow involves a FINRA arbitration brought by Louisiana petitioner Denise Badgerow, a financial adviser, against the principals of her former employer, REJ Properties Inc. She maintains she was harassed on the job, and filed a complaint with FINRA claiming her employer and its principals violated federal securities laws, U.S. Securities and Exchange Commission regulations, and the rules of FINRA, which regulates the actions of broker-dealers.

After losing the arbitration, Badgerow brought a new claim in a Louisiana state court to vacate the FINRA award that dismissed her complaints. The principals removed the case to Louisiana Eastern U.S. District Court, and both the District Court and the Fifth Circuit upheld federal jurisdiction. REJ Properties and its parent, Ameriprise Financial Inc., an NYSE-traded financial services company, were not part of the state court claim nor today’s Supreme Court decision.

The decision this morning is surprising in light of the Nov. 2 oral arguments. Badgerow’s attorney, Daniel L. Geyser, a Dallas partner in Haynes and Boone, faced strong skepticism from the Court on why the sections on enforcing and overturning awards should be treated differently for federal jurisdictional purposes than the earlier section on compelling parties into arbitration.  See CPR Speaks coverage here.

But the Court today accepted Geyser’s argument that the Sec. 4 language, which specifically says that parties seeking to compel arbitration proceed in federal court, isn’t present for the award enforcement and challenges of the statute’s later sections. “We have no warrant to redline the FAA, importing Section
4’s consequential language into provisions containing nothing like it,” wrote Kagan, adding, “Congress could have replicated Section 4’s look-through instruction in Sections 9 and 10.”

In an email, Geyser writes, “We’re very grateful for the win, and delighted for our client.  We think the Court’s opinion is an important contribution in clarifying the jurisdiction rules for everyday filings under the FAA.”

Walters’ attorney, Washington, D.C.-based Williams & Connolly partner Lisa Blatt, did not immediately reply to an email request for comment.

The opinion concludes noting that “Congress chose to respect the capacity of state courts to properly enforce arbitral awards. In our turn, we must respect that evident congressional choice.”

The Court used the opinion to resolve a circuit split and clarify that the “look through” test needs textual support in the FAA. Under Vaden, a federal court should “look through” the Federal Arbitration Act claims to the “substantive controversy” to determine if they could have been brought in federal court for disputes under Section 4.

* * *

Justice Stephen G. Breyer’s 13-page dissent said that the divergent jurisdiction tests for the different Federal Arbitration Act sections was confusing. “Although this result may be consistent with the statute’s text,” he wrote, “it creates what Vaden feared—curious consequences and artificial distinctions.  . . . It also creates what I fear will be consequences that are overly complex and impractical.”

Instead, Breyer writes that he would use the Vaden look-through approach “to determine jurisdiction under each of the FAA’s related provisions—Sections 4, 5, 7, 9, 10, and 11.”

* * *

For more on the procedural history of the case, see Bryanna Rainwater & Russ Bleemer, “Next at the Supreme Court: Badgerow’s Attempt to Reevaluate FAA Jurisdiction,” CPR Speaks (September 15) (available here).

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Bleemer edits Alternatives to the High Cost of Litigation for CPR at altnewsletter.com. Ling, a third-year law student at the University of Texas School of Law, in Austin, Texas, is a CPR 2022 Spring Intern.

[END]

Adding a Claim, and Avoiding Arbitration:  The Supreme Court Reviews California’s Private Attorneys General Act

By Russ Bleemer

The U.S. Supreme Court Wednesday examined California’s law allowing individuals to stand in for the state and file suits on behalf of coworkers against their employers even when they have arbitration obligations in the employment contracts.

California’s Private Attorneys General Act unquestionably has affected individualized arbitration processes under the Federal Arbitration Act, as a result of the California Supreme Case of Iskanian v. CLS Transp. Los Angeles LLC, 327 P.3d 129 (Cal. 2014) (available at https://stanford.io/3ILcTY5), which authorizes California employees to avoid mandatory arbitration employment contracts requirements by filing representative suits under the PAGA law.  The Court had held that PAGA was not preempted by the FAA.

Employers have said that tens of thousands of suits have been filed under PAGA by employees with arbitration contracts.

That’s not a good look for a Supreme Court which has struck other laws interfering with the FAA, and was a problem this morning for the Court.  The history of the cases that authorized mandatory individualized arbitration with waivers of class actions–AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (available at http://bit.ly/2VcI4mi), and the case that extended the authorization to employment cases that followed, Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018) (available at http://bit.ly/2Y66dwK)–loomed over the arguments.  

California employers want to halt the law being used as an end-run around their workplace dispute programs, which has been used to force them into class processes they seek to avoid with mandatory arbitration dispute resolution procedures. Employment attorneys and consumer advocates have countered that PAGA is a crucial state law that allows people to vindicate their employment rights.

The Court wasn’t called upon to remove the PAGA law today. But there also likely won’t be a compelling reason to keep PAGA claims out of arbitration, or at least, allow the possibility, even though the agreement at issue barred them entirely. Ultimately, the decision will focus on the Court’s Concepcion and Epic Systems arbitration-supportive history.

As a result, in Viking River Cruises v. Moriana, No. 20-1573, the advocates and the Court wrestled with the nature of the PAGA claim—as a procedural move that allows for a different legal claim or claims, or a substantive right under state law.

The Concepcion and Epic Systems cases divided the Court 5-4. It’s a different Court today, with wider ideological lines, but the Court’s three liberal justices are still inclined to back class processes. The justices who were in opposition in Concepcion and Epic Systems—Justices Stephen G. Breyer, Sonia Sotomayor, and Elena Kagan—were most animated today.  They provided the toughest questions to Viking River’s Paul D. Clement, a former U.S. Solicitor General and a partner in the Washington office of Kirkland & Ellis, asking him to justify how the Court can police the laws California provides to its residents for use in vindicating their rights.

The Court’s conservatives mostly took a backseat this morning.

Clement, arguing in the nation’s top Court for the second time in nine days in an arbitration case (details on the previous case on CPR Speaks here), conceded that the state had properly installed the PAGA law, but also insisted that Concepcion had been violated.  He said the law violations that were the basis of original plaintiff Angie Moriana’s claims would have been easily addressed by an arbitrator, even with an award going to the state under PAGA.  But forcing the PAGA claim into courts opens up a flood of claims on behalf of many potential workplace plaintiffs without the guidance of Federal Rule of Civil Procedure 23’s protections for defendants.

Moriana’s lawyer, Scott Nelson, an attorney at Washington, D.C.’s Public Citizen Litigation Group, faced challenges on the FAA end-run by PAGA users by telling the Court that his client’s objection was to Viking River arbitration provisions that explicitly required waiving PAGA claims altogether. Nothing in the FAA, he said, requires the enforcement of such an agreement.

* * *

Paul Clement in his petitioner’s argument faced an immediate challenge from Chief Justice John G. Roberts Jr., who said that respondent Moriana wasn’t acting for herself, but as a delegee of the California Attorney General, securing a recovery for the state and her fellow employees. Clement responded that the setting the chief justice described wasn’t “the critical feature of PAGA.” He objected to Moriana bringing the PAGA claim on the part of the Viking River sales force as a whole, later explaining that the law’s use contravened the customary nature of arbitration as an individualized process.

Justice Elena Kagan interrupted, and confronted Clement with an objection echoed by her fellow liberal justices. The state, said Kagan, has determined that it needed law for policing that it did not have the capacity to do on its own.  “So this is a state decision to enforce its own labor laws in a particular kind of way that the state has decided is the only way to adequately do it,” she said.

Clement agreed: “At the end of the day, that’s right,” he said. But he insisted that Concepcion set the path for parties to agree to arbitrate such disputes, and the state must conform to the Court’s decision.

Kagan asked whether he thought there would have been views when the FAA was passed in 1925 that the then-new law would preclude the state from structuring its own law enforcement for its labor laws. Clement conceded it was an interesting question what sort of class actions could have been foreseen, but he said, “[C]ertainly, if we take Concepcion and Epic [Systems and Lamps Plus Inc. v. Varela, 139 S. Ct. 1407 (2019) (available at http://bit.ly/2GxwFbC)] as a given, and nobody has asked [the Court] to overrule those cases here. . . This Court said that state policy had to yield. I don’t think the state policy here is any more sacrosanct.”

