Supreme Court Denies Review on the Interplay Between the U.S. Bankruptcy Code and the Federal Arbitration Act

By Amy Foust

The Supreme Court today denied certiorari in GE Capital Retail Bank v. Belton, No. 20-481, an arbitration case in a bankruptcy matter.  The question presented by petitioner GE Capital, and rejected in this morning’s order list by the Court, was “whether provisions of the Bankruptcy Code providing for a statutorily enforceable discharge of a debtor’s debts impliedly repeal the Federal Arbitration Act, 9 U.S.C. § 1 et seq.”

The U.S. Bankruptcy Code section in question, 11 U.S.C. § 524(a)(2), provides in part:

A discharge in a case under this title— …

(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived[.]

The case, on cert petition from the Second U.S. Circuit Court of Appeals in New York, suggests a tension between this section of the bankruptcy code and the Federal Arbitration Act, which provides that written agreements to arbitrate are “valid, irrevocable, and enforceable” (9 U.S.C. §2), and that if there is no issue with the making of the agreement, a court “shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.” 9 U.S.C. §4. 

The underlying dispute was a putative class action related to GE Capital’s efforts to collect debts discharged in bankruptcy.  The plaintiffs–the discharged debtors–brought contempt proceedings under § 524 arguing a violation of the injunction against continued recovery.  GE Capital moved to have the dispute referred to arbitration. 

The case of Respondent Belton and two others similarly situated were addressed in a consolidated decision by the federal bankruptcy court in New York’s Southern District, finding that referring these cases to arbitration would defeat the purpose of seeking bankruptcy protections.  The U.S. District Court for the Southern District reversed the bankruptcy court and sent Belton’s case to arbitration. 

But around the same time, the Second Circuit decided Anderson v. Credit One Bank, N.A., 884 F.3d 382 (2d Cir. 2018), a case involving similar facts to GE Capital. In Anderson, an appeals panel found an inherent conflict between § 524 and the FAA because the discharge injunction is critical to the bankruptcy code’s purpose; the contempt claim requires the bankruptcy court’s continuing supervision, and denying the court the power to enforce its own injunctions would undermine bankruptcy code enforcement. 

In response to a request for reconsideration in view of Anderson, the U.S. District Court reversed itself and denied the motion to compel arbitration.  GE Capital appealed to the Second Circuit, which affirmed the district court. 

GE Capital then appealed to the Supreme Court, framing the issue as an implied repeal of the FAA, citing the Court’s support from Epic Systems v. Lewis, 138 S. Ct. 1612, 1627 (2018), where the Court rejected a request to have the National Labor Relations Act override the Federal Arbitration Act. 

In a response to GE Capital’s request asking the nation’s top court to decline to hear the case, Respondent Belton had argued that the Second Circuit was correct in its analysis of this narrow issue, which is not the subject of any circuit split and did not merit the Court’s attention.

So the Second Circuit decision stands, allowing the respondents to proceed with contempt sanctions against major banks for continuing attempts to recover debts that had been subject of a bankruptcy discharge.

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The author is an LLM candidate studying dispute resolution at the Straus Institute, Caruso School of Law at Malibu, Calif.’s Pepperdine University, and an intern with the CPR Institute through Spring 2021.

[END]

Let’s Schein Again!

The International Institute for Conflict Prevention and Resolution presents a CPR Speaks blog discussion of the 1/25/2021 U.S. Supreme Court per curiam decision dismissing Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963, and a same-day order declining to hear Piersing v. Domino’s Pizza Franchising LLC, No. 20-695. Alternatives to the High Cost of Litigation Editor Russ Bleemer hosts Prof. Angela Downes, University of North Texas-Dallas College of Law, and arbitrator-advocates contributors Richard Faulkner, also of Dallas, and Philip J. Loree Jr. in New York.

By Russ Bleemer

The panel returns to CPR Speaks and YouTube to analyze the Monday Henry Schein dismissal–a one-line decision–just a month after the Court heard oral arguments on the issue of how a contract carve-out removing injunctions from arbitration affects the delegation of the entire matter to arbitration.

In fact, the Dec. 8, 2020, Henry Schein oral argument repeatedly turned to an issue in the rejected Piersing case on the effectiveness of the incorporation by reference of arbitration rules in designating an arbitration tribunal to decide whether a case is arbitrated, rather than a court deciding whether the matter is to be arbitrated. A cross-petition by Archer and White asking for review of the incorporation by reference of the arbitration contract’s American Arbitration Association rules was declined by the Supreme Court the same day it agreed to hear the carve-out issue last June.

Our panel discussed these issues after the oral argument on this blog.  See “Schein II: Argument in Review,” CPR Speaks (Dec. 9) (available at http://bit.ly/2VXfyIa) (in which the panelists also discuss their work on an amicus brief in the case, a subject that arose in this post’s video).

You can see today’s per curiam decision on the Supreme Court’s website here.

Monday’s Henry Schein dismissal ends a long period of Supreme Court litigation in the case that also included a 2019 U.S. Supreme Court decision. For now, the case returns to the Fifth Circuit for proceedings on whether the parties properly intended to arbitrate the case.

