UNCITRAL Adopts Expedited Arbitration Rules

By Mylene Chan

This is the third part of a series of CPR Speaks posts reporting on the United Nations Commission on International Trade Law’s 54th session where the commission adopted legislative and non-legislative texts relating to alternative dispute resolution. 

At the three-week session concluding July 16, the commission adopted the UNCITRAL Expedited Arbitration Rules and the Explanatory Notes to the UNCITRAL Expedited Rules. These rules and notes complement and are intended to be read together with UNCITRAL’s well-known arbitration rules, which are for resolving international disputes and applicable both in administered arbitrations under the auspices of an arbitral institution, as well as in ad hoc arbitrations.

The UNCITRAL Arbitration Rules were originally developed as an alternative to other major rule systems. UNCITRAL’s innovative rules were initially viewed with skepticism, but over time, they have been frequently used in investment arbitrations, commercial arbitrations, arbitrations between states, and between states and individuals, such as for the Iran-U.S. Claims Tribunals and several bilateral investment treaties. Latham & Watkins Guide to International Arbitration (2019) (available at https://bit.ly/2VeZKU8).

The UNCITRAL Arbitration Rules have gone through three versions, in 1976, 2010 (revised to meet the needs of modern business including improvements to procedural efficiency, inclusion of provisions on multi-party arbitration and the development of rules on interim measures; available at https://bit.ly/3i7UrPq), and 2013 (incorporated rules on transparency for investment arbitrations based on treaties; available at https://bit.ly/2UZMEKH). See general background on the rules from UNCITRAL at https://bit.ly/3l6RyjD.

In 2018, UNCITRAL mandated Working Group II to explore ways to improve the efficiency of the arbitral proceedings through streamlining and simplifying procedures, resulting in the drafting of the UNCITRAL Expedited Arbitration Rules. The goal is to reach a final dispute resolution in a cost- and time-effective manner while ensuring due process and fair treatment for the disputants. (See https://undocs.org/en/A/CN.9/934 for the 2018 statement on expedited rules.)

For coverage of the early drafting process of the UNCITRAL Expedited Arbitration Rules, see Piotr Wójtowicz & Franco Gevaerd, “How UNCITRAL’s Working Group II on Arbitration Is Analyzing the Field to Help Expedited Processes” 37 Alternatives 90 (June 2019) (available at https://bit.ly/377Nfwg), and Piotr Wójtowicz & Franco Gevaerd,  “The Framework: The U.N.’s Working Group II Debates New Expedited Arbitration Rules,” 37 Alternatives 99 (July/August 2019) (available at https://bit.ly/3l5OLqS).

Special features in the UNCITRAL expedited arbitration rules include the following:

  • Disputes under the expedited procedures shall be settled in accordance with the UNCITRAL Arbitration Rules as modified by the expedited rules.
  • The expedited rules shall apply only with express consent by the disputants.
  • To facilitate speedy constitution of the tribunal, the claimant must include, with its notice of arbitration, the proposal of an appointment authority and the arbitrator. The notice of arbitration constitutes the claimant’s statement of claim. The respondent then has 15 days to file a response to the notice of arbitration. By contrast, under UNCITRAL Arbitration Rules, the time to respond is 30 days from the receipt of the notice of arbitration.
  • When the disputants cannot agree on an appointing authority, any disputant can request that the Permanent Court of Arbitration Secretary-General designate the appointing authority or serve as appointing authority. The PCA Secretary-General has discretion to decline serving as appointing authority and designate another authority if it deems it more appropriate. In this way, the UNCITRAL Expedited Rules have deviated from the default two-step designation/appointment procedure found in the non-expedited UNCITRAL Arbitration Rules.
  • The tribunal has discretion in shaping the proceedings, including extending or abridging timeframes (except for award issuance, as discussed in the bullet below) and determining whether hearings will be held or evidence taken.  This discretion represents an expansion of the discretion contained in the UNCITRAL Arbitration Rules.
  • The time period for rendering the award employs a bifurcated approach. If the tribunal considers that it is at risk of not rendering an award within nine months, it shall propose a final extended time limit. If all disputants agree, the extension is considered adopted.  If a party objects to the extension, however, any party may make a request that the UNCITRAL Expedited Rules no longer apply to the arbitration. After hearing the disputants, the tribunal may then decide that it will instead conduct the proceedings in accordance with the UNCITRAL Arbitration Rules, which do not contain the time limits.

The most contentious issue was the last bullet point above regarding the time period for rendering the award. Working Group II spent more than six hours debating on this point during the 54th session, focusing on how to balance the policy interest of promoting a truly expedited process with the goal of ensuring that the result of that process would be enforceable through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, better known as the New York Convention.

At one point, the U.S. delegation objected vehemently that “[u]sing this approach, as the default in the rules, creates a very concerning precedent for an uncontrolled instrument in our delegation’s experience.  . . . That is why we have drafted the compromise language that . . . seeks to bridge the gap between delegations like ours, who are very concerned about adopting a system that will likely produce unknowable awards, and those delegations who primarily are concerned that without a hard stop at nine months, the rules will enable arbitrators who were not very diligent, or who simply procrastinated to continue to take extensions.”

There were more concerns about protecting those with lesser means and bargaining power:

  • The U.S. delegation noted, “We think that given that these rules may be used by unsophisticated parties because they are expedited, . . . one of the goals is to reach out to parties who might be otherwise deterred from pursuing arbitration because of the cost.  . . .”
  • The Israel delegation point out that “[t]here could be concerns of parties with weaker bargaining powers that would have to be essentially compelled to agree to this.  . . .”

While the debate was heated, ultimately the member states drafted an innovative approach to reach a consensus. 

The UNCITRAL Expedited Arbitration Rules will appear together with the explanatory notes toward the end of the year as an appendix to the UNCITRAL Arbitration Rules.  In the fall, Working Group II will deliberate on rules about early dismissal of frivolous claims that will require modifications to the UNCITRAL Arbitration Rules. Working Group II will post the final rules, and currently has the drafts, here.

In addition, UNCITRAL is contemplating developing a new framework for adjudication. commonly known as dispute resolution boards, to complement the UNCITRAL Arbitration Rules. There has been a recurring expression of interest within UNCITRAL member states in the principle of rapid decision common to adjudication in construction projects. The U.S. delegation noted that it hoped that this principle can be adapted to expedite the resolution of disputes in other long-term contracts, or at least to mitigate the impact of those disputes.

UNCITRAL expects to conduct colloquiums to discuss adjudication next spring. With the adoption of the expedited rules, UNCITRAL is taking steps to expand the use of arbitration as a method of dispute resolution available to a wider range of parties.

Thomas W. Walsh, special counsel based in the New York office of Freshfields, who in his arbitration work focuses on UNCITRAL matters and worked on an early draft of the UNCITRAL Expedited Rules, said that the rules “are a welcome example of the arbitration community responding to the needs of the businesses that use arbitration. If parties have a commercial need to expedite the resolution of their dispute, the rules offer a thoughtful, ready-made procedure that they can select to meet that commercial need.”

The UNCITRAL Expedited Rules eliminate many of the obstacles that made arbitration costly and overly time-consuming, and the role of UNCITRAL as a global trend-setter on arbitration means that these new provisions are likely to be used as models worldwide.

* * *

The author, an LLM candidate at Yeshiva University’s Benjamin N. Cardozo School of Law in New York, has covered UNCITRAL’s 54th Session proceedings for CPR Speaks as a 2021 CPR Summer Intern. Her articles can be found using the search box on the upper right of this page.

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Second Circuit Affirms on Sending a Contract’s Arbitrability to a Court, Not a Tribunal

By Mark Kantor 

It has become common to report on federal circuit court decisions deferring “who decides” gateway arbitrability issues to arbitrators based on the adoption by contract parties of a set of arbitration rules containing a “competence-competence” clause, as well as the U.S. Supreme Court consistently declining to take on that question. 

On Friday, though, the Second U.S. Circuit Court of Appeals decided that the existence of such a clause in the American Arbitration Association Commercial Arbitration Rules (here, R-7(a)) was not per se sufficient to satisfy the Supreme Court’s “clear and unmistakable” gateway test from First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995) (available at http://bit.ly/2WEXGnF).

 In DDK Hotels LLC et al v. Williams-Sonoma Inc., et al, No. 20-2748-cv (2d Cir. July 23) (available at https://bit.ly/3zIUIhv), a unanimous three-judge appeals panel concluded that the gateway question of whether a dispute about “prevailing party” fees was arbitrable under a joint venture agreement was “one for the district court, not the arbitrator, to decide.” 

The manner in which the U.S. District Court, and then the Second Circuit, reached this conclusion is an interesting approach toward limiting the impact of the rulings in all but one of the circuits (including the Second Circuit) that a “competence-competence” clause in arbitration rules–a provision that the tribunal decides its own jurisdiction as to whether a case is arbitrated–constitutes a “clear and unmistakable” showing that the contract parties intended for gateway arbitrability issues to be decided by the arbitral tribunal.

The core U.S. Federal Arbitration Act  (at 9 U.S.C. § 1, et seq.) test for allocating gateway issues between courts and arbitral tribunals is well known.  Gateway issues are to be decided by the courts unless there is clear and unmistakable evidence that the contracting parties intended to allocate the gateway issue to the arbitrator.  Ordinary contract law principles apply to that inquiry.

Writing for the unanimous panel, Second Circuit Senior Judge Robert D. Sack noted, “Courts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and unmistakabl[e]’ evidence that they did so. First Options, 514 U.S. at 944 (alterations in original) (quoting AT & T Techs. Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 649 (1986)).  . . .  We ‘apply ordinary state-law principles that govern the formation of contracts’ in conducting this inquiry into the parties’ intent. First Options, 514 U.S. at 944.”

Like every other circuit court that has ruled on the question, the Second Circuit has held that “[w]here the parties explicitly incorporate procedural rules that empower an arbitrator to decide issues of arbitrability, that incorporation may serve ‘as clear and unmistakable evidence of the parties’ intent to delegate arbitrability to an arbitrator.’” Citing Contec Corp. v. Remote Sol. Co., 398 F.3d 205, 208 (2d Cir. 2005).

The DDK Hotels appeals court, however, went on to point out a limiting aspect of those decisions: “[C]ontext matters,” such that incorporation of such rules does not per se show satisfaction with the First Options “clear and unmistakable” standard if other aspects of the parties’ agreement create ambiguity as to the requisite intent. Specifically, opinion states,

We have also advised, however, that in evaluating the import of incorporation of the AAA Rules (or analogous rules) into an arbitration agreement, context matters. 

Incorporation of such rules into an arbitration agreement does not, per se, demonstrate clear and unmistakable evidence of the parties’ intent to delegate threshold questions of arbitrability to the arbitrator where other aspects of the contract create ambiguity as to the parties’ intent.