Clement also noted for the first of repeated mentions that the California law is an outlier. While other states have considered the California law, he said its form is unique, and Clement emphasized that no other states joined in support of California as an amicus. (For details on the 22 amicus filers, as well as case background, see yesterday’s CPR Speaks preview of the argument, here.)

Clement lamented PAGA’s similarity to class actions on two points in particular, the potential dollar amounts that the claims put before the defendants, and the burdensome class discovery. Given the high stakes and the discovery, he said, “if I’m a defendant and you’re telling me I can’t escape this kind of aggregate litigation, . . . then I’m going to pick litigation every time, because I get lots of additional judicial review”  and remedies, and the result means that “arbitration is going to whither on the vine.”

Justice Sonia Sotomayor disputed Clement’s characterization of arbitration claim handling, noting that arbitration historically has handled complex cases, and the Court has backed its use in cases involving racketeering, antitrust and disparate impact claims. She said it’s parties that choose whether to have arbitration class actions, not the Court.

Clement countered that the key question, as raised by Justice Kagan, wasn’t complexity but it was the operation of the PAGA statute as the mechanism providing a cause of action and specifying penalties under it. He said that the FAA doesn’t preempt the statute itself, but the arbitration right under the contract has been cut off.  

Sotomayor pointedly stated that the goal was destroying the state’s mechanism for enforcing labor law violations, and Clement pushed back and said that the plaintiff’s claims could be brought in arbitration. He later noted that the critical part wasn’t calling PAGA a state claim, nor the classification of the claim as a substantive or procedural right, but the fact that the state claim let in many claims that are not customary in bilateral arbitration.

* * *

Public Citizen’s Scott Nelson said in response to the chief justice that the multiple claims of his client, respondent Angie Moriana, could be arbitrated as to her individual claims, and she could pursue others  on her own but under PAGA on behalf of the state and other workers.

He told Justice Amy Coney Barrett in response to a question that the most important part of his client’s claim wasn’t just that the PAGA claim belongs to California, but also that the FAA can’t override the right to pursue the claim that California has provided.

Nelson maintained that the PAGA action is not the kind of aggregated multiparty action on which the Court focused in Concepcion and Epic Systems, but rather the state’s right to civil penalties through its individual representatives. PAGA, he explained, can be brought by the state’s representative as an equally bilateral arbitration or litigation between the representative and the defendant.

The agreement waives Moriana’s right to pursue a statutory remedy, emphasized Nelson.  But Justice Samuel A. Alito Jr. was skeptical, and said that under the arbitration agreement, “she doesn’t have a right to pursue a substantive claim in court, but she does have a right to pursue the substantive claim just in arbitration. I thought that was sort of at the core of our precedents.  . . . Arbitration gets at the remedy. ”

Nelson responded that “the substantive claim . . . is the claim to recover civil penalties for these violations which are available only via PAGA, and the arbitration agreement explicitly prohibits the assertion” of a PAGA claim and a representative claim.  He said that the California Labor Code claim could be pursued in arbitration, but not the PAGA claim for damages.

Justice Breyer pressed Nelson on whether the California rule had special implications for arbitration, and whether the PAGA case could be brought in court if the Supreme Court held PAGA targeted arbitration. Nelson responded that if the law “is inconsistent with the nature of arbitration, then that’s what creates a problem.  . . . [W]hat the state has said is for contracts, whether they are part of an arbitration agreement or not, you can’t waive the right to bring a PAGA claim in an employment agreement before the claim arises. So [it] applies to every kind of agreement.”  

Justice Brett Kavanaugh concluded Scott Nelson’s argument by asking him to react to Viking River attorney Paul Clement’s point that California is alone on having the PAGA law. “It’s certainly true that California is the only state that has this mechanism,” said Nelson, adding “It’s somewhat ironic that one of the arguments made in favor of this Court’s review was that if you let California do it, everyone will do it. Now California is the only state that wants to do it.”

* * *

In his rebuttal, Kirkland & Ellis’s Clement said that the big problem with the law was that the representative could submit a claim on behalf of all of the employees “for all these disparate violations,” and in considering the scope of such an action, “then there is nothing left of Concepcion. ….. It’s too naked a circumvention.”

He re-emphasized his point about California’s outlier status in producing laws that are anti-arbitration. He noted that the substantive-procedural distinction can’t be used to avoid Concepcion/Epic Systems arbitration requirements.

Clement’s last point was on what he termed “practicalities.” He said that if respondent Moriana’s only claim was on timing of her final paycheck, “an arbitrator could dispatch that case in about an hour,” cutting her a check, and cutting a check for the state as well. But to do that in arbitration with many claims would require a claims administrator.  

Before Concepcion, he said, little attention was paid to the 2004 PAGA statute. Now, since Concepcion, Clement concluded, 17 PAGA complaints are being filed daily.

* * *

The official question presented to the Court today is

Whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA.

A decision is expected before the current Court term concludes at the end of June. For more background on Viking River, see Mark Kantor, “US Supreme Court to Review Whether Private Attorney General Action Can Be Waived by an Arbitration Agreement,” CPR Speaks (Dec. 16) (available here).

Today’s case concludes a run of four U.S. Supreme Court arbitration cases in nine days. Previews and analysis of the cases can be found on this CPR Speaks blog using the search function in the upper right, and searching for “Supreme Court” and/or “arbitration.” An overview and an analysis of the 2021-2022 Supreme Court arbitration docket, including the cases argued over the past two weeks, can be found at Russ Bleemer, “The Supreme Court’s Six-Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022), and Imre Szalai, “Not Like Other Cases: SCOTUS’s Unique Arbitration Year,” 40 Alternatives 28 (February 2022), both available for free at https://bit.ly/3GDEJEK. Argument coverage is available on CPR Speaks, here.

The audio stream archive and the transcript of the March 30 Viking River Cruises argument can be found on the Supreme Court’s website here.

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

[END]

The Fight over Arbitration and Class-Action Access Returns to the Supreme Court Tomorrow on California’s PAGA Law

By Russ Bleemer

Wednesday’s U.S. Supreme Court oral argument in Viking River Cruises v. Moriana, No. 20-1573, will sort the relationship between the Federal Arbitration Act and California’s Private Attorneys General Act. The case concludes a Supreme Court run of five arbitration cases in four oral arguments over nine days.

The Court tomorrow will likely revisit its extensive history on federal preemption of state laws in deciding whether the state law will continue to allow individuals with arbitration agreements to file suits in courts.

The issue is crucial for California employers, which have argued that the law is used as an end-run around their workplace dispute programs that forces them into class processes they seek to avoid with mandatory arbitration dispute resolution procedures.

Employment attorneys and consumer advocates have countered that PAGA is an essential state law that allows people to vindicate their employment rights.

The result is a return to the nation’s top Court on the broad issue of arbitration fairness. The fight over whether the California representative-class PAGA cases may continue in the place of individual arbitration—business groups say there have been tens of thousands of such cases—is also an amicus battleground among the nation’s leading business and consumer advocacy groups.  The amicus participants include business and consumer groups that have faced off in Washington, D.C., and federal and state courts nationwide on arbitration fairness issues for decades.

There are 22 amicus briefs filed.  Friend of the Court briefs on behalf of business petitioner Viking River Cruises, which is trying to overturn the PAGA law, have been filed by the California New Car Dealers Association; the Washington Legal Foundation and Atlantic Legal Foundation, nonprofit public interest law firms focusing on free marker principles, both based in Washington; the Employers Group, a 126-year-old California-based industry organization; Uber Technologies Inc. and Postmates LLC; the U.S. Chamber of Commerce, California Chamber of Commerce, and the National Federation of Independent Business Small Business Legal Center; the Retail Litigation Center Inc. and the National Retail Federation; the California Employment Law Council, a 29-year-old nonprofit that lobbies and advocates on behalf of employers; the Civil Justice Association of California, a 43-year-old tort reform organization; the Restaurant Law Center; and the California Business and Industrial Alliance, a five-year-old trade group of business executives and entrepreneurs formed specifically to fight the PAGA law.

