The Preliminary Ruling in the Achmea (formerly Eureko) v. Slovakia Case: the Uncertain Future of Intra-EU BITs

EU flag

Welcome to the inaugural post of a new CPR Speaks feature, “The European View,” offering valuable insights and perspectives from CPR’s European Advisory Board (EAB).

By Krzysztof Wierzbowski[1] and Aleksander Szostak[2]

The compatibility of investment protection treaties with the regulatory framework of European Union law has been a controversial issue for quite some time. A recent decision of the Court of Justice of the European Union in Achmea (formerly Eureko) v. Slovakia clarifies the matter and raises several concerns with respect to the future of intra-EU investment protection treaties. This article aims to shed a light on the potential implications of the decision on foreign investors engaging in the European market and the foreign direct investment protection system in the European Union.

Wierzbowski

Krzysztof Wierzbowski

Szostak_oferta

Aleksander Szostak

On March 6, 2018, the Court of Justice of the European Union (CJEU) ruled that the investor-State dispute settlement (ISDS) clause in the Slovakia-Netherlands bilateral investment treaty (BIT) had an adverse effect on the autonomy of European Union (EU) law. Accordingly, the CJEU declared that the clause was incompatible with EU law.[3]

Background to the decision

Slovakia challenged the Arbitration Tribunal’s award in Achmea (formerly Eureko) v. Slovakia and applied to the Higher Regional Court in Frankfurt to set the award aside. After the Court rejected its application, Slovakia turned to the Federal Court of Justice in Germany with a motion to set aside the award.

Slovakia claimed that the Tribunal lacked necessary jurisdiction in the dispute because the Slovakia-Netherlands BIT, providing for the ISDS mechanism, violated several provisions of the Treaty on the Functioning of the European Union (TFEU).[4]

Germany’s Federal Court of Justice (Federal Court) in Achmea v Slovak Republic turned to the CJEU with a request for a preliminary ruling to resolve as a matter of principle the issue of compatibility of investment protection treaties between Member States and the law of the European Union. In particular, the Federal Court asked whether Art. 267 and 344 TFEU precludes ISDS clauses in intra-EU BITs.[5]

The approach of the Advocate General

On Sept. 19, 2017, Melchior Wathelet, the Advocate General (AG) to the CJEU, issued its opinion with regard to issues raised in the request for a preliminary ruling. The AG demonstrated interesting reasoning, which, however, was not followed by the CJEU. The AG concluded that the ISDS clauses in intra-EU BITs are compatible with EU law.

As stipulated in the AG’s opinion, arbitral tribunals constitute courts or tribunals within the meaning of Art. 267 TFEU, which implies that arbitral tribunals can, and in fact have the obligation to, accept the supremacy of the EU law and, thereby use the preliminary ruling procedure in appropriate situations.[6]

The AG failed to observe that arbitral tribunals, both in commercial and investment treaty disputes, lack basic features of courts, or tribunals within the meaning of Art. 267 TFEU and, therefore, cannot use the procedure contained therein. As established by the CJEU in its case law, entities submitting a request for a preliminary ruling should, among other things:

  • be established by law;
  • be permanent;
  • have compulsory jurisdiction;
  • apply the rules of law;
  • be independent[7]

in order to be considered courts or tribunals under Art. 267 TFEU.

While the list is not absolute and the jurisprudence of the CJEU is not consistent, it is clear that parties to a dispute are under no legal obligation to settle it through arbitration. In principle, arbitral tribunals do not have a compulsory jurisdiction.[8] Although, it may be argued that investment treaty tribunals, contrary to tribunals in commercial arbitration disputes, can be considered as having compulsory jurisdiction conferred by a treaty, or domestic legislation implementing a treaty. Nonetheless, arbitral tribunals are established by parties for the purpose of settling a particular dispute and therefore do not have a permanent character, which prevents them from using the procedure envisaged under Art. 267 TFEU.[9]

Decision of the CJEU

The CJEU stated that disputes before arbitral tribunals based on intra-EU BITs may relate to matters of interpretation and/or application of the EU law. Nonetheless, while a preliminary ruling procedure under Art. 267 TFEU enables courts and tribunals of Member States to file a request pertaining to the interpretation and application of the EU law, arbitral tribunals do not constitute a court or tribunal within the meaning of the provision and, therefore, cannot request a preliminary ruling.

As decisions of arbitral tribunals are final and, therefore, in principle, cannot be appealed to the national courts, a threat now exists to the proper interpretation and application of the EU law, which in turn has an adverse effect on the autonomy of the EU law.[10]

The CJEU concluded that the ISDS mechanism in the Slovakia-Netherlands BIT is incompatible with the EU law since the mechanism prevents investment treaty disputes from being decided within the judicial system of the EU.[11]

Infringement proceedings against Member States

On June 18, 2015, the European Commission (EC) initiated infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden. The EC asked Member States to terminate their intra-EU BITs with the aim of resolving the conflict between the intra-EU BITs and European treaties.[12]

It is yet to be seen whether the EC will decide to bring the matter before the CJEU. Nonetheless, considering the approach of Poland, which is likely to terminate its intra-EU BITs, as well as that of Romania, Italy and Ireland, which already terminated their intra-EU BITs, it is probable that Member States, especially given the position of the CJEU, will cooperate with the EC.

Resolving the conflict

In light of Art. 351 TFEU, Member States are required to resolve any incompatibilities between their international agreements and EU treaties. Failure to fulfil this obligation may lead to the initiation of infringement proceedings by the EC under Art. 258 TFEU.

While it would be favourable to foreign investors to maintain the extra-level of protection by merely removing ISDS mechanism but preserving the substantive protection of investors under the BIT, it is apparent that the EC would prefer Member States to terminate intra-EU BITs entirely.

Art. 54(a) and 54(b) of the Vienna Convention on the Law of Treaties (VCLT) provide that an international treaty can be terminated unilaterally or by mutual consent of the contracting parties. While termination by mutual consent, unless otherwise specified in a treaty, leads to the immediate cessation of any effects of the agreement, unilateral termination often requires a notice period. Treaties provide for different notice periods; and some agreements provide for a waiting period upon expiry of which notice may be given. Because unilateral termination of intra-EU BITs may not have immediate effect, it likely will not be a desirable termination method because it does not mitigate the risk of infringement proceedings during the notice period.

Even termination of intra-EU BITs by mutual consent may not lead to the immediate cessation of protection of already existing investments. The existence of the so-called sunset clauses guarantees the continued protection of investments existing prior to the termination of the relevant BIT. In this sense, for a period of time specified in a relevant sunset clause the effectiveness of intra-EU BITs in general and ISDS clauses in particular will not be affected by termination. Accordingly, the termination as such will not resolve the issue and might not prevent the EC from initiating infringement proceedings against relevant Member States.

However, it seems possible to either terminate intra-EU BITs together with sunset clauses by mutual consent of contracting parties, or to modify the agreements with the aim of removing the sunset clauses from the legal framework and, subsequently, terminating the agreement. This method would enable the immediate termination of intra-EU BITs without the waiting period established by sunset clauses. While the effectiveness of such a termination or modification may be debatable (in particular by affected investors), the reading of Art. 70 (1) VCLT indicates that the parties’ (EU Member States) consent may prevail over the guarantees contained in sunset clauses.[13]

Paradox in the reasoning of the CJEU

The CJEU based its reasoning on the argument that arbitral tribunals cannot refer a question on the interpretation and application of the EU law to the CJEU under Art. 267 TFEU. Nonetheless, the CJEU had the opportunity to decide on the request for a preliminary ruling in the Achmea case.

While it was the Federal Court that relied on Art. 267 TFEU, the argument that ISDS clauses have an adverse effect on the autonomy of the EU law and prevent investment treaty disputes from being decided within the judicial system of the EU is misguided. The CJEU may issue a preliminary ruling in the context of arbitration if it is approached by a court exercising supervision over arbitral proceedings, or a court enforcing or annulling the arbitral award (as in Achmea), which demonstrates that ISDS clauses do not entirely prevent investment treaty disputes from being decided within the judicial system of the EU.

Implications of the decision

The Achmea decision has important implications for investors engaging on the European market. The incompatibility of the ISDS clauses with the EU law deny investors the recourse of investment treaty arbitration.

In particular, the decision indicates that the domestic judicial system of Member States is the only appropriate forum for the settlement of their disputes. This raises several concerns associated with the potential bias of national judges, political pressure exerted by governments, corruption and malfunctioning of domestic courts in general. Depriving investors of the benefits of the ISDS mechanism will also likely affect their decision to invest in the European market and limit the FDI capital flow, which may be disadvantageous for the European economy. Accordingly, it is apparent that the domestic judiciary for various reasons attributable to a given Member State may not provide a desirable alternative to the ISDS mechanism contained in intra-EU BITs.