Details on the Supreme Court’s Monday cert denial in Piersing v. Domino’s Pizza Franchising LLC, No. 20-695, are available on CPR Speaks here.

For more analysis on the Henry Schein dismissal, see Ronald Mann, “Justices dismiss arbitrability dispute,” Scotusblog (Jan. 25, 2021) (available at http://bit.ly/2Yh9U4O), in which the Columbia University professor and Scotusblog analyst concludes that

it seems likely that the justices ultimately decided that they couldn’t sensibly say anything about this matter without addressing the question of whether the contract called for arbitration of the gateway question. Because they had declined to call for briefs on that question, it did not make sense to address it here. A logical course of action, then, was to dismiss the matter from the docket, providing a rare victory for a party opposing arbitration.

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The author edits Alternatives for the CPR Institute.

Scotus’s Henry Schein No-Decision

By Russ Bleemer

If the U.S. Supreme Court appeared frustrated at last month’s arbitration argument in Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963, this morning’s one-line decision confirmed it.

The Court today dismissed the entire case without a decision on the merits.  The entire per curiam decision:  “The writ of certiorari is dismissed as improvidently granted.”

You can view it on the Supreme Court’s website here.

The immediate effect is that respondent Archer and White Sales sees a big win:  It will get the determination of whether its long-running case over a medical equipment contract dispute is to be arbitrated made by a judge, not an arbitrator.  A Fifth U.S. Circuit Court of Appeals decision now stands. See Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019) (available at http://bit.ly/2NC7EmL).

Archer and White contended that a delegation agreement sending a matter to arbitration did not “clearly and unmistakably” send the case to arbitration because of a contract carve-out for injunctions.

With a one-line dismissal, it’s unknown why the Court did what it did. In shutting down the case, it may be backing Archer and White’s and the Fifth Circuit’s view. 

Or it may have reconsidered a point that Henry Schein’s successor status to the contract didn’t sustain its arbitration demand.

Or, in a point returned to repeatedly in last month’s argument, the Court may have botched the case on its own. When it granted Henry Schein’s cert petition on June 15 on the carve-out issue, the Supreme Court simultaneously rejected Archer and White’s cross petition challenging the determination of arbitrability of the case on a question of incorporation by reference. The cross petition contended that the “clear and unmistakable” evidence of an intent to arbitrate was insufficient; the contract incorporated American Arbitration Association rules that include a provision that arbitrators decide arbitrability.

Even though the Court rejected the cross-petition, the issue returned in the December arguments, at times overwhelming the discussion of the question of the carve-out’s effect. For more on the argument, see “Schein II: Argument in Review,” CPR Speaks (Dec. 9) (available at http://bit.ly/2VXfyIa).

One thing is certain:  The Court won’t use a follow-up petition to address the incorporation-by-reference issue, which would have interpreted the standard from the Court’s seminal decision on arbitrability, First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 944 (1995) (available at https://bit.ly/39fAwcR).

That’s because a case that a petitioner and an amicus stated presented the issue cleanly—unencumbered by the carve-out issue and Henry Schein’s long history, including a 2019 U.S. Supreme Court decision—was denied certiorari 30 minutes ahead of today’s one-line opinion. Details on the Court’s cert denial in Piersing v. Domino’s Pizza Franchising LLC, No. 20-695, are available on CPR Speaks here.

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The author edits Alternatives for the CPR Institute.

[END]

Court Again Rejects Review on Incorporating Rules that Define Arbitrability

By Temitope Akande & Russ Bleemer

The U.S. Supreme Court this morning declined to hear a case that presented a persistent arbitration issue: whether the incorporation of a set of arbitration rules that state that an arbitrator decides whether a case goes to arbitration, instead of a court making the arbitrability decision, provides sufficient “clear and unmistakable evidence” that the parties agreed for the tribunal to make the decision.

It was the second time in eight months that the Court has rejected a significant case on the issue.

Piersing v. Domino’s Pizza Franchising LLC, No. 20-695, would have analyzed the clear-and-unmistakable evidence standard for delegation to arbitrability from the Court’s First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 944 (1995) (available at https://bit.ly/39fAwcR).  

The question presented by the petitioner, a former employee of two Domino’s franchisers who had a claim against the parent company, was:

In the context of a form employment agreement, is providing that a particular set of rules will govern arbitration proceedings, without more, “clear and unmistakable evidence” of the parties’ intent to have the arbitrator decide questions of arbitrability?

Last June, the Court declined to hear the question on arbitrability in a cross-petition in Henry Schein Inc. v. Archer & White Sales Inc., No. 19-1080 (June 15, 2020), while accepting the case on the original cert petition on another, close issue involving the reach of carve-out provisions in arbitration agreements. 

In its December arguments in Schein, which awaits decision, the discussion of incorporation by reference on arbitrability arose.  See “Schein II: Argument in Review,” CPR Speaks (Dec. 9) (available at http://bit.ly/2VXfyIa). In its brief in Piersing, the petitioner “acknowledges that [the] Court recently denied certiorari of a cross-petition presenting a similar question,” citing Schein, adding, “however, the question is presented in this case cleanly and as a stand-alone question.”

