class action waivers

New Clear and Unmistakable Outcome Exception to the Old Clear and Unmistakable Rule? (Part II)

/ CPR Staff / 3 Comments

loreejrII

By Philip J. Loree Jr.

Part I of this post discussed how the Second and Fifth Circuits, in  Metropolitan Life Ins. Co. v. Bucsek, ___ F.3d ___, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), and 20/20 Comms. Inc. v. Lennox Crawford, ___ F.3d ___, No. 18-10260 (5th Cir. July 22, 2019), suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability (a/k/a the “Clear and Unmistakable Rule”).

Under this Clear and Unmistakable Outcome Exception to the Clear and Unmistakable Rule, courts consider the merits of an underlying arbitrability issue as part of their analysis of whether the parties clearly and unmistakably agreed to arbitrate arbitrability issues.

But the Clear and Unmistakable Outcome Exception runs directly counter to the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ___, 139 S. Ct. 524 (January 8, 2019), and thus contravenes the Federal Arbitration Act as interpreted by Schein. 139 S. Ct. at 527-28, 529-31.

This Part II analyzes and discusses how Met Life and 20/20 Comm. effectively made an end run around Schein and considers what might have motivated those Courts to rule as they did.

Making an End Run Around Schein?

When, prior to 20/20 Comm. we wrote about Met Life, we said it “an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.” (See here. )

But after the Fifth Circuit decided 20/20 Comm. this July, in comments we made to Russ Bleemer, Editor of Alternatives, the Newsletter of the International Institute for Conflict Prevention & Resolution (“CPR”)—which were reproduced with our consent in Mr. Zhan Tze’s CPR Speaks blog article about 20/20 Comm. (here)—we expressed the belief that the Fifth Circuit was (whether intentionally or unintentionally) making an end run around Schein, effectively creating an exception to the Clear and Unmistakable Rule.

After analyzing 20/20 Comm. and comparing it to the Second Circuit’s Met Life decision, we concluded that the Second Circuit’s decision also ran counter to Schein.

Schein’s Abrogation of the “Wholly Groundless Exception” to the Clear and Unmistakable Rule

In Schein the U.S. Supreme Court abrogated the so-called “wholly groundless exception” to the Clear and Unmistakable Rule. Prior to Schein certain courts, including the Fifth Circuit, held that even when parties clearly and unmistakably agreed to arbitrate arbitrability questions, courts could effectively circumvent the parties’ agreement and decide for itself arbitrability challenges that it determined were “wholly groundless.”

The rationale Schein used to jettison the “wholly groundless exception” to the Clear and Unmistakable Rule is incompatible with the rationales the Second and Fifth Circuit used to support their decisions in Met Life and 20/20 Comm.

Under FAA Section 2, the Schein Court explained, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein, 139 S. Ct. at 529 (citation omitted). When those contracts delegate arbitrability questions to an arbitrator, “a court may not override the contract[,]” and has “no power to decide the arbitrability issue.” 139 S. Ct. at 529. That is so even where a Court “thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 139 S. Ct. at 529.

Schein explained that its conclusion was supported not only by the FAA’s text, but also by U.S. Supreme Court precedent. Citing and quoting cases decided under Section 301 of the Labor Management and Relations Act, the Court explained that courts may not “‘rule on the potential merits of the underlying’ claim that is assigned by contract to an arbitrator, ‘even if it appears to the court to be frivolous[,]’” and that “[a] court has “‘no business weighing the merits of the grievance’” because the “‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’” 139 S. Ct. at 529 (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649–650 (1986) and Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960)).

This “principle,” said the Schein Court, “applies with equal force to the threshold issue of arbitrability[]”—for “[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator.” 139 S. Ct. at 530.

Exception to Clear and Unmistakable Rule? Why the Second and Fifth Circuit Decisions Conflict with Schein

Both the Second Circuit and Fifth Circuit decided that the parties before them did not clearly and unmistakably agree to arbitrate arbitrability because each Court believed that there was not even a barely colorable basis for a court or an arbitrator to find that the underlying dispute should be submitted to arbitration. In other words, both courts focused on contractual provisions governing the merits of the arbitrability dispute rather than confining their analysis to the terms of the contract dealing directly with whether the parties clearly and unmistakably agreed to arbitrate arbitrability.

In Met Life the Court decided the merits of the underlying arbitrability issue before analyzing whether the provisions of the contract directly pertinent to the arbitration of arbitrability did or did not clearly and unmistakably delegate arbitrability to the arbitrators. The Court quite correctly found it implausible that the parties agreed to arbitrate a dispute that arose years after one of the parties had left the NASD and was not a member of FINRA.

But that was a conclusion about the merits of the arbitrability dispute, not about whether the parties clearly and unmistakably agreed to arbitrate arbitrability disputes. The Clear and Unmistakable Rule turns solely on whether the parties clearly and unmistakably delegated arbitrability questions to the arbitrator, irrespective of what the merits of those arbitrability questions may be.

In 20/20 Comm. the Court’s focus was on the parties’ broad class arbitration waiver. Class arbitration waivers are ordinarily dispositive of the merits of whether the parties consented to class arbitration, but the class arbitration waiver in 20/20 Comm., like most or all others we’ve seen, says nothing about who decides whether or not the parties consented to class arbitration.

