Arbitration

Supreme Court Backs Airport Worker, Applies Federal Arbitration Act Sec. 1 Exemption, and Sends Employment Dispute to Court

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By Russ Bleemer and R. Daniel Knaap

The U.S. Supreme Court affirmed unanimously a Seventh U.S. Circuit Court of Appeals decision that a worker who loads or unloads goods from vehicles that engage in interstate commerce, but does not physically transport goods, is exempt from the Federal Arbitration Act as a “worker engaged in foreign or interstate commerce” under FAA Sec. 1, resolving a circuit split.

Southwest Airlines Co. v. Saxon, No. 21-309 (today’s decision is available here), involves a Fair Labor Standards Act suit brought by Illinois respondent Latrice Saxon against petitioner Southwest Airlines Co., her employer. Southwest was initially successful, moving to dismiss under the FAA despite Saxon’s argument that she, as a ramp supervisor, is exempt from the FAA under FAA Sec. 1. Case No, 19-cv-0403 (N.D. Ill. Oct. 8, 2019) (available here). The District Court had followed the Fifth U.S. Circuit Court of Appeals.

But the Seventh Circuit reversed, agreeing with Saxon that airplane cargo loaders are engaged in interstate commerce, even though she was located solely at Chicago Midway International Airport. Saxon, in the Seventh Circuit’s view, consequently is a transportation worker whose employment contract is exempt from the FAA. 993 F.3d 492 (7th Cir. 2021) (available here).

That view was affirmed today in the 8-0 opinion by Justice Clarence Thomas, erasing the circuit split with the Fifth Circuit. Justice Amy Coney Barrett didn’t participate.

Southwest “maintain[ed] that §1 ‘exempts classes of workers based on their conduct, not their employer’s,’ and the relevant class therefore includes only those airline employees who are actually engaged in interstate commerce in their day-to-day work,” according to today’s opinion.

The view that the localized worker was not engaged in interstate commerce and was therefore subject to arbitration was soundly rejected in today’s opinion. The case may have implications for app-based companies, like Amazon and Lyft, who strongly urged the Court to back Southwest in amicus briefs and reject the use of the FAA Sec. 1 carve-out exemption from arbitration for Saxon.

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The Court has usually been focused on getting cases into arbitration, and that hasn’t meant success for individuals fighting arbitration and seeking court processes.

Yet the three arbitration cases decided this term, all based in employment matters, backed the workers. In addition to affirming today’s employee victory in the Seventh Circuit, last month, the Court ruled in favor of a Taco Bell worker resisting her employer’s motion to compel arbitration in a unanimous opinion by Justice Elena Kagan. The Court found that a party need not show it was prejudiced by the moving party’s actions, but instead focuses on the employer’s actions to indicate whether the employer had waived its right to arbitration. Details on Morgan v. Sundance Inc., No. 21-328 (available at https://bit.ly/3NywXj5) are available on CPR Speaks here.

In the first of the 2021-2022 arbitration cases to be decided, the Court embraced a narrow construction of subject-matter jurisdiction in arbitration matters. The March 31 decision reversed a Fifth U.S. Circuit Court of Appeals opinion that a federal trial court had jurisdiction under Sections 9 and 10 of the Federal Arbitration Act to confirm and overturn arbitration awards. The decision in Badgerow v. Walters, No. 20-1143 (available here) potentially gave the employee, who filed suit over workplace discrimination, a new shot at overturning an arbitration award in state court.

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So in today’s case, the Court also backs a worker trying to avoid arbitration, following similarly the 2019 New Prime v. Oliveira case, where Justice Neil Gorsuch, in his first Supreme Court arbitration opinion, read FAA Sec. 1 to exempt an independent contractor/interstate truck driver from arbitration. The Court has limited the exemption from FAA application to transportation workers “engaged in” interstate commerce only in Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001) (available at https://bit.ly/2HhwYLu). But since then, the Court has only recognized an FAA Sec. 1 exemption for an independent contractor—a long-haul truck driver—in New Prime Inc. v. Oliveira, 139 S. Ct. 532 (2019) (available here).