In Piersing, the petitioner worked as a delivery driver for a franchisee of respondent Domino’s, and later got an employment offer from Carpe Diem, another Washington state Domino’s franchisee. While the petitioner intended to increase his hours and earnings, the first franchisee fired him based on a no-poach clause in his employment agreement.

He eventually brought a U.S. District Court class-action suit against Domino’s alleging that the hiring rules violated, among other things, antitrust laws.

Domino’s sought to compel arbitration of Piersing’s claims based on the arbitration agreement between the employee and Carpe Diem.  Domino’s asked for arbitration, according to the Sixth Circuit opinion in the case that was the subject of the cert petition (see Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842 (6th Cir. 2020) (available at http://bit.ly/3sWDlrg)), “because the agreement’s reference to the AAA rules constituted a delegation clause in that the AAA rules supposedly provide for delegation.”

The district court held that equitable estoppel applies to permit franchiser Domino’s to enforce franchisee Carpe Diem’s agreement against Piersing and, according to the petitioner’s cert petition brief, “that the clause providing the AAA rules would govern any arbitration amounted to ‘clear and unmistakable’ evidence of Piersing’s and Carpe Diem’s intent to delegate questions of arbitrability to the arbitrator.”

Piersing appealed the district court’s decision. Relying on Rent-a-Center, West Inc. v. Jackson, 561 U.S. 63 (2010), and more, the Sixth Circuit held that the incorporation of arbitration rules that permit the arbitrator to resolve questions of arbitrability is sufficient to delegate those questions to the arbitrator.

Piersing’s Supreme Court cert petition brief analyzed the holdings in First Options, Rent-a-Center, West, and the first Henry Schein decision, Henry Schein Inc. v. Archer & White Sales Inc., 139 S. Ct. 524 (2019), which wrestled with the question of and the standard for who decides arbitrability, the tribunal or the court.

Based on these precedents, the petitioner argued that the existing circuit court analysis allowing for incorporation of rules that included arbitrators determining arbitrability wasn’t “clear and unmistakable evidence” of the parties’ intent to arbitrate.  It emphasized that, particularly for consumers and employees, the cases weren’t sufficiently thorough in light of the First Options standard. The petitioner also noted that the Sixth Circuit’s decision conflicts with the holdings of several state high courts.

Domino’s countered that an agreement incorporating privately promulgated arbitral rules that assign questions of arbitrability to the arbitrator clearly and unmistakably show the parties’ agreement that an arbitrator, not the court, will resolve whether the case is suitable for arbitration.

Domino’s successfully argued for the nation’s top Court to reject the petition and thereby uphold the Sixth Circuit.

An amicus brief in support of the petitioner was filed by Columbia University Law School Prof. George Bermann, who described the issue in the appeal as “a central but unsettled issue of domestic and international arbitration.” Echoing the petitioner, the brief noted the importance of the issue in both Henry Schein Supreme Court cases, but stated that “the delegation question is presented front and center for review in this case.” It also cited the divergence between state and federal court views.

The amicus brief discussed the principle of “competence-competence” in international commercial law—the international equivalent of the arbitrability question under which the tribunal is presumed to be in a position to determine its jurisdiction, and which the Sixth Circuit invoked.  Bermann’s brief discussed the concept under the “clear and unmistakable” agreement standard of parties to arbitrate.

The amicus noted that the competence-competence language does not constitute “clear and unmistakable” evidence. “[A]ll modern arbitral procedure rules contain a ‘competence-competence’ clause,” the brief argued, “so that treating such language as clear and unmistakable evidence of a delegation means that parties will almost invariably lose their right to a judicial determination of what this Court has multiple times referred to as the very cornerstone of arbitration, viz. consent to arbitrate.”

Noting the state-federal divide in the interpretation of whether the incorporation of rules satisfies First Options, the brief concluded, “Only this Court can definitively resolve that issue and ensure that parties do not forfeit their right to a judicial determination of arbitrability unless they manifest that intention clearly and unmistakably.”

For more information on the case and an in-depth discussion of the issues involved, see the Supreme Court’s docket page at http://bit.ly/39Zxed1.

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

[END]

Supreme Court Rejects Decade-Old Class Arbitration Employment Discrimination Case

By Cristina Carvajal

A contentious employment discrimination case now focusing on whether an arbitrator is within her authority to bind a class of employees who did not affirmatively opt-in or consent to class arbitration will not resurface now at the Supreme Court.

This morning, in its first 2020-2021 term order list (available at https://bit.ly/3la3Y72), declined to hear Jock v. Sterling Jewelers Inc., 942 F.3d 617 (2d Cir. 2019) (available at https://bit.ly/30yP3eZ).

The Second Circuit decision in the case last year will return the case to federal district court in New York for more proceedings ahead of arbitration in the 12-year-old-case.