As the CJEU in the Achmea decision referred to the incompatibility of ISDS clauses in intra-EU BITs only, one may consider that such clauses contained in BITs with non-EU States will be deemed as compatible with EU law. For that reason, investors may decide to engage in “treaty shopping” through, for instance, corporate restructuring with the aim of changing corporate nationality in order to benefit from BITs concluded between non-EU and EU States. Depending on the wording of a relevant BIT, treaty shopping may relate to a transfer of the seat or place of incorporation of investor to a non-EU State. While investment protection treaties provide for prevention mechanisms against treaty shopping through denial of benefits clauses or determination of corporate nationality on the basis of the nationality of the entity exercising direct or indirect control, treaty shopping is, in principle, permissible for legitimate purposes.

While treaty shopping could potentially mitigate the negative consequences of the Achmea decision, two issues may impair the effectiveness of such practice.

In certain situations, treaty shopping may constitute abuse of process which may deprive an investment tribunal of jurisdiction ratione temporis and, thereby, prevent an investor from resolving a dispute through investment arbitration. In light of the Pac Rim and Philip Morris cases, abuse of process will arise if an investor engaged in treaty shopping in order to obtain access for a dispute that is foreseeable, even if it has not yet materialised. A dispute must be foreseeable before the restructuring and there must be a reasonable prospect that it will in fact arise.[14] Tribunals, therefore, take into consideration matters such as the degree of foreseeability of a dispute, the timing of investment and restructuring.

The restructuring of investment must be legitimate and justified independent of the possibility of occurrence of a BIT dispute in order for a tribunal to accept its jurisdiction. This leads to a conclusion that depending on a number of factors, restructuring of investments by European investors with the aim of obtaining access to protection granted under investment protection treaties concluded with non-EU States may pose a risk of denial of jurisdiction by an investment tribunal.

In addition, the Achmea decision raises a concern with respect to enforcement of arbitral awards in the EU Member States. While the CJEU focused on the incompatibility of ISDS clauses in intra-EU BITs, the approach of the CJEU may be adopted in relation to clauses in BITs concluded by Member States with non-EU States. The issue may be particularly relevant in case of enforcement of awards issued in arbitrations concerning disputes between foreign investors engaging on the European market, and the EU Member States in the matters relating to the EU law. The argument of the CJEU and the approach of the EU Commission may apply to such situations as well, thereby preventing enforcement of such awards within the EU.

The above raises a risk that the EU Commission or the CJEU, faced with a request for a preliminary ruling, may intervene in the enforcement proceedings of such awards and claim that the arbitration between a foreign investor and EU Member State adversely affects the autonomy of the EU law and, therefore, domestic courts of EU Member States should refuse the enforcement of such awards. This would have a devastating impact on the effectiveness of guarantees contained in investment protection treaties.

In particular, if a dispute relates to a benefit obtained by an investor and such benefit constitutes state aid, based on the Ioan Micula, Viorel Micula and others v Romania case and position adopted by the EC, it is most likely that exclusive jurisdiction of the EC in such matters will constitute an argument against ISDS clauses, no matter which States would be parties to a given BIT.[15]

The same issue arises with respect to arbitrations initiated under the Energy Charter Treaty (ECT) by investors engaging on the EU market against a host Member State. It is possible that the reasoning demonstrated in the Achmea decision would apply due to the fact that such disputes will, essentially, constitute intra-EU arbitrations, which in turn raises a concern as to the enforcement of arbitral awards on the territory of the EU as well as to the effectiveness of the ECT.

One may only speculate on the future of settlement of investor-State disputes and investment protection treaties in general. But recent developments in the mega-regional treaties indicate the direction in which the issue is developing. The Investment Court System (ICS), initially proposed in the context of the negotiations on the Transatlantic Trade and Investment Partnership (TTIP), adopted in Comprehensive Economic and Trade Agreement (CETA), may provide a foundation for the creation of a European or Multilateral Investment Court. Such a system would need to be specifically designed to ensure the final and ultimate authority of the CJEU over the EU law as well as to enable the Investment Court to request binding preliminary rulings within the meaning of Art. 267 TFEU. However, the very structure and design of the ICS in CETA, which is a transparent two-tier body with quasi-permanent adjudicators chosen by a joint committee consisting of representatives of contracting States, could operate as a model for the establishment of European investment court, which could offer an effective and desirable alternative to the existing ISDS mechanism.

Concluding remarks

The CJEU’s decision in the Achmea case has important repercussions for the intra-EU BITs and functioning of the ISDS mechanism. ISDS clauses in intra-EU BITs are now considered incompatible with the EU law, which necessitates that Member States take appropriate actions with the aim of ensuring compatibility. Member States may choose to terminate their intra-EU BITs, rather than modify them in order to delete the ISDS clauses.

The decision rendered will likely reduce the level of the investor protection in intra-EU relations, which in turn could weaken investor’s perception of legal certainty and the rule of law in the EU and affect the FDI capital flows.

Looking forward, some investors may seek protection under existing BITs other than intra-EU ones. Paradoxically, perception of a broader (or at least recognized) protection enjoyed by non-EU investors can weaken the competitive position of EU investors. Such imbalance in protection of EU-based and non-EU based investors may adversely affect the functioning of one of the cornerstones of the EU: the free and non-discriminatory flow of capital.

It would be difficult to expect investors to sue any of the EU Member States under an applicable intra-EU BIT. While they could reasonably predict the time necessary to obtain an award and assume the cost of arbitration, which could amount to tens of millions of euros, at the end, the award would not be enforceable. Similarly, it is difficult to assume that there would be any developments with respect to third-party funding of such matters.

Some investors may engage in treaty shopping by changing the nationality of an entity that once was protected by an intra-EU BIT to a non-EU State so as to benefit from protection granted under a BIT concluded between that State and EU Member State.

Finally, while developments contained in mega-regional treaties, such as CETA, may provide a model for the creation of the European investment court, the institutional design of the body must comply with the EU law in order to provide an effective alternative to domestic courts and ISDS mechanism currently in place.

ENDNOTES:

[1] Krzysztof Wierzbowski is the senior partner at Wierzbowski Eversheds Sutherland. He is also a member of CPR’s European Advisory Board (EAB).

[2] Aleksander Szostak LL.M., LL.B. is a trainee lawyer at Wierzbowski Eversheds Sutherland.

[3] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par. 59-60.

[4] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par. 6-23.

[5] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par.23 and 31.

[6] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018], Opinion of AG Wathelet [2017] par. 84-89, 134.

[7]  E.g. Case C-54/96 Dorsch Consult Ingenieurgesellschaft v Bundesbaugesellschaft Berlin [1997] par. 23; Case C-125/04 Guy Denuit and Betty Cordenier v. Transorient-Mosaique Voyages et Culture SA [2005] par.12-17; Case C-416/96 Nour Eddline El-Yassini v Secretary of State for the Home Department [1999] par.17-22.

[8] E.g. Case C-377/13 Ascendi Beiras Litoral e Alta, Auto Estradas das Beiras Litoral e Alta SA v Autoridade Tributária e Aduaneira [2014] par.27.

[9] See. E.g.  Case C-125/04 Guy Denuit and Betty Cordenier v. Transorient-Mosaique Voyages et Culture SA [2005] par.14-17; Case C-126/97 Eco Swiss China Time Ltd v Benetton International NV [1999] par.28,34.

[10] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par. 55-59.

[11] Case C 284/16 Slowakische Republik (Slovak Republic) v. Achmea BV [2018] par. 59-60.

[12] European Commission – Press release: Commission asks Member States to terminate their intra-EU bilateral investment treaties Brussels, 18 June 2015.

[13] See. E.g. Tania Voon, Andrew Mitchell and James Munro, ‘Parting Ways: The Impact of Mutual Termination of Investment Treaties on Investor Rights’ [2014] 29(2) ICSID Review, 461-463 and 465-467.

[14] Pac Rim Cayman v. The Republic of El Salvador, ICSID Case No. ARB/09/12 [2012] Decision on the Respondent’s Jurisdictional Objections par. 2.96-2.100; Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12 [2015] Award on Jurisdiction and Admissibility par.566, 570, 584, 585-588.

[15] See. Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20;

International Commercial Mediation Update: UNCITRAL Finalizes Convention and Model Law Drafts on International Settlement Agreements Resulting from Mediation

By Erin Gleason Alvarez

erinEarlier this year, we reported on the United Nations Commission on International Trade Law (UNCITRAL) Working Group II’s progress towards finalizing a convention on the enforcement of international commercial settlement agreements resulting from mediation. On June 25, 2018, UNCITRAL finalized the draft Convention on International Settlement Agreements Resulting from Mediation, to be known as the Singapore Convention, as well as finalizing the draft Model Law.

