Under Consideration: The Supreme Court May Be Ready to Tackle Arbitrability–Again

By David Chung

A Fifth Circuit case on whether a matter was correctly sent to arbitration was distributed for conference at the U.S. Supreme Court for the fifth time over the past two months on Friday, March 20, so the Court could consider hearing it.

The case didn’t appear on this morning’s order list, but that fact alone may be indicative of a lot more arbitration at the nation’s top court.

Any arbitration case before the Court would gain notice on its own in the ADR world.  But the new petition for certiorari is even more noteworthy because the Court had appeared to have decided the issue just a little more than a year ago in its previous term.  Henry Schein, Inc., et al. v. Archer and White Sales, Inc., 139 S.Ct. 524 (2019) (available at http://bit.ly/2YLDkWQ), the Court held unanimously that parties to a contract have the ultimate say in whether to have an arbitrator or a court resolve disputes on questions of arbitrability.

But Schein’s main holding was that a court couldn’t refuse to enforce arbitration because it believed the claims for arbitration were “wholly groundless,” and the nation’s top court sent the case back on remand to the Fifth U.S. Circuit Court of Appeals.

The remand order was a step before actual arbitration, however.  The Court asked the Fifth Circuit to decide whether the contract’s delegation clause really pointed to an arbitrator deciding arbitrability.

The appeals panel looked at the contract again and said it didn’t, and found the decision was for the courts, again.

And the defense petitioned the Supreme Court to hear Schein, an appeal that was filed at the end of January and has not yet made it to a Court conference.  See Philip J. Loree Jr., “Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court,” (Feb. 19) (available at https://bit.ly/2U8ZumI); see also, Philip J. Loree Jr., “Schein’s Remand Decision Goes Back to the Supreme Court. What’s Next?” 38 Alternatives 54 (April 2020) (available next week at altnewsletter.com and on Lexis & Westlaw; CPR Institute membership access after logging in at www.cpradr.org/news-publications/alternatives).

But while Schein was being relitigated, at the same time and on the same issue about the extent of the reach of the clause that delegates arbitration decision making, The Rams Football Co. LLC v. St. Louis Regional Convention & Sports Complex Auth., No. 19-672, already was in front of the Court for consideration on whether it should be heard.

Closely mirroring Schein, the Rams issue, according to the team’s cert request petition is

Whether the Federal Arbitration Act permits a court to refuse to enforce the terms of an arbitration agreement assigning questions of arbitrability to the arbitrator if those terms would be enforceable under ordinary state-law contract principles in a non-arbitration context.

The case has made it to conference stage, repeatedly, without a denial or a “cert granted” or, indeed, any procedure other than rescheduling. The cert petition is dated Nov. 21, 2019, and the counsel of record is Paul Clement, a Washington, D.C., partner in Kirkland & Ellis who is a frequent participant in Supreme Court cases who, according to the Above the Law blog, argued his 101st case at the Court early this month.  See “Neil Gorsuch’s Frustration With Kirkland & Ellis Partner Paul Clement On Full Display,” Above the Law (March 4) (available at https://bit.ly/39dZS7A).

The Court had denied a stay in the case in October without comment.

Despite a government shutdown, including much of the judicial branch, the Court, after canceling oral arguments indefinitely, has continued its normal business of opinion writing and conferences, out of which come its orders, including cases it agrees to hear, and cases it denies. The Court’s Friday conference resulted in an order list earlier today, but Rams was not mentioned and should be back for consideration in the next conference, scheduled for Friday, March 27, with the latest version of Schein waiting to be listed.

The case is about a dispute between the NFL’s Rams, and three Missouri government entities, the St. Louis Regional Convention and Sports Complex Authority, the City of St. Louis, and the County of St. Louis.

The dispute is over an agreement on the Rams’ use of the former Edward Jones Dome stadium in St. Louis.  The team departed for Anaheim, Calif., after the 2015 season amidst a storm of controversy over owner E. Stanley Kroenke’s remarks about St. Louis’s viability as an NFL-hosting city. The Rams sought arbitration over whether it should pay damages in the wake of the team’s move to become the Los Angeles Rams for the second time in the team’s existence.

The agreement included an arbitration clause that incorporated terms by reference, stating that all disputes would be conducted “in accordance with the most applicable then existing rules of the American Arbitration Association.”  Those rules send the question of who decides whether a case should be arbitrated to an arbitrator, not a court.

The petitioner, the Rams, asserts that the key Missouri appellate court decision in a series of cases that include rulings by the state supreme court, should have simply “‘respect[ed] the parties’ decision as embodied in the contract’ by recognizing that it has ‘no power to decide the arbitrability issue.’” Petition for Writ of Certiorari citing Henry Schein, 139 S. Ct. at 528 (brief available at https://bit.ly/2U85jAG).

The Rams’ petition claims the “clear and unmistakable” test of whether the parties intended for an arbitrator, rather than a court, to decide whether an arbitration agreement should be arbitrated was too strict.  It contends the standard applied by the appellate court violated “an application of equal-footing principles,” which the Supreme Court requires under the Federal Arbitration Act—that is, that arbitration contracts are treated the same as other contracts.

While the Rams contend the parties clearly and unmistakably agreed to arbitrate under the then-existing AAA rule, the petition argues that the incorporation of the rule sending the arbitrability question to the arbitrator should have been recognized by state court to keep the arbitration contract on an equal footing with other contract principles.

The state respondents strongly dispute that the Missouri appellate court ignored the Court’s equal-footing principle.  It also asserted the parties could have never unequivocally agreed to arbitrate the issue because the AAA rule did not have the arbitrability provision when they signed the contract.

While conceding the applicable version of AAA rule confers power to the arbitrators to decide arbitrability, the respondents claim the incorporation principle is irrelevant to the case.  Instead, they argue that “[p]ursuant to fundamental Missouri contract law, the parties must agree to all essential terms of an agreement at the time of contracting.”  (Respondent’s Brief in Opposition to Petition for Writ of Certiorari (available at https://bit.ly/2U8ZumI).

Thus, “there must be an actual agreement to delegate at the time of contracting.” Id.

Despite the respondents’ denial of a division among federal and state courts on the applicable standard, the Rams’ petition claims that some state courts, including Missouri, are requiring an extraordinary degree of clarity for the “clear and unmistakable” test, which the petition says is contrary to how every federal court addresses the issue.

The petitioner urges that the Court provide guidance regarding the clear and unmistakable test, which it says is critical since the respondents’ position not only defies the FAA’s equal footing principle but also has been the subject of repeated requests for Court clarification, citing four cases the Court declined to hear between 2014 and 2018. The petition also notes that the situation has seen “every federal court resisting special rules disfavoring arbitration and only state courts on the anti-arbitration side of the dispute.”

Scotusblog’s case page, available at https://bit.ly/2QANwjk, contains the Rams’ cert petition, the respondent’s brief in opposition, and the Rams’ reply

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The author is a CPR Institute Spring 2020 intern.  Alternatives’ editor Russ Bleemer assisted with the research.

 

Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court

By Philip J. Loree Jr.

A party fighting to arbitrate under its contract has sought U.S. Supreme Court review of a Fifth U.S. Circuit Court of Appeals case holding that an injunctive action carve-out clause effectively negates the parties’ arbitration contract delegating the decision whether the case should be arbitrated to an arbitrator, not the courts.

If the Court agrees to accept the case, which is the subject of the Jan. 30 petition, it would be the second time in about two years that the nation’s top Court has heard the case.

The decision challenged in the cert petition, Archer and White Sales Inc. v. Henry Schein Inc., et al., No. 16‐41674 (5th Cir. Aug. 14, 2019) (available at http://bit.ly/33Cb78g) (“Schein II”), was a remand of the U.S. Supreme Court’s opinion of a year ago, Henry Schein Inc. v. Archer & White Sales Inc., 139 S. Ct. 524 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw) (Schein I).

There were several important 2019 cases concerning the application and effect of what are commonly referred to as “Delegation Clauses,” “Delegation Provisions,” or “Delegation Agreements.” These clear and unmistakable undertakings by parties to submit arbitrability issues to arbitration usually are expressly set forth in an arbitration agreement. Other times they are contained in arbitration rules that the parties incorporate by reference into their agreement.

Much of the controversy in the Delegation Agreement cases centers on whether the terms of the arbitration agreement should define or circumscribe the scope of a Delegation Agreement–or even effectively negate it.

These cases have conflated the question of who gets to decide whether an issue is arbitrable with the separate question of what the outcome of the arbitrability dispute should be, irrespective of who decides it.

The most important of the recent cases is Henry Schein Inc. v. Archer & White Sales, Inc., which for discussion purposes is conveniently bifurcated into its two most prominent components, Schein I and Schein II.

Schein I

In Schein I, the Supreme Court, in a 9-0 decision, held that where parties have clearly and unmistakably agreed to arbitrate arbitrability disputes, courts must compel the process even if the argument in favor of arbitrability is “wholly groundless.” Schein I, 139 S.Ct. at 528-531.