The appellate panel stated that, “where the arbitration agreement is broad and expresses the intent to arbitrate all aspects of all disputes,” then the First Options test will be met to allocate issues of arbitrability to an arbitrator.  If, however, “the arbitration agreement is narrower, vague, or contains exclusionary language” that the parties intended to arbitrate “only a limited subset of disputes,” then “incorporation of rules that empower an arbitrator to decide issues of arbitrability, standing alone, does not suffice to establish the requisite clear and unmistakable inference of intent to arbitrate arbitrability.” (Emphasis added.)  

Senior Circuit Judge Sack pointed to a Second Circuit ruling in NASDAQ OMX Grp. Inc. v. UBS Sec. LLC, 770 F.3d 1010, 1031 (2d Cir. 2014), to reinforce this conclusion: “[W]here a broad arbitration clause is subject to a qualifying provision that at least arguably covers the present dispute . . . we have identified ambiguity as to the parties’ intent to have questions of arbitrability . . . decided by an arbitrator.”

The Court of Appeals then applied these principles to the joint venture contract at issue in DDK Hotels.  Section 16(b) of the joint venture agreement limited arbitration solely to “Disputed Matters”:

“(b) Arbitration. The parties unconditionally and irrevocably agree that, with the exception of injunctive relief as provided herein, and except as provided in Section 16(c), all Disputed Matters that are not resolved pursuant to the mediation process provided in Section 16(a) may be submitted by either Member to binding arbitration administered by the American Arbitration Association (“AAA”) for resolution in accordance with the Commercial Arbitration Rules and Mediation Procedures of the AAA then in effect.  . . .” (Emphasis added by Court of Appeals.)”

The term “Disputed Matters” was defined in the JV agreement to cover corporate governance “deadlock” issues requiring Board or LLC Member approval or on which the Board was unable to reach agreement.

The “Deadlock” section is a corporate governance mechanism that applies only to “Disputed Matters,” which are defined as matters “requiring Board or Member approval” on which the board is unable to reach agreement.

Looking at that definition and at other provisions of the contract giving content to the term “Disputed Matters,” the Second Circuit found ambiguity as to the parties’ intent.

Payment of prevailing party fees pursuant to Section 21(h) is not on that list, the opinion notes, suggesting that disputes under Section 21(h), on prevailing party fees, may very well fall outside the scope of Section 16’s arbitration provision.

Nothing in Section 21(h), the opinion states, “suggests that such relief [compelling payment of prevailing party fees] is contingent upon board approval; to the contrary, it unambiguously directs the non-prevailing member to pay such costs and fees ‘upon demand.’”

For the Second Circuit, that ambiguity blocked a conclusion that the “competence-competence” provision in AAA Rule R-7(a) clearly allocated the “who decides” gateway decision to the arbitrator.  Consequently, under First Options, the gateway decision lay with the courts:

“While the arbitration agreement does indeed incorporate the AAA Rules, which empower the arbitrator to resolve questions of arbitrability, Section 16(b) provides that the AAA Rules ‘apply to such arbitrations as may arise under the [JV] Agreement.’ See NASDAQ OMX, 770 F.3d at 1032; SA.16.  Because Section 16(b)’s arbitration clause applies only to ‘Disputed Matters’ not resolved pursuant to the mediation process outlined in Section 16(a), the AAA Rules do not apply ‘until a decision is made as to whether [DDK Hospitality’s supplemental claim] does or does not fall within the intended scope of arbitration[.]’ NASDAQ OMX, 770 F.3d at 1032.  In other words, whether the AAA Rules, including Rule 7(a), apply turns on the conditional premise that the dispute falls within the definition of ‘Disputed Matter.’ If it does not, then the AAA Rules do not govern and no delegation of authority to the arbitrator to resolve questions of arbitrability arises.  The narrow scope of the arbitration provision therefore obscures the import of the incorporation of the AAA Rules and creates ambiguity as to the parties’ intent to delegate arbitrability to the arbitrator.”

Thus, the Second Circuit held in DDK Hotels that the contractual agreement in the JV agreement limiting arbitration to “Disputed Matters” operated to prevent allocation of the arbitrability decision to the arbitrator under the “clear and unmistakable” First Options test.  Accordingly, “[t]he district court therefore correctly determined that it, rather than the arbitrator, should decide whether the supplemental claim [for prevailing party fees] was arbitrable.”

One might reasonably ask how DDK Hotels squares with the unanimous 2019 U.S. Supreme Court decision, Henry Schein Inc. v. Archer & White Sales Inc., 139 S. Ct. 524 (2019) (available at http://bit.ly/2YLDkWQ), rejecting a “wholly groundless” basis for declining to forward a gateway question to arbitrators for decision. 

In Henry Schein, the Court’s summary does a good job of setting out the core of that ruling:

“Held: The ‘wholly groundless’ exception to arbitrability is inconsistent with the Federal Arbitration Act and this Court’s precedent.  Under the Act, arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.  . . . The parties to such a contract may agree to have an arbitrator decide not only the merits of a particular dispute, but also ‘’gateway’ questions of ‘arbitrability.’’ . . . Therefore, when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is  wholly groundless.”

Under the doctrine rejected by the Supreme Court in Henry Schein, the courts would have construed the parties’ contract to determine if the claimant’s arbitrability argument was “wholly groundless.”  Even in the face of a “clear and unmistakable” agreement to delegate arbitrability issues to the arbitrator, if the court was satisfied the arbitrability argument was “wholly groundless” under the contract, then the court could determine the arbitrability issue itself instead of referring the gateway question to the arbitrator.

In DDK Hotels, the district court and the Second Circuit again construed the parties’ contract, this time to determine if the parties’ intention to delegate the gateway issue to the arbitrator was ambiguous rather than clear and unmistakable.

To distinguish DDK Hotels from Henry Schein, one must come up with a persuasive explanation for how (i) the 2nd Circuit Court of Appeals’ inquiry into whether the dispute at issue in DDK Hotels arguably fell outside the meaning of the contract term “Disputed Matters” differs from (ii) the judicial inquiry into the contract terms in Henry Schein to determine if the claim of arbitrability was “wholly groundless.” 

This is perhaps a task the US Supreme Court declined to take on when it dismissed certiorari in Henry Schein II as improvidently granted earlier this year?

Any volunteers to tackle that job? Please feel free to comment below.

* * *

Mark Kantor is a member of CPR-DR’s Panels of Distinguished Neutrals.  Until he retired from Milbank, Tweed, Hadley & McCloy, he was a partner in the firm’s Corporate and Project Finance Groups.  He currently serves as an arbitrator and mediator.  He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor).  He also is Editor-in-Chief of the online journal Transnational Dispute Management.  He is a frequent contributor to CPR Speaks, and this post originally was circulated to a private list serv and adapted with the author’s permission.

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Another Appeals Court Take on ‘Who Decides’: The Sixth Circuit Overturns Provider’s Ruling to Reject Arbitration

By Mark Kantor

Last week, the Sixth Circuit U.S. Court of Appeals issued one of the rare rulings addressing the authority of an arbitral institution to make decisions. 

In the case, the appeals court considered the authority of an American Arbitration Association administrator to make what the court considered a “gateway” decision under the AAA’s Healthcare Policy Statement and rules rather than allowing that decision to be made by arbitrators. 

The 2-1 majority opinion ruled that only an arbitrator could make the decision, not the administrator.  That ruling has significant implications for the administrability of due process protocols and policy statements in patient healthcare, consumer and employment disputes.

In Ciccio, et al. v. SmileDirectClub LLC, No. 20-5833 (6th Cir. June 25, 2021) (available at https://bit.ly/2U8OqZ8), Senior Circuit Judge David W. McKeague authored the majority Sixth Circuit panel opinion overturning an AAA decision to apply the AAA’s policy against accepting a claim that “implicated various AAA policies that precluded arbitration unless the parties signed a post-dispute arbitration agreement or a court otherwise ordered arbitration.” 

The AAA’s Consumer Arbitration Rules, Healthcare Policy Statement and Healthcare Due Process Protocol bar the AAA from arbitrating a patient healthcare dispute unless either (1) all parties have agreed to submit the matter to arbitration after the dispute has arisen or(2) a court has ordered the disputing parties to arbitrate the matter.  The AAA Healthcare Policy Statement  describes this policy succinctly:

In 2003, the American Arbitration Association (“AAA”) announced that it would not administer healthcare arbitrations between individual patients and healthcare service providers that relate to medical services, such as negligence and medical malpractice disputes, unless all parties agreed to submit the matter to arbitration after the dispute arose. . . .  However, the AAA will administer disputes between patients and healthcare providers to the extent a court order directs such a dispute to arbitration where the parties’ agreement provides for the AAA’s rules or AAA administration.

The dispute in this case arose out of a false advertising claim brought by plaintiffs and former patients Dena Nigohosian, Dr. Joseph Ciccio, Dr. Arthur Kapit, and Dr. Vishu Raj, and joined by Dana Johnson and others, against SmileDirect, originally in federal court.  The U.S. District Court first held that an arbitration agreement in SmileDirect’s customer contract applied and ordered Nigohosian to arbitrate.  The other plaintiffs then voluntarily dismissed their court claims. 

The arbitration clause in question read:

AGREEMENT TO ARBITRATE – I hereby agree that any dispute regarding the products and services offered [b]y SmileDirectClub and/or affiliated dental professionals, including but not limited to medical malpractice disputes, will be determined by submission to arbitration and not [b]y lawsuit filed in any court, except claims within the jurisdiction of Small Claims Court . . . .   I agree that the arbitration shall be conducted by a single, neutral arbitrator selected by the parties and shall be resolved using the rules of the American Arbitration Association.

Johnson thereafter filed a class arbitration claim against SmileDirect with the AAA on behalf of consumer claimants who had been SmileDirect patients.

At that point, the AAA itself became involved in deciding whether the class arbitration should proceed in light of AAA policies and rules.  An AAA administrator advised the parties that that AAA’s Healthcare Due Process Protocol and Healthcare Policy Statement in the circumstances required healthcare providers and their consumers to sign post-dispute arbitration unless a court order has compelled arbitration, according to the Sixth Circuit opinion:

An AAA administrator informed the parties that AAA’s Healthcare Due Process Protocol and Healthcare Policy Statement applied, which require healthcare providers and their patients to sign an arbitration agreement after a dispute arises in certain cases unless a court order has compelled arbitration.  SmileDirect’s counsel asked the AAA administrator to reverse this decision but the AAA administrator maintained his “initial, administrative determination [that] the Protocol [and the Healthcare Policy Statement] appl[y].” . . . SmileDirect’s counsel objected again, noting that the district court had already compelled Nigohosian to arbitrate “whether the claims themselves are arbitrable” and argued that “AAA’s administrative decision to apply the Protocol [and the Healthcare Policy Statement] to these consumer claims is erroneous. ***

The AAA administrator “reaffirm[ed] [his] administrative determination” that the Healthcare Policy Statement applied to Johnson’s claims.  . . .  He concluded that arbitration could only proceed following a court order (seemingly like the court order already entered for Nigohosian) or a post-dispute arbitration agreement.

Johnson refused to sign a post-dispute agreement consenting to arbitration, while Nigohosian (who was bound by the earlier District Court order compelling arbitration) never initiated arbitration herself.  When claimants renewed their court proceedings in the U.S. District Court, however, “SmileDirect responded that they couldn’t rejoin the case because the Agreement required an arbitrator to decide the merits of any dispute, including any gateway issues about whether the dispute was arbitrable.” (Emphasis added.)