By way of background, Working Group II was initiated by UNCITRAL in 2014 in order to explore whether it might be feasible to develop mechanisms for the enforcement of mediated agreements in international commercial disputes. The need for this Working Group grew out of concern that parties to mediated agreements may not be afforded the same protections as those available in international commercial arbitration.

The achievements of Working Group II were extolled at an UNCITRAL conference at the United Nations on June 27, held in celebration of the 60th anniversary of the New York Convention. Representatives from Israel and Australia, who participated in the Working Group, led a discussion on the drafting process. Consideration over an international mediation convention lasted nearly four years, and it seems that a few mediations took place in finalizing the documents.

The Convention and Model Law drafts outline the requirements for a settlement agreement, process for enforcing an agreement and grounds for refusing to grant relief.  The documents are seen as completing the ADR framework for international disputes.

States that have participated in this process include Argentina, Australia, Austria, Bulgaria, Cameroon, Canada, Chile, China, Colombia, Czechia, Denmark, Ecuador, El Salvador, France, Germany, Greece, Hungary, India, Indonesia, Israel, Italy, Japan, Kuwait, Lebanon, Libya, Malaysia, Mexico, Namibia, Nigeria, Philippines, Republic of Korea, Romania, Russian Federation, Sierra Leone, Singapore, Spain, Switzerland, Thailand, Turkey, United Kingdom of Great Britain and Northern Ireland, United States of America and Venezuela (Bolivarian Republic of). The session was also attended by observers from Algeria, Belgium, Benin, Cyprus, Democratic Republic of the Congo, Dominican Republic, Finland, Iraq, Morocco, Nepal, Netherlands, Norway, Saudi Arabia, Syrian Arab Republic and Viet Nam, in addition to observers from the European Union and the Holy See.

From here the Convention and Model Law must be approved by the General Assembly, which will likely happen later this year. In August 2019, a signing ceremony will be held for the Convention in Singapore and thus the Convention will be known as the “Singapore Convention.”

At the June 27 United Nations event, hope was expressed that the Singapore Convention would do for mediation what the New York Convention has done for arbitration.

 

Erin Gleason Alvarez serves as mediator and arbitrator in commercial and insurance disputes.  She is a member of the CPR Institute Panel of Distinguished Neutrals and co-chairs the CPR Institute Mediation Committee.  Erin may be reached at erin@gleasonadr.com

Identifying the Blind Spots: Self Reflection in the Field of International Arbitration

Sophie Nappert, selected lecturer at the 2018 Proskauer International Arbitration Lecture, discusses the tumultuous perception of international arbitration and calls for the industry to look inward

By Sara Higgins

During the 2018 Proskauer International Arbitration Lecture, renowned international arbitrator Sophie Nappert took some of the industry’s leading lawyers to task. Her address, cheekily titled “Disruption Is the New Black”, examined what she identified as “blind spots” in the field of international arbitration (IA). Branding disruptive innovation as the poster child for progress, Nappert opined that it will inevitably impact the legal field, during these times of tectonic change and revolution, in a way that forays the very heart of international arbitration – a self-governed justice system that derives its jurisdiction from party consent.

Nappert opened with the current IA landscape. She painted a rather gloomy picture, revealing the sobering fact that in-house counsel consider external lawyers to be the primary obstacle to achieving collaborative, adjudicative and non-adjudicative dispute resolution.

Nappert also pointed to growing skepticism of the arbitral process around the world. “When the Chief Justice of the UK Supreme Court, in one of the most arbitration-friendly jurisdictions on the planet, bemoans the negative influence of arbitration on the development of English law; when the EU, a behemoth not known for its nimble footing, performs a 180-degree turn in less than a year from its initial, resolutely pro-ISDS stance towards pushing forward a court proposal complete with appellate jurisdiction on fact and law”, it might be time for some self-reflection. Nappert asked us to consider, “whether, heady on its nearly unbounded autonomy, on the vast deference granted to it by state courts and legislation and assisted by the unparalleled ease of enforcement of its decisions afforded by the New York Convention (NYC), the current model of IA has overreached itself at the expense of quality of procedure and output.”

In pondering her own question, Nappert praised the unprecedented expansion of IA into areas once considered non-arbitrable but cautioned that “It has made us oblivious to some substantial blind spots, focused as we are on driving the IA chariot forward towards the next development.” She identified three such blind spots, though undoubtedly there are others: diversity, corruption and artificial intelligence.

Diverse panels increase institutional legitimacy

“Current voices in scholarship posit that the above disruptive phenomena present an important opportunity to address shortcomings, and notably as regards the diversity in composition of panels, as a vector towards a better and more legitimate decision-making in investment and commercial arbitration,” Nappert said.

She shared a number of statistics demonstrating diversity in the field – or rather lack thereof. “At ICSID, 19% of the 195 appointments made in 2017 to ICSID tribunals or ad hoc committees were women. This can be compared with 2016, where 13% of appointees were female. Of the 37 appointments of women in 2017, there were 18 different individuals who were nationals of a dozen different states, thus reflecting some regional diversity.” “The SCC reports 254 appointments for 2017, of which 18% were female. When the appointment was made directly by the SCC, 37% of the appointees were female. When made by the parties – 8%; when made by co-arbitrators – 0%. For regional diversity, 231 of the 254 appointments were from Europe, followed by Australasia and North America with 5 each, I from South America, 3 from Asia and 2 from Africa.”

The 2018 Queen Mary/White & Case International Arbitration Survey showed that respondents were generally ambivalent as to whether there is a causal connection between a diverse panel of arbitrators and the quality of that panel’s decision-making. Nappert argued that this might be the wrong query to make altogether. In her opinion, “At a time where the legitimacy of IA is in crisis, in the eyes of others a more diverse tribunal is a more representative, and thus more legitimate, tribunal; and from the prism of enhanced legitimacy the desirability for diversity in tribunal composition is undebatable.”  She stressed that the quest for more diversity ought not to be made at the expense of quality and competence.

How can IA promote diversity?

Accepting that diversity among panelists is the goal, Nappert believes this issue should be championed at the institutional level. “Institutions have a powerful statement to make by enshrining diversity in their rules as a factor for consideration in the nomination and appointment of arbitrators, alongside and to the same extent as other credentials,” she stated. Chastising the “lip-service” treatment currently afforded diversity, Nappert called for institutional rules to anchor this value in the field. She suggested that institutional rules should consider enshrining diversity as a factor in considering appointment, to the same extent as nationality is currently accepted as such a factor.

Allegations of corruption

Nappert next considered IA’s approach to allegations of corruption in the field, calling for greater self-reflection in the wake of Belokon v Kyrgyzstan, where the Paris Court of Appeal famously annulled an Award as infringing public policy, after reconsidering the case on its merits and finding  sufficient evidence of money laundering. She warned, “That a state court in a country famous for its respect for, and deference to, arbitration tribunals should consider it necessary to reopen the merits of a matter should be a cause for concern, and immediate action on our part, lest we are failing to put our house in order in the eyes of others.” She added that between the ICCA, the IBA, and the ILA, there is no lack of fora to host an open discussion about corruption in the field. Nappert seemed to imply that in failing to have such a discussion with the goal of establishing best practices, IA is missing an opportunity to improve public perception and strengthen its legitimacy.

The rise of artificial intelligence

The final blind spot that Nappert addressed in her lecture was artificial intelligence. Arbitral outcomes can be computed using a series of algorithms that, to whatever degree of certainty, offer parties a predictable outcome that might be seen as mitigating some of the risks of dispute resolution. “Scientists and suppliers of algorithms,” observed Nappert, “are currently warning litigation and arbitration users that human decision-making as we exercise it on a daily basis is no better than a lottery. In addition to being costly, time-consuming, and resource-depleting, it is unpredictable and inevitably subject to bias.”

Though not claiming to be a computer scientist, Nappert spoke on the importance that IA query “how algorithms come to their decisions; where the boundary lies between the machine’s capacity for predictive and prescriptive analysis and the human decision-making mind; [and] the public policy implications of robot-assisted justice and how these awards are reviewed by state courts, notably under Article V of the New York Convention.”

She postured that the introduction of AI into IA could create a dispute settlement system tendering predictability and speed for users, and even the ability to suggest commercial solutions to their disputes to prevent reoccurrence — a tool she ventures would speak powerfully to users.

Preserving the “human element”

If this is the inevitable future of dispute resolution, how can IA fight to stay not only relevant, but valuable? To no one’s surprise, IA’s strongest asset is its fundamental value – the notion that parties have a stake in selecting the decision-makers who will ultimately decide their fate. Though an algorithm could eliminate human unpredictability, the ability to select the decision makers in one’s own dispute is what makes arbitration appealing at a basic – and yes, emotional – level.