The Schein I Court vacated an order and judgment of the Fifth Circuit, which held that, even assuming the parties entered into a Delegation Agreement, the arbitration proponent was not required to submit to arbitration the question whether a dispute concerning injunctive relief was arbitrable because that arbitrability dispute was, according to the Fifth Circuit, wholly groundless.

The Schein I Court remanded to the Fifth Circuit the question whether the parties entered into a Delegation Agreement, an issue that the Fifth Circuit had left open, but which had to be addressed in light of the U.S. Supreme Court’s decision abrogating the so-called “wholly groundless exception.”

And that remand case is Schein II.

Schein II

In Schein II, the Fifth Circuit set out to determine whether the parties had clearly and unmistakably agreed to submit arbitrability disputes to arbitration. The essential facts pertinent to this question can be distilled down to these:

  1. Party A’s and Party B’s contract contained an arbitration agreement, which featured a “carve-out” for certain claims, including “actions seeking injunctive relief”: “Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of Party B), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [the “AAA”].”
  2. Party A commenced an action against Party B that sought, among other things, injunctive relief, which A said was outside the scope of the arbitration agreement.
  3. Party B said that A’s arbitrability argument had to be submitted to arbitration because the parties clearly and unmistakably delegated arbitrability questions to the arbitrator by incorporating AAA Commercial Arbitration Rules into their contract, including Rule 7 of those rules.
  4. Rule 7(a) of the AAA Commercial Arbitration Rules provided:

(a) The 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.

On remand, the Fifth Circuit observed that under circuit precedent, incorporating arbitrator provider rules that clearly and unmistakably require arbitration of arbitrability constitute clear and unmistakable evidence of an intent to arbitrate arbitrability. The Court therefore recognized that the parties had entered into a Delegation Agreement.

But here, stated the Fifth Circuit, the “placement of the [injunctive action] carve-out . . . is dispositive[,]” and “[w]e cannot rewrite the words of the contract.”

“The most natural reading of the arbitration clause,” said the Court, is “that any dispute, except actions seeking injunctive relief, shall be resolved in arbitration in accordance with the AAA rules.”

The agreement “incorporates the AAA rules” and therefore delegates arbitrability “for all disputes except those under the carve-out.” (Emphasis is the Fifth Circuit’s.) Because of “that carve out,” wrote Fifth Circuit Judge Patrick E. Higginbotham for the unanimous three-judge panel, “we cannot say that the Dealer Agreement evinces a ‘clear and unmistakable’ intent to delegate arbitrability.”

Accordingly, the Fifth Circuit held that the parties did not clearly and unmistakably agree to delegate the arbitrability decision and affirmed the district court’s denial of the arbitration proponents’ motions to compel arbitration.

On Aug. 28, 2019, the arbitration proponent moved for rehearing en banc. On Dec. 6, the Fifth Circuit denied the motion for rehearing.  That’s when the proponent became the petitioner at the U.S. Supreme Court. Henry Schein Inc., a Melville, N.Y.-based dental equipment distributor, on Jan. 24 obtained from the Supreme Court a stay of litigation pending its petition for certiorari, which it filed on Jan. 30.

You can download a copy of the petition  here. A response from Archer & White Sales, a Plano, Texas, distributor, seller, and servicer of dental equipment, is due March 2.

Schein II was Wrongly Decided

This author believes Schein II was wrongly decided. In “Back to SCOTUS’s Schein: A Separability Analysis that Resolves the Problem with the Fifth Circuit Remand,” 37 Alternatives 131(October 2019), this author argued that Schein II can be reasonably interpreted to mean either:

(a) the parties did not clearly and unambiguously agree to arbitrate any arbitrability issues; or

(b) the parties’ agreed to arbitrate only arbitrability disputes about matters that fall within the scope of the arbitration agreement.

The first interpretation would negate the parties’ incorporation of AAA Commercial Rule 7. The second interpretation would mean that the parties clearly and unmistakably agreed to arbitrate only questions that ask whether a matter that is at least arguably within the scope of the arbitration agreement, but clearly outside the scope of the carve-out, is arbitrable.

Because the presumption in favor of arbitrability deems such matters to be arbitrable as a matter of law, the second interpretation would mean that the parties agreed to arbitrate only arbitrability questions that were not only relatively rare, but also legally uncontroversial.

That makes little sense and would mean the parties’ incorporation of AAA Commercial Rule 7 was of little or no practical significance or effect.

The article proposes a solution to the interpretative problem that a Schein II-Type analysis creates, and under which courts interpret arbitration-agreement terms as overriding or defining the scope of Delegation Agreements that are made part of those arbitration agreements.

It argues that courts instead should use the analytical framework of the separability doctrine—first espoused in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), and applied to Delegation Agreements in Rent-a-Center West Inc. v. Jackson, 561 U.S. 63 (2010)—to interpret Delegation Agreements as being independent from the arbitration agreements in which they are contained, and not graft upon those Delegation Agreements scope limitations that are based on the terms of the arbitration agreement containing the Delegation Agreement.

It explains in detail why using a separability-based analytical model has a number of advantages over the Schein II approach in that it gives full effect to the terms of the separate arbitration and Delegation Agreements, gives effect to the separate but related purposes that each of those agreements serves, and otherwise helps ensure that the parties’ legitimate contractual expectations are met.

The author hopes that the Supreme Court will grant certiorari, reverse, and clarify how the lower courts should address cases where parties agree to a broad arbitration agreement, incorporate by reference into that agreement a broad, unqualified, Delegation Agreement, but except from the scope of their arbitration agreement certain types of disputes.

There are many other reasons why the author believes SCOTUS should hear and reverse Schein II, but a thorough discussion of them must await another article or post.

The whole point of Schein I was that the merits of an arbitrability question has no bearing on the question of who gets to decide that question. Schein II does not comport with Schein I and should be reversed.

* * *

Philip J. Loree Jr. is a co-founder and partner at the New York law firm, Loree & Loree. The opinions expressed in this post are his own, and not those of the blog publisher, the CPR Institute.

 

 

 

Tuesday’s SCOTUS Argument: Can Non-Signatories Compel Arbitration in the United States Under the New York Convention?

By Doo-Won ‘David’ Chung and Russ Bleemer

When a party files for arbitration under a contract but it is not a signatory to the contract, sparks can fly.

On Tuesday, the U.S. Supreme Court heard from both sides that non-parties can compel arbitration under the Federal Arbitration Act in oral arguments for this term’s sole arbitration case, GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC, No. 18-1048.

But the arbitration falls under the international Convention on the Recognition and Enforcement of Foreign Arbitral Awards, best known as the New York Convention, adopted and implemented as the FAA’s Chapter 2 in the United States.

And on its surface, it appears the treatment may be different.  The Eleventh U.S. Circuit Court of Appeals rejected nonparty GE Energy’s motion to compel arbitration, focusing on the first of four treaty requirements for compelling arbitration— “there is an agreement in writing within the meaning of the Convention.” Outokumpu Stainless U.S. LLC v. Converteam SAS, 902 F.3d 1316, 1325 (11th Cir. 2018) (available at http://bit.ly/2E1eSc0).

The Supreme Court agreed to hear the case last year on whether the New York Convention allows a non-signatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel. See “The Friends Speak: Here’s What Scotus Will Decide in the GE Energy International Arbitration Case,” 38 Alternatives 2 (January 2020) (available at http://bit.ly/2v2pJ3Z).

The Court’s strong historical preference for arbitration appeared to be a tipoff that it took the case to reverse.  But early in the opening argument by GE Energy’s attorney, Shay Dvoretzky, a Washington, D.C. partner in Jones Day, Chief Justice John G. Roberts Jr. showed a concern he focused on repeatedly, that being able to force arbitration against a party who never consented would be inconsistent with “one of the central propositions of our arbitration precedents that arbitration is based on agreements.”

Dvoretzky had urged the Court to permit the use of the equitable estoppel doctrine as part of a group of methods by which nonparties can invoke an arbitration agreement under the New York Convention. Respondent Outokumpu contended that the Convention requires a signed arbitration contract by the party invoking arbitration.

Roberts seemed to share reservations about nonparties.  Responding to his own hypothetical for Dvoretzky, the chief justice said, “here somebody who never agreed to arbitration is being forced into arbitration, even though he has a clear right to take his dispute to court.”

While admitting that arbitration is a matter of consent, Dvoretzky argued that the consent by the respondent was exhibited by the contract’s existence with its arbitration provision, even if it didn’t name the party.  The scope of that agreement, at least in the context of FAA Chapter 1, had been determined Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630–31 (2009) (available at http://bit.ly/3442FxB), which extends the agreement’s use to nonparties under a variety of doctrines, without restriction to signatories.

The case arose out of a dispute between respondent Outokumpu, a Calvert, Ala., steel manufacturer, and a subcontractor, GE Energy, which agreed to supply nine motors to run three steel mills which failed.