The nation’s top Court today denied cert in Sterling Jewelers Inc. v. Jock, No. 1382 (Supreme Court case page available at https://bit.ly/3lgflL2). While the opt-in is the issue most recently litigated, the Court considered and rejected today a petition by the national jewelry chain on an event broader question presented,

Whether an arbitrator may compel class arbitration—binding the parties and absent class members—without finding actual consent, and instead based only on a finding that the agreement does not unambiguously prohibit class arbitration and should be construed against the drafter.

The employment case’s gender-based discrimination claim was first filed in 2008 by then-present and former women Sterling Jewelers employees. All workers were required to sign its Resolve agreement subject to American Arbitration Association rules, which included a mandatory arbitration clause, as well as a litigation waiver. For more, see Anne Muenchinger, “Still No Arbitration: In Its latest Jock decision, Second Circuit Reverses for More Contract Interpretation,” 38 Alternatives 77 (2020) (available at https://bit.ly/2GuxplA).

Not only has this case been moved from New York’s Southern U.S. District Court to the Second U.S. Circuit Court of Appeals four times, but today’s rejection was its second at the Supreme Court. Today’s decision puts the case back on a road to the case’s arbitrator, former New York Southern District magistrate Kathleen A. Roberts, now a JAMS Inc. neutral in the firm’s New York office.

David Bouffard, vice president of corporate affairs at Signet Jewelers Ltd.in Akron, Ohio, notes in a statement,

While we respect the Court’s decision, we believe the claims in this matter are without merit and are not substantiated the relevant facts and statistics. We will continue to vigorously defend against these claims, which do not accurately reflect our company or our culture. Indeed, we have long been committed to fostering a culture of respect, integrity, diversity, and inclusion where all employees feel safe, supported, and empowered—this is a tenet of who we are. In particular, Signet is a recognized leader among companies for gender diversity, with women filling 74% of store management positions and gender parity in both the C-Suite and Board of Directors. Under the leadership of our CEO, Gina Drosos, we continue to champion diversity and inclusion as a strategic priority, as we have been honored to be included on the Bloomberg Gender Equality Index for two consecutive years.

Plaintiffs’ attorney, Joseph M. Sellers, a Washington, D.C., partner in Cohen Milstein Sellers & Toll, declined to comment on the cert denial.

In its latest decision last year, the Second Circuit reversed the lower court’s judgment and held “that the arbitrator was within her authority in purporting to bind the absent class members to class proceedings because, by signing the operative arbitration agreement, the absent class members no less than the parties, bargained for the arbitrator’s construction of their agreement with respect to class arbitrability.” Jock v. Sterling Jewelers Inc., 942 F.3d 617 (2d Cir. 2019) (available at https://bit.ly/30yP3eZ).

The Second Circuit referred to its previous decisions as Jock I, Jock II and Jock III. (For more on the case’s knotty procedural history, see the Alternatives’ link above). Noting that a court’s standard of review of arbitrator decisions is highly deferential, the unanimous panel in the opinion written by Circuit Judge Peter W. Hall reasoned that the arbitration agreement’s incorporation of the AAA Rules, in particular the Supplementary Rules which give an arbitrator authority to decide if an arbitration clause permits class arbitration, makes it clear that the arbitrator can decide on the question of class arbitrability.

The panel further noted the arbitration agreement itself provides that “’[q]uestions of arbitrability’ and ‘procedural questions’ shall be decided by the arbitrator.” Id.at 624.

The decision underscored that while in Jock II the panel pointed out that Jock I did not address “whether the arbitrator had the power to bind absent class members to class arbitration given that they . . . never consented to the arbitrator determining whether class arbitration was permissible under the agreement in the first place.” (Quoting an earlier decision in the case.)

That fact, however, was not a basis to alter the Second Circuit’s analysis given that class actions in arbitration and courts may bind absent class members as part of mandatory or opt-out classes.

 The Second Circuit noted that its “use of ‘consent’ as shorthand” left unclear “the possibility that the absent class members consented in a different way to the arbitrator’s authority to decide class arbitrability.” Id.at 626.

In remanding the case, the Second Circuit left open for the District Court to decide “whether the arbitrator exceeded her authority in certifying an opt-out, as opposed to a mandatory, class for injunctive and declaratory relief.” The Second Circuit already reversed an affirmative determination on that issue, but in the 2019 decision, the panel states that the lower court may revisit the issue “after allowing the parties an opportunity to present renewed argument in light of any subsequent developments in the law.”

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The author, a third-year student at the City University of New York School of Law, is a Fall 2020 CPR Institute student intern.  Alternatives to the High Cost of Litigation editor Russ Bleemer assisted with reporting for this post.

[END]

A Look Ahead: The Supreme Court’s Arbitration Docket in Focus

In a preview of the September issue of Alternatives to the High Cost of Litigation, author Heather Cameron discusses the arbitration year at the U.S. Supreme Court with editor Russ Bleemer.

The article wraps up the Court year ended this summer, and previews the new fall 2020-2021 term. [UPDATE: The article is now available at https://onlinelibrary.wiley.com/doi/full/10.1002/alt.21852.]