The district court, though, decided that SmileDirect and Johnson “got what they bargained for” because the dispute had been “resolved using the rules of the [AAA].”  Consequently, the court  determined that Johnson could renew the dispute before the judicial forum:

The district court interpreted the Agreement to fully incorporate Rule 1(d), the Consumer Due Process Protocol, and the Healthcare Policy Statement.  The court’s interpretation of these rules and policies next led it to conclude that Johnson had discharged his obligations under the Agreement and could “submit [his] dispute to the appropriate court for resolution.” . . .  Under the district court’s reasoning, Rule 1(d) incorporates the Consumer Due Process Protocol, which in turn states that AAA has subject-specific policies (incorporating the Healthcare Due Process Protocol and Healthcare Policy Statement by implication), and the Healthcare Policy Statement requires a post-dispute arbitration agreement or a court order.  Therefore, the court held that “the AAA process to which the parties mutually agreed ha[d] been completed in Johnson’s case.”

With respect to Nigohosian, however, the Court decided that she was bound by the existing Court order compelling arbitration.  The District Court therefore stayed her claims, pending arbitration.

SmileDirect thereafter appealed the decision regarding Johnson to the Sixth Circuit Court of Appeals. 

The Court of Appeals did not resolve the substantive arbitrability issue.  Rather, Judge McKeague held on behalf of a majority of a divided appellate panel that “The text of the [parties’ arbitration agreement] confirms that the parties didn’t intend to allow an administrator to short-circuit arbitration by refusing to appoint an arbitrator to answer this initial gateway question.  Accordingly, we don’t have anything further to say on the matter until and unless a party asks us to review an arbitrator’s decision under 9 U.S.C. § 10.”

To reach this result, the appellate panel started with basic principles in U.S. arbitration jurisprudence that “[w]hether the parties have agreed to arbitrate or whether their agreement covers a particular controversy” are gateway arbitrability questions.”  The parties may decide to send these gateway issues to an arbitrator rather than a court, but only upon a showing of “clear and unmistakable” evidence that the parties did indeed intend to delegate those issues to an arbitrator under the ruling in the U.S. Supreme Court’s First Options v. Kaplan, 514 U.S. 938 (1995). 

In the Sixth Circuit, like almost all other federal circuit courts, the incorporation of AAA rules authorizing the arbitrator to decide on the scope or validity of the arbitration agreement or the arbitrability of a claim satisfies the First Options standard. 

Thus far, the Court of Appeal’s reasoning paralleled the U.S. District Court’s reasoning on gateway arbitration questions.  But, stated the McKeague opinion, “What remains is the related question of whether the parties intended to allow an AAA administrator to apply the Healthcare Policy Statement before sending any gateway-arbitrability questions to the arbitrator,” explaining that

The Agreement dictates that “any dispute . . . will be determined by submission to arbitration,” not by litigation, and “that the arbitration shall be conducted by a single, neutral arbitrator selected by the parties.” The parties never got that far here because an AAA administrator “ma[d]e[] an initial, administrative determination [that] the [Healthcare Policy Statement] applie[d].”

The appeals court read the arbitration agreement between the parties to show that they intended to send gateway questions of arbitrability “exclusively” to an arbitrator, not to an AAA administrator.  Senior Circuit Judge McKeague expressed confusion as to the basis relied upon by the AAA administrator to take this decision rather than referring the question to an arbitral panel:

It is unclear what the administrator was doing.  There are two ways to view his decision.  Perhaps the administrator independently interpreted the Agreement and read it to incorporate the Healthcare Policy Statement, which led the administrator to conclude that the parties did not intend to arbitrate the instant dispute without a post-dispute agreement or court order.  Or perhaps the administrator was simply applying AAA’s Healthcare Policy Statement because he concluded that this case concerns healthcare and the AAA follows this policy no matter what a particular agreement says or what particular parties intended.

“Either way,” wrote Judge McKeague, “the end result was contrary to the text of the Agreement and the FAA.” Arbitrators and arbitral administrators “are distinct.”  Under AAA instruments, he wrote, administrators do not decide the merits of a dispute. 

The opinion notes, “The arbitrator decides the merits of a dispute.  And if an administrator could preempt a final merits ruling by an arbitrator, the administrator would effectively run afoul of the provision that administrators ‘cannot overrule or change an arbitrator’s decisions or rulings.’”  It continues later:

Under AAA’s rules, an arbitrator and an administrator are distinct.  “The [a]dministrator’s role is to manage the administrative aspects of the arbitration, such as the appointment of the arbitrator.  . . .  [T]he [a]dministrator does not decide the merits of a case or make any rulings on issues such as what documents must be shared with each side.” . . .  Unsurprisingly, the administrator helps disputes get to an arbitrator and doesn’t make merits rulings.  On the other hand, “[a]rbitrators are neutral and independent decision makers who . . . make the final, binding decision on the dispute.  . . .  The [a]rbitrator makes all the procedural decisions on a case not made by the administrator.” ….  The arbitrator decides the merits of a dispute.  And if an administrator could preempt a final merits ruling by an arbitrator, the administrator would effectively run afoul of the provision that administrators “cannot overrule or change an arbitrator’s decisions or rulings.”

Therefore, concluded the Sixth Circuit, “the arbitrability of Johnson’s claim, thus should’ve gone to an arbitrator for a ‘final, binding decision.’”

The appellate court also considered whether the issue of compliance with the AAA’s post-dispute agreement requirement for consumer healthcare arbitrations is a “procedural decision” delegated to an AAA administrator rather than an arbitral panel.  The appeals panel stated, “We don’t see how it could be.” 

In so deciding, the appellate judges reminded the parties that contract interpretation is a legal question.  Procedural decisions, stated the Court of Appeals, are more like administrative aspects of the arbitration such as appointment of arbitrators, location of hearings and fees:

The procedural decisions AAA administrators make, in turn, are more akin to “administrative aspects of the arbitration, such as the appointment of the arbitrator, . . . preliminary decisions about where hearings might take place, and . . . handl[ing] the fees.” ***  So it generally wouldn’t make sense to require clear intent to delegate arbitrability questions to an arbitrator but then allow either arbitrators or administrators to decide that legal question. [Citation and footnote omitted.]

The appellate court distinguished in this regard a Fourth Circuit decision upholding resolution by AAA administrators of a dispute as to how many arbitrators would be appointed, Dockser v. Schwartzberg, 433 F.3d 421 (4th Cir. 2006). 

Not only were the clauses in the two disputes different, said the Sixth Circuit majority, but the issue in that latter case was procedural.  “Dockser dealt with ‘what kind of arbitration proceeding the parties agreed to,’ whereas here the relevant question is arbitrability—what the Agreement itself means.”

If, instead of interpreting the parties’ arbitration agreement, the AAA was applying its own “sound policy,” then according to Judge McKeague that conduct too would contravene applicable law.  Nor did the arbitration agreement grant the AAA administrator the authority to make this policy choice for the parties. The majority opinion states:

Although the AAA may choose for itself which claims it will arbitrate, it is not at liberty to “impose its own view of sound policy” regarding when or how parties should be allowed to arbitrate independent of the parties’ own choices in their contract.

***

We also see nothing in the Agreement that gives the administrator the right to make this policy choice for the parties.  To be sure, the Agreement incorporates the AAA rules, which perhaps could be read to include the AAA’s due process review under Consumer Rule 1(d).  And Consumer Rule 53 says that “[t]he arbitrator shall interpret and apply these Rules as they relate to the arbitrator’s powers and duties” but that “[a]ll other Rules shall be interpreted and applied by the AAA.” . . .  But Consumer Rules 1(d) and 53 must be read together with the Agreement and the other rules to ascertain the parties’ intent.  . . .  When an arbitration agreement and its incorporated rules seem to conflict, our job is to find the “best way to harmonize” them. [Emphasis is the court’s.]

“We won’t,” stated the appellate majority, “interpret this agreement to arbitrate to permit Johnson to avoid arbitration.”

Moreover, the appeals panel pointed out that its decision to require an arbitrator to decide the gateway question, rather than an administrator, was not inconsistent with AAA policy.  The court’s resulting order would satisfy the AAA Healthcare Policy alternative that the AAA will arbitrate consumer healthcare disputes if so directed by a court order. The opinion notes:

The Healthcare Policy Statement also does not stand in the way of such an appointment.  It makes clear that “the AAA will administer disputes between patients and healthcare providers” either when the parties enter into a post-dispute agreement or when “a court order directs such a dispute to arbitration where the parties’ agreement provides for the AAA’s rules or AAA administration.” . . . Our decision will lead to such a court order—seemingly clearing the administrative path.  Here, to give effect to both the parties’ agreement that “the arbitration shall be conducted by a single, neutral arbitrator” and that the arbitration “shall be resolved using the rules of the American Arbitration Association,” we can’t read the AAA rules to preclude decision by an arbitrator.

.The Sixth Circuit opinion also drew attention to the fact that the approach taken by the majority will result in a different, narrower judicial review standard by the federal courts–review for vacatur of an arbitral decision rather than de novo review:

The district court effectively reviewed the Agreement de novo.  In doing that, the district court relied on a court’s interpretation of the same set of AAA rules and policies to hold that the AAA rules effectively nullified an arbitration agreement.  . . . But by agreeing, clearly and unmistakably, to send the arbitrability question to the arbitrator, the parties here bargained for the narrow 9 U.S.C. § 10 review, not de novo review.  . . .

This is where the Agreement’s requirement that the dispute would not be determined by litigation comes in.  The district court determined the contract-interpretation question, so the dispute was determined by litigation contrary to the intent of the parties.  But once an arbitrator interprets the Agreement, any judicial review under 9 U.S.C. § 10 wouldn’t be review of the arbitrability question de novo but under the limited grounds identified (for fraud, corruption, etc.).  Because the parties bargained for an arbitrator to interpret the Agreement and for the courts to have a very limited role, it wouldn’t make sense to allow an administrator’s preemptive contract interpretation to be a portal to de novo judicial review.   

Circuit Judge Eric L. Clay dissented, noting “I agree with the majority’s statement at the onset of its opinion that “this case is about whether the Agreement incorporates the Healthcare Policy Statement,” even though it then proceeds to repudiate the Healthcare Policy Statement.”  The parties, Circuit Judge Clay reasoned, “made their decision to abide by the rules when they signed the contract incorporating rules that included the Healthcare Policy Statement.” He added:

Turning to the plain language of the agreement, the threshold question of what the agreement incorporated is readily apparent: [disputes] shall be resolved using the rules of the American Arbitration Association.  . . .  As part of the AAA rules, the AAA maintains consumer protocols that ensure a fair process in healthcare disputes.  The Healthcare Policy Statement’s incorporation into the agreement was clear to anyone who read the AAA’s rules.  The parties made their decision to abide by the rules when they signed the contract incorporating rules that included the Healthcare Policy Statement, but in my colleagues’ view, those rules may simply be disregarded if they interfere with requiring the parties to proceed with the arbitration.