While the contract between Outokumpu and its construction general contractor included an arbitration agreement, subcontractor GE Energy was not yet selected, according to Dvoretzky, and not a signatory.  When Outokumpu filed suit against GE Energy in a state court, the subcontractor removed to federal court and moved to dismiss and compel arbitration under the contract.

Alabama’s Southern District federal court granted GE Energy’s motion to compel arbitration and dismissed the action, but on appeal, the Eleventh Circuit reversed.

The appeals court acknowledged that, for domestic arbitration agreements, equitable estoppel allows the non-signatory to enforce the arbitration clause under Arthur Andersen.  But the circuit court distinguished international arbitration agreements, and held “to compel arbitration, the [New York Convention] requires that the arbitration agreement be signed by the parties before the Court or their privities.”

Shay Dvoretzky opened his argument on GE Energy’s behalf by noting that the New York Convention is silent about enforcement by non-signatories.  “That silence is consistent with the Convention’s design, which sets a floor, not a ceiling, for enforcing arbitration agreements and awards,” he explained.

According to Dvoretzky, since the Convention doesn’t say states can’t do more than what the Convention requires, the rest is left to the states’ domestic arbitration laws. Dvoretzky further contended, “Other contracting states are close to unanimous that the Convention does not preempt domestic law allowing non-signatory enforcement.”

Justice Elena Kagan told Dvoretzky, “It seems odd that Congress would have passed the implementing legislation on the view that another contracting state could compel arbitration without any consent whatsoever.”

“I think this goes to the core question of what the Convention is trying to do,” countered Dvoretzky, adding, “The Convention is trying to set forth minimum standards by which other countries will recognize and enforce arbitration agreements.”

After Justice Neil Gorsuch seemed satisfied by Dvoretzky’s response that there was nothing in the New York Convention preventing the use of the equitable estoppel doctrine in matters under the treaty, Kagan jumped back into the discussion, saying she agreed with the chief justice:

If you’re talking about an alter ego or something like that, or a successor in interest, maybe that person counts as a party, even though it is not the signatory but there is some limit.  . . .

[S]o if it’s a matter of voluntary consent, and everybody thinks that that’s what arbitration is, shouldn’t we read the parties to be, you know, the parties? Nobody else.

Dvoretzky responded with a return to Arthur Andersen. “Certainly under domestic law it is understood to be a matter of voluntary consent,” he said, “but the Court saw no issue with the possibility after an equitable estoppel theory that would allow a nonparty to enforce.”

Jonathan Y. Ellis, Assistant to the Solicitor General whose amicus argument supported GE Energy, explained that the New York Convention’s role is to assist courts in the recognition of international arbitration agreements, but it doesn’t provide a comprehensive set of arbitration rules. He argued that the Convention presumes validity of arbitration agreements, and doesn’t speak to agreements’ scope.

Justice Sonia Sotomayor leaned toward GE Energy’s case during Ellis’s argument, but pushed for a rule. She appeared to agree that there are bases for the argument that contracting states can pick who the parties are, but she also said that there should be limits.  “What’s the limiting principle of equitable estoppel?” she asked, adding, “It can’t be every single type of equitable estoppel is okay.”

She added that if GE is contemplated by the contract as a supplier, the matter “seems like a fairly straightforward case to me.”

Ellis responded that the New York Convention has standards on whether an arbitration agreement was reached between the parties, and signatory states’ limits on recognizing “other types of arbitration agreements” needs to be satisfied.  But, he said he didn’t think the Convention “can be read to impose those limits.”

Jonathan D. Hacker, a partner in Washington D.C.’s O’Melveny & Myers LLP, disagreed with GE Energy’s Convention interpretation in his argument on behalf of the steelmaker Outokumpu. Instead, Hacker asserted that the Convention makes it a ceiling—declaring that a written agreement by the parties is necessary to enforce international arbitration agreements.

After a hypothetical by Justice Stephen G. Breyer that allowed a successor party to arbitrate a contract via domestic law, Hacker contended that allowing domestic law to decide who gets to enforce arbitration “creates a huge problem under the Convention because then the states can begin subjecting parties to arbitration” even without consent, which he said is against the Convention’s requirements.

In closing, Hacker argued that “extension of an arbitration agreement to non-parties” is “supposed to be the exception that you almost never see,” and if GE Energy’s interpretation is adopted, “essentially all subcontractors would suddenly be able to arbitrate, even absent a written agreement.”

The Supreme Court’s decision, expected by the end of the term in June, may be crucial not just for arbitration practitioners, but also for parties engaged in cross-border transactions that involve performance by non-signatories.  If the Court affirms the circuit court’s decision, it may create the need for more detailed participation of potential parties, as signatories, for contracting.

* * *

Tuesday’s GE Energy arguments were the second of two for Chief Justice Roberts who, after the case concluded, walked across the street to the U.S. Capitol from the Court to begin his new second job presiding over the U.S. Senate impeachment trial of President Trump.

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This post is based on the transcript of the arguments, posted Tuesday afternoon, and is available on the Court’s website at http://bit.ly/2RD1JMG.

Chung, a law student at Benjamin N. Cardozo School of Law at New York’s Yeshiva University, is a 2020 spring semester CPR Intern; Bleemer edits Alternatives for the CPR Institute at altnewsletter.com.

Henry Schein Redux – The Appeals Court Decides “The Placement of the Carve-Out is Dispositive”

By Mark Kantor

Kantor Photo (8-2012)You may recall that the US Supreme Court last term in Henry Schein, Inc. v. Archer and White Sales, Inc. rejected a “wholly groundless” exception to its general principles allocating arbitrability issues between court and arbitrator (the First Options rule that “Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.”).  The Supreme Court then sent the case back to the US Court of Appeals for the Fifth Circuit for reconsideration in light of the Supreme Court’s ruling.

Yesterday, the Fifth Circuit issued its new opinion in that case (Archer and White Sales, Inc. v. Henry Schein, Inc., No. 16-41674, Aug. 14, 2019, available on TDM at https://www.transnational-dispute-management.com/legal-and-regulatory-detail.asp?key=22906, subscription required).  In that opinion, the Appeals Court concluded that the arbitration clause in question did not clearly and unmistakably allocate the relevant question to the arbitrators.  The Court then held that, based on the exclusion for “actions seeking injunctive relief” from arbitration under the relevant clause, the dispute in question was not arbitrable.  As explained more fully below, the appeals court relied on contract interpretation principles to reach this result.  The court thereby emphasized the importance of precise drafting of the arbitration clause and any exceptions – “the placement of the carve-out here is dispositive.”

The underlying court proceeding brought by Archer and White Sales, Inc. is an antitrust complaint against Henry Schein, Inc. and others relating to alleged anticompetitive agreements entered into among the defendants with respect to sales of dental equipment.  Complainant Archer and White Sales “alleges violations of federal and Texas antitrust law and seeks money damages and injunctive relief.”  The defendants argued that an exclusion in the relevant arbitration clause of “actions seeking injunctive relief” operated to prevent arbitrability of the dispute.

The arbitration clause in the underlying contract reads as follows (emphasis added):

Disputes. This Agreement shall be governed by the laws of the State of North Carolina.  Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of Pelton & Crane), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)].  The place of arbitration shall be in Charlotte, North Carolina.

Under AAA Commercial Arbitration  Rule 7(a), “[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.”  However, the Fifth Circuit interpreted this arbitration clause in the agreement to exclude actions seeking injunctive relief from arbitration.  By doing so, the parties, said the appeals court, had placed the relevant dispute entirely outside the AAA arbitration rules.  Thus, Rule 7(a) did not come into play, and the parties had not clearly and unmistakably delegated the issue of arbitrability of an action seeking injunctive relief to the arbitrator.

Finding that the exclusion in the arbitration clause was itself clear, the Court of Appeals itself then determined that the dispute was not arbitrable because the court claims sought injunctive relief in addition to damages.

The decision of the Fifth Circuit avoids reconsidering the issue raised by amicus and discussed by Justice Ginsburg in her separate Supreme Court opinion – do provisions in arbitration rules such AAA Rule 7(a) in fact constitute a clear and unmistakable delegation of arbitrability decisions to the arbitrator.  As the Fifth Circuit Court of Appeals noted in footnote 11, “While both parties read the tea leaves in the questions asked by the Justices at oral argument, attempting to shepherd them to support their own positions, the Court declined to decide whether this agreement in fact delegated the arbitrability question.”

In the Fifth Circuit, precedent holds that an arbitration rule such as AAA Rule 7(a) satisfies the First Options test; “As we held in [Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012)], an arbitration agreement that incorporates the AAA Rules “presents clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.””  That issue, as to which the ALI Restatement of The U.S. Law of International Commercial and Investor-State Arbitration takes the contrary position, therefore remains the subject of a circuit split among Circuit Courts of Appeals in the US to be resolved in the future by the US Supreme Court.

The manner in which the Fifth Circuit judges reached this conclusion is particularly relevant to patent licensing disputes, where the parties to a patent license agreement or similar IP agreement often provide for arbitration but contractually exclude patent validity, infringement and similar disputes from arbitration.