Backing Angie Moriana, a sales representative for the cruise line who brought several wage claims against her employer, are consumer and employee association representatives including the National Academy of Arbitrators, a 75-year-old nonprofit professional organization; Steve Chow (who, according to his filing, is “a first-generation American who owns and operates three convenience stores in the San Francisco Bay Area” and who “writes in favor of [PAGA]. Mr. Chow cannot afford to require his few employees to arbitrate, and the [FAA] might not apply to his small business anyway.”); the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO); the California Rural Legal Assistance Inc. (a 56-year-old legal services organization) and the California Rural Legal Assistance Foundation (a legal nonprofit that represents California immigrant farmworkers and others in class processes, including PAGA cases, in front of state agencies); a group of 10 civil procedure and arbitration law professors; the California Employment Lawyers’ Association, the National Employment Law Project, and the National Employment Lawyers’ Association, all nonprofit worker advocacy groups; Public Justice, a Washington nonprofit law firm and consumer advocacy group; the Taxpayers Against Fraud Education Fund (a 36-year-old Washington, D.C., nonprofit “dedicated to preserving effective anti-fraud legislation at the federal and state levels,” focusing on whistleblower statutes); the State of California (which in its statement of interest in the case notes, “In the State’s experience, PAGA is an important law enforcement tool enacted to address serious and widespread violations of the California Labor Code”); “Arbitration Scholar” Imre Stephen Szalai, a Loyola University New Orleans College of Law professor filing his own brief [Szalai recently wrote on the Court’s arbitration caseload for CPR Speaks’ publisher CPR’s monthly newsletter Alternatives; see link below]; Tracy Chen, “in Her Representative Proxy Capacity on Behalf of the State of California” (noting in her interest statement that she is “a proxy of the State of California’s Labor and Workforce Development Agency . . .pursuant to PAGA” and a plaintiff in a securities industry class action case seeking employer reimbursement of investment adviser fees), and the American Association for Justice, the Washington-based trial lawyers’ professional organization.

The PAGA law enables an individual employee to seek a court judgment for breach of California labor laws as a “private attorney general” on behalf of the state of California.

The question presented to the Supreme Court is

Whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA.

The controversial California Supreme Case of Iskanian v. CLS Transp. Los Angeles LLC, 327 P.3d 129 (Cal. 2014) (available at https://stanford.io/3ILcTY5), authorizes California employees to avoid mandatory arbitration employment contracts requirements by filing representatives suits under the PAGA law.  California’s top court held that PAGA was not preempted by the FAA.

As the Supreme Court itself points out in a prelude to the Viking River Cruises question presented, Iskanian has authorized Californians to avoid the Court’s ruling backing mandatory individualized arbitration in consumer cases in the seminal matter preceding Iskanian, AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (available at http://bit.ly/2VcI4mi), and the case that extended the authorization to employment cases that followed, Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018) (available at http://bit.ly/2Y66dwK).

For more background on Viking River, see Mark Kantor, “US Supreme Court to Review Whether Private Attorney General Action Can Be Waived by an Arbitration Agreement,” CPR Speaks (Dec. 16) (available here).

The audio stream of Wednesday’s argument will be available on the U.S. Supreme Court’s home page at 10 a.m. Eastern, here. Tomorrow afternoon, the Court will make available an archive of the stream and a transcript of the argument here.

* * *

A preview and an analysis of the 2021-2022 Supreme Court arbitration docket, including the cases argued this week and last week, can be found at Russ Bleemer, “The Supreme Court’s Six-Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022), and Imre Szalai, “Not Like Other Cases: SCOTUS’s Unique Arbitration Year,” 40 Alternatives 28 (February 2022), both available for free at https://bit.ly/3GDEJEK. Argument coverage is available on CPR Speaks, here.

* * *

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

[END]

Looking for Definitions, the Supreme Court Weighs the Limits of the Federal Arbitration Act’s Sec. 1 Exemption

By Russ Bleemer

Today’s Federal Arbitration Act oral argument in the U.S. Supreme Court gives the justices the opportunity to refine the meaning of the first section of the nearly century-old law designed to discourage bias against arbitration.

They struggled with that task in trying to set the limits of the types of workers who would be exempt from arbitration under the law, at the same time sounding skeptical that a residual exemption would not provide the exemption to some transportation workers.

The justices explored the classes of workers currently exempt from arbitration under the FAA, and discussed expansions to particular jobs in relation to the statute’s wording.  At times the justices appeared sympathetic to arguments from both sides as they tried to divine current application to commercial airline workers—job categories that didn’t exist when the FAA was enacted in 1925.

Southwest Airlines Co. v. Saxon, No. 21-309,  presents a Federal Arbitration Act Sec. 1 question:

Whether workers who load or unload goods from vehicles that travel in interstate commerce, but do not physically transport such goods themselves, are interstate ‘transportation workers’ exempt from the Federal Arbitration Act.

The statute’s defines its application to maritime transactions and commerce. The key section before the Court this morning is the conclusion that notes “nothing [in the statute] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

The Court has interpreted the law to mean that the exception from FAA application is only for transportation workers “engaged in” interstate commerce. Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001) (available at https://bit.ly/2HhwYLu).

The Seventh U.S. Circuit Court of Appeals in the case (available at https://bit.ly/3rRA8Ln) held that the plaintiff was a transportation worker, and therefore exempt from the FAA, and didn’t have to arbitrate her Fair Labor Standards Act claim.

Petitioner Southwest Airlines requires all workers who aren’t covered by collective bargaining agreements to arbitrate workplace disputes, according to court papers which also note that the original plaintiff worked only locally—a “ramp agent supervisor” at Chicago’s Midway Airport.  

For background, see Russ Bleemer, Supreme Court Preview: An Airline and an Employee Will Argue Over the Reach of an Exclusion from the Federal Arbitration Act, CPR Speaks (March 25) (available here).

Southwest Airlines’ lawyer said the FAA carves out the employee, who did not travel, for not being in interstate commerce, and therefore out of the flow of interstate commerce, following “from Circuit City and Section 1’s text and structure.”

Shay Dvoretzky, a Washington, D.C., partner at Skadden, Arps, Slate, Meagher & Flom, told the Court that meant that “an exempted class of workers must perform work analogous to that of seamen and railroad employees,” whose employment was characterized by working on moving ships and trains.

Jennifer Bennett, the lawyer for respondent Latrice Saxon, who heads the San Francisco office of Gupta Wessler, said that railway workers’ class was informed by the treatment of seamen in the statute and the “residual” wording of Sec. 1—“any other class of workers engaged in foreign or interstate commerce”—and that covered the original plaintiff, who therefore was not obligated to arbitrate her case under her employment agreement because of the exemption.

* * *

Dvoretzky opened on behalf of Southwest Airlines noting that petitioner Saxon was like a stevedore, land-based shipping industry cargo loaders who don’t travel, originally perceived as separate from the statute’s arbitration exemption.  “Seamen”, he said, was a term of art, with a long case history, and was based on the fact that they went on “long voyages,” unlike stevedores.

Chief Justice John G. Roberts Jr. told Dvoretzky that he was “very precise” in “emphasizing border crossing in . . . determining interstate commerce” in his opening and in his court papers, and asked whether a border crossing was required for the worker to be in interstate commerce under FAA Sec. 1.

No, Dvoretzky replied, the question “is whether movement of people or goods through the channel of interstate commerce is central to the job of the class of workers.” The inquiry, he explained, was “the job of the class of workers”—here, the ramp agent supervisor. “They all have the same job description,” he said, “and their job description doesn’t involve getting on the plane.”

But Dvoretzky initially added that the work, following Congress’s lead, would have to cross the border.  Even if not going across borders, he said, seamen as a class have the central characteristic of traveling on a ship.  He contrasted the ramp agent supervisors, with their own class characteristics, and which doesn’t include traveling across borders.

Justice Sonia Sotomayor said she didn’t see any difference between the FAA Sec. 1 definition of railway workers, which includes cargo loaders, and stevedores in the shipping industry. Dvoretzky countered that the view incorporated the “the fundamental characteristic of seamen is predominantly spending time on the ship.”

Justice Neil Gorsuch turned to the FAA Sec. 1 language, and asked repeatedly what evidence Dvoretzky could use to indicate that some railway workers were not covered by the statutory exclusion. “I know you like to talk about people who travel,” said Gorsuch, “What about the fellow who unloads cargo that’s come in interstate commerce from the railroad and hands it off to a carrier locally.  . . .  [W]hy isn’t the same person unloading cargo from a plane in the same position?”

Dvoretzky said those workers weren’t covered by the FAA Sec. 1 exemption. He said there are many types of railway workers, suggesting that many would not be part of the class of workers in the statute.