Had the Fifth Circuit not focused on the class arbitration waiver, and instead on the three provisions directly relating to arbitrability, then it could have easily found that the parties clearly and unmistakably delegated class arbitration consent issues to the arbitrator.

The so-called “exception language” in those provisions (see Part I, here) was quite beside the point. There is nothing “inconsistent” with an arbitrator, rather than a court, deciding the effect of the class arbitration waiver, no matter how clear it may be that the outcome will, or at least should, be an arbitral determination that the parties did not consent to class arbitration.

Exception to Clear and Unmistakable Rule?Second Circuit Attempted to Distinguish Schein, but Fifth Circuit did not

The Second Circuit articulated the reasons it believed that Schein did not foreclose its examination of the merits of the arbitrability issue before it, but the Fifth Circuit did not address Schein.

The Second Circuit said “[t]he point of the [Schein] opinion was that, where the parties have agreed to submit arbitrability to arbitration, courts may not nullify that agreement on the basis that the claim of arbitrability is groundless.” Met Life, slip op. at 24 (emphasis in original). The Court said it “reject[s] [A’s] claim for arbitration of arbitrability not because” it considers the “claim of arbitrability” to be “groundless[,]” but “because, upon consideration of all evidence of the intentions of the arbitration agreement, including the groundlessness of [A’s] claim of arbitrability, the agreement does not clearly and unambiguously provide for arbitration of the question of arbitrability.” Met Life, slip op. at 25. That “reasoning is based on the parties’ contract, and not based on any exception to what the parties have contracted for.” Met Life, slip op. at 25.

The Fifth Circuit might have made the same or a similar argument, but said nothing about whether it thought its decision was consistent with Schein.

While the Second Circuit’s reasoning was theoretically sound, it doesn’t hold up in practice. Apart from questions concerning the existence of the contract, the merits of most, if not all, arbitrability questions turn in large part on the language of the parties’ contract. That was certainly the case in both Met Life and 20/20 Comm.

Under the reasoning of those cases, however, the language directly relating to the question whether the parties clearly and unmistakably agreed to arbitrate arbitrability must be viewed in conjunction with the language of the contract bearing on the merits of the arbitrability dispute. If the language pertinent to the merits of the arbitrability issue suggests that the parties did not agree to arbitrate the dispute (or did not consent to class arbitration), then under the Second and Fifth Circuits’ reasoning, that conclusion weakens (or eliminates) the inference that the parties clearly and unmistakably agreed to arbitrate arbitrability.

Met Life and 20/20 Comm. Contravene the U.S. Supreme Court’s Decision in Schein

The Met Life/20-20 Comm. analytical regime effectively revives—and potentially might even expand the scope of—the “wholly groundless exception” that the U.S. Supreme Court laid to rest in Schein. Remember that disputes about arbitrability of arbitrability can be analytically broken down into at least four separate questions: (a) what the dispute on the merits is; (b) does that dispute raise a question of arbitrability, which is ordinarily decided by the court; (c) if so, did the parties clearly and unmistakably agree to arbitrate arbitrability disputes (i.e, does the Clear and Unmistakable Rule apply); and (d) what is the outcome of the dispute on the merits that the proper decisionmaker should reach once he or she decides it?

The Clear and Unmistakable Rule is concerned only with question (c), above, that is, did the parties clearly and unmistakably agree to arbitrate arbitrability disputes? The “wholly groundless exception” to the Clear and Unmistakable Rule—and the analytical regime imposed by the Second and Fifth Circuits—focuses not only on  question (c), above, but simultaneously considers question (d), that is, what is the outcome on the dispute on the merits that the proper decisionmaker should reach?

Assuming the dispute on the merits is a question of arbitrability (as was the case in Schein, Met Life, and 20/20 Comm.), if the provisions of the parties’ agreement suggest that there is only one proper outcome that a decisionmaker should reach on the merits of the arbitrability dispute—the subject of question (d), above— then a Court following Met Life and 20/20 Comm. would be more chary about concluding the parties clearly and unmistakably agreed to arbitrate arbitrability—the subject of question (c), above.

Schein forecloses any consideration of the merits of the arbitrability issue (question (d), above), limiting the scope of the Court’s analysis to whether the parties’ clearly and unmistakably agreed to arbitrate arbitrability (question (c), above).

Schein explains that, if the parties clearly and unmistakably agree to arbitrate arbitrability disputes, then courts should direct the parties to arbitrate the arbitrability issue. Just as it is with any other arbitrable issue, judicial review is postponed until the final award stage, and is limited to the grounds enumerated by Section 10 of the FAA, including manifest disregard of the agreement under Section 10(a)(4), and, in Circuits which recognize it (such as the Second—but not the Fifth—Circuit) manifest disregard of the law.

In Schein the proponent of the “wholly groundless exception” argued that the “back-end judicial review” available if an arbitrator “exceeds his or her powers” impliedly authorizes courts to determine that an arbitrability question is “wholly groundless” and obviates the need to submit the arbitrability question to arbitration. Schein, 139 S. Ct. at 530. But the Supreme Court said “[t]he dispositive answer to [the “wholly groundless exception” proponent’s] §10 argument is that Congress designed the Act in a specific way, and it is not our proper role to redesign the statute.”  Schein, 139 S. Ct. at 530.