***

Here, the AAA determined that proceeding to arbitration would violate their due process rules without its mandatory post-dispute agreement.  When the parties agreed that the dispute “shall be resolved using the rules of the AAA,” they were aware that those rules called for an administrator to render the AAA’s initial determination regarding the requirements of the organization’s own rules before proceeding to arbitration.  That was not an unusual decision, nor a decision out of lockstep with the rules of the AAA.  Quite the contrary, that decision followed the process by which the AAA typically administers all of its arbitrations.  That provides the “clear and unmistakable” evidence that the parties intended to have these gateway issues decided in accordance with the AAA’s procedures and policies.

The majority opinion addressed Circuit Judge Clay’s dissent in footnotes 3 and 4.  Notably, in footnote 4 the Court of Appeals stated, “we interpret the words of this Agreement in conjunction with AAA’s rules without deference to AAA’s ‘typical’ practice.” The footnotes state:

3The dissent agrees that AAA’s rules specifically assign arbitrability questions to the arbitrator while reserving AAA’s “administrative duties” for the administrator as detailed in the arbitration agreement and the AAA’s rules themselves.  . . .  Where we differ is whether the AAA rules include an initial arbitrability decision among these “administrative duties.”  The dissent points to no rule granting the administrator such authority, but instead locates the authority in the general requirement that “the AAA will administer the arbitration.” . . .  Our decision to follow the AAA’s rule granting such authority to an arbitrator doesn’t mean that the parties “contract[ed] the AAA’s administrator out of the process,” but instead means the parties intended the administrator to have the role the AAA’s rules mandate: “to manage the administrative aspects of the arbitration, such as the appointment of the arbitrator, preliminary decisions about where hearings might take place, and handling the fees associated with the arbitration.”

4The dissent suggests that requiring an administrator to determine arbitrability “was not an unusual decision” but is rather “the process by which the AAA typically administers all of its arbitrations”—a fact that “any party doing their due diligence would have seen.” . . .   But we interpret the words of this Agreement in conjunction with AAA’s rules without deference to AAA’s “typical” practice.  The Agreement or the AAA Rules could grant the administrator that authority, but in this case they do not.

Judge Clay volleyed back at the majority by arguing in his own footnote 1 that “The majority claims that we agree that the AAA’s rules assign arbitrability to the arbitrator, and ‘administrative duties’ to the administrator, but that is not the case.  To the contrary, the AAA’s rules do not clearly delineate these roles as the majority alleges.  Instead, as stated in the rule cited above, the AAA has the final decision on who administers cases under its rules.”

* * *

Whether one agrees with Senior Circuit Judge McKeague’s opinion on behalf of the majority or with Circuit Judge Clay’s dissent, this ruling has significant implications for many disputes in the U.S. involving healthcare, consumer and employment matters. 

The AAA has adopted due process protocols for those areas, as well as making policy statements regarding how the AAA will handle applications for arbitration in many areas.  The reasoning by the Ciccio majority could vitiate the authority of an AAA administrator to apply those instruments to decline to accept cases that do not comply with those protocols and policy statements. 

Instead, application of those instruments would be allocated to an arbitral panel, resulting in significant delay and expense while the panel is constituted and briefed before a decision on the applicability of due process protocols and policies crystallizes.

Given the dissent, it is worth wondering whether this case is headed toward en banc review by the Sixth Circuit Court of Appeals or will be the subject of a certiorari petition to the U.S. Supreme Court.

* * *

Mark Kantor is a member of CPR-DR’s Panels of Distinguished Neutrals.  Until he retired from Milbank, Tweed, Hadley & McCloy, he was a partner in the firm’s Corporate and Project Finance Groups.  He currently serves as an arbitrator and mediator.  He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor).  He also is Editor-in-Chief of the online journal Transnational Dispute Management.  He is a frequent contributor to CPR Speaks, and this post originally was circulated to a private list serv and adapted with the author’s permission. 

[END]

Court Declines Question on Email Service, Leaving an International Arbitration Award Confirmation Intact

By Jacqueline Perrotta

Today, the Supreme Court declined to hear Grupo Cementos de Chihuahua S.A.B. de C.V., et al. v. Compañía de Inversiones Mercantiles S.A., No. 20-1033, an international arbitration case regarding a breached stock-purchase agreement. The petitioner had asked the Supreme Court whether service of process by email, in line with Federal Rules of Civil Procedure 4(f)(3), to a foreign entity’s U.S. counsel violates the Hague Service Convention.

This morning’s order list denying cert in Grupo Cementos can be found here.

The Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters, Nov. 15, 1965, 20 U.S.T. 361, better known as the Hague Service Convention, details what constitutes valid service on parties in another country. The petitioner argued that the dispute falls under the Hague Service Convention and “service,” as instructed by the convention, does not include service by email.

The parties are a Bolivian company, Compañía de Inversions Mercantiles S.A. (“Cimsa”), the respondent in the U.S. Supreme Court case and the original plaintiff, and Mexican companies Grupo Cementos de Chihuahua, S.A.B. de C.V. and GCC Latinoamerica, S.A. de C.V. (collectively “GCC”), which appealed the case to the Court (cert petition available here) and who are the original defendants.

GCC had agreed to give Cimsa a right of first refusal if GCC decided to sell shares it acquired in a third-party cement company. GCC sold shares to a Peruvian company, and Cimsa alleged the sale breached its right of first refusal.

The companies had agreed to arbitrate disagreements arising from the stock deal. In a Bolivian arbitration, Cimsa was awarded several million dollars for the breach of its right of first refusal. GCC challenged this decision; litigation over the arbitration damages award is continuing in Bolivia.

This case came before a Colorado U.S. District Court when Cimsa filed an arbitral award confirmation action through the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which recognizes and enforces foreign arbitral awards.

Cimsa received court permission to serve GCC through its U.S. counsel, which GCC claimed was improper service. The district court found that alternative service through the GGC’s U.S. Counsel was proper under the Hague Service Convention, and confirmed the award.

The Tenth U.S. Circuit Court of Appeals affirmed that service was proper, and also affirmed the district court’s decision to back the Bolivian arbitration tribunal’s decision. Compania De Inversiones v. Grupo Cementos de Chihuahua, No. 19-1151 (10th Cir. 2020) (available at https://bit.ly/3vBlh65).

In holding that the district court correctly confirmed the arbitration tribunal, the Tenth Circuit found that courts construe the New York Convention defenses to enforcing awards “`narrowly’ to ‘encourage recognition and enforcement of commercial arbitration contracts’ citing OJSC Ukrnafta v. Carpatsky Petroleum Corp., 957 F.3d 487, 497 (5th Cir. 2020).

By affirming the district court’s decision, the Tenth Circuit has found that proper service under the Hague Convention includes service by email. By this morning’s Supreme Court action, that case stands, and the arbitration award’s confirmation will not be affected.

At the same time, in its cert petition, GCC had challenged the U.S. award confirmation on the basis that the U.S. courts did not have sufficient contacts for personal jurisdiction, which was also the subject of then-pending U.S. Supreme Court cases, Ford Motor Co. v. Montana Eighth Judicial District Court, No. 19-368 and Ford Motor Co. v. Bandemer, No. 19-369 (S. Ct.).  The Court decided the consolidated cases in Ford Motor Co. v. Montana Eighth Judicial District Court, No. 19-368 (March 25, 2021) (available at https://bit.ly/3wU5sbO).

With today’s cert denial, the Court also declined the petitioners’ suggestion to grant certiorari, vacate the matter, and remand for a decision on personal jurisdiction in accordance with the Ford Motor decision.

GCC’s Supreme Court cert petition can be found at https://bit.ly/2SOkTnl

* * *

The Court today declined to hear a second arbitration case, Amazon.com Inc., et al. v. Bernard Waithaka, No. 20-1077.

Amazon had asked the Court to consider ” Whether the Federal Arbitration Act’s exemption for classes of workers engaged in foreign or interstate commerce, 9 U.S.C. 1, prevents the Act’s application to local transportation workers who, as a class, are not engaged to transport goods or passengers across state or national boundaries.”

Amazon had cited conflicting lower court authority on whether drivers who signed up for an Amazon distribution program and who stayed within state lines could avoid arbitration provisions under the FAA exemption in their disputes with online retailing giant.

Both the federal district court and appeals court declined to compel arbitration. Those decisions stand, with other cases still pending. Earlier this year, in a similar case Amazon linked to today’s decision, the Court declined cert in Amazon.com Inc. v. Rittmann, No. 20-622 (Feb. 22).

* * *

The author, a J.D. student who will enter her second year this fall at Brooklyn Law School, is a 2021 CPR Summer Intern.

[END]

Y-ADR Interview Series #4: Mathias Goh

CPR’s new Y-ADR Interview Series returns with another discussion on in-house work, law practice development, and careers in dispute prevention and resolution.

This week, Y-ADR Steering Committee member Elizabeth Chan, an associate in the London office of Three Crowns, discusses career advice and conflict resolution with Mathias Goh, the Regional Legal Counsel with Carlsberg Asia in Hong Kong.

Goh discusses his career path and conflict resolution experience.  He covers factors to consider when negotiating dispute resolution clauses, with a spotlight on Hong Kong-seated arbitration provisions; the difficulties of multi-tiered dispute clauses; what he looks for when selecting external counsel for a matter and when designating an arbitrator; his experience with virtual hearings; advice for young lawyers–spoiler alert: learn financial concepts–and the importance of reputation and brand as a young lawyer.

Lizzie Chan’s interview is her fourth in the CPR Y-ADR Interview series.  The previous interview, with Timothy Shore on working as an ombudsman, can be viewed on CPR Speaks here. The second interview in the series, with CPR Y-ADR co-chair Jason Klingensmith, Assistant General Counsel, at General Motors Co. in Detroit, is available on CPR Speaks here.  The kickoff interview in the series, with Jason’s GM colleague Brittany Mouzourakis, is available on CPR Speaks here.

Watch above, and share the interview on YouTube here.

CPR’s Young Leaders in Alternative Dispute Resolution educates the next generation of leaders on the full spectrum of dispute prevention and resolution mechanisms, and offers unique networking and professional development benefits to participants. Through periodic seminars and other initiatives, participants are introduced to CPR and gain an insider’s view into how CPR’s community of corporate counsel, law firm counsel, and other experts in the field are using dispute prevention and resolution techniques to manage conflict.

Y-ADR is open to the conflict prevention and resolution community–attorneys, professionals, academics and students–45 years old and younger, or those with less than eight years of professional experience in international or domestic ADR practice or other areas of conflict prevention and resolution.

The Y-ADR Steering Committee is the leadership group for Y-ADR. Jason Klingensmith’s co-chair is Ulyana Bardyn, counsel in the New York office of Eversheds Sutherland.

Follow CPR’s social media at the links at the bottom of this page for developments, and connect with Y-ADR’s LinkedIn page here.