Gorsuch pressed for more. Dvoretzky conceded there was nothing that directly answers the FAA Sec. 1 definition limits, but insisted there were multiple solid indicators: statutory context, which shows that less than all railroad employees were included; the treatment of “seamen” engaged in interstate context, not all maritime employees; and the texts “engaged in foreign or interstate commerce” and “class of workers,” noting “the workers in particular have to be engaged in foreign or interstate commerce.”

Gorsuch responded, “I’m going to take all that as, ‘No, we don’t have any evidence.  . . .’”

Justice Brett Kavanaugh pressed the point in a different way, noting an old case just before the 1925 FAA enactment that similarly classified workers loading and unloading shipments under the Federal Employers’ Liability Act to be a part of interstate commerce.

The question began a long exchange. Dvoretzky strongly contested the FELA cases’ view of interstate commerce as focusing on the businesses themselves, not on the workers.  FAA Sec. 1 provides a narrower standard, he said.

He said that the view that seaman doesn’t include everyone involved in shipping should be applied to railway workers, too, under the FAA Sec. 1 exemption, noting that, for example, railway management is excluded.  “The most natural reading,” he said, “isn’t everybody who works for the railroad.”

Later, at the conclusion of his argument, Kavanaugh returned to the FELA cases, but Dvoretzky deflected, noting that the case’s dormant Commerce Clause challenges were analyzed differently.  Those cases characteristically looked at local laws prejudicing interstate commerce.  “That is simply answering a different question on whether the people doing the loading and unloading are engaged in interstate commerce as [FAA] Sec. 1 uses that term,” he said.

Before Kavanaugh’s final questions, Justice Elena Kagan asked Dvoretzky to concede that if the Court found that baggage handers are included in interstate commerce, Southwest Airlines would lose the case.  But he countered that Congress didn’t mean “to exempt the airline industry,” and returned to stevedores’ exclusion from the seaman definition as the proper ruling point for the Court.

Circuit City, he emphasized, supports the exclusion of the ramp supervisors and baggage handlers. “You still look at ‘engaged in foreign or interstate commerce,’” he said, “which, under Circuit City, is supposed to be a narrow construction.”

Justice Clarence Thomas, returning to the Court after missing last week, hospitalized for an unspecified infection, participating remotely, also pressed Dvoretzky on whether an individual seaman would have to travel interstate or internationally to qualify.  The Southwest Airlines attorney said yes, the seaman would be part of the class even if the worker didn’t make such travels as part of the class of worker specifically cited in FAA Sec. 1.

Kagan returned to particular jobs.  She asked whether railway signal operators would be considered railway employees for the Sec. 1 exclusion, and Dvoretzky said “they’re not riding the train,” so they wouldn’t be included. 

She asked whether the test is that the employee is moving. Yes, replied Dvoretzky, “through the channels of interstate commerce.”

* * *

Respondent’s attorney Bennett, representing original plaintiff Saxon, told the Court that her client engaged in interstate commerce, and made historical arguments via the FAA’s legislative history of the FAA.

“Southwest contends that workers who load and unload airplanes are not part of any class of workers engaged in commerce for purposes of the FAA,” said Bennett in her opening, adding, “There’s no support for this contention in the text of the statute. Southwest can’t point to even a single example from any time period in which the phrase ‘engaged in foreign or interstate commerce’ has ever been given the meaning it proposes.”

She suggested that Congress intended to exempt cargo workers from the statute, at least under the residual clause, discussed above. The Court and Bennett explored—and struggled–putting limits on a definition as to who was included under the exemption, with Bennett conceding that some examples were borderline.

 Bennett told Chief Justice Roberts that railroad ticket workers in 1925 would be exempt-from-arbitration transportation workers under FAA Sec. 1, as well as station employees. “[T]he ordinary meaning was those people who did the customary work of the railroad at that time” were exempt from FAA arbitration, she said.

But she stopped short of office workers, noting that a general counsel, and executives, were not included in the statute, agreeing with her adversary.  Both Bennett and the Court wrestled with airline workers’ fit with the statute.

Justice Gorsuch said that Southwest Airlines’ strongest argument was that “seamen were people who rode the waves and did not include stevedores,” who therefore weren’t in interstate commerce, which would be analogous to Saxon’s airline role in Chicago. Bennett countered on the differences under the statute between railway workers and seamen in separate industries, and said the lack of “commonality” in the statute—referring to the specificity of “seamen”–also pointed to respondent Saxon’s distinct job at an airline.

She conceded that Southwest’s credit card points program workers aren’t doing FAA Sec. 1 transportation work, but under questioning said that schedulers would be doing the customary work under the statute.

Justice Kagan asked about website designers. “That’s a difficult question,” replied Bennett, “but it’s at the outer edge.”

Bennett earlier declined to extend the rule to Lyft and Uber drivers who may not cross state lines, but might pick up goods and travelers who have come from interstate commerce.  She told Gorsuch, that the question would be “[I]s it part of this continuous journey . . . [or] is it really a separate sort of local transportation?”

Both of the shared ride companies, along with Amazon.com, filed amicus briefs in the case asking the court to exclude local workers from the FAA Sec. 1 exemption. (The briefs are available at the Supreme Court docket link above.) But Bennett leaned toward a narrower definition in a discussion with Kagan.

That discussion continued with Kagan and Alito on bright line exemption rules by industry or, alternatively, more narrowly, in interstate commerce for classes of workers under Sec. 1.

Alito asked if the rule covered industries, which besides airlines would be subject to the exemption. Bennett she said two major industries would be trucking and busing, and perhaps space travel, but still likely with the narrower test under FAA Sec. 1. That was followed by a discussion led by Chief Justice Roberts on shipped goods, and the status of warehouse workers.

The exploration of the variations, without definitive views from the Court, suggested that the FAA Sec. 1 exemption fate of local Lyft and Uber drivers, and warehouse and local driver Amazon workers, may be left for future cases.  Bennett pushed for workers at warehouses to be included in the FAA Sec. 1 exemption—” you know, a warehouse that is in the middle of . . . the goods journey.”

Justice Samuel A. Alito Jr. questioning potential FAA Sec. 1 exemptions and exclusions, told Saxon attorney Jennifer Bennett that her arguments shifted back and forth, with just about every commercial activity included today, but under a statute which is narrow. He said he couldn’t see how a Queen Mary cruise ship ticket seller could be included, and the FAA Sec. 1 foreign and interstate commerce meaning “has to have a narrower meaning.”

Bennett strongly disagreed.  She said the language wasn’t “surplusage” as Alito suggested, because under Circuit City, being engaged in commerce was in the transportation requirement. She added that the two classes of workers cited in the statute, which also had preexisting dispute resolution statutes, “were commonly understood categories” illustrative of classes of workers.

It wasn’t thoroughly job specific, she explained. “Here, it doesn’t say seamen, you know, flagmen, railroad conductors,” said Bennett, “It says seamen and railroad employees. And so we’re talking about the classes of workers that are specific to the industry.”

She closed noting the distinctions between seamen and railroad employees, and the residual clause.

* * *

Today’s case is expected to be decided before the Court’s term ends at the end of June. The transcript and audio of the Sec. 1782 arguments are available on the Supreme Court’s website here. Justice Amy Coney Barrett was not present on the audio stream today.  The Court earlier announced she took no part in the consideration or decision of the certiorari petition in the case.

* * *

The author edits Alternatives to the High Cost of Litigation for CPR at altnewsletter.com. Andrew Ling, a third-year law student at the University of Texas School of Law, in Austin, Texas, and a CPR 2022 Spring Intern, contributed to the research and writing of this post, which was based on the live audio stream provided by the Court Monday morning, March 28.

[END]

Supreme Court Preview: An Airline and an Employee Will Argue Over the Reach of an Exclusion from the Federal Arbitration Act

By Russ Bleemer

The U.S. Supreme Court reconvenes Monday morning to hear oral arguments in the third of four arbitration matters before the justices in a nine-day period.

Southwest Airlines Co. v. Saxon, No. 21-309, may have the biggest impact on workers of any of the cases.  It presents a Federal Arbitration Act Sec. 1 question:

Whether workers who load or unload goods from vehicles that travel in interstate commerce, but do not physically transport such goods themselves, are interstate ‘transportation workers’ exempt from the Federal Arbitration Act.