The Circuit Court of Appeals (Judge Patrick Higginbotham writing for a unanimous court) began its analysis in the customary two-step fashion, asking first if there is any arbitration agreement at all and thereafter considering whether “this claim is covered by the arbitration agreement” (footnotes omitted here and elsewhere).

We review a ruling on a motion to compel arbitration de novo.  Our inquiry proceeds in two steps.  The first is a matter of contract formation—“whether the parties entered into any arbitration agreement at all.”  Next we turn to the question of contract interpretation and ask whether “this claim is covered by the arbitration agreement.”

Judge Higginbotham then restated the well-known First Options “clearly and unmistakably” formulation for allocating the second question between court and arbitrator.

While ordinarily both steps are questions for the court, the parties can enter into an arbitration agreement that delegates to the arbitrator the power to decide whether a particular claim is arbitrable. The Supreme Court has repeatedly made clear that “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.”

When considering whether there was a valid delegation, “the court’s analysis is limited.” As always, we ask if the parties entered into a valid agreement. If they did, we turn to the delegation clause and ask “whether the purported delegation clause is in fact a delegation clause—that is, if it evinces an intent to have the arbitrator decide whether a given claim must be arbitrated.”  When determining that intent, “[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clear and unmistakable’ evidence that they did so.” If there is a valid delegation, the court must grant the motion to compel.

Here, the disputing parties had agreed that a valid arbitration agreement existed, leaving only the second step for consideration – was the particular claim covered by that agreement.  Archer and White argued that decision was for the courts to make.

Archer asserts that the AAA rules (and resulting delegation) only apply to disputes that fall outside of the arbitration clause’s carve-out for actions seeking injunctive relief. Under their reading, if a case falls within the carve-out, the agreement does not incorporate the AAA rules and the gateway arbitrability question is not delegated to an arbitrator.

Henry Schein argued in response that, by operation of AAA Commercial Arbitration Rule 7(a), the parties had expressly delegated that issue to the arbitrator.

[D]efendants argue that the agreement’s incorporation of the AAA rules ends the inquiry.  They maintain that the carve-out for actions seeking injunctive relief does not trump the parties’ delegation.  Defendants warn that to read the contract as Archer suggests would require the court to make a merits determination about the scope of the carve-out—whether this is indeed an action seeing injunctive relief—to answer the delegation question, precisely the category of inquiries a court is precluded from making in answering the delegation question.

The Fifth Circuit agreed with claimant Archer and White, holding that the “plain language” of the arbitration clause did not incorporate the AAA rules for disputes “under the carve-out”.

that is precisely the point—the placement of the carve-out here is dispositive. We cannot re-write the words of the contract. The most natural reading of the arbitration clause at issue here states that any dispute, except actions seeking injunctive relief, shall be resolved in arbitration in accordance with the AAA rules. The plain language incorporates the AAA rules—and therefore delegates arbitrability—for all disputes except those under the carve-out.  Given that carve-out, we cannot say that the Dealer Agreement evinces a “clear and unmistakable” intent to delegate arbitrability.

The appellate court then considered whether the “backdrop of a strong presumption in favor of arbitration” would result in referring the dispute to arbitration.  But the language of the exclusion in the arbitration clause, said the judges, was clear.  Moreover, the court noted that the clause excluded “actions seeking injunctive relief,” not “actions seeking only injunctive relief.”  The appellate court therefore refused to compel arbitration, even of only the claim for damages.

We note first that the arbitration clause creates a carve-out for “actions seeking injunctive relief.” It does not limit the exclusion to “actions seeking only injunctive relief,” nor “actions for injunction in aid of an arbitrator’s award.” Nor does it limit the carve-out to claims for injunctive relief. Such readings find no footing within the four corners of the contract. Under North Carolina law, “[w]hen the language of a contract is clear and unambiguous, effect must be given to its terms, and the court, under the guise of construction, cannot reject what the parties inserted or insert what the parties elected to omit.” The mere fact that the arbitration clause permits Archer to avoid arbitration by adding a claim for injunctive relief does not change the clause’s plain meaning. “While ambiguities in the language of the agreement should be resolved in favor of arbitration, we do not override the clear intent of the parties, or reach a result inconsistent with the plain text of the contract, simply because the policy favoring arbitration is implicated.” Fundamentally, defendants ask us to rewrite the unambiguous arbitration clause. We cannot.

It is noteworthy that the appeals court did not consider severing Archer and White’s remedial request for injunctive relief from its remedial request for damages, which might have resulted in sending the latter to arbitration but keeping the former in court.

The appellate panel’s decision in Henry Schein is of particular importance to intellectual property practitioners.  It is common in the marketplace for patent licensing and similar agreements to contain arbitration clauses.  However, those clauses often expressly exclude from arbitration a dispute for example, “concerning the validity, scope, infringement and essentiality of a patent or a patent claim.”  Moreover, it is extremely common in all sorts of contracts for an arbitration clause to include as well an express authorization for a disputing party to seek injunctive relief from the courts.

Thus, the Fifth Circuit has previously compelled arbitration of the scope question in another precedent, Crawford Professional Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 256 (5th Cir. 2014), under  an arbitration clause stating inter alia “nothing in the arbitration provision “shall prevent either party from seeking injunctive relief for breach of th[e Agreement.”

In the Ninth Circuit, though, the appeals court there has concluded that the scope of arbitrability was for the arbitrator to decide under an arbitration clause providing that “all” disputes arising out of or relating to the subject license agreement were to be arbitrated, and then containing a carve-out for certain IP and licensing claims.

The Ninth Circuit considered a similar agreement in Oracle Am., Inc. v. Myriad Group A.G.  The arbitration clause adopted arbitration rules delegating arbitrability issues to the arbitrator and contained a carve-out for certain intellectual property and licensing claims.  Because the claims carved-out by that agreement “ar[ose] out of or relat[ed] to” the Source License, and the agreement explicitly provided that any claim arising out of the Source License was subject to arbitration, the Ninth Circuit held that Oracle’s carve-out argument “conflate[ed] the scope of the arbitration clause . . . with the question of who decides arbitrability.30

****

30.  ****  The court noted that the issue with Oracle’s carve-out argument was that the two categories of exempted claims by definition were claims arising out of or relating to the Source License, which were explicitly subject to arbitration. Id. at 1076.  No such circularity exists in the contract at issue here.

Where, though, the meaning of a carve-out clause is ambiguous, the Second Circuit Court of Appeals has previously allocated to the courts the scope question in NASDAQ OMX Grp., Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d Cir. 2014).

the parties in NASDAQ had not clearly and unmistakably delegated arbitrability “where a broad arbitration clause is subject to a qualifying provision that at least arguably covers the present dispute.”  Because there was ambiguity as to whether the parties intended to have arbitrability questions decided by an arbitrator—because the dispute arguably fell within the carve-out—the court held the arbitrability question was for the court to decide.

These varying precedents emphasize the point made by the Fifth Circuit in Henry Schein that the parties must take care in the drafting of their exclusionary clauses; “But that is precisely the point—the placement of the carve-out here is dispositive.  We cannot re-write the words of the contract.”

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Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

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

CMS Finalizes Rule on Nursing Home Pre-Dispute Arbitration Agreements

By Mark Kantor

Kantor Photo (8-2012)

You will recall the controversy during the Obama Administration over the use of mandatory pre-dispute arbitration agreements by nursing homes.  Last week, the Centers for Medicare & Medicaid Services (CMS) of the U.S. Department of Health and Human Services finalized a revised rule (the 2019 Final Rule) removing the prohibition in the 2016 Rule on pre-dispute arbitration agreements for long-term healthcare facilities but keeping provisions from the 2016 rule “banning facilities from requiring that residents sign arbitration agreements as a condition of admission to a facility” and “specifying that a resident’s right to continue to receive care at the facility must not be contingent upon signing an arbitration agreement.”

Many thanks to Beth Graham and Karl Bayer’s Disputing Blog for following these developments – see www.disputingblog.com/cms-issues-final-rule-allowing-pre-dispute-nursing-home-arbitration-agreements/ .

As M-and-A participants will recall, CMS promulgated a rule in October 2016 barring long-term care facilities (e.g., nursing homes) from Medicare and Medicaid programs unless the facility gave up provisions requiring pre-dispute binding arbitration agreements between LTC facilities and their residents.  The 2016 Rule:

“prohibit[ed] LTC facilities from entering into pre- dispute, binding arbitration agreements with any resident or his or her representative, or requiring that a resident sign an arbitration agreement as a condition of admission to the LTC facility. It also required that an agreement for post-dispute binding arbitration be entered into by the resident voluntarily, that the parties agree on the selection of a neutral arbitrator, and that the arbitral venue be convenient to both parties. The arbitration agreement could be signed by another individual only if allowed by the relevant state’s law, if all of the other requirements in this section were met, and if that individual had no interest in the facility. In addition, a resident’s right to continue to receive care at the facility post-dispute could not be contingent upon the resident or his or her representative signing an arbitration agreement. The arbitration agreement could not contain any language that prohibited or discouraged the resident or anyone else from communicating with federal, state, or local officials, including but not limited to, federal and state surveyors, other federal and state health department employees, and representatives of the Office of the State Long-Term Care Ombudsman. In addition, when a LTC facility and a resident resolved a dispute through arbitration, a copy of the signed agreement for binding arbitration and the arbitrator’s final decision was required to be retained by the facility for 5 years and be available for inspection upon request by the Centers for Medicare & Medicaid Services (CMS) or its designee.