Nappert discussed briefly the role of human emotion in arbitration and seemed to defend it as an inherent, underlying thread of dispute resolution. She called for “arbitral institutions proactively to dialogue with AI scientists and providers to ascertain in an ethical manner, how lawyers are made to understand the way algorithms work, how exactly machine speak translates into the human language, and how we can carry on selling the human values underpinning decision making, so that we have an economically competitive and intelligible answer to give to scientists, suppliers of algorithms, and users.”

IA must put its house in order

Nappert ceded that these blind spots – diversity, allegations of corruption and artificial intelligence – are not the only ones IA possesses. But, while they need to be addressed as soon as possible, reacting to these blind spots is no longer enough, in Nappert’s opinion. “In the face of rapidly-paced and seismic disruption, we need to be proactive lest we become the Kodak and Blockbusters of dispute resolution,” she cautioned.

The IA community is largely governed by its own practitioners serving on boards and steering committees, including in arbitral institutions. This close relationship should be taken advantage of to show the rest of the legal community, and the world at large, that IA can keep its own house in order. Nappert concluded, “If we show that this closeness can deliver the benefit of building consensus on best practice and policing our own terrain in a forward-looking manner, we will make strides towards the continued legitimacy and relevance of IA in the face of disruption.”

 

Sophie Nappert is a dual-qualified lawyer in Canada and the UK. She is an arbitrator in independent practice based in London, specializing in international disputes. Sophie is ranked in Global Arbitration Review’s Top 30 List of Female Arbitrators Worldwide and is commended as a “leading light” in the field by Who’s Who Legal. She won the 2016 Global Arbitration Review Award for Best Speech for her address at the EFILA Annual Lecture, International Investment Arbitration: Escaping from Freedom? The Dilemma of an Improved ISDS. http://www.3vb.com/our-people/arbitrators-associate-members/sophie-nappert

Sara Higgins is a legal intern at CPR and a third-year law student at Northeastern University School of Law. Sara recently completed the New York State Bar Association Commercial Arbitration Training for Arbitrators and Counsel and previously worked for the United States Attorney’s Office in Boston, Massachusetts.

Arbitration Practice After Epic Systems

By Russ Bleemer

Today’s U.S. Supreme Court decision backs the use of employer-imposed bars on class-action processes. See Epic Systems Corp. v. Lewis, No. 16-285 (opinion in the consolidated cases is available at https://bit.ly/2rWzAE8).  The case is summarized on this CPR Speaks blog here: https://bit.ly/2KEuXFN,   with Justice Clarence Thomas’s concurrence summarized the blog at https://bit.ly/2wYEKEB, and Justice Ruth Bader Ginsburg’s dissent examined on CPR Speaks here: https://bit.ly/2rXQFgT.

So what’s next?

Mandatory individual employment arbitration, with a waiver of class/collective processes, means simply that business can require employees to go it alone in addressing problems about the workplace.

A recent study found that mandatory arbitration use already had been soaring on its own over the long-term—see Alexander J.S. Colvin, “The growing use of mandatory arbitration,” Economic Policy Institute (April 6, 2018)(available at https://bit.ly/2HxgQUL–even as earlier studies found that employers prefer more conciliatory processes (see the Alternatives article cited below).

Employers surely will continue to restrict class processes.  For many, the ADR process was a sideshow to the ability to limit class actions. New employment arbitration programs will be faced with the same legitimacy questions that adopters over the past 20 years have had to address, and now, with the higher-profile, perhaps more worker skepticism.

Plaintiffs’ lawyers will be forced to assess new approaches for dealing with clients’ work problems without the prospects of bigger matters.

The bottom line, of course, is that leading lawyers on both sides have been ready for today’s decision in the consolidated cases. Both already have begun maneuvering while now facing the decision they are still analyzing.

* * *

The cases involve arbitration provisions that kick in due to class waivers which prohibit employees from joining class processes—litigation or arbitration—in favor of mandatory, predispute, individualized arbitration to resolve disputes with their employers.

The decision is actually on three cases—NLRB v. Murphy Oil (No. 16-307), from the Fifth U.S. Circuit Court of Appeals; Ernst & Young v. Morris (No. 16-300), from the Ninth Circuit, and the Seventh Circuit’s Epic Systems—that had been consolidated into the Court’s 2017-2018 term’s kickoff argument on Oct. 2, with four attorneys arguing the case on behalf of the parties in all three cases.

The long-contested issue began with the release in 2012 of an opinion by the National Labor Relations Board. The administrative decision, which found that class waivers illegally violated the National Labor Relations Act’s Sec. 7 allowing employees to take concerted action to confront their employer, was overturned repeatedly by the Fifth U.S. Circuit Court of Appeals in numerous cases.  See below.

The NLRB ruled that the class waivers eliminated by the FAA’s Sec. 2 savings clause, which enforces arbitration agreements “save upon such grounds as exist at law or in equity for the revocation of any contract.” The Fifth Circuit rejected that view on the ground it infringed on arbitration under the Federal Arbitration Act, a position strongly echoed today by the U.S. Supreme Court in the majority opinion written by Justice Neil Gorsuch.

The class waivers in question require workers, from collectively bargained rank-and file to executive suites, to address disputes with their employers in individual arbitration. While unions can agree to mandatory predispute arbitration on behalf of their members, the cases involved white-collar employees and nonunion workers with little bargaining power.

The Court had definitively permitted mandatory arbitration contract clauses accompanied by class waivers for products and services contracts where consumers have little or no bargaining power. See AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011)(available at https://bit.ly/2KJc8RE).

The Federal Arbitration Act-focused decision today now settles how arbitration is used in workplace matters.

Cases challenging the class waivers that provided for mandatory arbitration flooded the federal courts, starting in the Fifth Circuit, which reversed the NLRB’s 2012 decision, In re D.R. Horton, 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012)(PDF download link at http://1.usa.gov/1IMkHn8), enforcement denied in relevant part, 737 F.3d 344 (5th Cir. 2013)(Graves, J., dissenting)(PDF download link at http://bit.ly/1XRvjrM), reh’g denied, No. 12-60031 (Apr. 16, 2014).

The Fifth Circuit became the venue of choice for employers seeking to reverse the NLRB’s finding that they had violated labor law by requiring class waivers and arbitration as a condition of employment. The New Orleans-based federal appeals court issued dozens of opinions countering in their reasoning, and then officially reversing in their holdings, the many NLRB decisions in which the board, an independent Washington agency, followed its D.R. Horton decision.  The reversal, however, only applied to law in the circuit in which the decision was made.

A circuit split emerged, from the Seventh and Ninth Circuits–first the Seventh Circuit’s Epic Systems Corp. v. Lewis (No. 16-285), which became today’s lead Supreme Court case won by the employer, then with the case of Ernst & Young v. Morris (No. 16-300), from the Ninth Circuit.

The Court accepted the cases, along with NLRB v. Murphy Oil (No. 16-307), one of those Fifth Circuit decisions reversing the NLRB–which itself is a party in the case–and then consolidated the three cases with Epic Systems as the lead more than a year ago.  The argument in the cases kicked off the Court’s current term on Oct. 2.

For details on the arguments, see the blog by Alternatives’ publisher, the CPR Institute, CPR Speaks, at Mark Kantor, “Supreme Court Oral Argument on NLRB Class Actions vs. Arbitration Policy,” CPR Speaks (Oct. 2)(available at http://bit.ly/2fLwU9C), and Russ Bleemer, “The Class Waiver-Arbitration Argument: The Supreme Court Transcript,” CPR Speaks (Oct. 3) (available at http://bit.ly/2yWjWuf).

Kantor noted that the NLRB’s ruling that mandatory arbitration teamed with class waivers were illegal might have disappeared on its own with Trump administration appointees now installed as commissioners ready to reverse the Obama-era D. R. Horton administrative decision.

Regardless, Kantor noted, “This dispute is a reminder that many aspects of arbitration in the U.S. are now a partisan political issue, with regulatory measures addressing arbitration shifting back and forth as political party control shifts back and forth.”

In his majority opinion, Gorsuch used almost the same language.  See the end of CPR Speaks post on the dissent and the majority reaction here: https://bit.ly/2rXQFgT

* * *

For now, today’s Supreme Court has cleared up history’s questions by resolving the overarching issue, with the details to be worked out in employment policies, ADR sessions and, eventually, courtrooms nationwide.

Still, how that plays out in practice is far more in question than it was even a few months ago.

Arbitration has been under attack recently for its frequent use of confidentiality provisions by the #MeToo movement.  The ADR process has been a target in high-profile matters such as Gretchen Carlson’s settlement with her former employer, Fox News.