The distinction of whether a worker is operating in interstate commerce has a knotty history.  A restrictive reading could eliminate a workplace dispute arbitration obligation for many employees nationwide. An expansive reading could eviscerate employment agreement dispute resolution clauses.

The Court hasn’t been sympathetic to workers avoiding arbitration.  But the view isn’t categorical. A notable exception is the three-year-old FAA Sec. 1 case, New Prime Inc. v. Oliveira, 139 S. Ct. 532 (2019) (available here), in which an 8-0 opinion by Justice Neil Gorsuch held that an independent contractor—a long-haul truck driver—was exempt from arbitration because there was no employer-employee relationship.

FAA Sec. 1 defines the statute’s application to maritime transactions and commerce. The section ends noting that “nothing [in the statute] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

Southwest Airlines likely will require a similar textual analysis of the so-called Sec. 1 residual clause–which New Prime needed for “contracts of employment”–on “interstate commerce” characteristics.

The Court has interpreted the law to mean that the exception from FAA application is only for transportation workers “engaged in” interstate commerce. Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) (available at https://bit.ly/2HhwYLu).

Original plaintiff Latrice Saxon, now the Supreme Court case respondent, is a “Ramp Agent Supervisor for Southwest Airlines who occasionally loads and unloads passenger baggage from airplanes,” according to Southwest Airlines’ cert petition, which is available at the docket link above.

Saxon works at Chicago’s Midway Airport. She filed a class-action suit against her employer for overtime she contended that the employees were owed under the Fair Labor Standards Act.

The Seventh U.S. Circuit Court of Appeals in the case (available at https://bit.ly/3rRA8Ln) held that the plaintiff was a transportation worker, and therefore exempt from the FAA, and didn’t have to arbitrate. Southwest Airlines requires all workers who aren’t covered by collective bargaining agreements to arbitrate workplace disputes, according to court papers.

Noting a circuit split, Southwest Airlines appealed, and the nation’s top Court agreed to decide whether the local worker was FAA-exempt, which suggests the examination of the plaintiff’s work in relation to interstate commerce.

* * *

That’s the key inquiry for the amicus filings on both sides. The briefs supporting petitioner Southwest Airlines echo the carrier’s position seeking to have a narrow FAA Sec. 1 definition and define being “engaged in foreign or interstate commerce” as meaning moving goods or people across borders. Southwest Airlines and the amicus parties want the Seventh Circuit decision reversed.  Joining the petitioner are six amicus briefs, from the

  • The U.S. Chamber of Commerce and the National Association of Manufacturers;
  • Lyft Inc.;
  • Uber Technologies Inc.;
  • Amazon.com;
  • Washington Legal Foundation, a conservative, free-market think tank and public interest law firm (which notes that “The FAA contains a discrete exemption, in § 1, for a few categories of transportation workers. Congress included the exemption not to excuse these classes of workers from arbitration, but merely to enable them to arbitrate through other congressionally created channels. The respondent here is not subject to an alternative channel of this sort; she just wants to avoid arbitration altogether. She seeks to gut the federal policy in favor of arbitration by expanding the § 1 exemption far beyond its proper bounds.”), and
  • Airlines for America, an 86-year-old trade association, which discusses FAA Sec. 1 but also emphasizes the benefits of arbitration for the airline industry.

There are seven amicus filings backing respondent/original plaintiff Latrice Saxon in asking the Court to uphold the Seventh Circuit and retain the ruling that her Chicago-based transportation work was a part of interstate commerce and she is therefore exempt under FAA Sec. 1 from arbitration in her employment agreement. The briefs are from

  • The National Employment Lawyers Association, whose members focus on representing individual workers;
  • The American Federation of Labor and Congress of Industrial Organizations–the AFL-CIO;
  • The American Association for Justice, a trial lawyers’ professional organization;
  • A brief on behalf of 17 states, their attorneys general, and the District of Columbia;
  • Public Justice, a Washington, D.C., nonprofit law firm, consumer advocacy group, and left-leaning think tank;
  • The National Academy of Arbitrators and the National Association of Railroad Referees, whose brief states, “It may appear puzzling that organizations of professional arbitrators oppose petitioner’s proposal to increase the use of arbitration under the FAA, but it is not. Amici’s position is grounded in their fundamental fidelity to the institution of arbitration, to a clear understanding of Congress’ legislative intent . . ., and to judicial precedent,” and
  • Three legal historians who maintain that the Court has recognized that Congress enacted the FAA Sec. 1 exemption “to avoid unsettling then-established dispute-resolution schemes covering workers like ‘railroad employees’ under Title III of the Transportation Act of 1920 and ‘seamen’ under sections 25-26 of the Shipping Commissioners Act of 1872,” regardless of whether the transportation workers crossed state lines in their employment, relying on Circuit City reasoning. The professors are James Pope, Rutgers Law School, Newark, N.J.; Imre Szalai, Loyola University New Orleans College of Law, and Paul Taillon, University of Auckland, in Auckland, New Zealand.

The parties’ and the amicus briefs are available on the Supreme Court’s docket page, linked at the top of this article.

* * *

While Southwest Airlines may have the biggest direct impact on workers of the 2021-2022 Supreme Court caseload, it isn’t alone in its arbitration consequences. Four of the six matters before the U.S. Supreme Court involve employment cases at their core, though often arcane legal points have brought them to the Court and will be the focus of the decisions, as well as in the two arguments still to be heard. The effect of the opinions could have a profound effect on workplace disputes . . .  or boost Congressional efforts to change arbitration in Congress. (See report on the recently signed-into-law Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 and the push for further reforms on CPR Speaks here.)

In addition to Southwest Airlines,  on Nov. 2 the Court heard Badgerow v. Walters, No. 20-1143, which awaits decision. The case focuses on the limits of state court jurisdiction and the reach of federal court jurisdiction over the provisions of the Federal Arbitration Act.  The case was brought by a financial services employee against her bosses and company for harassment and other workplace claims.  More on the November argument on CPR Speaks here.

Last Monday, the Court examined a suit by a former Taco Bell employee who claimed that the franchise company had waived its right under her employment agreement to arbitrate their wage dispute.  The original plaintiff was contesting an Eighth U.S. Circuit Court of Appeals decision that found for the company because the employee had not been prejudiced by the company’s conduct.  The former employee challenged the prejudice requirement and asked the Court to focus on the company’s actions. The case of Morgan v. Sundance Inc., No. 21-328,  is expected to be decided before the current Court term ends in June; more on the argument earlier this week on CPR Speaks here.

Next Wednesday’s Viking River Cruises v. Moriana, No. 20-1573, focuses on the relationship between the FAA and California’s Private Attorneys General Act. The Court will likely revisit its extensive history on federal preemption of state laws.

The PAGA law enables an individual employee to seek a court judgment for breach of California labor laws as a “private attorney general” on behalf of the state of California. Thousands of cases have been filed under the law and, many employers say, skirt employment agreements requiring arbitration for workplace disputes. For background on Viking River, see Mark Kantor, “US Supreme Court to Review Whether Private Attorney General Action Can Be Waived by an Arbitration Agreement,” CPR Speaks (Dec. 16) (available here).

* * *

A preview and an analysis of the 2021-2022 Supreme Court arbitration docket can be found at Russ Bleemer, “The Supreme Court’s Six-Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022), and Imre Szalai, “Not Like Other Cases: SCOTUS’s Unique Arbitration Year,” 40 Alternatives 28 (February 2022), both available for free at https://bit.ly/3GDEJEK.

* * *

A live audio stream of Monday’s argument will be available at the Court’s home page, here. Archives of recordings and transcripts for cases this term, including the three arbitration cases argued so far, are available on the Court’s website here.

* * *

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

[END]

Supreme Court Hears Arguments on Whether Section 1782 Allows Discovery for Use Before International Arbitration Tribunals

By John Pinney & Russ Bleemer

The U.S. Supreme Court today heard almost two hours of argument on whether 28 U.S.C. § 1782 allows parties to seek a federal district court order for discovery of evidence for use before international arbitral tribunals.  

In consolidated cases this morning, the Court not only heard arguments from the parties’ counsel but also conducted a potentially pivotal discussion with an attorney from the U.S. Solicitor General’s office.  The government sided with the petitioners and argued against Section 1782’s application for both private international and investor-state arbitrations.