Today’s decision revisits the limited scope of the FAA Sec. 1 exemption, and says it applies to the original plaintiff/respondent in the case.

First, Justice Thomas notes that Saxon, who is a Southwest ramp supervisor located solely at Chicago Midway, belongs to a class of workers who physically load and unload cargo on and off airplanes, using plain language and textual analysis to put the respondent/original plaintiff in the FAA Sec. 1 exemption. He finds that such workers are “as a practical matter, part of the interstate transportation of goods.” (Citation omitted.)

He used the Circuit City Sec. 1 analysis holding that the exemption applies only to transportation workers to establish the backing for Saxon’s position, finding, “Cargo loaders exhibit this central feature of a transportation worker.”

In analyzing the nature of interstate commerce in a key part of the opinion, Thomas notes, “any class of workers that loads or unloads cargo on or off airplanes bound for a different State or country is ‘engaged in foreign or interstate commerce’”—a point sure to refocus attorneys on the employment arbitration policies of app-based commerce. Amazon, for example, strongly urged the Court to reverse and back Southwest in an amicus brief, available here. (See the docket link above for more amicus briefs supporting both sides.) In a footnote, the Court notes that the issues most important to delivery companies weren’t needed to be addressed to decide Southwest Airlines.

Still, Thomas stopped short of including all airline industry employees as “transportation workers” for purposes of the FAA Sec. 1 exemption, which states, “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

In a painstaking dictionary analysis, Thomas notes that seamen and railroad workers are not industry-wide categories, and therefore don’t include the entire industry workforces. The implication is that a job-by-job, task-by-task analysis with the effects on interstate commerce, will be required for exempting workers from arbitration under FAA Sec. 1.

At the same time, the Thomas opinion rejects three Southwest points that sought to keep Saxon out of the exemption and require her to arbitrate under her employment agreement. Similar to the opinion’s rejection of the generalized interpretation of transportation workers that would include all airline workers by Saxon, the Court also states that the idea that the employee must ride on transportation in interstate commerce is too broad a reading of the FAA Sec. 1 language.

Next, Thomas notes that the goods that Saxon loaded only in Illinois were destined for interstate commerce, pointedly rejecting other Southwest-cited cases where the Court found localized activity was not in interstate commerce.

Finally, the opinion rejects a “statutory purpose” argument by Southwest, which claimed that the Seventh Circuit’s Sec. 1 interpretation hurts the pro-arbitration lean of the rest of the statute, particularly FAA Sec. 2, which “broadly requires courts to enforce arbitration agreements in any ‘contract evidencing a transaction involving commerce.'”

“Here,” countered Justice Thomas, “§1’s plain text suffices to show that airplane cargo loaders are exempt from the FAA’s scope, and we have no warrant to elevate vague invocations of statutory purpose over the words Congress chose.”

The opinion concludes, “Latrice Saxon frequently loads and unloads cargo on and off airplanes that travel in interstate commerce. She therefore belongs to a ‘class of workers engaged in foreign or interstate commerce’ to which §1’s exemption applies.”

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While the nation awaits decisions on abortion and gun rights, the decision comes in an unprecedented time for arbitration at the Court. While there are usually one or two arbitration decisions per term, the Court has heard six cases—two consolidated–on how arbitration works during the 2021-2022 term, four of which were argued in March alone.  Highlights of the cases can be found on CPR Speaks, here, including with the preview and argument reports for the three cases already decided, including today’s case. Detailed oral argument coverage for Southwest Airlines v. Saxon can be found on CPR Speaks here; and the preview with background can be found here. The remaining two 2021-2022 Supreme Court arbitration cases are expected to be decided before the current term ends at the end of this month.

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Bleemer edits Alternatives to the High Cost of Litigation for CPR; Knaap, a law student at Columbia University Law School in New York, is a 2022 CPR Summer intern.

[END]

One Declined, One Pending: Scotus Asked to Enforce an Arbitration Award against a Sovereign and an Oil Company

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By R. Daniel Knaap

The U.S. Supreme Court earlier this week declined to hear a case where Saudi Arabian landowners sought to enforce an arbitration award against the Saudi Arabian Oil Co., best known as Saudi Aramco.