The 2016 Rule was preliminarily enjoined nationwide by the U.S. District Court for the Northern District of Mississippi in November 2016 as a result of litigation brought by the American Health Care Association and a group of affiliated nursing homes.  Promptly thereafter, CMS issued an instruction calling for non-enforcement of the 2016 Rule’s pre-dispute arbitration agreement provisions.  In 2017, the new Trump Administration issued proposed revisions to the 2016 Rule.  CMS sought public comment on the 2017 proposed rule, receiving over 1,000 comments including many from groups that advocate for the rights of older adults, residents in nursing homes or people with disabilities, as well as State Offices of the Long-Term Care Ombudsman.

Last week, CMS finalized and issued a revised 2019 Final Rule at 84 Fed. Reg. 34718 (July 18, 2019, available at https://www.govinfo.gov/content/pkg/FR-2019-07-18/pdf/2019-14945.pdf), making some changes to its proposed revised rule but retaining the removal of the core prohibition on pre-dispute arbitration agreements for long-term healthcare facilities.  Significantly, the final rule keeps important provisions from the 2016 Rule “banning facilities from requiring that residents sign arbitration agreements as a condition of admission to a facility” or “specifying that a resident’s right to continue to receive care at the facility must not be contingent upon signing an arbitration agreement.”  The 2019 Final Rule also modifies in some respects the transparency requirements offered in the 2017 proposed rule.  The CMS short summary of the Final Rule states as follows.

We have reviewed all of the comments received and considered the concerns raised by all stakeholders. As a result, we have made some revisions to the proposed rule in response to public comments. Specifically, as discussed in detail below, we are finalizing our proposals to remove the requirement at § 483.70(n)(1) precluding facilities from entering into pre-dispute, binding agreements for binding arbitration with any resident or his or her representative, and the provisions at § 483.70(n)(2)(ii) regarding the terms of arbitration agreements. We are not finalizing the proposed removal of the provision at § 483.70(n)(2)(iii) banning facilities from requiring that residents sign arbitration agreements as a condition of admission to a facility. Therefore, facilities will continue to be prohibited from requiring any resident or his or her representative to sign an agreement for binding arbitration as a condition of admission to the facility. In addition, to address commenters’ concerns that facilities may still coerce or intimidate the resident and his or her representative into signing the agreement, the facility must explicitly inform the resident or his or her representative that signing the agreement is not a condition of admission and ensure that this language is also in the agreement. We are finalizing provisions requiring that arbitration agreements be in a form and manner that the resident understands. However, we are not finalizing the proposed transparency related provisions that the facility must ensure that the agreement for binding arbitration is in ‘‘plain language’’ and that the facility post a notice regarding the use of agreements for binding arbitration in an area that is visible to residents and visitors. We are not finalizing the proposed removal of the provision specifying that a resident’s right to continue to receive care at the facility must not be contingent upon signing an arbitration agreement. Finally, based on comments, we are adding a requirement that facilities grant to residents a 30 calendar day period during which they may rescind their agreement to an arbitration agreement.

The full revised Final Rule can be found here – https://www.govinfo.gov/content/pkg/FR-2019-07-18/pdf/2019-14945.pdf.  It will be interesting to see if the nursing home industry opposes this Rule as well, in reliance on the reasoning of Epic Systems Corp. v. Lewis.  Whether or not there is a potential conflict between Epic Systems and CMS’ 2019 Final Rule, the industry may simply believe it has won enough in the political battle to step away from the legal battle.

_______________________________________________

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

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

US Sup Ct Grants Review to Decide Whether New York Convention Permits Non-Signatory to Compel International Arbitration on Equitable Estoppel Grounds

By Mark Kantor

Kantor Photo (8-2012)

This morning the U.S. Supreme Court granted certiorari and agreed to hear in its next Term the international arbitration case of GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC (Docket No. 18-1048, case documents available at https://www.scotusblog.com/case-files/cases/ge-energy-power-conversion-france-sas-v-outokumpu-stainless-usa-llc/).  The dispute addresses whether, under the New York Convention, a non-signatory can compel arbitration.  The Question Presented is:

Whether the Convention on the Recognition and Enforcement of Foreign Arbitral Awards permits a nonsignatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel.

As described in GE’s petition for cert, “Sometimes, a signatory to a contract may sue a non-signatory for claims that arise out of the contract.  When that happens, is the signatory bound by the arbitration clause it agreed to in the contract?  For domestic arbitration agreements, the answer is yes: Equitable estoppel allows the non-signatory to enforce the arbitration clause.  But the Eleventh Circuit [Court of Appeals] held that a non-signatory cannot compel arbitration if one of the parties is a foreign entity.  That erroneous holding deepens a 2-to-2 circuit split and warrants this Court’s review.”

Readers will note that GE’s quoted description of the issue speaks confusingly about both (i) a signatory compelling arbitration with a non-signatory and (ii) a non-signatory compelling arbitration with a signatory.  One hopes the U.S. Supreme Court will be able to distinguish the two situations and determine whether that distinction is relevant to resolving the question.  The 11th Circuit decision declining to compel arbitration rested in part on the non-US nature of one of the parties.

We shall learn within the next year how the U.S. Supreme Court believes non-signatories fit into the commercial arbitration universe.

_______________________________________________

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

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

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

By Echo K.X. Wang and Russ Bleemer

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

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

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

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

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

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

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

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

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

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

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

Roberts continues:

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

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

* * *

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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

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

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

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

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

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

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

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

* * *

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

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

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

* * *

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

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

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

* * *

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

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

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

 

* * *

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

 

More on Mass Individual Arbitration As an Alternative to Class Arbitration

By Echo K.X. Wang

A plaintiffs-side law firm is embracing a recently developed path to pursuing employment disputes against companies that mandate class-action waivers.

Last month in California’s Northern District federal court, Uber and Lyft were separately faced with individual JAMS Inc./American Arbitration Association claims and petitions to compel arbitration from thousands of Uber and Lyft drivers working for each company.

The Uber lawsuit, Abadilla v. Uber Technologies Inc., is scheduled for a hearing on a motion to compel arbitration on March 28 with U.S. District Court Judge Edward M. Chen. (The Abadilla case page is available at http://bit.ly/2By5Zpf.)

The Lyft lawsuit, Abarca v. Lyft Inc., is scheduled for an initial case management conference on Mar. 14, 2019 with U.S. District Court Judge William Haskell Alsup. (The Abarca case page can be found at http://bit.ly/2Svtny8.)

The drivers claimed that the ride-share companies have misclassified them as independent contractors and violated the Fair Labor Standards Act.

The basis for these arbitration claims arose in light of last year’s California Supreme Court case, Dynamex v. Superior Court of Los Angeles County, 4 Cal. 5th 903 (Cal. April 30, 2018) (available at http://bit.ly/2ByKGnH), where the state’s top Court limited companies’ ability to label their workers as independent contractors. Unlike workers classified as employees, independent contractors, including Lyft and Uber drivers, are not entitled to minimum wage and other benefits promised under state and federal law.

The U.S. Supreme Court last year ruled in favor of employers in limiting employee’s ability to bring class suits, backing waivers in favor of mandatory individual arbitration, in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) (available at https://bit.ly/2rWzAE8); see also Noah Hanft, “What’s Next for Employers, Post Epic Systems?” Corporate Counsel (July 24, 2018) (available on the CPR Institute’s website at http://bit.ly/2E6ZUlB).

Another earlier Supreme Court case, Stolt-Nielsen v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) (available at http://bit.ly/2SP4ugk), held that a party may not be compelled to submit to class arbitration under the Federal Arbitration Act unless otherwise provided for within the contract.

These decisions impose restrictions on employees’ ability to resolve workplace disputes, requiring them to arbitrate claims individually.

Yet 2019 has started off with a shift toward a more expansive view of workers’ rights which will affect—in ways yet to be determined—resolving conflicts with their employers. Last month, the Supreme Court in New Prime v. Oliveira, No. 17–340 (2019) (available at https://bit.ly/2CyEpbd) resolved a circuit split about whether the FAA Section 1 exemption applies to independent contractor agreements.

Plaintiff Oliveira brought a class action wage-and-hours claims against New Prime, an interstate trucking company. When New Prime sought to enforce its mandatory arbitration agreement under the FAA, Oliveira contended that he qualifies for the FAA Section 1 exemption, and the FAA shouldn’t apply to his case, thereby striking the mandatory arbitration clause in his independent contractor agreement.