The subject, of course, is the Court’s seemingly favorite business topic, arbitration. 

In this video preview of the article, which will be available at altnewsletter.com on or around Sept. 1, Heather first looks at the GE Energy case, the sole Supreme Court arbitration opinion issued in the last term. GE Energy, which was decided June 1, is about international arbitration practice, an area the Court doesn’t visit often. Heather discusses why the opinion’s guidance is intertwined with the factor the Court avoided discussing, arbitration costs.

Next, Heather looked ahead to the term that starts in October, to the Schein case.  Schein was just decided last year, and now the same case is back on another similar arbitration point.  See our most recent CPR Speaks blog post on the case here.

Finally, in the video and the article, Heather fills us in on a case the Court rejected, and tell us why maybe the Court shouldn’t have declined the case and why its effects are a crucial practice point for arbitration advocates and, especially, neutrals.

Will the U.S. Supreme Court Allow Discovery in Private International Arbitrations?

By Russ Bleemer

Under federal circuit court case law, 28 U.S.C. §1782(a) did not include private international arbitration tribunals under its provisions for ““Assistance to foreign and international tribunals and to litigants before such tribunals.”

In other words, “foreign and international tribunals” didn’t include arbitrations.

Suddenly, last fall, that court view began to change, and an esoteric and once-sedentary point of law is facing upheaval. 

In an article in the new July/August issue of Alternatives, and in the video above, John B. Pinney of Graydon in Cincinnati explains how seemingly settled law has erupted into six federal circuit court cases, and is about to be put before the justices of the U.S. Supreme Court on a cert petition.

Will the nation’s top Court take up the matter?

John ties together the cases and sets out the prospects on whether the Court will decide to incorporate arbitral tribunals into the §1782 definition in his just-posted article, “Will the Supreme Court Take Up Allowing Discovery Under Section 1782 for Private International Arbitrations?” 38 Alternatives 103 (available in multiple formats at https://bit.ly/2ZwUt8N; see altnewsletter.com for full issues and archives).

He also discusses in the video and the article the practice implications—what arbitrators, arbitration users, and providers need to do now in the wake of the evolving caselaw.

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The author edits Alternatives to the High Cost of Litigation, on publisher CPR Institute’s website here, and on the Wiley Online Library at altnewsletter.com.

Monster Energy and Evident Partiality

Alternatives to the High Cost of Litigation Editor Russ Bleemer is joined by veteran arbitrator-litigators Philip J. Loree Jr., in New York, and Richard Faulkner, in Dallas, to discuss the U.S. Supreme Court’s Monday cert denial in Monster Energy v. City Beverages LLC. The panel also discusses a recent Pennsylvania federal court case that follows Monster Energy, Martin v. NTT Data Inc., No. 20-CV-0686 (E.D. Pa. June 23) (available at https://bit.ly/2VwZi0V).   

By Heather Cameron

The U.S. Supreme Court this morning declined to grant certiorari on a petition requesting clarification of the Federal Arbitration Act’s “evident partiality” standard.

This means that the Court, for now, will not revisit the “evident partiality” standard for arbitrators that can be used to overturn an arbitration award under the Federal Arbitration Act at 9 U.S.C. § 10(a)(2). And a Ninth Circuit decision overturning an arbitration award because a JAMS Inc. arbitrator failed to disclose his ownership ties to the Irvine, Calif., provider, will stand.

The Court’s docket page for the case, Monster Energy Co. v. City Beverages LLC, No. 19-1333, is available HERE.

Monster Energy was an appeal from a Ninth U.S. Circuit Court of Appeals decision last October, throwing out an arbitration award in favor of Monster Energy and ruling that “arbitrators are required to disclose their ownership interests in the organizations they are affiliated with and the organizations’ business dealings with the arbitration parties.” Monster Energy Co. v. City Beverages LLC, Nos. 17-55813/17-56082 (9th Cir. Oct. 22, 2019) (available at http://bit.ly/2PjmXzq); for more background and analysis, see Daniel Bornstein, “Ninth Circuit, Overturning an Award, Backs More Arbitrator Disclosure,” 37 Alternatives 170 (December 2019) (available at https://bit.ly/2NE7Q1x).

The decision is unusual because of its emphasis on the “repeat-player” phenomenon in arbitration.  It highlighted a circuit split over disclosure requirements for arbitrators, and reflected concern over bias in favor of repeat players in arbitration—an issue usually restricted to employment and consumer arbitration cases, not big companies. See Lisa Bingham, “Employment Arbitration: The Repeat Player Effect, 1 Emp. Rights & Emp. Policy J. 189, 209–17 (1997) (available at https://bit.ly/2VuElDJ).

The questions presented to the Supreme Court were:

  1. What is the standard for determining whether an arbitration award must be vacated for “evident partiality” under the Federal Arbitration Act, 9 U.S.C. § 10(a)(2)?
  2. Under the correct “evident partiality” standard, must an arbitration award be vacated when the arbitrator does not disclose that (i) he has a de minimis “ownership interest” in his arbitration firm and (ii) that firm has conducted a “nontrivial” number of arbitrations with one of the parties?