The long-running matter, rooted in a nearly 90-year oil development land lease agreement, isn’t over. There’s a companion case from the same petitioners before the Court–against Chevron Corp., Saudi Aramco’s predecessor in the oil exploration and production deal–scheduled to be considered at a Supreme Court conference on June 16.

The Saudi Aramco case explores the limits of sovereign immunity in the face of a request to enforce an arbitral award against a government-tied entity. Now, at least in the Fifth Circuit’s view, the matter’s complex back story was sufficient to deny enforcement of the award against the state-owned enterprise in the absence of a 28 U.S.C. §1605 exception to foreign sovereign immunity.

In contrast, the Chevron case involves the issue of whether its predecessor’s arbitration agreement applies to the dispute.

The petitioners instituted two different enforcement proceedings regarding an $18 billion International Arbitration Center award against Saudi Aramco (Al-Qarqani v. Arab AMOCO, 2020 WL 6748031 (S.D. Tex., Nov. 17, 2020) and Chevron (Al-Qarqani v. Chevron Corp., 2019 WL 4729467 (N.D. Cal., Sept. 24, 2019).

Both the California and Texas U.S. District Courts refused to confirm the award. The Ninth Circuit affirmed the California district court, holding that the enforcement petition should be denied on the merits and not dismissed for failure to state a claim. Al-Qarqani v. Chevron Corp., 8 F.4th 1018 (9th Cir. 2021) (available at https://bit.ly/3zhYVvM). It further denied the petitions for rehearing and rehearing en banc, Al-Qarqani v. Chevron Corp., 2021 U.S. App. LEXIS 33976 (9th Cir. Cal., Nov. 16, 2021).

The case continues. A petition for certiorari in the nation’s top Court for Waleed Khalid Abu Al-Waleed Al Hood Al-Qarqani, et al. v. Chevron Corp., No. 21-1153, is pending and distributed for the June 16 conference.

In the Saudi Aramco case, the Fifth Circuit vacated the Southern District of Texas’s judgment, remanding with instructions that the case should be dismissed for lack of jurisdiction since Saudi Aramco qualified as a foreign state immune from suit under the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. §1603. Al-Waleed v. Saudi Arabian Oil Co., 19 F.4th 794 (5th Cir. 2021) (available at https://bit.ly/3zgvSZC).

The petition for certiorari in that case, Waleed Khalid Abu Al-Waleed Al Hood Al Qarqani, et al. v. Saudi Arabian Oil Co., No. 21-1335, was denied on May 31; Tuesday’s order declining cert is available here.

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According to the Supreme Court filings and lower court decisions, the case concerns a dispute between Saudi landowners and Saudi Aramco, which is Chevron’s successor in interest and fully owned by the Kingdom of Saudi Arabia. In 1933, an agreement was concluded between Chevron’s predecessor, Standard Oil Co. of California, and Saudi Arabia, which provided for rent payments to private landowners of oil-rich land, who were not a party to the agreement.

A deed of concession was concluded in 1949, which transferred the property from the landowners to Arabian American Oil Co., now Saudi Aramco. The petitioners, heirs of the landowners that were a party to the 1949 deed, claim that the land was leased, not sold, and that the 1933 agreement arbitration provision was imported into the 1949 deed. The petitioners initially sought back rent in Saudi Arabian courts. That proceeding took place in 2011, and a “Saudi Legal Committee” found that the 1949 deed was a sale, not a lease. 19 F.4th 794, 797.

The petitioners commenced arbitration proceedings at the International Arbitration Center in Egypt against Aramco and Chevron entities. Aramco rejected the arbitration and did not participate in the proceedings. The Chevron entities objected but nominated an arbitrator. Initially, the tribunal held that it lacked jurisdiction, but the proceedings were reopened by a panel with different members, resulting in an opinion in favor of the petitioners, awarding them $18 billion. Id. In the aftermath of the arbitration, an Egyptian court convicted two IAC administrators and three arbitrators of fraud, forgery, and other crimes relating to the second proceeding. Id.