A key issue that emerged during today’s argument was whether the phrase “foreign or international tribunal” should be the focus or whether the single word “tribunal” alone should form the basis of the court’s consideration of whether Section 1782 allows U.S. federal district courts to provide judicial assistance to international arbitral tribunals. 

The Court itself was hesitant about arbitration matters’ inclusion in the law, which is titled “Assistance to foreign and international tribunals and to litigants before such tribunals.” There are “too many problems extending this,” said Justice Stephen G. Breyer to respondent counsel urging foreign arbitral tribunals’ access to the law, asking whether the decision should simply be, “[G]o to Congress [and] get it worked out.”

Soon after, Justice Neil Gorsuch said that including arbitration tribunals “runs very counter to our intuitions that arbitration which is that it is supposed to be quick. . . . And [Sec.] 1782 is a very liberal grant of discovery.”

The cases were differentiated by the types of arbitration involved.  ZF Automotive US Inc. v. Luxshare Ltd., No. 21-401, is a private arbitration, and AlixPartners LLP v. The Fund for Protection of Investor Rights in Foreign States, No. 21-518, is investor-state arbitration, involving the government of Lithuania.

The Court granted certiorari for the two cases argued today in December, shortly after another case addressing the same issue argued today was dismissed in late September.  That case, Servotronics, Inc. v. Rolls-Royce, PLC, No. 20-794, was voluntarily dismissed on the eve of argument that had been set for Oct. 5, during the first week of the Court’s 2021-2022 term. 

[CPR Speaks blog publisher CPR filed an amicus brief in Servotronics and today’s AlixPartners urging the Court to take the cases because of the significance of their issues to international arbitration, but not in support of either side. These briefs were written principally by co-author John Pinney. For details, see John Pinney, “International Arbitration Is Back at the Supreme Court with Today’s Cert Grant on Two Section 1782 Cases,” CPR Speaks (Dec. 10) (available here).]

The first of the two consolidated cases argued today was ZF Automotive, which arises from a private commercial contract with ZF Automotive’s German parent that requires any disputes to be arbitrated before the German Arbitration Institute.  The ZF Automotive case was brought in Detroit prior to commencement of any private international arbitration in Germany.  The district court allowed the requested discovery.  On appeal to the Sixth Circuit, ZF Automotive, in a most unusual move, petitioned for certiorari before judgment to bypass waiting for the Sixth Circuit to decide its appeal. The Supreme Court granted certiorari on Dec. 10.

The second case, AlixPartners, involves an investor-state arbitration arising from a bilateral investment treaty between Russia and Lithuania.  Interestingly, the AlixPartners case is an appeal from the Second Circuit, which in its decision distinguished NBC (see details below), as well as the Second Circuit’s more recent In re Guo, 965 F.3d 96 (2d Cir. 2000), to allow Section 1782 discovery for investor-state cases.

By accepting both a private international arbitration case (ZF Automotive) and an investor-state arbitration case (AlixPartners), the Supreme Court is poised to decide definitively whether any non-governmentally created tribunal can be a “foreign or international tribunal” within the meaning of Section 1782. That was the key focus in today’s arguments.

The cases have attracted 12 amicus briefs – five in support of the petitioners opposing Section 1782 discovery, four in favor of Section 1782 discovery, and three in support of neither side. 

The most significant amici is the United States, which opposes Section 1782 discovery in both private and investor-state arbitrations, arguing that the term “tribunal” does not include international arbitral tribunals, whether they be created either for private international arbitrations or under bilateral or multi-national investment treaties.  The Solicitor General requested and was granted the right to argue orally for the United States today in support of petitioners.

Today’s Arguments

As noted above, a key issue that emerged early in today’s arguments was whether the Section 1782 phrase “foreign or international tribunal” should be the focus or whether the single word “tribunal” alone should form the basis of the court’s consideration of whether the law allows U.S. federal district courts to provide judicial assistance to international arbitral tribunals.   

The 58-year-old statute states, “The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation.  . . .”

The petitioners opposing Section 1782 discovery–Roman Martinez, deputy office managing partner in the Washington, D.C. office of Latham & Watkins on behalf of ZF Automotive, and Joseph T. Baio, senior counsel at New York’s Willkie Farr & Gallagher, for AlixPartners–argued that the entire phrase, “foreign or international tribunal,” must be considered, and that the phrase has never been used with respect to an arbitral tribunal.

The respondents, on the other hand, focused on the word “tribunal” and argued that it has frequently been used with respect to arbitral tribunals, both contemporaneously in 1964 when the statute was enacted and in current usage. The respondent attorneys arguing on behalf of, respectively, Luxshare and the Fund for Protection of Investor Rights in Foreign State, were Andrew Rhys Davies, a New York partner at Allen & Overy, and Alexander A. Yanos, a New York and Washington partner in Alston & Bird.

Veteran Assistant Solicitor General Edwin Kneedler’s argument, which split the four party appearances, appeared to be given weight, especially in relation to how allowing discovery under Section 1782 might affect the United States’ relations with foreign governments.  His argument contended that there is no meaningful distinction between private international arbitral tribunals and arbitral tribunals established under investment treaties, mainly because neither are “governmental.” 

If you have a U.S. court engaged in discovery, said Kneedler, “it creates the potential for . . . controversy and . . . for having the United States involved . . . in something that is really none of its business.”

The takeaway from Kneedler’s arguments was that the Court should be cautious in accepting respondents’ arguments because any expansion of the scope of Section 1782’s reach should be addressed by Congress.  Congress “had specifically in mind formality,” he concluded.

Kneedler’s point resonated with both Justices Gorsuch and Breyer in the argument that immediately followed by Andrew Rhys Davies, arguing for Luxshare to allow discovery under Sec. 1782 for the company’s arbitration in Germany.  Davies had a difficult time answering Gorsuch’s repeated inquiries on why a definitive Sec. 1782 extension shouldn’t be left to Congress.  Davies ultimately countered that there was no need because the full statute answers the application question by putting it in the U.S. District Court’s hands.

Breyer shrugged the answer off, and said there may be too many problems extending the statute, referring to timing of the discovery requests in the arbitration proceeding, including before a tribunal is established.

Davies insisted the statute as it currently exists contemplates those decisions by the federal court, but Gorsuch jumped back into the conversation immediately, noting that such moves runs counter what arbitration is supposed to be, characterizing Sec. 1782, as noted, as “a very liberal grant of discovery.”

Source of the Review

The Court’s review on this issue can be attributed to a 3-to 2-circuit split created when the Sixth U.S. Circuit Court of Appeals decided Abdul Latif Jameel Transp. Co. v. FedEx Corp., 939 F.3d 710 (6th Cir. 2019) (“FedEx”).  At the time, the only circuit court decisions on the issue had been decided in 1999 by the Second Circuit (National Broadcasting Co. v. Bear Stearns & Co., 165 F.3d 184 (2d Cir. 1999)) and the Fifth Circuit (Republic of Kazakhstan v. Biedermann Int’l., 168 F.3d 880 (5th Cir. 1999)). In both cases, the courts ruled that the phrase “foreign or international tribunal” in Sec. 1782 did not apply with respect to private international arbitral tribunals. 

After the Sixth Circuit decided FedEx, the Fourth Circuit followed the Sixth Circuit in Servotronics Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020), but in a parallel case also brought by Servotronics, the Seventh Circuit instead followed the Second and Fifth Circuits in Servotronics Inc. v. Rolls-Royce PLC, 975 F.3d 689 (7th Cir. 2021), holding that Sec. 1782 did not apply with respect to private international arbitral tribunals.

All of these cases came in the wake of the only U.S. Supreme Court facing Section 1782 head on, Intel Corp. v. Advanced Micro Devices Inc., 542 U.S. 241 (2004). Today’s arguments discussed extending discovery to arbitration tribunals in light of Intel’s inclusion of matters quasi-judicial and administrative bodies.

* * *

For an amicus argument against allowing Sec. 1782 discovery, see analysis by Derek T. Ho & Eliana M. Pfeffer, “Discovery in Aid of Foreign Arbitration Proceedings Unfairly Imposes Tremendous Costs on U.S. Companies,” 40 Alternatives 58 (April 2022) (available at https://bit.ly/3JUXs13).

* * *

Today’s consolidated cases are expected to be decided before the Court’s term ends at the end of June. The transcript and audio of the Sec. 1782 arguments are available on the Supreme Court’s website here. Justice Clarence Thomas has missed this week’s arguments — hospitalized with an infection, according to the Court’s Sunday announcement — but will participate using the briefs and the transcript.