City Beverages, which distributed its adversary’s energy drinks in the Pacific Northwest, alleged that Monster Energy committed breach of contract in 2015 when it terminated their distribution contract without good cause. Monster Energy  exercised the contract’s clause permitting such termination so long as severance of $2.5 million was paid.

Though City Beverages rejected payment, the move was upheld in arbitration and Monster Energy was awarded $3 million in attorneys’ fees.

Overturning that award, the Ninth Circuit agreed with City Beverages’ claim that the arbitrator had failed to adequately disclose his relationship to JAMS and his firm’s relationship with Monster Energy.

In the Supreme Court’s only prior case examining the FAA’s evident partiality  standard, which authorizes vacatur of arbitration awards “where there was evident partiality or corruption in the arbitrators,” a majority agreed to overturn the award in question, but no clear rationale emerged. See Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968) (available at https://bit.ly/3g766Ks); see also Petition for Writ of Certiorari at 6–8 (available at https://bit.ly/2Bo3VU7).

Commonwealth Coatings, written by Justice Hugo Black, interpreted evident partiality as coextensive with the judicial standard, finding that arbitrators must not only be unbiased, “but must also avoid even the appearance of bias.” Commonwealth Coatings, 393 U.S. at 150.

Two of the five justices joining Black’s opinion, however, wrote a narrowing concurrence, penned by Justice Byron White, concluding that vacatur was only appropriate where the arbitrator failed to disclose “a substantial interest in a firm which has done more than trivial business with a party” to the arbitration. Id. at 151­–52. They found that the mere “appearance of bias” disqualification standard for federal judges does not establish evident partiality on the part of an arbitrator. See Petition at 19.

A majority of federal circuit courts have applied something akin to Justice White’s reasoning, according to the petition. “The First, Second, Third, Fourth, Fifth, and Sixth Circuits require those seeking vacatur of an arbitration award for evident partiality to show ‘a reasonable person would have to conclude that an arbitrator was partial to one party to an arbitration.’” Id. (Citations omitted; emphasis is in the brief.)

In its Monster Energy decision, the Ninth Circuit joined the Eleventh Circuit in adopting Justice Black’s less-demanding “reasonable impression of partiality” standard.

In her dissenting opinion in Monster Energy,Ninth Circuit Judge Michelle T. Friedland wrote that such a standard will have the effect of generating endless litigation over arbitral awards, defeating arbitration’s benefits of expedience and finality, echoing Monster Energy’s claims. See Bornstein, supra at 172.

JAMS, noting its role as a neutral organization “that has always refrained from supporting or opposing challenges to the arbitral process or arbitration awards,” filed an amicus brief in support of Monster’s rehearing petition. (Available HERE).

Both Monster Energy’s petition and JAMS’ brief stressed the lack of evidence to support the Ninth Circuit’s assumption that arbitrators might be biased in favor of repeat players since the law review article it cited on the phenomenon described a single study of employment, rather than commercial, arbitrations. See Petition at 31–32.

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Cameron, a second-year Fordham University School of Law student, is a CPR Institute 2020 Summer Intern.

Supreme Court Returns Schein To Its Docket, With a Focus on Arbitrability

By Russ Bleemer & Heather Cameron

Schein is back.

The U.S. Supreme Court this morning agreed to hear a new arbitration petition on an old case. 

The Court granted cert today on the issue of “Whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”

The case, Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963, is expected to be scheduled in the Court’s 2020-2021 term beginning in October. The Court’s docket page is available at https://bit.ly/30L3gX4.

The issue will be on the delegation agreement in the arbitration contract in a case the Court saw and decided last year, Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw).

The new case, which comes at the request of New York-based health care supplier Schein, will likely center on whether the arbitration agreement’s exclusion of injunctive relief from an arbitrator decision in favor of a court overrides the agreement’s delegation to an arbitrator a decision on whether the matter should be arbitrated.

But that’s also only half the Court’s arbitration story today.  It also denied a cross petition in the case by Texas dental supply company Archer & White Sales on two more arbitration issues that still could still work their way into the decision or, at the least, are guaranteed to see more litigation in state and circuit courts. 

The cross-petition cert denied issues were

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

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

A question related to the latter issue already appeared just this month in the Court’s decision in an international arbitration case, GE Energy Power Conversion France SAS Corp. v. Outokumpu Stainless USALLC, et al., No. 18-1048 (available at https://bit.ly/2XogerH) (see a CPR Speaks article and video analysis at https://bit.ly/2U1QrDs).

When the Court first decided Schein in January 2019, it reversed the Fifth Circuit and unanimously held that under the Federal Arbitration Act, an arbitrator, not the court, should determine the threshold question of arbitrability—whether an arbitration agreement applies to a particular dispute—when the parties have clearly and unmistakably delegated that question to an arbitrator via delegation agreement, even if the argument for arbitrability is “wholly groundless.” See Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. at 526 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw).