The Schein Court further explained that acceptance of the “wholly groundless exception” proponent’s “argument would mean. . . that courts presumably also should decide frivolous merits questions that have been delegated to an arbitrator.” But, said the Supreme Court, “[we] have already rejected that argument: When the parties’ contract assigns a matter to arbitration, a court may not resolve the merits of the dispute even if the court thinks that a party’s claim on the merits is frivolous. So, too, with arbitrability.” 139 S. Ct. at 530 (citation omitted).

Under Schein the proper course for the Second and Fifth Circuits was to determine whether the parties clearly and unmistakably delegated arbitrability issues to the arbitrators without determining or analyzing the merits of those underlying arbitrability issues. If the answer was “yes,” then the Courts should have directed the arbitrators to decide those arbitrability questions.

If the arbitrators, after having decided those underlying arbitration issues, decided that the issues were arbitrable, then the arbitration opponents could challenge them as being in manifest disregard of the contract (and, in the Second Circuit, perhaps also in manifest disregard of the law).

But rather than let the arbitration and post-award review process run its course, the Second and Fifth Circuit took it upon themselves to decide arbitrability issues that the parties clearly and unmistakably agreed to submit to arbitration. Met Life and 20/20 Comm. cannot be meaningfully squared with Schein.

What Might have Motivated Met Life and 20/20 Comm. Courts to Rule the way they did?

While we respectfully believe that Met Life and 20/20 Comm. are inconsistent with Schein, it would be unfair not to acknowledge that the very able and experienced judges who decided those cases were faced with unusual circumstances that would presumably be of concern to many or most other fair-minded jurists. In Met Life a FINRA arbitration claim was made against an entity that had never been a member of FINRA, and had not been a member of the NASD, FINRA’s predecessor, for several years. The claim itself arose out of conduct that took place after the entity had left the NASD.

The Second Circuit concluded the dispute was not arbitrable because FINRA had no regulatory interest in the dispute, but apparently there were no FINRA rules, or terms in the parties’ agreement, which addressed directly the unusual arbitrability question the case presented. And prior Second Circuit precedent suggested that, under the Clear and Unmistakable Rule, the breadth of the parties’ arbitration agreement, together with a provision of the applicable arbitration rules, constituted clear and unmistakable evidence of an intent to arbitrate arbitrability.

The Second Circuit might have been legitimately concerned about whether a FINRA arbitrator would necessarily reach the same conclusion as the Court did, and if so, whether the award could be vacated if the arbitrator got it wrong. That would mean that the arbitration opponent might have been forced to arbitrate not only the underlying arbitrability issue, but also the entire dispute on the merits, before there was any opportunity for FAA Section 10 review.

If the award was ultimately vacated, the parties would be forced to incur a great deal of time and expense vindicating their rights. But if the award was not, and could not be, vacated, and the arbitration opponent lost on the merits, then the arbitration opponent would effectively have been forced to arbitrate a dispute that the Second Circuit strongly believed the parties never agreed to arbitrate.

“Hard cases,” the adage goes, “make bad law.”

The Fifth Circuit might have had similar reservations about the case before it, although the stakes were probably not as high as they were in Met Life. The contract’s incorporation of AAA employment arbitration rules, which brought into play the AAA Supplementary Rules for Class Arbitration, meant that the arbitrator would have been empowered to make a “Clause Construction Award,” which the parties are deemed to agree is a final award subject to judicial review under Section 10.

There was no reason to think that the briefing, argument, and decision of the Clause Construction issue, and the rendering of the Clause Construction Award, would take a great deal of time, given how narrow the issue was, and given the clear class arbitration waiver. And FAA Section 10 review would have been available once the Clause Construction Award was made.

Thus, had the Fifth Circuit compelled arbitration of the class arbitration consent issue, and had the arbitrator made a ruling in favor of class arbitration consent by ignoring the class arbitration waiver (or at least by not even arguably interpreting it), FAA Section 10 review would be available in relative short order, and certainly long before the parties were forced to engage in a class arbitration that could drag on for several years before Section 10 review could take place.

But the Fifth Circuit might nevertheless have been very concerned that a class arbitration opponent who had taken the time to include a broad class arbitration waiver in its contract, the enforceability of which is not really open to legitimate question in light of the many U.S. Supreme Court decisions that have closed state- and federal-law enforcement loopholes, should be forced to engage in the several months of arbitration and litigation necessary to vindicate its legitimate, bargained-for right to arbitrate on a bilateral basis only. Even apart from the extra costs imposed on the class arbitration opponent, compelling arbitration would have virtually guaranteed that within a relatively short period, the district court and, possibly also the Fifth Circuit, would again have to devote substantial time and effort into matters that were the subject of the consolidated appeal in 20/20 Comm.

Those concerns about economic inefficiency and judicial economy are unquestionably legitimate. But Schein, as we’ve seen, has already said that the courts do not, in the name of public policy or judicial economy, have the power to amend or alter the post-award-review-only procedures mandated by the FAA.

And the class arbitration opponent, a sophisticated business entity, could have drafted its contract more precisely, providing that notwithstanding anything to the contrary, disputes about class arbitration consent, including the application and interpretation of the class arbitration waiver, must be decided by courts, not arbitrators. In fact, other class arbitration opponents would be well advised to consider carefully whether they might find themselves in a situation where they are forced to arbitrate and litigate in the district court (and perhaps in an appellate court) for several months or more court, and if so, to take appropriate steps to mitigate this risk by more precisely drafting their contracts’ class arbitration waivers.