Microsoft CEO Brad Smith announced that the company would stop using mandatory employment arbitration with respect to sexual harassment claims (which was shortly followed by Uber and Lyft) and legislation barring the process has been proposed. Elena Gurevich, “Predispute Arbitration Would be Barred for Sex Harassment Claims under Legislative Proposal,” CPR Speaks blog (Jan. 25)(available at http://bit.ly/2FUyv4V).

And yet, the license to use arbitration has produced unintended consequences for employers.  A class of employees decertified by a California federal court bombarded national health club 24-Hour Fitness with hundreds of individual arbitrations earlier in the decade, forcing the company to settle all at once.  The decertification–over the claims’ content and unrelated to the class waiver issue—pushed the company to be more aggressive about defending its arbitration clauses, though the Supreme Court didn’t accept its case as part of the consolidated cases decided today. 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)

That hardline stance may be an anachronism, despite apparent backing from the Supreme Court today. Employers five years ago were exhibiting a much stronger preference for “mediation and other interest-based processes over mandatory arbitration and other rights-based processes.” David B. Lipsky, J. Ryan Lamare and Michael D. Maffie, “Mandatory Employment Arbitration:  Dispelling the Myths,” 32 Alternatives 133 (October 2014)(available at https://bit.ly/2s11Aqd).

That article also questioned whether employees were increasingly being subject to mandatory arbitration.  And new data from the same source, the Cornell University ILR School—see Colvin article linked above–indicates that the number has soared, more than tripling since the 1990s.  According to Colvin, more than half of employers now have mandatory arbitration, both with and without class waivers, with more than half the nation’s nonunion workers covered by the agreements.  That’s up from only two percent in 1992. Alexander J.S. Colvin, “The growing use of mandatory arbitration,” Economic Policy Institute (April 6, 2018)(available at https://bit.ly/2HxgQUL).

Whether more workplace conflict is diverted to resolution methods via human-resource departments’ open-door policies or mediation remains to be seen.  But the growing presence of mandatory arbitration at least guarantees more court cases that will drill down into finer points involving arbitration use—the limits and parameters will be under scrutiny more than the extent of the practice.

Next up for the Supreme Court’s arbitration scrutiny is Oliveira v. New Prime Inc., No. 17-340, which will investigate whether courts or arbitrators decide the arbitrability of a case where Federal Arbitration Act Sec. 1 exemption removing a case from arbitration applies. The case, which will be heard in the fall, could authorize further expansion of the reach of class waivers and mandatory arbitration to independent contractors from today’s employees’ decision. Early speculation is that Epic Systems makes Oliveira an easy call for the employers.

And three weeks ago, the Court took a second arbitration case for next year, Lamps Plus Inc. v. Varela, No. 17-988, which will examine the issue of whether 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.”

Today’s Epic Systems decision will overshadow whatever happens in those cases for human resources executives and in employment lawyers’ offices for longer.  The battleground may move to legislatures.

* * *

Meantime, players on both sides have begun to assess it. They are elated—or searching for words, depending on their side of the employment fence.

Referring to the FAA, Cliff Palefsky, of San Francisco’s McGuinn Hillsman & Palefsky, who has represented employees in the 24- Hour Fitness litigation above, says that the Court “took a statute that Congress expressly said doesn’t apply to employment and used it to preempt the nation’s most significant labor and civil rights laws.”

Palefsky, who worked on an amicus brief filed in the consolidated cases on behalf of 10 labor unions and the National Employment Lawyers Association, and who is has been active on the employees’ side in the cases for years, says he’s still reviewing the decision, but adds, “It was an intellectually and legally indefensible political assault on worker’s rights.”

On the other side, Evan M. Tager, a Washington, D.C., Mayer Brown partner who has argued many arbitration cases on employers’ behalf, says, “The Court reaffirmed in the strongest possible terms that conditioning the enforcement of arbitration provisions on the availability of class-like procedures frustrates the purposes of arbitration and is not permissible absent a clear congressional command.”

Tager worked on Mayer Brown’s amicus brief on behalf of the U.S. Chamber of Commerce in the consolidated cases.  He also represented the petitioner in AT&T Mobility, and says he was glad that the Court decision today reasserted that case’s view that FAA Sec. 2 doesn’t save the NLRB’s view that class waivers violated public policy, which he notes was “indistinguishable” from the rule invalidated 2011 case.

Christopher Murray, an Indianapolis shareholder in Ogletree Deakins–the firm that brought D.R. Horton to the Fifth U.S. Circuit Court of Appeals where it was overturned, leading to today’s decision (the firm also submitted an amicus brief on behalf of trade associations in the consolidated cases)—says, “Today’s decision affirms what almost everyone already knew before the NLRB’s 2012 D.R  Horton decision: The NLRA has nothing to do with class-action procedures used by other decision makers to adjudicate claims under other statutes. Rather, the FAA gives parties the right to determine the procedures they’ll use in arbitration, including the right to arbitrate individually.”

Murray–who authored this month’s Alternatives cover story, “No Longer Silent: How Accurate Are Recent Criticisms of Employment Arbitration?” 38 Alternatives 65 (May 2018)(available at https://bit.ly/2rYmned), and who co-chairs his firm’s Arbitration and ADR Practice Group—adds, “This is a good decision for parties interested in any form of alternative dispute resolution because it confirms those parties are best situated to agree on the procedures to be used to resolve their disputes quickly, effectively, and fairly, and courts are generally not permitted under the FAA to second-guess those procedures.”

.

 

Russ Bleemer is the editor of CPR’s award-winning publication, Alternatives.

The Dissent, and the Majority’s Push Back

By Russ Bleemer

The divisive battle over class waivers associated with mandatory arbitration, settled today in the Supreme Court with strong backing for Federal Arbitration Act supremacy over the National Labor Relations Act, was almost destined for a closely divided Court.

It’s unlikely any Court watchers were surprised by the majority’s 5-4 opinion in Epic Systems Corp. v. Lewis, No. 16-285 (opinion in the consolidated cases is available at https://bit.ly/2rWzAE8), written by Justice Neil Gorsuch, the Court’s newest member, especially in light of the arguments, which kicked off the term last Oct. 2.  [For details on the arguments, see the CPR Speaks: Mark Kantor, “Supreme Court Oral Argument on NLRB Class Actions vs. Arbitration Policy,” (Oct. 2)(available at http://bit.ly/2fLwU9C), and Russ Bleemer, “The Class Waiver-Arbitration Argument: The Supreme Court Transcript,” (Oct. 3) (available at http://bit.ly/2yWjWuf).]

The Court delayed the case from the previous term apparently with an eye to a full Court that would avoid a 4-4 split that would have allowed different laws depending on the circuit decisions.  In the interim, Gorsuch was confirmed.

His opinion today for the majority strongly backs the waivers and employers’ ability to require workplace disputes to be resolved in individual arbitration.  It is summarized on this CPR Speaks blog here: bit.ly/2KEuXFN 

Justice Clarence Thomas’s concurrence is summarized on CPR Speaks here: https://bit.ly/2wYEKEB.

And the generally expected lengthy dissent emerged too, authored by Justice Ruth Bader Ginsburg, who was joined by Justices Stephen G. Breyer, Sonia Sotomayor, and Elena Kagan.

“The Court today subordinates employee protective labor legislation to the [Federal] Arbitration Act,” notes Ginsburg at the dissent’s outset. “In so doing, the Court forgets the labor market imbalance that gave rise to the [Norris-LaGuardia Act] and the [National Labor Relations Act], and ignores the destructive consequences of diminishing the right of employees ‘to band together in confronting an employer.’ NLRB v. City Disposal Systems Inc., 465 U. S. 822, 835 (1984).”

The dissenters immediately asked for an intervention: “Congressional correction of the Court’s elevation of the FAA over workers’ rights to act in concert is urgently in order,” Ginsburg writes.

Ginsburg outlined her attack on the majority’s view in two intertwined points:  an analysis of “the extreme imbalance once prevalent in our Nation’s workplaces, and Congress’ aim in the NLGA and the NLRA to place employers and employees on a more equal footing,” as well as a counter-analysis of the FAA’s reach, which “does not shrink the NLRA’s protective sphere.”

Tracing the history of the nation’s labor movement, Ginsburg notes that actions enforcing “workplace rights collectively fit comfortably under the umbrella ‘concerted activities for the purpose of . . . mutual aid or protection.’ 29 U.S.C. § 157”—the NLRA’s Sec. 7, at the heart of the consolidated cases decided by the Court.

She notes that the Court’s view that the NLRA doesn’t protect class litigation is counter to the statute’s “text, history, purposes, and longstanding construction.”