The exemption clause states that “nothing herein” the FAA “shall apply to contracts of employment of . . . any [] class of workers engaged in foreign or interstate commerce.” While both parties agreed that Oliveira is considered a class of worker “engaged in interstate commerce,” the parties disagreed on whether the FAA’s “contracts of employment” included independent contractor agreements, or only to employer-employee agreements.

In the unanimous 8-0 decision by Justice Neil M. Gorsuch—new Justice Brett Kavanaugh wasn’t seated when the case was argued and didn’t participate—the Court held that “contract of employment” includes a broad reading of employee-employer relationships, including independent contractor agreements. Therefore, under FAA Sec.1, transportation workers like Oliveira may not be compelled to arbitrate.

Looking to the historical usage of the word “employment,” Gorsuch explained that when the FAA was enacted in 1925, “employment” was understood broadly to be “more or less as a synonym for ‘work.’” He also noted that both federal and state courts in the early 20th century have used the term “contract of employment” to describe work agreements involving independent contractors.

In summary, he wrote, “a contract of employment did not necessarily imply the existence of an employer-employee . . . . relationship.” (Emphasis is in the opinion.)

* * *

The New Prime decision could have a significant impact on the interstate transportation industry, including the outcomes of the pending Uber and Lyft disputes. Chicago-based law firm Keller Lenkner  initially filed and is orchestrating both the 12,501 arbitrations claims against Uber (Abadilla v. Uber Technologies Inc.)and the 3,420 Lyft drivers arbitration claims against Lyft (Abarca v. Lyft Inc.).

When the two companies failed to fully pay the initial arbitration filing fees as promised within the companies’ arbitration agreements, Keller Lenkner enlisted Los Angeles firm Larson O’Brien LLP to help with the Uber Abadilla cases, and filed a motion to compel arbitration against both companies in the N. D. California District Court.

It is not a surprise that Uber and Lyft are delaying the fee payments. As it turns out, the large numbers of individual arbitrations are expensive and time consuming for companies. In the Uber arbitrations under JAMS, the initial filing fees for arbitration is $1,500 per dispute.

Similarly, Lyft’s American Arbitration Association arbitrations are $1,900 per dispute. A detailed list of AAA’s employment dispute arbitration fees is available at https://bit.ly/2X4VD9Q.

At the same time, Uber counters in the joint case management statement filed by both parties on Feb. 7 that the plaintiffs haven’t paid their arbitration fees either. The joint statement is available at http://bit.ly/2X10Tew.

Uber even proposed to resolve the arbitrations through four representative arbitrations. Alison Frankel, “Forced into arbitration, 12,500 drivers claim Uber won’t pay fees to launch case,” Reuters (Dec. 6, 2018) (available at https://reut.rs/2tha1xS). While Keller Lenkner rejected this offer on behalf of its clients, it is interesting and unusual that Uber proposed the equivalent of class arbitration, after fighting so hard—and successfully—against class action arbitrations at the Ninth U.S. Circuit Court of Appeals. O’Connor, et al.  v. Uber Technologies Inc., No. 14-16078 (Sept. 25, 2018) (available at http://bit.ly/2Gnhggl).

In combatting these individual arbitration claims, the ride-share companies adopted several tactics including: 1) delay the arbitrations by not paying the arbitration initial filing fees, 2) challenging their opposing counsels’ qualifications, and 3) offering incentives for employees to drop their arbitration claims.

The tactic to delay arbitration fee payments, as both Uber and Lyft seem to be doing, is not new. See Howard E. Levin, Stiffing the Arbitrators and the Respondents, ABA GPSolo eReport (Aug. 22, 2017) (available at http://bit.ly/2WZQD6c). Neither is the plaintiffs’ push for mass individual arbitrations. See Jessica Goodheart, “Why 24 Hour Fitness Is Going to the Mat against Its Own Employees,” Fast Company (March 13) (available at http://bit.ly/2pkDPIm) (A class of health club employees decertified by a California federal court filed hundreds of individual arbitrations, which the employer settled as a group); Ben Penn, “Buffalo Wild Wings Case Tests Future of Class Action Waivers,” Bloomberg Law (July 12, 2018), https://bit.ly/2Sx9qXY (Workers at Buffalo Wild Wings filed nearly 400 individual arbitrations for wage-and-hour disputes, which also resolved in a group settlement).

Uber and Lyft did not respond to a request for comment.

Since arbitrations can only proceed after the initial filing fees are paid, there is perverse incentive for companies to delay or even refuse to pay the arbitration fees, in hopes that employees would either pay for the filing fees themselves, or simply give up and abandon the claims altogether.

As noted, the companies advanced arguments to attack the qualifications of their opposing firms and attorneys. In a separate but similar wage-and-hour arbitration dispute at the California Northern District federal court, Uber succeeded in its motion to disqualify Keller Lenkner and its partner Warren Postman from representing Diva Limousine against Uber in Diva Limousine Ltd. v. Uber Technologies Inc. (case page available at http://bit.ly/2Ia1wz2).

In Diva, Uber argued that in his previous job at the U.S. Chamber of Commerce, Postman frequently “exchanged confidential and privileged communications [with Uber] on the driver classification issue,” and should therefore be disqualified for conflicts of interest. (A detailed account of Uber’s argument can be found at Alison Frankel, “Law firm for Uber drivers in mass arbitration is bounced from federal court case,” Reuters (Jan. 10) (available at https://reut.rs/2GntPYS).

On Jan. 11, Judge Edward M. Chen from the California Northern District federal court in San Francisco granted Uber’s motion to disqualify Postman & Keller Lenkner. On Feb. 11, 2019, the plaintiff appealed this decision to the Ninth Circuit, filing a writ of mandamus.

Uber is now trying to use the Diva opinion as the basis to disqualify Keller Lenkner and Larson O’Brien in the Abadilla case. In Uber’s opposition to the plaintiffs’ motion to compel arbitration (see motion available at http://bit.ly/2TNcnjx), the company argued that while the counsel of record for the 12,501 drivers is the Larson O’Brien firm, the arbitration demands were initially submitted to JAMS by Keller Lenkner.

Uber expressed doubts on Larson O’Brien’s involvement in the case, alleging that Keller Lenkner, with Larson O’Brien by association, should not be able to represent the drivers given the Diva disqualification judgment.

Keller Lenkner might face the same conflict problem against Lyft as well.  In November, soon after Keller Lenkner requested arbitration, Lyft filed a tort lawsuit against Postman, seeking both money damages and an injunction against Postman from representing the Lyft drivers in arbitrations. (Lyft Inc. v. Postman, case court docket available at https://bit.ly/2SRO4DY). There, Lyft alleged that Postman worked closely with Lyft when he was at the Chamber of Commerce, and like Uber, alleged that he was exposed to confidential information about Lyft’s driver classification issues (see motion available at https://bit.ly/2tiNMYu).

On Jan. 16, the Court grant an extension for Postman to respond to the complaint, but Postman has yet to respond as of Feb. 14. It is unclear if the Diva opinion, now on appeal, would affect Keller Lenkner’s eligibility to represent the drivers in the Lyft arbitrations.

* * *

In addition to stalling the arbitration and imposing other defenses against the arbitrations, Uber and Lyft might also consider other ways to settle these claims. Uber already did this in the past, in offering to pay 11 cents per mile in exchange for drivers to opt out of another arbitration. After all, Uber and Lyft are both hoping to go public in the next few months, and it would be to their advantage to resolve these matters before then.

It is unknown if mass individual arbitrations—the plaintiffs’ “death by a thousand cuts” strategy—will turn out to be a key path for gig-economy workers. While mass individual arbitrations may impose pressure for companies to change their policies or to settle, would it be possible to arbitrate so many disputes?

Although it appears that Uber is stalling for time by attacking Postman’s qualifications, it is questionable whether Keller Lenkner, a 10-attorney firm, is equipped to handle more than 16,000 individual arbitrations–though, according to Keller Lenkner, they have been referring affected clients to other firms as a way to address this problem.

The plaintiffs’ mass arbitration strategy also has been questioned by experts, who wonder whether it risks corrupting the processes.  They charge that attorneys employing this strategy may be trying to gain negotiation leverage, rather than intending to arbitrate each claim, which, they say, is detrimental to ADR. See Andrew Wallender, “Corporate Arbitration Tactic Backfires as Claims Flood In,” Bloomberg Law (Feb. 11) (available at https://bit.ly/2BwruqF).

Moreover, in light of New Prime, significant changes loom in how transportation workers bring their claims. For drivers in the ride-share industry who “engage[] in … interstate commerce,” New Prime stands for the proposition that they have a choice to bring future wage and hour claims directly to the state and federal courts, rather than through arbitrations.

Another question is whether Uber and Lyft drivers will fit under the FAA Sec. 1 umbrella of transportation workers “engaged in … interstate commerce.” Even if they are, how will the New Prime sit with individual state laws and regulations?