***

 

Philip J. Loree Jr. is a co-founder and partner at law firm, Loree and Loree. This post was originally published on the firm’s blog, Loree Reinsurance and Arbitration Forum, and has been republished with permission here.

New Clear and Unmistakable Outcome Exception to the Old Clear and Unmistakable Rule? (Part I)

/ CPR Staff / 1 Comment

loreejrIIBy Philip J. Loree Jr.

Arbitration law is replete with presumptions and other rules that favor one outcome or another depending on whether one thing or another is or is not clear and unmistakable. Put differently, outcomes often turn on the presence or absence of contractual ambiguity.

There are three presumptions that relate specifically to questions arbitrability, that is, whether or not an arbitrator or a court gets to decide a particular issue or dispute:

  1. The Moses Cone Presumption of Arbitrability: Ambiguities in the scope of the arbitration agreement itself must be resolved in favor of arbitration. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Rebutting this presumption requires clear and unmistakable evidence of an intent to exclude from arbitration disputes that are otherwise arguably within the scope of the agreement.
  2. The First Options Reverse Presumption of Arbitrability:  Parties are presumed not to have agreed to arbitrate questions of arbitrability unless the parties clearly and unmistakably agree to submit arbitrability questions to arbitration. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995)
  3. The Howsam/John Wiley Presumption of Arbitrability of Procedural Matters: “‘[P]rocedural’ questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)) (internal quotation marks omitted). To rebut this presumption, the parties must clearly and unmistakably exclude the procedural issue in question from arbitration.

These presumptions usually turn solely on what the contract has to say about the arbitrability of a dispute, not on what the outcome an arbitrator or court would—or at least should—reach on the merits of the dispute.

Some U.S. Circuit Courts of Appeal, including the Fifth Circuit, recognized an exception to the First Options Reverse Presumption of Arbitrability called the “wholly groundless exception.” Under that “wholly groundless exception,” courts could decide “wholly groundless” challenges to arbitrability even though the parties have clearly and unmistakably delegated arbitrability issues to the arbitrators. The apparent point of that exception was to avoid the additional time and expense associated with parties being required to arbitrate even wholly groundless arbitrability disputes, but the cost of the exception was a judicial override of the clear and unmistakable terms of the parties’ agreement to arbitrate.

Earlier this year the U.S. Supreme Court in Schein v. Archer & White Sales, Inc., 586 U.S. ___, slip op. at *1 (January 8, 2019) abrogated the “wholly groundless” exception. Schein, slip op. at *2, 5, & 8. “When,” explained the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Schein, slip op. at 2, 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Schein,slip op. at 8.

But since Schein both the Second and Fifth Circuits have decided First Options Reverse Presumption of Arbitrability cases by effectively conflating the question of who gets to decide an arbitrability issue with the separate question of who should prevail on the merits of that arbitrability issue. The Courts in both cases determined whether the parties clearly and unmistakably agreed to arbitrate arbitrability questions by considering, as part of the clear and unmistakable calculus, the merits of the arbitrability question.

These two cases suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First OptionsReverse Presumption of Arbitrability. But the problem with that trend is that it runs directly counter to the Supreme Court’s decision in Schein, and thus contravenes the Federal Arbitration Act as interpreted by Schein.

In Part I of this post we discuss the Second Circuit and Fifth Circuit decisions. In Part II we analyze and discuss how— and perhaps why — those courts effectively made an end run around Schein.

Clear and Unmistakable Rule: The Second Circuit’s Met Life Decision

We first wrote about the Second Circuit decision, Metropolitan Life Ins. Co. v. Bucsek, ___ F.3d ___, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), in an April 3, 2019 post. In Met Life the Second Circuit was faced with an unusual situation where party A sought to arbitrate against party B, a former member of the Financial Industry Regulatory Authority (“FINRA”)’s predecessor, the National Association of Securities Dealers (“NASD”), a dispute arising out of events that occurred years after party B severed its ties with the NASD.

The district court rejected A’s arguments, ruling that: (a) this particular arbitrability question was for the Court to decide; and (b) the dispute was not arbitrable because it arose years after B left the NASD, and was based on events that occurred subsequent to B’s departure. The Second Circuit affirmed the district court’s judgment.

After the district court decision, but prior to the Second Circuit’s decision, the U.S. Supreme Court decided Schein, which—as we explained earlier—held that even so-called “wholly-groundless” arbitrability questions must be submitted to arbitration if the parties clearly and unmistakably delegate arbitrability questions to arbitration. Schein, slip op. at *2, 5, & 8.

The Second Circuit was faced a situation where a party sought to arbitrate a dispute which clearly was not arbitrable, but in circumstances under which prior precedent suggested that the parties clearly and unmistakably agreed to arbitrate arbitrability.

To give effect to the parties’ probable intent not to arbitrate before the NASD (or its successor, FINRA) arbitrability questions that arose after B left the NASD, the Second Circuit apparently believed it had no choice but to distinguish and qualify its prior precedent, and to attempt to do so without falling afoul of the Supreme Court’s recent pronouncement in Schein.

That required the Second Circuit to modify, to at least some extent, the contractual interpretation analysis in which courts within the Second Circuit are supposed to engage to ascertain whether parties “clearly and unmistakably” agreed to arbitrate arbitrability in circumstance where they have not specifically agreed to arbitrate such issues.