The core dissent argument over Sec. 7 is the activity it enumerates.  Gorsuch, writing for the majority, describes a “regulatory regime” for the law that offers “specific guidance” for protective activities.  Ginsburg attacks the majority’s view that the NLRA doesn’t discuss employees’ collective litigation, about which Gorsuch noted that “it is hard to fathom why Congress would take such care to regulate all the other matters mentioned in [§7] yet remain mute about this matter alone—unless, of course, [§7] doesn’t speak to class and collective action procedures in the first place.”

But the dissent counters that NLRA Sec. 7 only discussed collective bargaining representatives’ selection with specificity. Ginsburg notes that the section didn’t offer “specific guidance” about forming labor organizations, the right to strike, or “other concerted activities” as provided in the law.

Later specific guidance on “some of the activities protected” under the law doesn’t “shed[] any light on Congress’s initial conception” of Sec. 7’s scope, which protects “numerous activities for which the [NLRA provides no ‘specific’ regulatory guidance.”

The dissent blasts the Court’s view that the employees should realize that with class action rules they use also provide inherent limits—that they can be contracted away in favor of individualized arbitration.

“The freedom to depart asserted by the Court,” writes Ginsburg, “is entirely one sided.” She concludes the section noting that NLRA Sec. 7 rights include the right to pursue collective litigation, and therefore “employer-dictated collective-litigation stoppers, i.e., ‘waivers,’ are unlawful.”

* * *

Similarly, Ginsburg analyzes the FAA’s history to conclude that it should not override NLRA protections she and her colleagues say are present in the labor statute. “In recent decades,” the dissent says, “this Court has veered away from Congress’ intent simply to afford merchants a speedy and economical means of resolving commercial disputes.”

Specifically, the dissent cites Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20, 23 (1991)—which provided that the FAA authorized arbitration of Age Discrimination in Employment Act claims as long as the remedies available in courts were also available in arbitration—and Circuit City Stores Inc. v. Adams, 532 U. S. 105, 109 (2001), which opened FAA application up to a wide range of employment contracts containing arbitration clauses.

“Few employers imposed arbitration agreements on their employees in the early 1990’s,” Ginsburg writes. “After Gilmer and Circuit City, however, employers’ exaction of arbitration clauses in employment contracts grew steadily. “

The dissent calls that application “exorbitant,” and said it pushed the National Labor Relations Board to confront the issue in In re Horton, 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012)(PDF download link at http://1.usa.gov/1IMkHn8).

“As I see it,” Ginsburg writes, “in relatively recent years, the Court’s [FAA] decisions have taken many wrong turns. Yet, even accepting the Court’s decisions as they are, nothing compels the destructive result the Court reaches today.”

She continues her FAA analysis by noting that the NLRA prohibition doesn’t discriminate against arbitration in violation of the arbitration law. “That statute neither discriminates against arbitration on its face, nor by covert operation,” notes the dissent, adding, “It requires invalidation of all employer-imposed contractual provisions prospectively waiving employees’ §7 rights.” [Emphasis in the opinion.]

The dissent concluded with a plea on behalf of U.S. workers, who Ginsburg writes will be subject to under-enforcement of federal and state statutes. “In stark contrast to today’s decision,” she writes, “the Court has repeatedly recognized the centrality of group action to the effective enforcement of antidiscrimination statutes.” The dissent passage cites a 2015 Consumer Financial Protection Bureau study that pre-dispute agreements cut off consumers’ claims; the study was used to outlaw mandatory consumer arbitration in financial services contracts, but was overturned by the Senate under the Congressional Review Act when Vice President Mike Pence cast the deciding vote to kill the regulation last October.

* * *

Justice Gorsuch countered the dissent arguments as vehemently as Ginsburg’s dissent took on the majority decision.

“In its view,” writes Gorsuch at the beginning of a section addressing the minority dissent, “today’s decision ushers us back to the Lochner era when this Court regularly overrode legislative policy judgments. The dissent even suggests we have resurrected the long-dead “yellow dog” contract. [Such contracts prohibited unionization; citation to Ginsburg’s opinion omitted.] But like most apocalyptic warnings, this one proves a false alarm.”

First, Gorsuch says that the decision doesn’t override Congressional policy. Workers’ rights to unionize and bargain collectively “stand every bit as strong today as they did yesterday,” the majority opinion states.

“[T]oday’s decision merely declines to read into the NLRA a novel right to class action procedures that the [NLRB’s] own general counsel disclaimed as recently as 2010,” the opinion says.

The minority’s problem, according to Gorsuch, is that it doesn’t like the Court’s FAA jurisprudence:

Shortly after invoking the specter of Lochner, it turns around and criticizes the Court for trying too hard to abide the Arbitration Act’s “‘liberal federal policy favoring arbitration agreements,’” Howsam v. Dean Witter Reynolds Inc., 537 U. S. 79, 83 (2002), saying we “‘ski’” too far down the “‘slippery slope’” of this Court’s arbitration precedent.  . . . [Internal citation omitted.] But the dissent’s real complaint lies with the mountain of precedent itself. The dissent spends page after page relitigating our [FAA] precedents, rehashing arguments this Court has heard and rejected many times in many cases that no party has asked us to revisit.

Similarly, Gorsuch and the majority also hammer the Ginsburg-minority NLRA view. “The dissent imposes a vast construction on Section 7’s language,” the opinion notes, “But a statute’s meaning does not always ‘turn solely’ on the broadest imaginable “definitions of its component words.” Yates v. United States, 574 U. S. ___, ___ (2015) (plurality opinion) (slip op., at 7). Linguistic and statutory context also matter. We have offered an extensive explanation why those clues support our reading today. By contrast, the dissent rests its interpretation on legislative history.  . . . But legislative history is not the law.” [Internal citations omitted.]

Gorsuch writes that the Court’s decision wasn’t between the laws the justices preferred but on the precise issue:

[T]he question before us is whether courts must enforce particular arbitration agreements according to their terms. And it’s the [FAA] that speaks directly to the enforceability of arbitration agreements, while the NLRA doesn’t mention arbitration at all. So if forced to choose between the two, we might well say the Arbitration Act offers the more on-point instruction. Of course, there is no need to make that call because, as our precedents demand, we have sought and found a persuasive interpretation that gives effect to all of Congress’s work.  . . .

Finally, the majority rejects the dissent policy arguments, noting that that the “respective merits of class actions and private arbitration as means of enforcing the law are questions constitutionally entrusted not to the courts to decide but to the policymakers in the political branches where those questions remain hotly contested.”

Gorsuch then, immediately, notes that the Senate’s repeal of the CFPB’s move to ban mandatory arbitration.

 

Russ Bleemer is the editor of CPR’s award-winning publication, Alternatives

Future Challenges Nixed? Thomas Writes That Public Policy is Not FAA Illegality

By Russ Bleemer

There were two opinions in addition to the five-justice majority opinion this morning in Epic Systems Corp. v. Lewis, No. 16-285, covering three consolidated cases that declared that employers may require their employees to use mandatory individual arbitration to resolve workplace disputes, and waive their rights to class processes in either traditional litigation class actions, or in class arbitration processes.

[Our first blog post on the majority opinion here: https://bit.ly/2KEuXFN  Opinion here: https://www.supremecourt.gov/opinions/17pdf/16-285_q8l1.pdf.%5D

Justice Clarence Thomas, who joined the majority, wrote separately to explain why he believes that the Federal Arbitration Act Sec. 2 savings clause relied upon by the employees didn’t apply.

Thomas’s concurrence explains that the Sec. 2 ground for revocation of an arbitration agreement—“valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract” (9 U. S. C. §2)—concern the contract’s formation.

But the employees, Thomas writes, said the National Labor Relations Act makes the class waivers illegal, which is a public policy defense.

Because “‘[r]efusal to enforce a contract for public-policy reasons does not concern whether the contract was properly made,’ the saving clause does not apply here,” according to Thomas, quoting his concurrence in AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 353, 357 (2011).

The position is a significant distinction and expands the majority opinion’s view that there was no Sec. 2 violation because the National Labor Relations Board interfered with a fundamental attribute of arbitration, also from AT&T Mobility.  Thomas’s position could be used by the Court to reject future challenges to arbitration contracts.

AT&T Mobility was the case in which the Court permitted mandatory individual arbitration with class waivers in consumer contracts.  Today’s Epic Systems decision mirrors AT&T Mobility in the workplace.

More on the Justice Ruth Bader Ginsburg-authored dissent soon.

 

Russ Bleemer is editor of CPR’s award-winning publication, Alternatives.

Supreme Court Backs Federal Arbitration Act’s Power to Require Mandatory Individual Arbitration

By Russ Bleemer

The U.S. Supreme Court this morning has affirmed the ability of companies to use mandatory arbitration clauses in employment agreements that are accompanied by waivers of class processes in litigation and arbitration.