 

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

Implications of Henry Schein and New Prime US Supreme Court Decisions

By Mark Kantor

Kantor Photo (8-2012)

As you know, the US Supreme Court has now issued its opinions in two of the three arbitration-related cases it heard this Term, the 8-0 (with an additional short concurrence by Justice Ginsburg) unanimous decision authored by Justice Gorsuch in New Prime Inc. v. Oliveira and the 9-0 unanimous decision authored by Justice Kavanaugh in Henry Schein v. Archer & White Sales.  Only Lamps Plus Inc. v. Varela remains to be decided this Term (Question Presented: whether the Federal Arbitration Act (FAA) overrides a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements).

The headlines in those decisions relate to excluding from the FAA obligation to enforce arbitration any pre-dispute agreements with independent contractor transportation workers (New Prime v. Oliveira) and the rejection of a “wholly groundless” exception to a court’s obligation to allow the arbitral tribunal to decide jurisdictional disputes where the parties have “clearly and unmistakably” allocated that authority to the arbitrators (Henry Schein v. Archer & White Sales).  But there are other implications of those decisions to which we should pay attention.

First, with respect to the decision in Henry Schein and as discussed on the listserv, the lower courts had relied on the competence-competence Rule 7(a) in the AAA Commercial Arbitration Rules to conclude that the parties had “clearly and unmistakably” allocated that decision-making power to the arbitrators, as required by First Options of Chicago, Inc. v. Kaplan.  However, the Henry Schein Court stated:

We express no view about whether the contract at issue in this case in fact delegated the arbitrability question to an arbitrator.  The Court of Appeals did not decide that issue.  Under our cases, courts “should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.” First Options, 514 U. S., at 944 (alterations omitted).  On remand, the Court of Appeals may address that issue in the first instance, as well as other arguments that Archer and White has properly preserved.

As has been explained by others, there is an existing Circuit split as to whether a competence-competence provision in arbitration rules is sufficient to satisfy the First Options standard.  Moreover, Prof. George Bermann’s amicus brief on that issue, reflecting the view of the draft Restatement that a provision within the arbitration rules should not by itself be sufficient, triggered critical questioning by the Justices (particularly Justice Ginsburg) at the case’s oral argument.  That issue was not, however, part of the Question Presented on which the Supreme Court had granted certiorari for review.  It thus appears the Justices are preparing themselves to resolve that Circuit split in a future case.  In that regard, you may recall my October 31 post (see below, triggered by Prof. Bermann’s amicus brief) asking whether that question will be “the Next Big Arbitration Issue”.

Second, the New Prime decision makes clear that independent contractors may nevertheless be transportation “workers” with “employment agreements” who cannot be bound by a pre-dispute arbitration agreement enforceable under the FAA.  Mr. Oliveira himself is an independent trucker.  But I suggest to you the bigger practical impact will be to reinvigorate class actions in US courts brought by Uber and Lyft drivers against their respective ride-sharing employers.  Many of those judicial class actions had been dismissed in favor of arbitration due to mandatory arbitration clauses in the drivers’ independent contracts with the ride-sharing companies.

Similarly, seamen on shipping and fishing vessels and working personnel on cruise ships are not often employees of their shipping companies, fishing vessels or cruise lines etc.  Instead, they are regularly engaged under independent contractor agreements containing arbitration clauses.  There too, we can anticipate a resurgence of claims in US courts, rather than in arbitration, including possible class actions against shipping companies and cruise lines on various compensation, hiring and firing, and working conditions issues.  Unlike ride-sharing companies, though, those maritime companies generally operate internationally.  Consequently, we may anticipate as well that even more of those maritime companies will specify in their employment/independent contractor agreements an arbitration situs outside FAA jurisdiction, such as the many maritime employment arbitrations now being conducted in Caribbean seats.

Rail workers may also employ New Prime to move some disputes from arbitration to courts, although much of that field in the US is unionized under collective bargaining agreements for which arbitration is statutorily authorized outside the FAA.  Independent contractor relationships are less common.

But Justice Gorsuch may have gone further in his opinion.  He wrote:

Given the statute’s terms and sequencing, we agree with the First Circuit that a court should decide for itself whether §1’s “contracts of employment” exclusion applies before ordering arbitration. After all, to invoke its statutory powers under §§3 and 4 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or beyond the boundaries of §§1 and 2. The parties’ private agreement may be crystal clear and require arbitration ofevery question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.

(Emphasis added)

It is certainly possible to interpret that statement to mean that a court must itself determine whether the arbitration agreement falls within or outside §2 of the FAA, not just FAA §1.  FAA Section 1 excludes, according to long-standing precedent, maritime transportation workers from the obligations of the court to stay litigation and compel arbitration.  But FAA §2, the basic provision of the FAA enforcing covered arbitration agreements, contains the well-known savings clause for “such grounds as exist at law or in equity for the revocation of any contract”:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

(Emphasis added)

The quoted language authored by Justice Gorsuch (and endorsed by seven other Justices) can be read to suggest that, regardless of any “clear and unmistakable” delegation of jurisdictional decisions to arbitrators by the contracting parties, a supervising court must itself determine whether a challenge to an arbitration agreement on grounds such as unconscionability, duress or mistake is successful before the dispute proceeds to arbitration; i.e., a challenge under FAA §2 on grounds that exist in law or equity for revocation of any contract.  Certainly, counsel for parties seeking to avoid an arbitral forum in favor of a judicial forum will seize upon that language in New Prime to try to place the dispute in the courts.  We do not know if that was what Justice Gorsuch intended, but we can therefore anticipate a string of US court cases addressing the “who decides” issue again from that perspective, ultimately returning to the US Supreme Court for further clarification.

There is also another important conceptual issue embedded in Justice Gorsuch’s New Prime opinion that may affect many other issues relating to the FAA.  Justice Gorsuch spent considerable effort in his opinion focusing on the original legislative intent in 1925 for the FAA.  For example, these selections from the opinion.

Why this very particular qualification?  By the time it adopted the Arbitration Act in 1925, Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers.  And it seems Congress “did not wish to unsettle” those arrangements in favor of whatever arbitration procedures the parties’ private contracts might happen to contemplate.

****

In taking up this question, we bear an important caution in mind. “[I]t’s a ‘fundamental canon of statutory construction’ that words generally should be ‘interpreted as taking their ordinary . . . meaning . . . at the time Congress enacted the statute.’” Wisconsin Central Ltd. v. United States, 585 U. S. ___, ___ (2018) (slip op., at 9) (quoting Perrin v. United States, 444 U. S. 37, 42 (1979)). See also Sandifer v. United States Steel Corp., 571 U. S. 220, 227 (2014).  After all, if judges could freely invest old statutory terms with new meanings, we would risk amending legislation outside the “single, finely wrought and exhaustively considered, procedure” the Constitution commands. INS v. Chadha, 462 U. S. 919, 951 (1983).  We would risk, too, upsetting reliance interests in the settled meaning of a statute. Cf. 2B N. Singer & J. Singer, Sutherland on Statutes and Statutory Construction §56A:3 (rev. 7th ed. 2012).  Of course, statutes may sometimes refer to an external source of law and fairly warn readers that they must abide that external source of law, later amendments and modifications included. Id., §51:8 (discussing the reference canon).  But nothing like that exists here.  Nor has anyone suggested any other appropriate reason that might allow us to depart from the original meaning of the statute at hand.

****

To many lawyerly ears today, the term “contracts of employment” might call to mind only agreements between employers and employees (or what the common law sometimes called masters and servants).  Suggestively, at least one recently published law dictionary defines the word “employment” to mean “the relationship between master and servant.” Black’s Law Dictionary 641 (10th ed. 2014).  But this modern intuition isn’t easily squared with evidence of the term’s meaning at the time of the Act’s adoption in 1925.  At that time, a “contract of employment” usually meant nothing more than an agreement to perform work.

****

What’s the evidence to support this conclusion?  It turns out that in 1925 the term “contract of employment” wasn’t defined in any of the (many) popular or legal dictionaries the parties cite to us.  And surely that’s a first hint the phrase wasn’t then a term of art bearing some specialized meaning.  It turns out, too, that the dictionaries of the era consistently afforded the word “employment” a broad construction, broader than may be often found in dictionaries today.  Back then, dictionaries tended to treat “employment” more or less as a synonym for “work.”  Nor did they distinguish between different kinds of work or workers: All work was treated as employment, whether or not the common law criteria for a master-servant relationship happened to be satisfied.

What the dictionaries suggest, legal authorities confirm.  This Court’s early 20th-century cases used the phrase “contract of employment” to describe work agreements involving independent contractors.  Many state court cases did the same.  So did a variety of federal statutes.  And state statutes too.  We see here no evidence that a “contract of employment” necessarily signaled a formal employer-employee or master-servant relationship.