Met Life modified that analysis to mean that in cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.

Effectively articulating a new interpretative rule necessitated by the unusual case before it, the Court said “what the arbitration agreement says about whether a category of dispute is arbitrable can have an important bearing on whether it was the intention of the agreement to confer authority over arbitrability on the arbitrators.” Slip op. at 13-14.

To that end, said the Court, “broad language expressing an intention to arbitrate all aspects of all disputes supports the inference of an intention to arbitrate arbitrability, and the clearer it is from the agreement that the parties intended to arbitrate the particular dispute presented, the more logical and likely the inference that they intended to arbitrate” arbitrability questions.  Slip op. at 12-13 (citations and quotations omitted).

The contrapositive, the court explained, was also true (at least conditionally): “the clearer it is that the terms of an arbitration agreement reject arbitration of the dispute, the less likely it is that the parties intended to be bound to arbitrate the question of arbitrability, unless they included clear language so providing . . . .” Slip op. at 13. But, added the Court, “vague provisions as to whether the dispute is arbitrable are unlikely to provide the needed clear and unmistakable inference of intent to arbitrate arbitrability.” Slip op. at 13.

What the Court appears to be saying is that where the parties have not expressly, clearly and unmistakably expressed their intent to arbitrate arbitrability questions, the strength of the inference of clear and unmistakable intent to arbitrate arbitrability is inversely proportional to how clear it is that the terms of the agreement reject arbitration of the dispute.

In other words, if the terms of the agreement strongly suggest that a court, rather than an arbitrator, should resolve the dispute on its merits, then the strength of the inference of clear and unmistakable intent to arbitrate the arbitrability of the dispute will be weaker. But, all else equal, if the terms of the agreement suggest that an arbitrator rather than a court should resolve the dispute on its merits, then the inference of clear and unmistakable intent to arbitrate arbitrability of the dispute will be stronger.

The Fifth Circuit’s 20/20 Comm. Decision

A few months after Met Life was decided, on July 22, 2019, the United States Court of Appeals for the Fifth Circuit decided 20/20 Comms. Inc. v. Lennox Crawford, ___ F.3d ___, No. 18-10260 (5th Cir. July 22, 2019). Although 20/20 Comms did not cite Met Life, it engaged in what might be roughly described as a simplified version of the Second Circuit’s reasoning in that case.

Hew Zhan Tze, an International Institute for Conflict Resolution and Prevention (“CPR”) summer intern has published— under the very able tutelage of our friend Russ Bleemer, a New York attorney who is the editor of CPR’s Alternatives, an international ADR newsletter published by John Wiley & Sons, Inc.—a well-written and insightful article about 20/20 Comm.in the CPR Speaks blog. (A shout-out also to CPR’s Tania Zamorsky, who is the blog master of CPR Speaks.)

Mr. Zhan Tze’s excellent article discusses the case and quotes some commentary I provided by email to Russ about the case, as both Russ and I were quite intrigued by the decision. You can read that article in the CPR Speaks Blog here.

Zhan Tze’s article thoroughly discusses the background of the case, its reasoning, and holding. (See here.) The case involved consent to class arbitration.

There were two questions before the Court: (a) whether class arbitration consent was a question of arbitrability for the Court; and (b) if so, whether the parties, under the First Options Reverse Presumption of Arbitrability, had clearly and unmistakably agreed to submit class arbitration consent questions to the arbitrator.

As to the first issue, the Court determined that consent to class arbitration was a question of arbitrability, thereby joining the Fourth, Sixth, Seventh, Eighth, Ninth, and Eleventh circuits, which have likewise concluded that class arbitration consent presents a question of arbitrability. See Del Webb Cmtys., Inc. v. Carlson, 817 F.3d 867, 877 (4th Cir. 2016); Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013); Herrington v. Waterstone Mortg. Corp., 907 F.3d 502, 506-07 (7th Cir. 2018); Catamaran Corp. v. Towncrest Pharmacy, 864 F.3d 966, 972 (8th Cir. 2017); Eshagh v. Terminix Int’l Co., L.P., 588 F. App’x 703, 704 (9th Cir. 2014) (unpublished); JPay, Inc. v. Kobel, 904 F.3d 923, 935-36 (11th Cir. 2018).

As respects the second issue—whether the parties clearly and unmistakably agreed to arbitrate class-arbitration consent issues— the Court held that the parties did not clearly and unmistakably so agree.

The parties’ contract contained three provisions pertinent to arbitrability questions:

1.      “If Employer and Employee disagree over issues concerning the formation or meaning of this Agreement, the arbitrator will hear and resolve these arbitrability issues.”

2.      “The arbitrator selected by the parties will administer the arbitration according to the National Rules for the Resolution of Employment Disputes (or successor rules) of the American Arbitration Association (‘AAA’) except where such rules are inconsistent with this Agreement, in which case the terms of this Agreement will govern.” (emphasis added)

3.      “Except as provided below, Employee and Employer, on behalf of their affiliates, successors, heirs, and assigns, both agree that all disputes and claims between them . . . shall be determined exclusively by final and binding arbitration.” (emphasis added)

But the parties’ contract also contained a broad class arbitration waiver, which provided:

[T]he parties agree that this Agreement prohibits the arbitrator from consolidating the claims of others into one proceeding, to the maximum extent permitted by law. This means that an arbitrator will hear only individual claims and does not have the authority to fashion a proceeding as a class or collective action or to award relief to a group of employees in one proceeding, to the maximum extent permitted by law.