The case was remanded to the Fifth Circuit to determine whether the parties’ contract contained a delegation agreement, sending the determination of arbitrability to a tribunal rather than a court, and satisfied the Supreme Court’s “clear and unmistakable” intent standard established in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (available at https://www.oyez.org/cases/1994/94-560).

Rule 7(a) of the AAA Commercial Arbitration Rules, which the parties incorporated into their contract in the case, explicitly gives the arbitrator power to determine his or her own jurisdiction as well as the arbitrability of any claim or counterclaim. (available at https://www.adr.org/Rules).

Following circuit precedent, the Fifth Circuit noted that by incorporating the AAA’s rules, the parties had indeed entered into a delegation agreement for at least some disputes. But in its remand, the Fifth Circuit also found an explicit “carve-out” exception in the contract for disputes, like the one at hand, seeking injunctive relief.

The appeals court, therefore, affirmed the district court’s denial of Schein’s motion to compel arbitration. Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019) (available at http://bit.ly/33Cb78g).

Schein petitioned the Supreme Court again to challenge that decision. That’s the case and the issue the Court agreed to hear today, while Archer & White’s conditional cross-petition issues were not accepted.

For more on the case and an in-depth discussion of the issues involved, see Philip J. Loree Jr., CPR Speaks, “Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court” (Feb. 19, 2020) (available at http://bit.ly/3bQXQgl); Richard D. Faulkner & Philip J. Loree Jr., “Schein’s Remand Decision: Should Scotus Review the Provider Rule Incorporation-by-Reference Issue?” 38 Alternatives 70 (May 2020) (available at https://bit.ly/2C6Ksap), and Richard D. Faulkner & Philip J. Loree Jr., “Why the U.S. Supreme Court Should Review Whether Arbitrability May Be Incorporated by Reference,” 38 Alternatives 87 (June 2020) (available athttps://bit.ly/2YB0zVj).

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Bleemer edits Alternatives at altnewsletter.com for the CPR Institute.  Cameron, a second-year Fordham University School of Law student, is a CPR Institute 2020 Summer Intern.

Supreme Court Declines to Hear a California Supreme Court Case on Arbitration and Unconscionability

By Seorae Ko

Alternatives editor Russ Bleemer is joined once more by Richard Faulkner and Philip Loree Jr., this time talking about the Supreme Court recently declining to hear a California Supreme Court case on arbitration and unconscionability, OTO LLC v. Kho, discussed below

The U.S. Supreme Court this morning declined a certiorari petition ona California Supreme Court decision to render a wage arbitration agreement unenforceable as procedurally and substantively unconscionable.

While the issue of unconscionability overhangs the breadth of arbitration jurisprudence, the Supreme Court has used the Federal Arbitration Act to preempt such concerns in favor of arbitration’s predominance. AT&T Mobility LLC v. Concepcion, 563 U.S.333, 344, 348 (2011). Today’s cert denial can be seen as a divergence from the pattern.

On the other hand, today’s declined case, OTO LLC v. Kho, No. 19-875, reinforces the California’s top Court decision that, though it found in favor of the employee opposing arbitration, permitted an agreement to arbitrate wage disputes “so long as it provides an accessible and affordable process.” The California decision follows AT&T Mobility in that it states that the “FAA preempts a state-law rule that categorically prohibits an adhesive arbitration agreement from requiring an employee to waive access to a Berman hearing.”

The Berman hearing is a California administrative process designed to provide a quick, informal, and affordable method for resolving disputes over unpaid wages, according to a brief filed in the case by the state’s labor commissioner. (See below.)

The California Supreme Court OTO decision held that a court “faced with a petition to compel arbitration under these circumstances must grant the petition unless the party opposing the petition asserts a valid contract defense.”

In the case, the parties contested the enforceability of an arbitration agreement on wage disputes, which the employee, Ken Kho, challenged as unconscionable. OTO L.C. v. Ken Kho, 447 P.3d 680 (Cal. 2019) (available at https://casetext.com/case/oto-llc-v-kho-1).

The California Supreme Court first noted that general contract defenses such as unconscionability may be applied to invalidate arbitration agreements without contravening the FAA or state arbitration acts, citing Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 282 P.3d 1217, 1231 (Cal. 2012)).

The opinion then evaluated the agreement’s substantive and procedural unconscionability on a “sliding scale,” and stated that substantive fairness must be considered in the context of the agreement’s procedural unconscionability, citing Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669, 689 (Cal. 2000); Sanchez v. Valencia Holding Co., LLC, 353 P.3d 741(Cal. 2015)).

Ultimately, the California Supreme Court ruled that the arbitration agreement in question was unenforceable as unconscionable. It found that the agreement was made under such oppression and surprise as to produce a high degree of procedural unconscionability. In light of the substantial procedural unconscionability, the court also found substantive unconscionability in the agreement.

OTO filed a cert petition in January to have the decision reversed. Petitioner argued that the California Supreme Court’s decision violated U.S. Supreme Court precedent in two ways.