While Court watchers’ eyes this week have been on the confirmation hearings in the U.S. Senate Judiciary Committee, the continuing business of the nation’s top Court is a two-week deep dive into arbitration. The arbitration focus will resume with arguments on Monday morning with Southwest Airlines Co. v. Saxon, No. 21-309. That employment case will consider whether workers who load or unload goods from vehicles that travel in interstate commerce, but do not physically transport such goods themselves, are interstate ‘transportation workers’ exempt from the Federal Arbitration Act.

Highlights from Morgan v. Sundance Inc.No. 21-328 — an employment arbitration case that was the first of the March arbitration cases, argued earlier this week — can be found on CPR Speaks here. The four-case run will conclude next Wednesday with Viking River Cruises v. MorianaNo. 20-1573, which focuses on the relationship between the FAA and California’s Private Attorneys General Act. For background on Viking River, see Mark Kantor, “US Supreme Court to Review Whether Private Attorney General Action Can Be Waived by an Arbitration Agreement,” CPR Speaks (Dec. 16) (available here).

And one 2021-2022 term arbitration case, Badgerow v. Walters, No. 20-1143, awaits decision. Details on the case from the Nov. 2 arguments is available on CPR Speaks here.

* * *

Pinney is counsel to Graydon Head & Ritchey in Cincinnati. On CPR’s behalf, he acted as counsel of record in an amicus brief urging the U.S. Supreme Court to accept the Servotronics and AlixPartners cases, as detailed above. Details on the brief can be found on CPR Speaks here. His AlixPartners brief on CPR’s behalf can be found on the Supreme Court docket page linked at the top or directly at https://bit.ly/3pzZpHj. Bleemer edits Alternatives to the High Cost of Litigation for CPR at altnewsletter.com.  Tamia Sutherland, a second-year law student at the Howard University School of Law, in Washington, D.C., assisted with the preparation of this post.

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Supreme Court Preview: Wednesday’s Combined Arguments Will Seek to Extend Federal Discovery Law to Arbitration Tribunals

By Tamia Sutherland

The U.S. Supreme Court will continue its two-week, four-argument deep dive into arbitration law and practice on Wednesday morning with an international law case.  It will consider the consolidated arguments in ZF Automotive US Inc. v. Luxshare Ltd., No. 21-401, and AlixPartners LLP v. The Fund for Protection of Investor Rights in Foreign States, No. 21-518.

The issue that the Court has agreed to decide is whether 28 U.S.C. § 1782 can be invoked in international arbitrations to obtain U.S.-style discovery for evidence. The question is whether the statutory language—“foreign or international tribunal”—extends to arbitration panels.

There is a circuit split on the issue, which is detailed at length at John Pinney, “International Arbitration Is Back at the Supreme Court with Today’s Cert Grant on Two Section 1782 Cases,” CPR Speaks (Dec 10, 2021) (available here).

ZF Automotive US, ZF Friedrichshafen AG (ZF AG) is a German corporation. It sold its Global Body Control Systems business unit to respondent Luxshare, a Hong Kong limited liability company. Luxshare alleges that after the deal with ZF AG closed, it learned that ZF US―a Michigan-based automotive parts manufacturer and a subsidiary of ZF AG―fraudulently concealed material facts during the negotiation and diligence process.

The Master Purchase Agreement provided that the transaction is to be governed by German law, and requires that all disputes be resolved “by three (3) arbitrators in accordance with the Arbitration Rules of the German Institution of Arbitration (DIS).”

In contrast to the private arbitration of ZF Automotive, AlixPartners focuses on investor-state arbitration, in which one of the parties is the government. In AlixPartners, the respondent Fund now before the Supreme Court is a Russian entity pursuing claims before an ad hoc UNCITRAL-rules arbitral tribunal against Lithuania for investors’ financial losses resulting from the insolvency of a Lithuanian bank.

The Fund brought its § 1782 request for discovery in New York against AlixPartners, a financial consulting firm that had advised the Lithuanian government regarding the bank’s insolvency.

More information on the cases and their parallels to Servotronics, Inc. v. Rolls-Royce, PLC, No. 20-794 , a case dismissed by the Court last September before its hearing in the wake of an arbitration award, is available in John Pinney’s post linked above. [The post also contains links to a CPR amicus brief in AlixPartners authored principally by Pinney urging the Court to take the case, but not in support of either side.]

On Wednesday, the consolidated arguments will include an argument by the U.S. Solicitor General, Elizabeth Barchas Prelogar.  In an amicus brief in support of the petitioners, Prelogar and her office argue that Section 1782 “does not authorize judicial assistance to obtain discovery for use in an arbitration, before a nongovernmental adjudicator, to which the parties consent.”

The amicus defines a foreign or international tribunal under the law as “a governmental adjudicator that exercises authority on behalf of one or more nation-states. It criticizes the approaches of the two federal circuits courts permitting arbitration discovery as “unsound.”

The Court’s calendar with the arguments’ timing is available here; the arguments will be available live, audio-only, via www.supremecourt.gov.

* * *

For an amicus argument against allowing Sec. 1782 discovery, see analysis by Derek T. Ho & Eliana M. Pfeffer, “Discovery in Aid of Foreign Arbitration Proceedings Unfairly Imposes Tremendous Costs on U.S. Companies,” 40 Alternatives 58 (April 2022) (available at https://bit.ly/3JUXs13).

* * *

The author, a second-year law student at the Howard University School of Law, in Washington, D.C., is a CPR 2021-22 intern.

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Supreme Court Reviews the Role of Prejudice to a Party in Determining Arbitration Waiver

By Russ Bleemer

This morning’s U.S. Supreme Court arbitration arguments in Morgan v. Sundance Inc., No. 21-328, reviewed what appeared to be a simple case of whether a plaintiff needs to show prejudice as a pivotal factor in claiming that a defendant has waived its right to arbitration.

But it wasn’t so simple. The arguments ranged over multiple possible standards for including the factor, as well as how to do so if it stays.

The question of whether the Federal Arbitration Act supports prejudice as a factor in waiving the right to arbitration stood next to evaluating the defendant’s actions for waiver in the arguments, with the petitioner soon attacking whether prejudice should be a part of the determination.

The solution likely will be anything but simple. Today expansive arguments lasted nearly an hour and a half–wiith just two attorneys–showed the Court wrestling with the need and content of a prejudice evaluation that has split the circuits.  The Eighth U.S. Circuit Court of Appeals decision on review today had held that “[a] party waives its right to arbitration if it: (1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts.” 

In its summary ahead of the question presented, the Supreme Court noted that eight other federal courts of appeals and most state supreme include the requirement that the waiving party’s inconsistent acts caused prejudice in the waiver analysis, while three federal courts of appeal, and at least four state supreme courts  “do not include prejudice as an essential element of proving waiver of the right to arbitrate.

With nearly everyone in the courtroom stressing the need for a simple evaluation, both sides missed opportunities to offer one.  Karla Gilbride, co-Director of the Access to Justice Project at Washington, D.C., a nonprofit public interest law firm Public Justice, and attorney for petitioner Robyn Morgan, compellingly noted that the prejudice requirement was “atextual” and “all over the place.”

But she didn’t draw a bright line by noting that employees would be prejudiced by expending time or money on cases where employers delayed their arbitration requests until after they took litigation steps.

Former U.S. Solicitor General Paul D. Clement, a partner in the Washington office of Kirkland & Ellis, facing Justice Neil Gorsuch’s option that the Court eschew a Federal Arbitration Act analysis and send the case back to the lower court for a pure Iowa state law analysis, said that if that path is taken, the Court instead of offering a ruling, should dismiss Morgan entirely as improvidently granted.

And the Court wasn’t helping the advocates by invoking layers of state contract law doctrines, federal statutes, and case interpretations in order to establish a standard for evaluating waiver and whether to include prejudice.

Every member of the Court had pointed questions for the advocates in today’s arguments.  Justice Clarence Thomas didn’t participate, however; the Court announced Sunday that he had been hospitalized with an infection, but it noted this morning that he would participate in the case based on the filings and the arguments’ transcript.