(Emphasis added.)

The Court said that the first three provisions, “[d]ivorced from other provisions of the arbitration (most notably, the class arbitration bar). . . could arguably be construed to authorize arbitrators to decide gateway issues of arbitrability, such as class arbitration.” Slip op. at 8. As respects the second of the three, the incorporation by reference of the National Rules for the Resolution of Employment Disputes (or successor rules) of the AAA, the Court noted that “Rule 3 of the AAA Supplementary Rules for Class Arbitration provides that the arbitrator is empowered to determine class arbitrability.” Slip op. at 8. And, according to the Court, “the third provision states in broad terms that ‘all disputes and claims between them’ shall be determined by the arbitrator, language arguably capacious enough under this court’s previous rulings to include disputes over class arbitrability.” Slip op. at 8.

But the Court did not decide whether those “provisions, standing alone, clearly and unmistakably” required arbitration of the class arbitration consent issue, because the Court held that the class arbitration waiver foreclosed such a finding. Slip op. at 8, 6-7.

The court said “that this class arbitration bar operates not only to bar class arbitrations to the maximum extent permitted by law, but also to foreclose any suggestion that the parties meant to disrupt the presumption that questions of class arbitration are decided by courts rather than arbitrators.” Slip op. at 6-7. “[I]t is[,]” observed the Court, “difficult for us to imagine why parties would categorically prohibit class arbitrations to the maximum extent permitted by law, only to then take the time and effort to vest the arbitrator with the authority to decide whether class arbitrations shall be available.” Slip op. at 7.  “Having closed the door to class arbitrations to the fullest extent possible,” queried the Court rhetorically, “why would the parties then re-open the door to the possibility of class arbitrations, by announcing specific procedures to govern how such determinations shall be made?” Slip op. at 7.

Comparing the first three provisions “with the class arbitration bar at issue in this case, we conclude that none of them state with the requisite clear and unmistakable language that arbitrators, rather than courts, shall decide questions of class arbitrability.” Slip op. at 8.

Two of the provisions, said the Court, “include express exception clauses. . . , which “expressly negate any effect these provisions might have in the event they conflict with any other provision of the arbitration agreement—as they plainly do here in light of the class arbitration bar.” Slip op. at 9.

Even apart from “the exception clauses,” none of the three provisions “speak with any specificity to the particular matter of class arbitration.” Slip op. at 9. “[B]]y contrast[,]” said the Court, [t]he class arbitration bar. . . specifically prohibits arbitrators from arbitrating disputes as a class action, and permits the arbitration of individual claims only.” Slip op. at 9 (citations and quotations omitted).

Those three provisions “[a]ccordingly[]. . . do not clearly and unmistakably overcome the legal presumption—reinforced as it is here by the class arbitration bar—that courts, not arbitrators, must decide the issue of class arbitration.” Slip op. at 9.

In our next post we’ll analyze and discuss how Met Life and 20/20 Comm. effectively make an end run around Schein and what might have motivated those courts to rule as they did.

***

 

Philip J. Loree Jr. is a co-founder and partner at law firm, Loree and Loree. This post was originally published on the firm’s blog, Loree Reinsurance and Arbitration Forum, and has been republished with permission here.

Epic Systems vs. #MeToo: What Now?

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By Anna M. Hershenberg & Sara Higgins

Panelists and audience members came together to discuss workplace dispute resolution in the wake of the U.S. Supreme Court’s Epic Systems v. Lewis decision, analyzing the impact of mandatory arbitration and class actions waivers in light of the #MeToo movement as it continues to raise awareness of the pervasive culture of sexual harassment in the workplace, and society generally.

More than 100 in-house employment counsel from Fortune 500 companies, corporate defense attorneys, counsel from the plaintiff’s bar, as well as noted academics and neutrals attended a CPR Institute mini-symposium last month on the intersection of the Supreme Court’s decision in Epic Systems v. Lewis, No. 16-285 (May 21)(available at https://bit.ly/2rWzAE8) and the #MeToo movement.

The two-panel program discussed anticipated responses from state and federal legislatures and the plaintiff’s bar, the pros and cons of mandatory arbitration for employment disputes and what makes an employment disputes program successful in light of new, competing priorities from the perspective of all stakeholders.

The event started with a CPR members-only meeting of CPR’s Employment Disputes Committee members.  The meeting featured an exclusive interview with Anil K. Chaddha, Lead Counsel of Labor, Employment and Benefits at General Motors, about his experience with employment ADR throughout his career.

The program was then opened up to the public where CPR Institute Chief Executive Officer and President Noah Hanft led off by noting that CPR is working to bridge the gap between the two sides of these types of contentious discussions, and provides an avenue for discourse and cooperation between plaintiff’s counsel and corporate defense to tackle common issues.  [Follow CPR Events at www.cpradr.org/events-classes/upcoming, on Facebook and on Twitter].

The first panel, titled “Was Epic Systems Really Epic: Responses to Epic and the Next Battlegrounds for Mandatory Arbitration,” was moderated by Washington, D.C. based neutral Mark Kantor, who is an adjunct professor at Georgetown University Law Center and a member of CPR’s Panel of Distinguished Neutrals.