[END]

Roundup: Four New Arbitration Petitions Under Consideration at the U.S. Supreme Court

By Mylene Chan

Four recent petitions for writs of certiorari pending before the U.S. Supreme Court raise a number of interesting arbitration issues. While the Court may decline to hear these cases, they are worth following because they could help to define the scope of arbitration in both consumer and commercial contexts.

The cases are being briefed and will be scheduled for conferences.  If accepted, they likely would be argued in the 2021-2022 Court term beginning Oct. 4.

The Court already has two cases that will be argued in the new fall term, and which are awaiting hearing dates:

* * *

Here are the cases the Court will soon be considering:

Shivkov v. Artex Risk Solutions Inc., No. 20-1313

Shivkov centers on the availability of class arbitrations. In the case, the plaintiffs contracted with Artex and TSA Holdings LLC to set up and manage business entities—captive insurance vehicles the small business owner-plaintiffs entered into with the defendants–that the U.S. Internal Revenue Service later determined were illegal tax shelters.  The plaintiffs alleged the captive insurance schemes were “mass-marketed fraud” that caused the plaintiffs to be liable for back taxes, penalties, interest and “significant fees.”

The plaintiffs filed a class action against the defendants, alleging a variety of Arizona state and federal claims for breach of fiduciary duty, negligence, conspiracy and related claims.  Relying on an arbitration clause in the agreements, the defendants moved to compel arbitration.

The Ninth U.S. Court of Appeals ordered individual arbitrations of the plaintiffs’ claims. The appeals court first rejected the plaintiffs’ arguments that the defendants had a fiduciary duty to explain the arbitration clause to the plaintiffs, that the arbitration clause did not survive termination of the contracts, and that the arbitration clause did not cover all of the plaintiffs’ claims.

The appeals court also found that class arbitration was unavailable.  In so ruling, the appellate panel held that the availability of class arbitration is a gateway issue for courts–not arbitrators–to decide that the arbitration agreements did not provide for class arbitration. The Ninth Circuit also rejected the plaintiffs’ argument that the inclusion of the American Arbitration Association as the default arbitration method in the agreements was the equivalent of incorporating AAA rules about class arbitrability by reference into the agreements.

On March 17, the plaintiffs filed a petition for a writ of certiorari and presented two questions: (1) Whether an agreement that specifies arbitration before the AAA as the default dispute resolution method also must specifically mention the AAA rules to avoid being considered ambiguous about whether the parties intended to apply the AAA rules; and (2) Whether the availability of class arbitration is a matter for an arbitrator to decide, or for a court to decide.

* * *

Eni USA Gas Marketing LLC v. Gulf LNG Energy LLC, No. 20-1462

The next case involves an attempt to use arbitration proceedings as a means of collateral attack on a previous arbitration award. In the case, Gulf entered into a Terminal Use Agreement (TUA) with Eni whereby Gulf would construct a natural gas terminal and Eni would use the terminal to deliver natural gas. The TUA contained a broad arbitration clause.

Eni initiated arbitration, alleging breach of contract, and arguing that the TUA was void because of unforeseen changes in the market. The arbitration tribunal found that the TUA had terminated and ordered Eni to pay Gulf for the value of Gulf’s partial performance under the TUA.

Eni then filed a second arbitration alleging a breach of contract claim left undecided from the first arbitration and misrepresentation. Gulf moved to enjoin Eni from pursuing the second arbitration. Eni argued that an arbitrator–rather than a court–should decide whether the first arbitration award precludes the second arbitration.

The Delaware Supreme Court enjoined Eni from pursuing the second arbitration. The Court reasoned that when a party files a second proceeding attacking a prior arbitration award, it circumvents the contractual  Federal Arbitration Act review procedure. The Court held that courts may intervene in a party’s attempt to seek arbitration when the objective is to rectify a prior unfavorable arbitration award by arbitrating claims in new separate arbitration proceedings. 

On April 15, Eni filed a petition for a writ of certiorari in the U.S. Supreme Court presenting the issue of whether the FAA permits a court to refuse to enforce an arbitration agreement delegating all questions, including a question of arbitrability, to an arbitrator where a party contends that the claim sought to be arbitrated represents a “collateral attack” on a prior arbitration award.

* * *

HRB Tax Group v. Snarr, No. 20-1570

This case looks at the scope of the Federal Arbitration Act preemption of state law in cases where plaintiffs seek a remedy of a public injunction. In HRB Tax Group v. Snarr, the plaintiffs sought to stop their tax service provider from continuing business practices they alleged are fraudulent.

HRB and the plaintiffs entered into agreements in which HRB offered the plaintiffs services in filing tax returns. The service agreements required all disputes arising from these agreements to be resolved through individual arbitration.

The plaintiffs, customers of H&R Block’s accounting services, alleged that the marketing of HRB’s tax filing services violated California’s Consumers Legal Remedies Act, False Advertising Law, Cal. Bus. & Prof. Code, and Unfair Competition Law. They filed a class action suit against HRB and sought a public injunction enjoining HRB’s alleged misleading web services and advertising.

HRB moved to compel arbitration, arguing that the Federal Arbitration Act, which provides that arbitration agreements are presumptively valid, preempts McGill v. Citibank, N.A. 393 P.3d 85 (2017) (which held that a contract is unenforceable when it entirely waives the right to seek public injunctive relief under consumer protection statutes). 

The Ninth Circuit denied HRB’s motion to compel arbitration. The court reasoned that HRB’s argument had been foreclosed by Blair v. Rent-A-Center Inc., 928 F.3d 819 (2019) (holding that the FAA does not preempt McGill.)

HRB’s May 10 U.S. Supreme Court cert petition asks whether California’s public policy rule declining to enforce agreements for individualized arbitration whenever a plaintiff seeks a public injunction is preempted by the Federal Arbitration Act.

* * *

Viking River Cruises v. Moriana, No. 20-1573

The fourth case raises questions about the applicability of agreements for bilateral arbitration to claims brought under California’s Private Attorneys General Act of 2004 (PAGA). In Viking River Cruises, aggrieved employees sought relief from an international cruise line.

Original plaintiff Angie Moriana agreed upon joining Viking as a sales representative to an arbitration agreement providing that any employment-related disputes would be arbitrated. The agreement also required Moriana to waive all rights to bring a class, collective, representative, or private attorney general action in the employment contract.

Moriana filed suit against Viking on behalf of the state and all other similarly situated employees alleging various California Labor Code violations under PAGA.

Viking moved to compel individualized arbitration of Moriana’s PAGA claims, arguing that Epic Systems Corp. v. Lewis 138 S.Ct. 1612 (2018), validates private predispute waivers of such claims. Viking claimed that Epic Systems overruled Iskanian v. CLS Transportation Los Angeles, LLC  59 Cal. 4th 348 (2014), a California Supreme Court decision holding that arbitration agreements that waived the right to bring PAGA actions are unenforceable.

The California Court of Appeal denied Viking’s motion to compel arbitration, reasoning that the real party in a PAGA claim is the state and Moriana was not acting as an agent of the state when she bound herself to arbitrate. The court  explained that Iskanian remains good law because Epic Systems differs fundamentally from a PAGA claim. Epic Systems addressed the enforceability of an individualized arbitration requirement against challenges that such enforcement violated the National Labor Relations Act.

Viking filed a petition for writ of certiorari on May 10. The issue the Court will decide to consider is whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA.

* * *

The author, an LLM candidate at Yeshiva University’s Benjamin N. Cardozo School of Law in New York, is a 2021 CPR Summer Intern.

Supreme Court Adds an Arbitration Case for the 2021-2022 Term

By Mark Kantor

Today is an important day in the US Supreme Court, as the Court agreed for the first time in many years to hear a case on abortion rights.  Court watchers will rightly focus extensively on that development.

In far-less significant news, but perhaps of interest to the arbitration community, this morning the U.S. Supreme Court also denied certiorari in Selden v. Estate of Silverman, 20-895, a Federal Arbitration Act case involving (1) whether vacatur on public policy grounds is permitted and (2) the proper standard for “evident partiality” vacatur.  The March 2020 Nebraska Supreme Court decision in the matter stands, upholding the confirmation of an arbitration as well as sanctions and attorneys fees.

The Court, however did grant certioraritoday in another FAA case, Badgerow v. Walters, No. 20-1143 (documents available at https://www.scotusblog.com/case-files/cases/badgerow-v-walters/).

The Question Presented in Badgerow is:

Whether federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the Federal Arbitration Act when the only basis for jurisdiction is that the underlying dispute involved a federal question.

Badgerow is thus a dispute regarding when, if at all, the U.S. federal courts have “federal question” jurisdiction over an FAA confirmation/vacatur dispute.  It will accordingly be of primary interest for U.S. litigators seeking a court ruling on whether a local state court or a federal court is the proper forum to decide whether an arbitration award can be confirmed or vacated under the FAA when the underlying arbitration award resolves a question of federal law.

Federal courts are forums of limited jurisdiction.  Longstanding jurisprudence holds that the FAA itself does not create federal court jurisdiction.  Rather, a party seeking to have a U.S. federal court forum for an FAA-related dispute must find an independent ground for jurisdiction. 

The implementing statutes for the New York and Panama Conventions do, however, expressly create federal subject matter jurisdiction for their covered international awards.  Consequently, the issue does not arise for those awards.

Badgerow poses the question of whether a federal court may “look through” to see if the underlying subject matter of the arbitration award resolves a “Federal question” and, if the answer is “yes,” take jurisdiction of the case.

The petitioner’s cert petition summarizes the legal issue and circuit split succinctly:

As this Court has repeatedly confirmed, the FAA does not itself confer federal-question jurisdiction; federal courts must have an independent jurisdictional basis to entertain matters under the Act.  In Vaden  v.  Discover Bank, 556 U.S. 49 (2009), this Court held that a federal court, in reviewing a petition to compel arbitration under Section 4 of the Act [failure to arbitrate under agreement; petition to United States court having jurisdiction for order to compel arbitration], may “look through” the petition to decide whether the parties’ underlying dispute gives rise to federal-question jurisdiction.  In so holding, the Court focused on the particular language of Section 4, which is not repeated elsewhere in the Act.

After Vaden, the circuit courts have squarely divided over whether the same “look-through” approach also applies to motions to confirm or vacate an arbitration award under Sections 9 and 10. In Quezada v. Bechtel OG & C Constr. Servs. Inc., 946 F.3d 837 (5th Cir. 2020), the Fifth Circuit acknowledged the 3-2 “circuit split,” and a divided panel held that the “look-through” approach applies under Sections 9 and 10. In the proceedings below, the Fifth Circuit declared itself “bound” by that earlier decision, and applied the “look-through” approach to establish jurisdiction.  That holding was outcome-determinative, and this case is a perfect vehicle for resolving the widespread disagreement over this important threshold question.

The question presented is:

Whether federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the FAA where the only basis for jurisdiction is that the underlying dispute involved a federal question.

[Emphasis is in the brief, which can be found here.]

The dispute will likely come up for oral argument before the U.S. Supreme Court sometime in its October Term.