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The Saudi Aramco petition presented the following questions: whether a foreign sovereign or instrumentality of a state that (1) is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards–the New York Convention–may assert the FSIA as a defense to enforcement of a foreign arbitral award, (2) accepts and accedes the United Nations Conventions on Jurisdictional Immunities amounts to an express waiver of sovereign immunity under the New York Convention, and (3) fails to timely file a cross appeal from a U.S. district court order that denied the sovereign’s assertion of the FSIA as a defense amounts to waiver and bars a subsequent request for a jurisdictional dismissal on appeal that is based on the merits.

Since certiorari was denied, the Fifth Circuit’s judgment stands. It held that Saudi Aramco is a foreign state under the FSIA since it was “a distinct legal entity incorporated under Saudi law, a majority of whose shares are owned by the Kingdom of Saudi Arabia and whose principal place of business is in Saudi Arabia” and thus “presumptively immune from suit in the courts of the United States.” 19 F.4th 794, 800. This immunity was not waived by the exceptions set out in FSIA’s 28 U.S.C. §1605(a). It was not waived under §1605(a)(1) because “the dispute underlying the arbitral award at issue … is clearly outside its scope,” since neither Saudi Aramco, its predecessor, nor the petitioners were party to the 1933 agreement. Id.

The immunity was also not waived under §1605(a)(2) by Saudi Aramco conducting business in the United States since the arbitration took place in Egypt and “did not cause a ‘direct effect’ in the United States.” Id., at 801.

The expropriation exception provided in §1605(a)(3) also does not apply because the action is to enforce an arbitral award, “not litigation of a property dispute involving international law.” Id.

Finally, immunity also was not waived under §1605(a)(6)’s arbitration agreement exception since neither Saudi Aramco, its predecessor, nor the petitioners were party to the 1933 agreement, and the 1949 deed did not mention arbitration nor did it refer to the 1933 agreement’s arbitration clause. Therefore, the Fifth Circuit concluded, the action should be dismissed for lack of jurisdiction instead of denying the petition for enforcement. Id. at 801-2.

The cert denial allowing the Fifth Circuit decision to stand in turn appears to provide some answers to the petitioner’s questions presented.

First, a foreign sovereign or instrumentality of a state that is a signatory to the New York Convention may assert the FSIA as a defense to enforcement of a foreign arbitral award. Second, a foreign sovereign or instrumentality of a state that accepts and accedes the United Nations Convention on Jurisdictional Immunities does not amount to an express waiver of sovereign immunity under the New York Convention. The third question, however, was not explicitly addressed since the appeal was found to be timely.

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The author, a law student at Columbia University Law School in New York, is a 2022 CPR Summer intern.

[END]

Supreme Court Won’t Hear Rates-Review Arbitration Request, Sending Customer Dispute to Court

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By Russ Bleemer

The U.S. Supreme Court this morning declined to hear a case on whether the nearly century-old Federal Arbitration Act preempts state law—this time, a clash with Tennessee common law on contracts.

The FAA has shown a lot of muscle in the U.S. Supreme Court over its history, and it’s rarely displaced.  Petitioners seeking to avoid arbitration under a state law are almost always sent to arbitration.

That was not outcome in today’s cert denial in Branch Banking and Trust Co. v. Sevier County Schools Federal Credit Union, et al., No. 21-365. The matter also was about arbitrability–not on the merits of a dispute as to whether the respondents get the money market interest rate on their investment guaranteed by a predecessor of the petitioner bank, which wanted the case over its rate-drop arbitrated.

The petitioner bank had required account holders to arbitrate disputes by amending its agreement with the fund holders after it had purchased the predecessor bank.

The respondent account holders’ argument–successful in the federal appeals court at Sevier Cnty. Sch. Fed. Credit Union v. Branch Banking & Tr. Co., 990 F.3d 470 (6th Cir. 2021) (available at https://bit.ly/3K7BxnV)–was straightforward:  The so-called FAA Sec. 2 Savings clause (an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract “) backs a state-law challenge to the contract. 

And the Sixth Circuit held that there was a lack of mutual assent to the arbitration clause, which is required under Tennessee law. The bank services agreements “in question are clearly contracts of adhesion,” stated the Sixth Circuit opinion.