Kantor broke down the Epic Systems case and discussed both its immediate impact and far-reaching implications with panelists Christopher C. Murray, a shareholder in the Indianapolis office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C., who co-chairs the firm’s Arbitration and Alternative Dispute Resolution Practice Group, and Fran L. Rudich, a partner in Rye Brook, N.Y.’s Klafter Olsen & Lesser.

In Epic Systems, Kantor explained, the Supreme Court upheld the enforceability of class action waivers. He noted that, in writing for the majority, Justice Neil Gorsuch concluded:

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

The panel largely agreed that, from the employer’s perspective, this holding decisively shifts the balance in favor of mandatory arbitration with class action waivers.

From the employees’ perspective, Rudich previewed the plaintiff’s bar’s anticipated response: plaintiffs’ attorneys will now make concerted efforts to bring multiple, individual cases against the same employer as a workaround to class action waivers.  Rudich warned, “be careful what you wish for,” because employers that seek to avoid class matters are going to get exactly that, numerous individual employment dispute arbitrations, potentially with repetitive evidentiary and discovery requests.

The panel also discussed the burgeoning federal and state laws taking aim at mandatory arbitration, including that more states are poised to adopt California-style private attorney general (“PAGA”) laws to supersede employment class actions.

After a brief intermission, a second panel, “Epic Systems v. #MeToo: What Now? Best Practices for Workplace Disputes Program Design,” which included Sarah E. Bouchard, a Philadelphia-based partner in Morgan, Lewis & Bockius LLP; Lisa J. Banks, a named partner in Washington, D.C.’s Katz, Marshall & Banks LLP; Peter J. Cahill, Executive Director and Associate General Counsel at Ernst & Young LLP in New York; Diane Dann, Senior Vice President of Employment Law at Mastercard Inc. in Purchase, N.Y., and Kathleen McKenna, a partner at event host Proskauer, took the stage to focus on practical guidance for designing workplace disputes programs in the midst of the #MeToo movement.

The panelists discussed the legal, business and public relations implications for implementing employment disputes programs with mandatory arbitration in today’s climate.  They debated whether carving sexual harassment claims out of mandatory arbitration – like Microsoft, Uber and Lyft have done — is workable solution.

The employer-side and employee-side counsel agreed that the Tax Cuts and Jobs Act of 2017’s conditioned use of nondisclosure agreements (NDAs) in sexual harassment suits may make it harder to settle these types of claims.  Because the law attempts to disincentive the use of NDAs without regard to the wishes of the victim, it forces the parties to find work-arounds to the law where (as often happens) victims do not wish to have these disputes resolved publicly.  The panelists explained that most victims don’t want to be Gretchen Carlson — the journalist and advocate who brought a 2016 sexual harassment complaint against the chairman of Fox News – but instead want to move on with their lives without calling attention to the situation.

Panelists seemed to agree generally that incorporating opt-in or opt-out clauses into workplace dispute resolution programs might be a useful tool for assault victims who aren’t interested in publicly calling out their attackers.

Some tips for preventing sexual harassment in the workplace that the panel discussed included thoroughly vetting new hires’ pasts; evaluating the corporate culture from the top down; training bystanders who witness harassment to report it, and serving less alcohol – and more water — at business functions.

The panelists concluded that the #MeToo movement is broader than just sexual harassment – it has challenged how women are treated in the workplace and how they are compensated.

The program was followed by a networking cocktail reception.

 

Hershenberg is Vice President of Programs and Public Policy at the CPR Institute. Higgins is a CPR Institute Summer 2018 intern.

Arbitration Practice After Epic Systems

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By Russ Bleemer

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

So what’s next?

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

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

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

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

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

* * *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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

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

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

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

And yet, the license to use arbitration has produced unintended consequences for employers.  A class of employees decertified by a California federal court bombarded national health club 24-Hour Fitness with hundreds of individual arbitrations earlier in the decade, forcing the company to settle all at once.  The decertification–over the claims’ content and unrelated to the class waiver issue—pushed the company to be more aggressive about defending its arbitration clauses, though the Supreme Court didn’t accept its case as part of the consolidated cases decided today. Jessica Goodheart, “Why 24 Hour Fitness Is Going to the Mat against Its Own Employees,” Fast Company (March 13)(available at http://bit.ly/2pkDPIm)

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

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

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

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

And three weeks ago, the Court took a second arbitration case for next year, Lamps Plus Inc. v. Varela, No. 17-988, which will examine the issue of whether the Federal Arbitration Act “forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”

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

* * *

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

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

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

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

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

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

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

.

 

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

Supreme Court Oral Argument on NLRB Class Actions vs. Arbitration Policy

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By Mark Kantor

The US Supreme Court heard oral argument this morning in the three consolidated cases involving the policy of the National Labor Relations Board (NLRB) prohibiting arbitration clauses in employment agreements that bar class actions (Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris and National Labor Relations Board v. Murphy Oil USA).  The transcript of that oral argument will be available here later this afternoon – https://www.supremecourt.gov/oral_arguments/argument_transcript/2017

Many observers believe the Court’s decision in these cases will come down to Justice Anthony Kennedy’s vote.  For what it is worth, Reuters characterized Justice Kennedy’s questions as “pro-employer” (https://www.reuters.com/article/us-usa-court-labor/u-s-supreme-court-divided-over-key-employment-dispute-idUSKCN1C71RP).