In 5-4 decision by Associate Justice Neil Gorsuch, the Court held that the Federal Arbitration Act requires enforcement of employees’ agreements to mandatory individual arbitration. Gorsuch, joined by Chief Justice John G. Roberts Jr., and Associate Justices Anthony Kennedy, Clarence Thomas and Samuel Alito, held that the employees’ arguments that the FAA’s Sec. 2 Savings Clause, which would exempt arbitration agreement provisions from enforcement when they run afoul of “generally applicable contract defenses,” and the National Labor Relations Act, do not counter the FAA’s mandate.

The case is available at https://www.supremecourt.gov/opinions/17pdf/16-285_q8l1.pdf

The long-running controversy involves arbitration provisions that kick in due to class waivers which prohibit employees from joining class processes—litigation or arbitration—in favor of mandatory, predispute, individualized arbitration to resolve disputes with their employers.

The cases—NLRB v. Murphy Oil (No. 16-307), from the Fifth U.S. Circuit Court of Appeals; Ernst & Young v. Morris (No. 16-300), from the Ninth Circuit, and the Seventh Circuit’s Epic Systems Corp. v. Lewis (No. 16-285)—had been consolidated into the Court’s 2017-2018 term’s kickoff argument on Oct. 2, with Epic Systems as the lead case, and four attorneys arguing the case on behalf of the parties in all three cases.

The class waivers in question require workers, from collectively bargained rank-and file to executive suites, to address disputes with their employers in individual arbitration. While unions can agree to mandatory predispute arbitration on behalf of their members, the cases involve white-collar employees and nonunion workers with little bargaining power.

The Court previously definitively permitted mandatory arbitration contract clauses accompanied by class waivers for products and services contracts where consumers have little or no bargaining power. The Federal Arbitration Act-focused decision today now settles how arbitration is used in workplace matters.

Gorsuch’s opinion rejects a 2012 National Labor Relations Board administrative that held that FAA Sec. 2 removed mandatory individual arbitration from FAA application for employee agreements.  The Court’s opinion notes that the reasoning interfered with a fundamental attribute of arbitration.

After rejecting the Sec. 2 argument, Gorsuch dismantled the employees’ other arguments.  He develops the Supreme Court precedent concerning two clashing federal statutes, finding that the National Labor Relations Act, passed in 1935, didn’t override 1925’s FAA to require class or collective actions.

“Section 7 focuses on the right to organize unions and bargain collectively,” Gorsuch writes. “It may permit unions to bargain to prohibit arbitration. Cf. 14 Penn Plaza LLC v. Pyett, 556 U. S. 247, 256–260 (2009). But it does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.”

Moreover, Gorsuch notes that NLRA Sec. 7’s definition of protected employees’ “concerted activities” didn’t include, nor was it amended to include, class-action litigation. “[W]e’ve stressed that the absence of any specific statutory discussion of arbitration or class actions is an important and telling clue that Congress has not displaced the Arbitration Act,” the majority opinion states.

Similar arguments regarding claims under the Fair Labor Standards Act and the Norris-LaGuardia Act also were rejected.

Finally, Gorsuch, a longtime critic of Chevron U. S. A. Inc. v. Natural Resources Defense Council Inc., 467 U. S. 837, which provides Court deference to agency determinations made in the areas of the agency’s expertise, writes that the NLRB’s decision that launched the case, In re Horton, 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012)(PDF download link at http://1.usa.gov/1IMkHn8), didn’t meet the Chevron deference standards.

The NLRB, the opinion notes “has sought to interpret this statute in a way that limits the work of a second statute, the Arbitration Act. And on no account might we agree that Congress implicitly delegated to an agency authority to address the meaning of a second statute it does not administer. One of Chevron’s essential premises is simply missing here.”

Gorsuch, after countering the lengthy dissent—we will return to the dissent and majority’s counterpoints in a subsequent CPR Speaks post later today–concludes:

The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA—much less that it manifested a clear intention to displace the Arbitration Act. Because we can easily read Congress’s statutes to work in harmony, that is where our duty lies.

 

Russ Bleemer is editor of CPR’s award-winning publication, Alternatives

Uber Eliminates Mandatory Arbitration of, and NDAs for, Sexual Assault and Harassment Claims

AnnaBy Anna M. Hershenberg, Esq.

Uber Technologies Inc. announced that it will no longer require its customers, drivers or employees to arbitrate sexual assault or harassment claims, and that it would allow victims to decide whether to enter into non-disclosure agreements or confidentiality provisions as a part of any settlement with the company.

Uber is the second tech company to announce it has changed its dispute resolution policies in response to the #MeToo movement, following Microsoft’s December move.  Brad Smith, “Microsoft endorses Senate bill to address sexual harassment,” Microsoft blog (Dec. 19, 2017)(available at http://bit.ly/2mR65jR).

In a blog post yesterday, “Turning the lights on,” Uber’s Chief Legal Officer Tony West announced the details of three major changes to Uber’s policies. Tony West, “Turning the lights on,” Uber blog (May 15, 2018) (available at https://ubr.to/2KrVhD1).

First, Uber states it “will no longer require mandatory arbitration for individual claims of sexual assault or sexual harassment claims by Uber riders, drivers or employees.” The company instead will allow victims to choose whether to mediate, arbitrate or litigate their individual claims.

In an interview with the New York Times, West confirmed that the “waiving of arbitration only applied to those claims and not for other legal claims, like discrimination.” Daisuke Wakabayashi, “Uber Eliminates Forced Arbitration for Sexual Misconduct Claims,” New York Times (May 15, 2018)(available at https://nyti.ms/2GjbBTW).

West also noted that the new policy applies “to people currently in arbitration with Uber over sexual assault or harassment claims.” Id. 

The Uber blog post specifically states that the company waives application of mandatory arbitration to “individual” claims, still barring class actions. Notably, as of the writing of this blog post, Uber’s driver agreement still contains a mandatory arbitration clause.  Uber US Terms of Use (Dec. 13, 2017)(available at https://ubr.to/2jrKPBW).

Second, Uber will no longer require people who settle sexual harassment or abuse claims with the company to sign confidentiality provisions or NDAs that forbid them from speaking about their experience in order to “help end the culture of silence that surrounds sexual violence.” Tony West, “Turning the lights on,” Uber blog (May 15, 2018)(available at https://ubr.to/2KrVhD1).

This does not appear to prohibit victims from agreeing to keep the terms of the settlement confidential. “Whether to find closure, seek treatment, or become advocates for change themselves, survivors will be in control of whether to share their stories,” the blog post states.

Third, Uber has committed to publishing “a safety transparency report that will include data on sexual assaults and other incidents that occur on the Uber platform.” Id.

Soon after Uber announced these changes, competitor Lyft announced the same changes, and said on Twitter it would join Uber in producing a safety report.  Johana Bhuiyan, “Following Uber’s lead, Lyft is also allowing alleged victims of sexual assault to pursue cases in open court.” Recode (May 15, 2018)(available at https://bit.ly/2ILLXfO).

Some news sources have linked Uber’s policy change to its hopes for an initial public offering in 2019, and mounting public pressure following a CNN investigation, which found that 103 U.S. Uber drivers had been accused of sexual assault or abuse in the past four years.  Daisuke Wakabayashi, “Uber Eliminates Forced Arbitration for Sexual Misconduct Claims,” New York Times (May 15, 2018)(available at https://nyti.ms/2GjbBTW); Stephanie Forshee, “Uber CLO Explains Decision to Scrap Mandatory Arbitration Clauses and NDAs Around Sexual Harassment, Assault,” Corporate Counsel (May 15, 2018)(available at https://cnnmon.ie/2I35QyI); see also Sara Ashley O’Brien, Nelli Black, Curt Devine and Drew Griffin, “CNN investigation: 103 Uber drivers accused of sexual assault or abuse,” CNN Money (April 30, 2018) (available at https://cnnmon.ie/2I35QyI).

Uber’s Tony West, however, insists that the new policies are aimed at winning back the “public’s trust,” “respect of customers [Uber] lost through [its] past actions and behavior,” and, in the words of the company’s new “cultural norm,” to “do the right thing, period.”  Tony West, “Turning the lights on”, Uber blog (May 15, 2018) (available at https://ubr.to/2KrVhD1); see also Dara Khosrowshahi, Uber’s new cultural norms, Linked In (Nov. 7, 2017)(available at https://bit.ly/2jaoiL7)(the author is the company’s chief executive officer).