****

If courts felt free to pave over bumpy statutory texts in the name of more expeditiously advancing a policy goal, we would risk failing to “tak[e] . . . account of ” legislative compromises essential to a law’s passage and, in that way, thwart rather than honor “the effectuation of congressional intent.” Ibid.  By respecting the qualifications of §1 today, we “respect the limits up to which Congress was prepared” to go when adopting the Arbitration Act. United States v. Sisson, 399 U. S. 267, 298 (1970).

****

When Congress enacted the Arbitration Act in 1925, the term “contracts of employment” referred to agreements to perform work.  No less than those who came before him, Mr. Oliveira is entitled to the benefit of that same understanding today.

****

(footnotes omitted)

As US arbitration practitioners are aware, the US Federal courts have for many decades strayed from the exact text of the FAA in the course of developing US federal arbitration law.  Instead, the Federal courts have developed a sort of “common law” of arbitration, building on their notions of how to fill legislative gaps or to find modern interpretations to effectuate the FAA’s purposes.  The most obvious example lies in the continuing Circuit split over the meaning of arbitrator “evident partiality” as a ground for vacatur of arbitration awards by arbitrators alleged to have conflicts of interest.  So too, the judicial presumption in favor of arbitration itself.  If Justice Gorsuch’s “1925 legislative intent” approach is applied to such issues, US arbitration jurisprudence on arbitrator conflicts, presumptions of arbitration and many other issues may be in for a vigorous shaking up.

Justice Ginsburg was attentive to the implications of this interpretive approach, although I rather doubt her primary focus was on FAA jurisprudence.  In her short concurrence to the unanimous opinion (in which she also joined), Justice Ginsburg pointed out a more flexible view for interpreting legislative meaning.

Congress, however, may design legislation to govern changing times and circumstances. See, e.g., Kimble v. Marvel Entertainment, LLC, 576 U. S. ___, ___ (2015) (slip op., at 14) (“Congress . . . intended [the Sherman Antitrust Act’s] reference to ‘restraint of trade’ to have ‘changing content,’ and authorized courts to oversee the term’s ‘dynamic potential.’” (quoting Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 731‒732 (1988))); SEC v. Zandford, 535 U. S. 813, 819 (2002) (In enacting the Securities Exchange Act, “Congress sought to substitute a philosophy of full disclosure for the philosophy of caveat emptor . . . . Consequently, . . . the statute should be construed not technically and restrictively, but flexibly to effectuate its remedial purposes.” (internal quotation marks and paragraph break omitted)); H. J. Inc. v. Northwestern Bell Telephone Co., 492 U. S. 229, 243 (1989) (“The limits of the relationship and continuity concepts that combine to define a [Racketeer Influenced and Corrupt Organizations] pattern . . . cannot be fixed in advance with such clarity that it will always be apparent whether in a particular case a ‘pattern of racketeering activity’ exists. The development of these concepts must await future cases . . . .”). As these illustrations suggest, sometimes, “[w]ords in statutes can enlarge or contract their scope as other changes, in law or in the world, require their application to new instances or make old applications anachronistic.” West v. Gibson, 527 U. S. 212, 218 (1999).

These different approaches toward divining legislative meaning are part of the basic legal philosophy differences between the conservative and liberal wings of the Supreme Court.  Those differences will play out in many areas of US law but, in light of New Prime, one of them now may be the interpretation of the FAA.

_______________________________________________

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

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

US Sup Ct: Will the “Next Big Arbitration Issue” Be Whether Provisions of Arbitration Rules Constitute Clear and Unmistakable Evidence That the Disputing Parties Allocated “Who Decides” Authority to the Arbitrators?

By Mark Kantor

Kantor Photo (8-2012)

The U.S. Supreme Court heard oral argument in two arbitration-related cases on Monday, Henry Schein Inc. v. Archer & White Sales Inc. and Lamps Plus Inc. v. Varela.  The issue before the Court in Henry Schein was whether or not there is a “wholly groundless” exception to the general Federal Arbitration Act caselaw rule that, if the parties have “clearly and unmistakably” allocated the “who decides” question to the arbitrators, then issues of jurisdiction/arbitrability are for the arbitrator to decide in the first instance, not the courts.

The facts of the Henry Schein case involved the relatively commonplace occurrence of a commercial arbitration agreement referencing arbitration rules (here, AAA Commercial Arbitration Rule 7(a)) that grant the arbitrators the power to decide their own jurisdiction.  The lower courts in Henry Schein, like many other Federal courts before them, concluded that provision of the Rules constituted “clear and unmistakable evidence” (as called for by the Supreme Court in First Options of Chicago, Inc. v. Kaplan) allocating the “who decides” authority to the arbitrators, and then proceeded to consider whether or not an exception to that allocation exists if the claim of arbitrability is “wholly groundless”.

The 5th Circuit Court of Appeals ruled below in Henry Schein that such a “wholly groundless” exception does exist.  Further, said the Court of Appeals, that “wholly groundless” exception applied in the dispute such that the Federal courts could refuse to compel arbitration in the circumstances.  The disappointed claimant then sought, and obtained, U.S. Supreme Court review on the question of whether such a “wholly groundless” exception to the “clear and unmistakable evidence” allocation rule exists under Federal arbitration law.

However, Prof. George Bermann of Columbia Law School, known to many of us as inter alia the chief reporter of the ALI’s Restatement of the U.S. Law of International Commercial and Investor-State Arbitration, felt moved to submit an amicus brief in Henry Schein questioning, not the issue expressly before the Court, but instead the underlying principle that incorporation of arbitration rules granting jurisdiction/arbitrability power to the arbitrators satisfies the “clear and unmistakable evidence” test for allocating “who decides” authority to the arbitrators .

Although a majority of courts have found the incorporation of rules containing such a provision to satisfy First Options’ “clear and unmistakable” evidence test, the ALI’s Restatement of the U.S. Law of International Commercial and Investor-State Arbitration has concluded, after extended debate, that these cases were incorrectly decided because incorporation of such rules cannot be regarded as manifesting the “clear and unmistakable” intention that First Options requires.

https://www.supremecourt.gov/DocketPDF/17/17-1272/65270/20181001112810079_REPRINT%20Amicus-GAB.pdf .

Many of the Supreme Court Justices commented that this issue of “clear and unmistakable evidence … due to incorporation by reference” was not part of the Question Presented on which the Supreme Court granted certiorari in Henry Schein.  Based on those comments, it seems unlikely that the eventual decision of the Court in Henry Schein will resolve the issue posed by Prof. Bermann.  Nevertheless, Justices from across the judicial spectrum commented respectfully regarding Prof. Bermann’s amicus argument.  See comments and questions of Justice Ginsburg, Tr. 7:16-23; Justice Breyer, Tr. 49:15-23; Justice Gorsuch, Tr. 42:13-20; Justice Sotomayor, Tr. 38:4-7; Justice Alito, Tr. 35:7-36:4.

Counsel for the Petitioner did take substantive issue with Prof. Bermann’s argument, in addition to arguing that the issue was not within the Question Presented and thus in any event not before the Court.

What is going on in this case, if you look at the four corners of the delegation -of the arbitration agreement **** is that the arbitration agreement by its terms incorporates the rules of the American Arbitration Association and it does so very clearly. That is a quite common arrangement, particularly in commercial arbitrations like the one at issue here.

Then, if you take a look at the rules of the American Arbitration Association, those rules, and, in particular, Rule 7(a), clearly give the arbitrator the authority to decide arbitrability.  And under this Court’s decision in First Options, the relevant inquiry is whether or not the parties were willing to be bound by the arbitrator’s determination on the issue in question.

And so, with all due respect to Professor Bermann and his amicus brief, the position that he propounds has been rejected by every court of appeals to have considered this issue.  And if the Court has any interest in this issue, I would refer the Court to the very thoughtful opinion of the Tenth Circuit in the Belnap case, which discusses this issue in some detail.

Tr. 8:9-9:13.

The transcript of the oral argument in Henry Schein, available at https://www.supremecourt.gov/oral_arguments/argument_transcripts/2018/17-1272_bqmc.pdf, is very much worth reading in this regard.

The arguably positive comments by some Justices in reaction to Prof. Bermann’s amicus argument create the possibility that opportunistic counsel in other cases will see a signal that raising the principle to the Supreme Court in a future case might be worth the effort.  Consequently, I suggest that the “Next Big Arbitration Issue” to come to the U.S. Supreme Court may be whether or not an arbitration agreement incorporating arbitration rules that include within themselves a provision authorizing the arbitrators to rule on their own competence satisfies the “clear and unmistakable evidence” test in First Options for allocating “who decides” authority to the arbitrators in the first instance.

By the way, reading the tea leaves in the Henry Schein oral argument, at least some observers believe the comments/questions of the Supreme Court Justices indicate that the Court is not inclined to validate a “wholly groundless” exception to the allocation of “who decides” authority to the arbitrators.  See, e.g., http://www.scotusblog.com/2018/10/argument-analysis-justices-signal-opposition-to-vague-exceptions-that-would-limit-enforceability-of-arbitration-agreements/#more-276785.

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Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

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