Badgerow is the second arbitration case slated for the new fall term.  On March 22, the Court agreed to hear Servotronics Inc. v. Rolls-Royce PLC, et al., No. 20-794, which will examine “[w]hether the discretion granted to district courts in 28 U.S.C. §1782(a) to render assistance in gathering evidence for use in ‘a foreign or international tribunal’ encompasses private commercial arbitral tribunals, as the Fourth and Sixth Circuits have held, or excludes such tribunals without expressing an exclusionary intent, as the Second, Fifth, and, in the case below, the Seventh Circuit, have held.”

Argument dates for both cases are expected this summer.

* * *

Mark Kantor is a member of CPR-DR’s Panels of Distinguished Neutrals. Until he retired from Milbank, Tweed, Hadley & McCloy, he was a partner in the firm’s Corporate and Project Finance Groups. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). He also is Editor-in-Chief of the online journal Transnational Dispute Management. He is a frequent contributor to CPR Speaks, and this post originally was circulated to a private list serv and adapted with the author’s permission.

[END]

A Two-Time Supreme Court Arbitration Matter Is Ready to Settle

By Russ Bleemer

The long-running price-fixing matter between dental equipment suppliers that turned into an epic arbitration procedure fight, with two separate visits to the U.S. Supreme Court, appears to be over.

Documents have been filed in a Texas federal court indicating that the parties have reached an agreement in Archer and White Sales Inc. v. Henry Schein Inc, et al., Civil Action No. 2:12-CV-00572-JRG. Texas Eastern U.S. District Court Chief Judge Rodney Gilstrap, of Marshall, Texas, yesterday signed an order issuing a 30-day stay “of all deadlines” in the case because the parties “have agreed in principle on a settlement agreement and are in the process of finalizing the agreement.” Attorneys from both sides signed and submitted the stay request last week.

Just a few months ago, the case was argued before the U.S. Supreme Court a second time on the issue of who decides whether a case is arbitrated, a court or an arbitrator. The hour-long December arguments resulted in a nine-word per curiam decision on Jan. 25, when the nation’s top Court announced that the writ of certiorari was improvidently granted, and it dismissed the case.

The problem for the Court appeared to be that another issue, on the effectiveness of the incorporation of American Arbitration Association rules that speak to the decision-maker question, was needed to decide the case. 

But the Court last June had turned down a cross-petition on the incorporation-of-rules issue, which still figured heavily in the December oral arguments. The sole issue that the Court had expected to decide the abandoned case was on “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 result was that the Texas Eastern District federal court was readying the case for trial, because the Supreme Court ruling meant that the Fifth U.S. Circuit Court of Appeals case declining to send the case to arbitration stood as the law of the case.

The appeals court decision was unusual, too, in that it found that a clause effectively delegated the arbitration decision to the arbitrator via the incorporation of the AAA rules to that effect. Nevertheless, the panel didn’t compel arbitration.  It found that because of the way the clause was drafted, a  carve-out from arbitration for injunctions still applied to the contract. Archer & White Sales, Inc. v. Henry Schein Inc., 935 F.3d 274 (5th Cir. 2019) (available at https://bit.ly/2NC7EmL).

That’s the state of the case that was put on pause by Gilstrap’s order yesterday.

But it’s also only half of the arbitration history. The Supreme Court already had decided an arbitration point in the case less than two years before the December oral arguments. In Henry Schein Inc. v. Archer and White Sales Inc., 139 S. Ct. 524 (Jan. 19, 2019) (available at https://bit.ly/338gdLT), the Court held that the “wholly groundless” exception to arbitrability is inconsistent with the Federal Arbitration Act and the Court’s precedent.

Archer and White had argued that the dispute was not subject to arbitration because its complaint sought injunctive relief, at least in part. Henry Schein contended that because the rules governing the contract provide that arbitrators have the power to resolve arbitrability questions, an arbitrator—not the court—should decide whether the arbitration agreement applied. Archer and White countered that Schein’s argument for arbitration was wholly groundless–at the time, an exception to arbitration.

The Texas trial court and the Fifth Circuit agreed, but the Supreme Court, in January 2019, reversed, unanimously, and sent the case back to the Fifth Circuit.  Still, Justice Brett Kavanaugh, in his first Supreme Court opinion, wrote that the Court declined to determine “whether the parties agreed to arbitrate arbitrability” as indicated by “clear and unmistakable evidence.”

That began a road that had the case back in front of the Court again last December, and the Fifth Circuit’s reassessment that found that there still was not clear and unmistakable evidence that the parties wanted the injunctive relief arbitrated.  

Lost in the public arbitration morass was the dispute itself—a complicated antitrust matter. In 2012, Archer and White Sales Inc., a distributor, seller, and servicer for dental equipment manufacturers based in Plano, Texas, filed suit against Henry Schein Inc., a Melville, N.Y.‐based distributor and manufacturer of dental equipment, and subsidiaries of Washington, D.C.’s Danaher Corp., in U.S. federal court alleging that the defendants violated U.S. federal and state antitrust laws by conspiring to fix prices and refusing to compete with each other.

Specifically, Archer and White maintained that its competitor Henry Schein conspired with Danaher to terminate or reduce Archer and White’s distribution territory because the plaintiff was selling dental equipment at discounted prices. Archer and White sought millions of dollars in damages and injunctive relief.

The defendants had moved to compel arbitration based on the arbitration clause in the distributor contract between Archer and White and Danaher, which provided:

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

There were no settlement details in last week’s request or Judge Gilstrap’s stay order, which was first reported yesterday for Bloomberg subscribers here.

* * *

CPR Speaks has watched the arbitration developments in the matter closely.  For information, see:

Analysis of the first U.S. Supreme Court case in the matter is available using the search features at CPR Speaks and altnewsletter.com.  A good starting point on this blog is Philip J. Loree Jr., Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court (Feb. 19, 2020).

* * *

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

[END]

In Its ‘Setty’ Decision, the Ninth Circuit Revisits Whether a Non-Party Can Compel Arbitration Under the FAA and the New York Convention

By Temitope Akande

Litigation over a non-party compelling arbitration via the contract theory of equitable estoppel lives on in the wake of a U.S. Supreme Court decision last year, and looks as though it will continue for some time, courtesy of a still-in-progress federal appeals court case–which itself already has visited the Supreme Court.

In Setty v. Shrinivas Sugandhalaya LLP, 986 F.3d 1139 (9th Cir. Jan. 20, 2021) (available at https://bit.ly/3gCLXzk),  the Ninth U.S. Circuit Court of Appeals revisits the enforceability of an arbitration clause by a non-party. The parties in the case are two companies set up by former partners, with the petitioner seeking to arbitrate under their partnership agreement.  The respondent—the original appellee—maintains that the arbitration is between the individual parties, not their companies, and the case should not be arbitrated.

The Ninth Circuit, in a January opinion on remand from the U.S. Supreme Court, agreed, and declined to compel arbitration.  The petitioner asked for a panel rehearing, or, alternatively, a rehearing en banc by the full Ninth Circuit.  A decision is pending.  The case may eventually re-trace its steps to the nation’s top Court.

The action arises from a dispute between two brothers who formerly ran a partnership in India under the trademarked name Shrivinas Sugandhalaya. The brothers’ Deed of Partnership provides an agreement to arbitrate “All disputes of any type whatsoever in respect of the partnership arising between the partners.” The brothers separated and later established their separate incense businesses at different locations.

Ninth Circuit respondents (and original plaintiffs) Balkrishna Setty and his Indian company, referred to in the Ninth Circuit case as SS Bangalore, filed suit against brother Nagraj Setty’s company, referred to in the opinion as SS Mumbai–both references to their operating locations.

Original plaintiff SS Bangalore claimed that original respondent SS Mumbai used the partnership’s intellectual property without permission. But the suit did not name SS Mumbai owner Nagraj Setty, who signed the Deed of Partnership containing the arbitration clause. Yet SS Mumbai, despite its nonsignatory status, in the current case petitioned in federal court to stay the litigation and compel arbitration pursuant to the Federal Arbitration Act and the New York Convention.

A Washington state U.S. District Court denied SS Mumbai’s motion, holding  that since SS Mumbai was not a signatory to the Deed of Partnership, it had no right to enforce the agreement’s arbitration provisions or stay the litigation. SS Mumbai appealed, and the Ninth Circuit affirmed the District court’s decision.

The U.S. Supreme Court granted certiorari, vacated the judgment, and remanded for further consideration last year in light of GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020). The district court once again denied the defendant’s motions to compel arbitration and to grant a stay pending arbitration in a civil case. 

The Ninth Circuit again affirmed in January in the case cited above, but a detailed dissent, more than twice as long as the panel decision, appears to have sparked the rehearing motions now pending before the Ninth Circuit, and could eventually be the impetus to return the case to the U.S. Supreme Court in the form of a new cert petition. 

In the most recent case decided by the Ninth Circuit on remand from the Supreme Court, SS Mumbai raised two issues. The first was whether the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, best known as the New York Convention, permits a nonsignatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel or similar principles of applicable law.

On that point, the petitioner argued that FAA Chapter 1 makes written arbitration agreements “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. Therefore, it also permits enforcement of an arbitration clause “against (or for the benefit of) a third party”—i.e., a nonsignatory—if enforcement would be permitted “under state contract law.” Arthur Andersen v. Carlisle, 556 U.S. 624, 631 (2009).

Consequently, state law doctrines and concepts such as equitable estoppel prevent a party from “cherry-picking” the beneficial provisions of the contract while trying to avoid provisions it deems detrimental, such as a requirement to arbitrate disputes. 21 Richard A. Lord, Williston on Contracts, § 57:19, at 200, 202 (4th ed. 2017) (cited in Arthur Andersen, above).

The petitioner’s second issue was whether the court could issue a stay of the litigation pending the arbitration.

The Ninth Circuit denied both motions.  It declined to compel arbitration since the partnership deed provided for arbitration exclusively for disputes “arising between parties,”—here, it would have between the brothers, not the brothers’ partnership–and not by a third party.

Regarding petitioner SS Mumbai’s request for a stay of the litigation under FAA Section 3, the Ninth Circuit further held that SS Mumbai’s ability to stay the litigation depended on its right to compel and, with SS Mumbai’s request to compel rejected, the district court did not abuse its discretion in denying a stay of proceedings pending arbitration.

SS Mumbai had argued that the district court and previous Ninth Circuit decisions misconstrued the New York Convention and the FAA, leaving international arbitration agreements with less protection than domestic agreements.

The decision, written by Senior Ninth Circuit Judge Dorothy W. Nelson, joined by Circuit Judge Johnnie B. Rawlinson, is a straightforward, seven-page affirmation of a denial to compel, relying on the use of federal law to determine the ability to apply equitable estoppel to allow non-party SS Mumbai to compel arbitration under the Deed of Partnership. 

But a detailed 18-page dissent by Senior Circuit Judge Carlos T. Bea, focusing on the choice of law that is needed to make the decision as to whether equitable estoppel can be applied by the court to compel arbitration in favor of the petitioners, ensures more attention for this case before it is litigated or arbitrated.