The legal profession’s use of mandatory employment arbitration also has recalibrated, at least at some firms, in the wake of the #MeToo movement. In March, major law firms, including New York-based Skadden, Arps, Slate, Meagher & Flom, San Francisco’s Orrick, Herrington & Sutcliffe and Los Angeles’ Munger, Tolles & Olson announced they would no longer require employees to sign onto mandatory employment arbitration agreements. The moves followed a Twitter attack invoking #MeToo directed primarily at Munger.

And on Monday, Yale Law School sent a letter on behalf of top law schools asking law firms that recruit on their campuses to “disclose whether they require summer associates to sign mandatory arbitration agreements and nondisclosure agreements related to workplace misconduct, including but not limited to sexual harassment.” Staci Zaretsky, “Elite Law Schools Demand That Biglaw Firms Disclose Whether Students Will Be Forced to Sign Arbitration Agreements,” Above the Law (May 14, 2018)(available at https://bit.ly/2ILJMZU).

 

Ms. Hershenberg is Vice President of Programs and Public Policy at CPR. She can be reached at ahershenberg@cpradr.org.

How to Tank a Mediation Without Even Trying

By James P.S. Leshaw

LeshawEvery so often, you may want to tank a mediation. Maybe you know in advance it can’t settle. Maybe the blood is so bad between lawyers or clients that you just want to teach a lesson to the other side.  It could be that you think the judge or arbitrator is really enjoying all of the discovery disputes or doesn’t have enough to do. Whatever the reason, based on my experience as a mediator, here are the top ten ways to blow a mediation (as well as some light reading).

  1. Promise your client (preferably in writing) that there is no way he can lose at trial. Also, be sure to under-estimate the cost of the litigation both in terms of the cost of fees and expenses as well as the client’s expected time-commitment and anticipated loss of sleep. This should sufficiently reduce the client’s incentive to settle at mediation.
  2. Do not submit a mediation statement to either the mediator or the other side. The reality is that the mediation statement serves very little purpose other than to educate the mediator and the other side to the strengths of your case. If you do decide to deliver a mediation statement anyway, consider using it as an opportunity to educate the mediator on how unreasonable the other side is (though this should be obvious to any experienced mediator as the other side has not yet caved to your demands). You may also choose to inundate the mediator and other side with copies of pleadings you have already filed in the case, with no explanation as to their relevance.
  3. Do not personally attend the mediation – your attendance might send the message that you are serious about settling. Instead, send a junior associate who has had little or no involvement with the litigation, who does not know the factual or legal issues and who does not have the confidence or trust  of the client. This will help to ensure that the mediation is not successful.
  4. Be efficient when preparing for the mediation (assuming you decide to attend). Do not focus on the law or the facts – the other side must already be familiar with these or be too dense to understand your version of the law or the facts. Focus on the important stuff like making the mediation personal.  Be prepared to embarrass opposing counsel by talking about their procedural gaffes in this case or their losses in other cases. This is really just constructive criticism.
  5. Do not make an opening statement at the mediation – simply state that your position is already clear. Should you decide to make an opening statement, be sure to point out how unreasonable the other side has been for not simply giving in, explain you are not prepared to compromise in any way, but have a “take it or leave it” offer. Also, don’t forget to remind the other side and the mediator that you have scheduled only one hour for the mediation because you need to be back at your office to take a phone call.
  6. Do not bring your client to the mediation. Instead tell the other side that the client is available by telephone or that you already have settlement authority. Should your client inconveniently decide to show up at the mediation, make sure he does not participate in the mediation. You’re being paid to attend the mediation so you should respond to any questions or comments made to your client by the mediator or the other side. This is your case after all.
  7. If your client is the defendant, cry poverty but do not provide any financial information to support the claim.
  8. Do not admit that your case has any weaknesses at all, including in a private session with the mediator. So long as you bury your head in the sand, neither the mediator nor the other side will realize there is a potential chink in your client’s armor.
  9. Yell, scream and pound on the table so everyone in the room knows you really mean what you are saying.
  10. If it looks like the case may settle despite your best efforts, be prepared to pack your bag and leave. The best exit is a dramatic exit.

About Jim Leshaw:

Jim Leshaw is a mediator and arbitrator based in Miami and Key Biscayne, Florida.  He handles a wide variety of commercial disputes throughout the United States, Latin America and Europe.  He also sits on the board of directors of Avianca Holdings, S.A. (NYSE:  AVH), the Latin American based airline. He can be reached at Jim@LeshawLaw.com.

This post originally appeared in Law360, and was republished with permission.

Opiate Crisis Faces Two Tracks, Settlement and Litigation

By Ginsey Varghese

The potentially vast opioid litigation has received a big push for an alternative dispute resolution intervention.

In December, the U.S. Judicial Panel on Multidistrict Litigation (MDL) consolidated and transferred more than 400 opiate-related cases to Ohio’s Northern U.S. District Court under the oversight of Judge Dan Aaron Polster.

And Polster immediately said he will push for a solution to get a handle on the cases filed against manufacturers by cities and counties and bring on special masters to handle the negotiations. Jan Hoffman, Can This Judge Solve the Opioid Crisis? N.Y. Times (Mar. 5) (available at http://nyti.ms/2Fhx7sK).

The plaintiffs in the MDL are cities, counties and states, though some states participating in the MDL settlement discussions have filed separate suits.

The consolidated case under Judge Polster is called In re Nat’l Prescription Opiate Litigation. In re Nat’l Prescription Opiate Lit., No. MDL 2804, 2017 WL 6031547,*1 (J.P.M.L. Dec. 5, 2017)(available at https://bit.ly/2G3EELQ). The court’s case page is available at https://bit.ly/2qDbbmg.

Opioid makers and distributers, including individual doctors, are accused of creating a public-health crisis with their mishandling of the potent drugs, estimated to kill 180 people in the U.S. daily from misuse. Opioids are painkillers, and they range from prescription drugs to illegal heroin.

Judge Polster said in the first hearing on Jan. 9 that he will drive the case toward settlement. He explained the importance of meaningful resolution. He said, “I don’t think anyone in the country is interested in a whole lot of finger pointing . . . depositions, and discovery, and trials.  . . . [W]ith all these smart people here and their clients, I’m confident we can do something to . . . make sure that the pills manufactured and distributed go to the right people and no one else, and that there can be an effective system to monitor delivery and distribution.  . . .” Transcript of Proceedings (Doc 58) at 411-12, In re Nat’l Prescription Opiate Litig., No. MDL 2804 (N.D. Ohio Jan. 9, 2018)(available at https://bit.ly/2DPT1BA).

The parties suggested three names to serve as Special Masters–David Cohen, a Cleveland-based special master with experience in mass torts and antitrust (see www.specialmaster.law); Cathy Yanni, a JAMS Inc. neutral in San Francisco who has worked as a special master on pharmaceutical cases (see www.jamsadr.com/yanni/), and Duke University Prof. Francis McGovern, of Durham, N.C., who also has worked as a special master in pharmaceutical cases (see https://law.duke.edu/fac/mcgovern/). Id. at 414.

Polster had said that there been substantial progress made in settlement discussions since January, but several barriers “to a global resolution” identified prompted the establishment of “limited litigation track, including discovery, motion practice, and bellwether trials.” Minutes of 3/6/2018 Conference and Order, In re Nat’l Prescription Opiate Litig., No. MDL 2804 (N.D. Ohio Mar. 7, 2018) (available at https://bit.ly/2HZmdZy); see also, Amanda Bronstad, Opioid Judge Allows Some Discovery, Motions to Go Forward in MDL, Nat’l L. J. (Mar. 7, 2018)(available at https://bit.ly/2HYeriy).

This was followed by an April 11 discovery order by Polster (available at https://bit.ly/2KiSSen). The National Law Journal termed the case management order—the first in the MDL–“aggressive,” noting it targets the litigation track to a first-quarter 2019 trial date. Amanda Bronstead, Polster Sets Aggressive Discovery Schedule, Slating Opioid Trial for March 2019, Nat’l L. J. (Apr. 12)(available at https://bit.ly/2FhYdPy).

Polster identified some of the cases that would proceed on the litigation track in the order. The Bloomberg article above notes that allowing local governments and opioid makers’ attorneys to prepare for trial may be the quickest way to overcome some of the barriers to settlement, which include causation issues.

A settlement conference is scheduled for May 10, announced earlier this year and confirmed in an order by Polster earlier this week (available at https://bit.ly/2HTzc2g).

If no deal can be reached, Polster noted in the first hearing that he is prepared to try Ohio’s claims against opioid makers in 2019. Transcript of Proceedings (Doc 58) at 412-13, above.

* * *

More details will appear in an expanded article later this spring in Alternatives to the High Cost of Litigation.

The author was a CPR Institute 2018 intern. She is a law student at Pepperdine University’s School of Law in Malibu, Calif.