That opinion stands as a result of the today’s cert denial.

The appeals court criticized the petitioner bank’s unilateral imposition of the arbitration clause and, while noting that the rate promised two decades ago was several times higher than current available rates, it agreed with the plaintiffs’ analysis that the bank couldn’t require ADR where there had been none in the original bank services agreement.

The bank countered in its Supreme Court cert petition, “The Sixth Circuit’s decision is directly at odds with this Court’s recent arbitration decisions and with the law in other courts.”

The issue formally presented to the Court by the petitioner bank was

Whether the Federal Arbitration Act displaces a state common-law rule forbidding companies from adding an arbitration requirement to their standard form contract with customers unless the contract already includes a dispute-resolution clause.

The bank noted in its petition,

The Sixth Circuit’s adoption of a rule that singles out arbitration agreements and subjects them to heightened contract-formation requirements conflicts with [Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1424 (2017) (available at https://bit.ly/3GojOWE), which struck a Kentucky rule that “singles out arbitration agreements for disfavored treatment”] and other recent precedents from this Court holding that arbitration agreements cannot be “disfavored” or subjected to more demanding requirements than other contracts. The panel opinion did not cite, let alone distinguish, any of this Court’s modern FAA precedents.

Today’s order denying cert, available here, granted a motion by the American Bankers Association to file an amicus brief, which strongly urged the Court to take the case and reverse the Sixth Circuit. That brief is available at the Court’s docket page linked above (directly here).

The original plaintiffs’ Sixth Circuit success in avoiding arbitration is a rarity once cases reach the U.S. Supreme Court.

The nation’s top Court has taken six arbitration cases over five arguments in the current term. Two have been decided, and three cases, all argued in March’s second half, await decision.  Details on the decisions, arguments, and case previews can be found on this blog by searching on the U.S. Supreme Court here.

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Bleemer edits Alternatives to the High Cost of Litigation for CPR.

[END]

Supreme Court Rejects Prejudice Requirement for Defeating a Motion to Compel Arbitration

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By R. Daniel Knaap & Russ Bleemer

The U.S. Supreme Court backed a Taco Bell worker resisting her employer’s motion to compel arbitration this morning when it ruled, in a unanimous opinion by Justice Elena Kagan, that a party need not show it was prejudiced by the moving party’s actions.

The decision vacated an Eighth U.S. Circuit Court of Appeals decision that arbitration was not waived because the resisting party did not prove it was prejudiced by the adversary’s actions.

Morgan v. Sundance, Inc., No. 21-328 (today’s decision available at https://bit.ly/3NywXj5), means that parties waive their right to compel arbitration based on their actions, not on the judicially established prejudice requirement—a plain reading of the Federal Arbitration Act.

“Did Sundance knowingly relinquish the right to arbitrate by acting inconsistently with that right?” writes Kagan, framing the state of the law on the inquiry for courts. The opinion concludes: “On remand, the Court of Appeals may resolve that question, or determine that a different procedural framework (such as forfeiture) is appropriate. The Court’s sole holding today is that it may not make up a new procedural rule based on the FAA’s ‘policy favoring arbitration.’”

The decision resolves a 9-2 circuit split; nine jurisdictions require a party resisting arbitration under waiver to prove that they have been prejudiced, while two jurisdictions do not have such a requirement. Today’s opinion sides with the minority position, rejecting the idea that the FAA authorizes federal courts to invent arbitration-specific procedural rules, holding that the “federal policy is about treating arbitration contracts like all others, not about fostering arbitration.”

Morgan is the second arbitration opinion of the term, and the second by Kagan invoking a plain reading of the FAA that backs the plaintiff’s position. Today’s 9-0 decision was preceded by Badgerow v. Walters, No. 20-1143 (available here), an 8-1 March 31 decision rejecting FAA jurisdiction in federal courts for statutory sections on enforcing and challenging awards. For more on Badgerow, see Russ Bleemer & Andrew Ling, “Supreme Court Rejects Federal FAA Jurisdiction for Arbitration Award Enforcement and Challenges, (March 31) (available at https://bit.ly/3wB2hZ8).