The GE Energy Supreme Court decision was pivotal–the reason for the nation’s top Court granting cert in Setty, then vacating and remanding.  In GE Energy last spring, the Court held that nothing in the New York Convention conflicted with “the application of domestic equitable estoppel doctrines permitted under Chapter 1 of the FAA.”

As a result, the Court allowed nonsignatories to agreements governed by the New York Convention—codified in FAA Chapter 2–to request compelling arbitration as permitted under FAA Chapter 1, using state law contract grounds.  For details and analysis on GE Energy, including a link to the case, see  “Holding There Is No Treaty-FAA Conflict, Supreme Court Permits Equitable Estoppel for International Arbitration Parties,” CPR Speaks (June 1, 2020) (available at https://bit.ly/2U1QrDs).

But even post-GE Energy, the Ninth Circuit panel early this year said that the Setty question involved “federal substantive law.” Under its case of Letizia v. Prudential Bache Securities Inc., 802 F.2d 1185, 1187 (9th Cir. 1986), that means that the court looks to “ordinary contract and agency principles” in determining the arbitrability of federal claims by or against nonsignatories to an arbitration agreement.

In her opinion, Senior Circuit Judge Nelson concluded that the petitioner’s claims were not clearly intertwined with the partnership deed providing for arbitration. Accordingly, she concluded, the district court properly exercised its discretion in rejecting the argument that the original plaintiffs should be equitably estopped from avoiding arbitration and denying SS Mumbai’s motion to stay the proceedings pending arbitration.

But Senior Circuit Judge Bea’s dissent viewed the majority’s choice of federal law differently. He would have sent the case back for further consideration under different law—which perhaps would have reached a different FAA result that would have allowed equitable estoppel to be applied and sent the case to arbitration.

“The Supreme Court and Ninth Circuit,” wrote Bea, “have time and again held that whichever background body of state contract law that governs the arbitration agreement also governs equitable estoppel claims to compel arbitration pursued under [FAA Chapter 1 at] 9 U.S.C. §§ 1 et seq. We should not hold differently here.”

The problem with the majority opinion, explained Bea, was the choice of federal substantive law.  He opened his dissent noting, “On remand from the Supreme Court, we are faced with the question of which equitable estoppel law governs an Indian company’s motion to compel another Indian company and its Indian owner to arbitration based on an agreement entered into in India, signed by two Indian brothers (who own the Indian companies), and governing conduct in India. The majority holds that, not Indian, but U.S. federal common law governs the issue.”

Circuit Judge Bea points out that the first Ninth Circuit refusal to compel arbitration didn’t rule on the merits of SS Mumbai using equitable estoppel, but rather held that the doctrine wasn’t available under the New York Convention.  That was the point in focus under the Supreme Court’s cert grant and accompanying order to vacate and reconsider in light of GE Energy Power.

The dissent emphasizes that the Supreme Court now backs the use of equitable estoppel under FAA Sec. 1, because GE Energy allows nonparties under the New York Convention to use Sec. 1 to compel arbitration.  He maintains that GE Energy overrules previous Ninth Circuit caselaw that barred Sec. 1 use under the New York Convention.

The current difference in the Setty matter, notes the dissent, is that the state law doctrine to be applied in the New York Convention cases should be the foreign law that applies in the case.  In Setty, the law of India on equitable estoppel would be applied to determine whether SS Mumbai can rely on its principal’s Deed of Partnership contract, according to Senior Circuit Judge Bea’s view.

“I see no reason to hold that settled FAA Chapter 1 law should somehow apply differently to nonsignatories of agreements otherwise governed by the New York Convention” codified in FAA Chapter 2, he wrote.  Circuit Judge Bea added that “neither the Supreme Court nor the Ninth Circuit has ever relied on the subject matter jurisdiction or the nature of the claims in holding that state law governs equitable estoppel under FAA Chapter 1.”

In addition, in his choice-of-law analysis, Bea noted, “It would appear to me that India is the forum with the most significant relationship to the Partnership Deed and that the traditional principles of Indian contract law may very well govern whether a signatory may be compelled to arbitrate with a nonsignatory over an issue arising from that contract.”

That analysis, however, wasn’t developed in the parties’ briefing, so Bea concluded that he would “remand the case back to the district court to resolve in the first instance which choice-of-law principles should be used to determine which contract law should govern the equitable estoppel issue, apply the principles, and resolve the equitable estoppel issue.”

* * *

SS Mumbai has asked the panel to re-hear the case or, alternatively, for an en banc rehearing before the full Ninth Circuit, following from points in the Bea dissent. 

The petition notes that:

  1. “The majority’s decision conflicts with other decisions of the Ninth Circuit recognizing that federal common law also incorporates choice of law principles; determining whether those principles continue to apply to agreements subject to the New York Convention is a question of exceptional importance”;
  2. “The majority’s decision conflicts with other Ninth Circuit decisions allowing non-signatories to enforce arbitration agreements using equitable estoppel” and conflicts with Supreme Court decisions, “creates unnecessary confusion, and involves questions of exceptional importance regarding maintaining the uniformity of the law to be applied to arbitration agreements.”

In opposition to the SS Mumbai motion, original plaintiff-appellee SS Bangalore responded that the arbitration agreement at issue is subject to the FAA’s implementation of the New York Convention and if the federal statute in question demands national uniformity, federal common law provides the determinative rules of decision.

The court need not analyze the choice of law, the response says, but instead determine the issue based on federal common law. The reply brief notes, “By concluding that federal common law governs whether a nonsignatory may invoke equitable estoppel to force a party into arbitration, the Majority’s decision furthers the New York Convention’s goal of achieving uniformity in how courts implement international arbitration agreements. [Citation omitted.] With the Majority’s ruling, signatories to international arbitration agreements can rest assured that a nonsignatory will not be able to require arbitration unless they meet the federal standard for equitable estoppel, regardless of the forum state, when invoking federal question jurisdiction.”

The parties now await the decision of the Ninth Circuit on the pending motion to rehear the appeal en banc, with the prospect of an eventual return to the nation’s top Court looming.

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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.

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Part II: More on Workplace ADR Under the Biden Administration

In “Part I: How Workplace ADR Will Evolve Under the Biden Administration,” CPR intern Antranik Chekemian reviewed on CPR Speaks the first half of comments during an online panel discussion hosted in late February by CPR’s Employment Disputes Committee and its Government & ADR Task Force.  Washington, D.C., arbitrator Mark Kantor focused on prospects for legislative changes for employment and labor ADR issues, and possible regulation, while Mark Gaston Pierce, Visiting Professor and Executive Director of the Georgetown University Law Center Workers’ Rights Institute, covered labor developments in decisions of the National Labor Relations Board, where he served as chairman from 2011 to 2017.  After their presentations, panel moderator Arthur Pearlstein, who is Director of Arbitration for the Federal Mediation & Conciliation Service, turned to panelist Kathryn Siegel, a shareholder in Littler Mendelsohn’s Chicago office, before concluding with a general discussion. Highlights from the second half of the program appear below.

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By Antranik Chekemian

Kathryn Siegel mainly focused on the Equal Employment Opportunity Commission, which, like the National Labor Relations Board, also has five members.

Siegel noted that she did not expect to see drastic EEOC policy changes during the Biden administration. Even though the chair has recently been changed by President Biden, a Republican majority still exists in the commission.

The general counsel at the Feb. 24 seminar date, Sharon Fast Gustafson, was fired by Biden March 5, and replaced by veteran EEOC attorney Gwendolyn Young Reams, who is now Acting General Counsel. Gustafson was a Republican appointee whose term would not have expired until August 2023.

Still, Siegel pointed out, “There is still going to be a Republican [board] majority through at least July of 2022, possibly through the end of 2022 because of the terms of the Republicans,” she said.  Siegel concluded that this will prevent the Biden-appointed chair from advancing Democratic policy initiatives and significant changes through at least the middle of next year.

Regarding the impact of the changes in the EEOC on arbitration/mediation, Siegel noted the “conclusion of the two six-month pilot programs relating to the agency’s conciliation and mediation efforts.”

She provided insights on the program. “The message of the… pilot was to mediate early, mediate often, mediate late, and mediate all the time,” she said. She emphasized that parties could mediate at any stage of any charge, and that it did not have to be at the outset.

She added that the parties in Category B charges—those that require more EEOC investigation to substantiate and pursue–were the ones that were being invited to mediation.  Siegel said, “What we saw during this pilot program was that you could really mediate even the EEOC’s high-priority charges that advanced an issue of law that the EEOC potentially wanted to litigate, that had . . . kind of bad facts in it.”

After the mediation pilot’s conclusion, however, there is not going to be an opportunity to mediate high priority charges. Siegel noted that even though this is a big change, it would not be difficult to adapt to this change as the pilot program was only six months long.

She also discussed the pilot program on conciliation that was launched around the same time as the mediation pilot program. The conciliation program also was officially dropped in January. Siegel, however, noted that a rule was established just before the EEOC’s chair changed. “That final rule as to the new EEOC conciliation and how that will be handled is in place for now,” she said.

Siegel added that the rule will last until the Democrats get the majority back sometime in 2022. She said that the conciliation process rule change provided that the “EEOC must provide factual support for its reasonable cause finding and its damages calculations as part of the conciliation process.”

She then discussed another 2020 change she observed with the EEOC regarding “the number of investigations and how robust those investigations were.” Even for charges that were classed as Category B, she said, requests for position statements were lower than before, and the investigations ended more quickly. She noted that this could have been the result of both the Trump administration and Covid-19, and predicted that investigations will likely ramp up again as things get back to normal post-pandemic.

“Part of that speed in which charges were pushed through and right-to-sues were issued was a result of pressure from the administration to clear a backlog,” she said, adding to “expect that there will be a little bit of the brakes put on, slowing down, to make sure that each charge gets due time in investigation.”

* * *

Moderator Arthur Pearlstein then directed a question to panelist Mark Kantor regarding how administrative actions could potentially affect class action waivers and arbitration. Pearlstein further asked Kantor to clarify the 2019 U.S. Supreme Court Lamps Plus decision.

Kantor noted that Lamps Plus provides that “the presumption is that arbitration is individualized and there is not collective arbitration unless the arbitration clause clearly provides for that.” He also said, however, that “in most circumstances . . . the question of what the arbitration clause says would be delegated to the arbitrator.”

In Lamps Plus, Inc. v. Varela, 139 S.Ct. 1407 (2019), the U.S. Supreme Court provided that because the individualized form of arbitration was envisioned by the Federal Arbitration Act, “Courts may not infer from an ambiguous agreement that parties have consented to arbitration on a classwide basis.” The decision further notes that the class arbitration lacks the benefits of individualized arbitration. “It [class arbitration] sacrifices the principal advantage of arbitration – its informality – and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”

Kantor said, “A very large number of arbitration clauses in employment agreements, consumer contracts and the like . . . expressly waive the right to bring a class proceeding in arbitration as well as in court.”

He concluded that “a regulatory measure from an independent agency or an executive agency would prohibit that claim . . . in a contract so long as it was aimed at all forums. Not focusing on arbitration has a good chance of passing muster under [Epic Systems v. Lewis] and that might override the literally millions of clauses out there in existing contracts that provide for waivers of class proceedings.”