Petitioner attorney Gilbride opened, with an argument that centered around the case issue of whether the the Eighth Circuit ruling favored arbitration, in violation of AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011), and FAA Sec. 2, which says that arbitration contracts are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

She maintained that the prejudice requirement has become specific to arbitration. She said there was a lot of discussion in the briefs about waiver and default, but the Eighth Circuit should have applied generally applicable Iowa law.  Then, she explained, if it found waiver, the court would still have to assess if the actions of employer Sundance, which owns Taco Bell franchises, were in default of proceeding.

“So whether Sundance’s actions constituted default is a secondary question,” said Gilbride, “not a replacement for the first-order waiver inquiry.”

Gilbride was moving from her FAA Sec. 2 analysis to FAA Sec. 3, and urging the Court to adopt a two-step analysis for evaluating waiving a right to arbitration. She was countering an argument made by Paul Clement in his Court briefs, who maintained that FAA Sec. 3 could be dispositive.

FAA Sec. 3 deals with motions to stay proceedings in favor of arbitration:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

“Prejudice,” declared Gilbride, “has no part to play in either of these inquiries.”

Under initial questioning from Chief Justice John G. Roberts Jr. and Justice Elena Kagan, Gilbride offered that the Court could remand for analysis of Iowa’s generally applicable waiver doctrines, but instead the Eighth Circuit looked at federal law and erroneously required prejudice. See Morgan v. Sundance Inc., 992 F.3d 711 (8th Cir. 2021) (available at https://bit.ly/3nqL7sJ). She conceded that prejudice could be a part of the state contract law, and that each case needed individual determination at the trial court level. 

At the same time, she noted that there could be a statutory default under federal law in FAA Sec. 3.

Justice Samuel A. Alito Jr. pressed Gilbride on how state law would affect the analysis if it in some way provided something different for arbitration cases than for other contract cases. She warned that arbitration-specific standards wouldn’t likely survive in analyzing three hypothetical Alito treatments of state law.

Justice Sonia Sotomayor told Gilbride her analysis was confusing, with the FAA Sec. 3 default meshing with FAA Sec. 4 on federal court jurisdiction over parties who refuse to honor arbitration agreements for purposes of compelling the process. Sotomayor appeared uncomfortable with the need to find a federal law default standard under Sec. 3 after finding the state law waiver standard needed for Sec. 2 in Gilbride’s sequential analysis proposal.

Sotomayor summarized, noting, “Some of my colleagues are troubled by the fact that states differ in how they define waiver.  I am troubled by the fact that the circuits define prejudice in different ways.”

At that point, Gilbride offered a bright-line standard. She noted that the requirement is “atextual” and not applied uniformly. “A presumption that a party should raise their defense of arbitration . . . by the time they file their first responsive pleading, by the time of their answer . . . before their answer if they file a motion,” she said, “that would be presumptively enough to get someone not to be in default in proceeding.”

The analysis Gilbride proposed, countered Chief Justice Roberts, will “increase the complexity and delay in arbitration proceedings.  . . . [It is] creating a whole new battleground before you even get to arbitration about whether or not there’s been . . waiver under state law. It seems quite contrary to the policy behind the FAA.”

Gilbride quickly countered that the prejudice requirement “actually increases delay and increases the sort of skirmishing in court . . . before anyone resorts to the arbitral forum that the FAA was designed eliminate.

In response to a comment by Justice Stephen G. Breyer that delay cases are fact intensive, Public Justice’s Karla Gilbride insisted that the analysis isn’t “any more complicated than questions about . . . who is bound by the contract or whether a particular dispute fall within the terms of the contract.  . . . State courts and federal courts applying state law answer those questions . . . within the parameters of the FAA all the time . . . without anything seeming to have ground to a halt.”

* * *

Sundance’s Paul Clement said that his client wasn’t in default under FAA Sec. 3, because there was no violation of a contract or a law. “[U]under all relevant state law doctrines, one has to show prejudice before a contractual right is lost because you litigated or waited too long to assert it,” he said at the outset, adding, “The most straightforward way to affirm the decision below is to apply Section 3 and its stay absent default direction.”

Client Sundance, Clement explained, moved under FAA Sec. 3 to stay the litigation, and “it is not in violation of any contractual deadline, any court rule, or any other legal obligation.”

He said the problem wasn’t a waiver by the respondent of its right to arbitrate.  “[W]hat is at issue is simply not asserting a right soon enough,” he said.

Chief Justice Roberts was skeptical, asking, “Waiver plays no role in regard–evaluating that situation at all?”

Clement said that in the absence of filing deadlines, courts will assess a variety of factors–including prejudice to the other side.  

Justice Neil Gorsuch pressed him on assessing a waiver in the absence of an intentional act, and Clement said that the lower court really meant a forefeiture. 

At that point, Gorsuch suggested it would make sense to send the case back for that state law analysis stating that the Eighth Circuit made a mistake using a federal law analysis.  That’s when Clement said that the Court should dismiss the case instead.

“The Eighth Circuit wasn’t saying this is absolutely waiver and ‘that’s why we’re applying this three-factor test,’” explained Clement.

The circuit court, he continued, “applied the three-factor test presumably as–if you go back in their case law . . .– as a gloss on the [FAA Sec. 3] statutory phrase ‘in default.’ And [the appeals panel] said, as a general matter, ‘This is when it’s too late to invoke your right to arbitrate, and we have a three-factor test, and the plaintiff in this case fails under the third factor.’ Importantly, [the Eighth Circuit] didn’t even definitively resolve the second factor [acting inconsistently with the right to arbitration], which is the only thing that actually even goes to an inconsistency that possibly could get to an implied waiver. And there’s not a hint in the decision that they thought they were talking about the explicit waiver that your question alludes to.”

Clement emphasized under tough questioning from Justices Breyer and Kagan that there was no dispute about the arbitration agreement’s existence, and attempts to resolve state law issues preliminarily under such circumstances belong with arbitrators, at one point invoking to Breyer the opinion the justice wrote on arbitrator versus court determinations in Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79 (2002) (available at https://bit.ly/2yiejeh).

“The arbitration agreement is valid,” said Clement. “Nobody questions that.”

Justice Brett Kavanaugh asked whether the failure to raise the arbitration defense to a court action in the first responsive pleading could be a review standard for waiver, but Clement rejected it. He said it wasn’t fair to his client. “[If you want to write an opinion in my client’s favor and suggest to the rules committee that they amend the rules to give clear notice to parties, then I could live with that.”

Clement followed up when Kavanaugh pressed further to note that the line drawn by courts generally isn’t the first responsive pleading, but when there already has been extensive discovery.

Kagan returned to Clement’s point that missing a deadline would satisfy FAA Sec. 3’s requirement that a stay wouldn’t be issued if the party asking for the stay was in default. “Where does this federal common law rule come from as to what counts as default?” she asked.

“It’s a gloss on the statutory phrase ‘in default,’” responded the former solicitor general, “and I think everybody agrees ‘default’ means you violated a legal obligation.”

Justice Sotomayor recounted Sundance’s moves in the matter, and maintained that the company intentionally waived arbitration to see how it would do in litigation, and then reversed course.  Clement resisted, but noted also countered that the strategy was sound and adhered to its arbitration contract.  

He responded:

I think what the parties bargained for here was not just arbitration but bilateral arbitration. And when the other side decides not just to violate the arbitration agreement but to seek a nationwide collective action, I think my client is perfectly within its rights, and it’s what I would advise my client to do under the circumstances[–]don’t make a motion to compel arbitration because you might get a motion to compel nationwide collective arbitration, and pretty much every defendant on the planet agrees that’s the worst of both worlds. So you wait.

Sotomayor said that Sundance should have raised that objection in its motion to compel.

“I suppose we could have,” responded Kirkland’s Paul Clement, “and with the benefit of that additional advice, maybe that’s what I’d tell my clients to do. But I’d still say, OK, at worst, we failed to make a motion. At worst, we’re in the realm of forfeiture, and we still have the ability to make this motion under [FAA] Sec. 3.”

The case is expected to be decided before the Court’s current term ends in June.  The audio of Supreme Court oral arguments, as well as transcripts, can be found here. For more background on Morgan, see Russ Bleemer, “The Supreme Court’s Six-Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022) (available here), and Mark Kantor, “U.S. Supreme Court Adds an Arbitration Issue: Is Proof of Prejudice Needed to Defeat a Motion to Compel?” CPR Speaks (Nov. 15, 2021) (available here).

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

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