In fact, three more decisions are pending. Morgan is one of four arbitration cases argued in the nation’s top Court in the second half of March. Decisions on the other three cases are pending. More information can be found by inserting “Supreme Court” in the box in the upper right of this page to search CPR Speaks, or by clicking here.

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In Morgan, Justice Kagan takes both narrow and broad views of different arbitration points.

First, the opinion narrowly declines to tackle a variety of analogous analysis points on state law in assessing waiver, focusing the decision on the Eighth Circuit’s approach that has “generally resolved cases like this one as a matter of federal law, using the terminology of waiver.”

“For today,” writes Kagan, “we assume without deciding they are right to do so.”

After declining to rule fully on that approach, the opinion said that instead it looked solely at “the next step,” whether federal courts “may create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s ‘policy favoring arbitration.’”

That made the case an easy call. The Court agreed in just seven pages that the answer is a hard no on adding a prejudice requirement to the inquiry of whether the party knew it was subject to arbitration, and acted inconsistently with that right.

The opinion notes that “in demanding . . . proof [of prejudice] before finding the waiver of an arbitration right, the Eighth Circuit applies a rule found nowhere else—consider it a bespoke rule of waiver for arbitration.”

Instead, the Court adopted the views of the Seventh and District of Columbia U.S. Circuit Courts of Appeals that there is no prejudice requirement.

But more broadly, Kagan also used the opinion to tamp down perceptions of the Court’s tilt to arbitration. The effect of the clarification is an unmistakable unanimous Court acknowledgment to criticism that it has elevated arbitration over courtroom litigation.

The opinion returned to seminal cases to explain—in the opinion’s view, re-emphasize–that the Court’s policy favoring arbitration–emanating from Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983)–“does not authorize federal courts to invent special, arbitration-preferring procedural rules.” Nor does it allow courts to “devise novel rules to favor arbitration over litigation,” referring to Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213, 218–221 (1985).

Citing Granite Rock Co. v. Teamsters, 561 U. S. 287, 302 (2010), Kagan writes that the policy “is merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.”

She then added the Prima Paint pronouncement: “The policy is to make ‘arbitration agreements as enforceable as other contracts, but not more so.’” Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 404, n. 12 (1967).

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Morgan involves a Fair Labor Standards Act suit brought by petitioner Robyn Morgan against Sundance Inc., which owns 150 Taco Bell franchises throughout the United States, including the Iowa franchise where Morgan was an hourly employee. The complaint alleged that Sundance did not fully compensate its employees for the hours they worked. Although the suit was initially filed as a nationwide collective action, Michigan hourly employees were excluded because they were able to join a similar action filed two years earlier in Michigan’s Eastern U.S. District Court–the so-called Wood action.

The Morgan and Wood plaintiffs engaged in joint mediation with Sundance in April 2019. The mediation settled the Wood action, but not Morgan. Sundance then moved to compel individual arbitration of Morgan’s claims in May 2019, invoking the arbitration provision in the employment contract.

Morgan opposed this, arguing that Sundance had waived its right to compel arbitration by engaging in litigation. The Iowa Southern U.S. District Court denied the motion, finding that Morgan was prejudiced by having to defend to Sundance’s earlier motion to dismiss and by spending time and resources on the class-wide mediation instead of individual arbitration.

The oral arguments were discussed in detail at “Supreme Court Reviews the Role of Prejudice to a Party in Determining Arbitration Waiver,” CPR Speaks (March 21) (available here).

For more on the history of the case, see Mark Kantor, “U.S. Supreme Court Adds an Arbitration Issue: Is Proof of Prejudice Needed to Defeat a Motion to Compel?” CPR Speaks (November 15, 2021) (available here), and Russ Bleemer, “The Supreme Court’s Six-Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022) (available here).

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Knaap, a law student at Columbia University Law School in New York, is a 2022 CPR Summer intern. Bleemer edits Alternatives to the High Cost of Litigation for CPR.

[END]

Update: An Influx of Arbitration Legislation

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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.

* * *

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.

A 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).

* * *

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

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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.

* * *

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

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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).

* * *

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

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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.

* * *

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

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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

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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.

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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.”

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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.

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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.

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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.

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