Pearlstein then noted the “obvious difficulty in getting major legislation passed regarding labor and employment issues” and asked the panelists about the chances of less-dramatic piecemeal legislation passing in Congress. He also asked about the Biden administration’s role with administrative actions and whether it means agencies like the National Labor Relations Board and the EEOC “become more important than they have ever been, or, certainly, in a long time?”

Siegel said that rulemaking has already been used a substitute for doing things at the NLRB, and that this was effective in dictating policy goals. She added that this was an alternative presented at the agency level as a common law substitute. “They did not want to have to wait for the case to come up before them to rule,” she said, and “in lieu of waiting for Congress and having to pass legislation that is not exactly what they would want and as a compromise, that would be an alternative.”

Mark Gaston Pearce said that “rulemaking will show up and go the other direction and use up a lot of agency resources in that regard.” Regarding a piecemeal legislative approach, Pearce noted that it’s “more likely than a wholesale acceptance of a statute like the PRO Act, because there may not be enough Democratic senators — much less Republicans — that are going to buy into the entire measure, but as Mark Kantor suggests, it’s very possible that they can tag on particular key measures of the PRO Act into must-have legislation in order to get some of that across.”

There was a question from the audience asking whether there is proposed federal legislation that would restrict waivers of jury trials, which companies might use as an alternative to class-action waivers.


Mark Kantor responded that he was not aware of any standalone legislation aiming at prohibiting jury-trial waivers. He said, “We do know that several states have enacted legislation, for example, California and Georgia, achieving that result in their own state courts, but at the federal level, again, you’re going to run into the filibuster, so it’s unlikely you would find Republican support in the Senate for legislation like that, and it is equally unlikely that you could obtain 60 votes, a closure vote to override filibuster. It’s not going to be budget reconciliation, which means you’re looking at appending it to a must-pass legislation.”

Panelist Kathryn Siegel also noted that states attempt to accomplish certain goals when it’s not possible at the federal level, especially in the context of arbitration limits. “We have seen states,” she said, “such as Illinois, trying to . . . make their own rules as to arbitration and when you can require arbitration of disputes.” She further added even though such laws are going to be preempted by the FAA, many states pass them “hoping that they have crafted it in a way that it avoids the issues that other states have had or that no one will notice.”

An attendee asked the panel whether they “expect a Biden majority to overturn the NLRB’s General Motors decision by re-implementing the specific tests for evaluating discipline for conduct that occurred during protected concerted activity, instead of the Wright Line standard.”

According to the new standard provided by the General Motors decision, the NLRB General Counsel must show that “(1) the employee engaged in Section 7 activity, (2) the employer knew of that activity, and (3) the employer had animus against the Section 7 activity, which must be proven with evidence sufficient to establish a causal relationship between the discipline and the Section 7 activity.”

The General Motors decision provided that the conflict between the anti-discrimination laws and the setting-specific standards explained below required the adoption of the Wright Line standard. The NLRB further cited the EEOC and mentioned that discrimination laws do not forgive abusive conduct when it arises from heated feelings about working conditions or because crude language is common in the workplace. The decision also characterized the setting-specific standards to be “wholly indifferent to employers’ legal obligations to prevent hostile work environments on the basis of protected traits.”

The General Motors case replaced several setting-specific standards:

  • The Atlantic Steel standard on workplace discussions with management: To determine whether abusive conduct by the employee during protected concerted activity was severe enough to lose the National Labor Relations Act’s protection, the Board had  applied a four-factor standard: (1) the place of the discussion; (2) the subject matter of the discussion; (3) the nature of the employee’s outburst; and (4) whether the outburst was, in any way, provoked by an employer’s unfair labor practice. General Motors noted that because the Board had not assigned any specific weight to any of these factors, the Board’s application of these factors resulted in inconsistent outcomes over the years. Furthermore, the second factor – the subject matter of the discussion – favored the protection of the employees as the Atlantic Steel factors only applied when the subject matter was related to Section 7 activity. NLRA Section 7 provides that “employees shall have the right to self-organization, to form, join, or assist labor organizations… and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid protection.” The Board in General Motors also criticized the shortcomings of the Atlantic Steel standard as it was “giving little, if any, consideration to employers’ right to maintain order and respect.”
  • The totality of the circumstances on social media posts and coworker discussions: The General Motors decision also replaced the totality of the circumstances standard that had applied to social-media posts and coworker discussions. “The Board’s flexibility in considering a wider of range of facts in each specific circumstance promises to create the same, if not more, inconsistency and unpredictability,” noted the decision.
  • The Clear Pine Mouldings Test for conduct taking place on the picket line: Cases that applied the 1978 Clear Pine Mouldings test had found that the employees lose NLRA protection only when “it involves an overt or implied threat or where there is reasonable likelihood of an imminent physical confrontation.” General Motors noted that, “As a result, the Board has found appallingly abusive picket-line misconduct to retain protection, including racially and sexually offensive language.”

The NLRB further concluded in General Motors that absent evidence of discrimination against Section 7 activity, there is no merit of “finding violations of federal labor law against employers that act in good faith to maintain civil, inclusive, and healthy workplaces for their employees. These results [from setting-specific standards] simply do not advance the Board’s mission of promoting labor peace or any of the other principles animating the Act.”

After the General Motors decision, the Trump-appointed Chairman, John F. Ring praised the decision. “For too long,” he stated, “the Board has protected employees who engage in obscene, racist, and sexually harassing speech not tolerated in almost any workplace today. Our decision in General Motors ends this unwarranted protection, eliminates the conflict between the NLRA and antidiscrimination laws, and acknowledges that the expectations for employee conduct in the workplace have changed.” President Biden replaced Ring on Jan. 20 with NLRB member Lauren McFerran; Ring’s board term continues through Dec. 16, 2022.

Panelist Mark Gaston Pearce noted that the applicability of the Wright Line standard during protected concerted activity should be fleshed out and that it was an overreach. Even though Pearce said he believed there was a need for a fix with respect to Title 7-type situations, the test could have been within the realm of the existing test–the Clear Pine Mouldings test.

Pearce further acknowledged Clear Pine Mouldings’ shortcomings, noting that under this test, “racial and sexual derogatory remarks were not sufficient to take protection away from the actor, because they were not violence or threats of violence.” He noted that the NLRB had failed to look at the situations from the viewpoint of the recipient of those kinds of remarks, and what kind of reaction that had.

Pearce expressed his concerns regarding the new Wright Line standard that when it comes to obscene or profane remarks made during the heat of the moment or during an exchange between someone engaged in protected concerted activity and management, noting that such circumstances should be treated differently.

He further added that the Wright Line standard does not respond to what happens when management has provoked a response in the course of protected concerted activity. He further explained:

It may well be while that standard exists, these issues are going to have to be fleshed out before an arbitrator who is using the just-cause standard. Because of course if someone was provoked into something in a unionized setting, and it comes out in an arbitration, . . . [the] arbitrator has the ability to weigh those kinds of determinations and [make] an assessment as to whether or not there was just cause for them to act the way it did.

In a non-union setting, that opportunity does not present itself, so there is an inequitable situation there. Furthermore, if employees don’t know what they can say or how they should say, they will censor, self-censor and deny themselves the ability to engage in rights protected under the National Labor Relations Act. The Supreme Court says, and there are several cases that say, that the NLRB and the courts are not in the business of making civility codes.

A seminar attendee asked the panel, “What changes in labor arbitration should we expect with federal agencies like the VA, Capitol Police, Bureau of Prisons, military bases, etc.?”

Moderator Pearlstein first responded that the Capitol Police is not under the Federal Labor Relations Act authority. As to federal agencies in general, he said, “There are dramatic changes on the horizon once the makeup of the NLRB changes . . . and once things rotate into a Democratic majority.”

He said that “the changes under the Trump board at the NLRB were so dramatic, reversing so much precedent, that I think you’re going to start seeing quite a lot of change as that catches up.”

Regarding executive orders, Pearlstein noted that “the president has already reversed all the executive orders basically that applied to the federal workplace.”

There was a question asking whether the EEOC will go back to its prior policy criticizing mandatory arbitration once the Democrats get the majority.

Panelist Kathryn Siegel responded that the “EEOC and most of the federal agencies . . . once they are able to effectuate Democratic policies, they are going to pretend like the last four years were just a nightmare and return as quickly as possible to the policies and the plans that they had prior to the Trump election.”

Therefore, she said, it is likely that there will be a return to what was being advanced by Democrats four years ago.

Panelist Pearce added that NLRB’s “only issue was solely with respect to class-action waivers. The NLRB didn’t challenge mandatory arbitration, because the FAA . . . [and] other Supreme Court cases [concluded] that mandatory arbitration is the rule of the day.”

Pearce said the NLRB’s Epic Systems concern was “the flip handling of what constitutes concerted activity  . . and what kind of impact that will have on future cases.” He added, “Certainly, this Trump board did its best to clamp down on protected concerted activity definitions and issued some cases that really restricted that. I agree in that respect that the Biden board will go in the other direction.”

Another attendee asked: “Is there any attempt to have Congress address the extent to which the Federal Arbitration Act can be used?”

Said panelist Mark Kantor, “That is exactly what the FAIR Act will aim at. It will pass the House. It will get hearings and committee action in the Senate. but it seems highly unlikely that it will be enacted by the Senate over a filibuster in light of vote counting,” said Kantor (see links above to Kantor’s discussion in Part I, which also includes links to his CPR Speaks articles on the subject).

Moderator Arthur Pearlstein then asked whether there will be an effect on the market for labor and employment arbitration under the Biden administration.

Panelist Siegel replied that the NLRB Trump Board policy was to defer to arbitration as frequently and as early as possible. In 2019, the Board replaced the Babcock standard and returned to the less rigorous standards of Spielberg/Olin [cited and explained in Babcock] to defer to arbitration in cases alleging discharge and discipline in violation of NLRA Sections 8(a)(3) and (1).

Siegel noted that fewer cases were being decided by the Board when there was a parallel proceeding in arbitration. Considering the possibility of a new Board reverting to the Babcock standard which makes arbitration less likely, Siegel concluded that it followed that this could negatively affect the number of cases in the labor and employment arbitration market.

Finally, Mark Kantor mentioned that in its 2019 decision, New Prime Inc. v. Oliveira, “the Supreme Court made clear that the exclusion from enforcement of arbitration agreements under the Federal Arbitration Act for transportation workers did extend to an independent trucker, by application to independent contractors in the transportation field.”

He noted that “the Court was very careful to signal that the interpretation was only to apply to the Federal Arbitration Act and not to any other legislation. There was nothing in that decision signaling that the Court might wish to rethink its interpretation of the exclusion to go beyond transportation workers into other industries.”

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The author, a second-year student at New York’s Benjamin N. Cardozo School of Law, is a CPR 2021 intern.

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You can read the final installment of Antranik Chekemian’s report on the CPR workplace and employment seminar at Part III: Deference Change–Analysis of a Shift on a Labor Arbitration Review Standard (April 26).

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