First, the petitioner argued that the decision went against precedent mandating that the FAA preempt state rules discriminating against arbitration. The California Supreme Court’s comparative approach to substantive unconscionability, unique to arbitration agreements, failed to place arbitration agreements on equal footing with other agreements. Brief for Petitioner at 4 (citing AT&T Mobility, 563 U.S. at 339-340 (2011)) (available at https://www.supremecourt.gov/DocketPDF/19/19-875/128316/20200113114622841_OTO%20cert%20petition.pdf).

The petitioner connected this approach to a broader trend in the California Supreme Court to adopt “sharply anti-arbitration rules, only to be reversed by this Court.” Brief by Petitioner at 13 (citing DIRECTV Inc. v. Imburgia, 136 S. Ct. 463, 468-471 (2015); AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339-340 (2011); Preston v. Ferrer, 552 U.S. 346, 353-354 (2008); Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987); Southland Corp. v. Keating, 465 U.S. 1, 16 n.11 (1984)).

Citing Sonic-Calabasas A Inc. v. Moreno, 247 P.3d 130 (2011) (Sonic I), the petitioner explained that the California Supreme Court’s substantive unconscionability analysis was a method devised to reach “effectively the same result” as its decision in Sonic I, which had been vacated by the Supreme Court for violating the equal treatment principle. Brief for Petitioner at 13. The Sonic I decision had been condemned because its class-arbitration rule uniquely addressed arbitration agreements; by the same reasoning, the petitioner suggested, the OTO decision could not stand.

Second, the petitioner, an auto dealership, argued that the decision went against precedent mandating the FAA to preempt even a general contract defense if it interferes with the “‘fundamental attributes of arbitration,’ including lower costs, greater efficiency and speed, and the ability to choose an expert adjudicator to resolve specialized disputes.”

Accordingly, a contract defense erecting “preliminary litigating hurdles” that destroy the “prospect of speedy resolution” is preempted by the FAA. Brief for Petitioner at 6 (citing AT&T Mobility, 563 U.S. at 344, 348). The petitioner argued that the California Supreme Court’s approach erected such a litigating hurdle because it required a prolonged fact-intensive inquiry. Brief for Petitioner at 17 (referring to American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013)).

A particularly salient point pursued by the petitioner focused on the California Supreme Court’s substantive unconscionability analysis. The petitioner suggested that the court condemned the arbitration agreement, which it claimed covered a wage dispute with the respondent, a service technician, as a time-consuming hurdle to litigation when the agreement consumed time because it “offered too many of the protections of civil litigation.” Brief for Petitioner at 12. (Emphasis is in the brief.) Such an approach evaluates an agreement to be substantively unconscionable for the reason that it tries too hard to avoid unfairness.

The petitioner also stressed that the case holds enormous significance in “safeguard[ing] the [FAA]’s commitment to the enforceability of arbitration agreements.” Brief for Petitioner at 19.

Petitioner OTO was not alone in its view. Five amicus briefs were filed in support of the objections. Cautioning against “judicial hostility towards arbitration” (Amicus Brief by Atlantic Legal Foundation at 2 (citing Nitro-Lift Techs., L.L.C. v. Howard, 133 S. Ct. 500, 503 (2012) (per curiam)) (available at https://www.supremecourt.gov/DocketPDF/19/19-875/133006/20200213191401278_19-875tsac%20Atlantic%20Legal%20Foundation%20%20-OTO%20v%20Kho%20FINAL.pdf)), they called out the decision below as “a thinly veiled effort to bar wage-dispute arbitration altogether.” Amicus Brief by Washington Legal Foundation at 8 (available at https://www.supremecourt.gov/DocketPDF/19/19-875/133008/20200214090311910_19-875%20tsac%20Washington%20Legal%20Foundation.pdf).

The petitioner’s reasoning on both the equal treatment principle and the litigating hurdle assessment found support in the amicus briefs.

On the other side, respondent Kho argued that the California Supreme Court’s decision was consistent with the Supreme Court’s arbitration precedents. Brief for Respondent California Labor Commissioner at 10 (available at https://www.supremecourt.gov/DocketPDF/19/19-875/142627/20200429130457818_No.%2019-875%20DOJ%20CA%20FINAL%20BIO.pdf). Pointing to the California courts’ tradition of comprehensive and contextual approach to unconscionability, the respondent emphasized that OTO had offered “no conflicting case remotely similar which creates a need to hear [the] case.” Brief for Respondent Ken Kho at 18 (available at https://www.supremecourt.gov/DocketPDF/19/19-875/142640/20200429135355866_OTO%20v.%20Kho%20Opposition%20to%20Petition%20for%20Writ%20of%20Certiorari%2019-875.pdf). The respondent further asserted that, instead of disfavoring arbitration, the California Supreme Court had promoted arbitration by “requir[ing] an arbitration procedure that has all of the ‘fundamental attributes of arbitration.’” Brief for Respondent Ken Kho at 25.

As a tangentially related matter, Kho also challenged the jurisdiction of the Supreme Court, arguing that petitioner had failed to establish either that the FAA applies or that the dispute effects commerce as per the commerce clause. Brief for Respondent Ken Kho at 27.

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The author, a second-year Harvard Law School student, is a 2020 CPR Institute Summer intern.