Justice Anthony Kennedy, often the swing vote in major cases, asked questions that appeared to favor employers, as did two fellow conservatives, Chief Justice John Roberts and Justice Samuel Alito.

Kennedy indicated that a loss for workers would not prevent them from acting in concert because they would still be able to join together to hire the same lawyer to bring claims, even though the claims would be arbitrated individually. That would provide “many of the advantages” of collective action, Kennedy said.

See also Bloomberg’s take, which picked up on the same Kennedy comment –  https://www.bloomberg.com/news/articles/2017-10-02/justices-suggest-they-will-divide-on-worker-class-action-rights.

Anne Howe, the respected Court-watcher writing on her own blog Howe on the Court and on Scotusblog, started her review of the proceedings with her bottom line; “In the first oral argument of the new term, a divided Supreme Court seemed likely to uphold employment agreements that require an an employee to resolve a dispute with an employer through individual arbitration, waiving the possibility of proceeding collectively.” (http://amylhowe.com/2017/10/02/argument-analysis-epic-day-employers-arbitration-case/, republished at www.scotusblog.com/2017/10/argument-analysis-epic-day-employers-arbitration-case/#more-262296 ).

Not often noted in the analyses of these cases, the NLRB regulatory policy at issue in Epic Systems et al may in any event become moot.  Effective just a few days ago, the Board of the NLRB now has a Republican majority (http://fortune.com/2017/09/26/nlrb-labor-workers-rights-william-emanuel/).  Moreover, the incumbent NLRB General Counsel (a separate position appointed directly by the President, not the NLRB Board, and subject to Senate confirmation), who actually argued the cases for the NLRB, is scheduled to leave his post in November, thereby opening up that position to a Republican nominee who has apparently already been identified (http://www.insidecounsel.com/2017/09/19/peter-robb-trumps-pick-for-nlrb-general-counsel-is).  It would not at all be surprising for Republican control of the NLRB to result in a reversal of this NLRB policy, just as Democratic control of the NLRB led to promulgation of the policy in the first place.  This dispute is a reminder that many aspects of arbitration in the US are now a partisan political issue, with regulatory measures addressing arbitration shifting back and forth as political party control shifts back and forth.

More broadly, for those of you who feel that these individual employment cases (and similar measures by Federal regulators, under general regulatory statutes, preferring class actions in court over mandatory arbitration of individual claims) are not relevant to your commercial or investment arbitration practice, the precedential impact of a Supreme Court ruling overturning the NLRB’s pro-class action policy may extend far beyond employment and consumer-related claims.  Illustratively, for many years, the U.S. Securities Exchange Commission (SEC) has maintained an informal policy of refusing to register public offerings of stock by companies that include mandatory arbitration clauses in their charter documents for disputes between shareholders and the issuing company.  As a result, shareholder law suits (such as shareholder class actions) are brought in the US courts.

In July of this year, Republican SEC Commissioner Michael Piwowar stated publicly that the SEC is now open to the idea of allowing companies contemplating initial public securities offerings to include mandatory shareholder arbitration provisions in their company charter documents.  That idea, if implemented, could arguably kill off shareholder securities class actions in the US courts.  One might think that a Republican majority of Commissioners on the SEC would be amenable to changing the SEC’s shareholder claims policy barring arbitration.  It is not, however, yet clear whether the SEC’s new Republican Chairman Jay Clayton is also receptive to the idea. See  https://www.reuters.com/article/us-otc-arbitration/shareholder-alert-sec-commissioner-floats-class-action-killing-proposal-idUSKBN1A326T .

The SEC’s unwritten policy barring mandatory arbitration of shareholder claims came under interest group pressure in 2006-2007.  It was also the subject of several corporate efforts to cause a change in the SEC’s policy, most notably in connection with a 2012 proposed share offering by the Carlyle Group.  But the SEC policy survived due to inter alia push-back from the Democratic-controlled Congress.  A broad pro-arbitration decision by the US Supreme Court, rejecting the NLRB’s regulatory effort to preserve employment class actions by prohibiting mandatory arbitration, could easily have a significant impact on the SEC’s unwritten policy to deny registration of securities offerings covered by a mandatory arbitration provision in the issuer’s charter documents.

The SEC question is sure to trigger aggressive lobbying by both sides as it arises again – indeed, it has already done so in the blogosphere.  Illustratively:

For shareholder arbitration and against class actions  – http://clsbluesky.law.columbia.edu/2017/08/21/shareholders-deserve-right-to-choose-mandatory-arbitration/

Against shareholder arbitration and for class actions – http://clsbluesky.law.columbia.edu/2017/08/28/mandatory-arbitration-does-not-give-stockholders-a-choice/

 

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

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

DOJ to NLRB: You’re On Your Own in the Supreme Court

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CLASS WAIVER/MANDATORY ARBITRATION CASES

By Nicholas Denny

In the clearest illustration so far of the Trump Administration’s evolving hands-off policy toward mandatory arbitration clauses and class action waivers, the U.S. Solicitor General authorized the National Labor Relations Board (NLRB) last week to represent itself in one of three consolidated arbitration cases to be heard by the U.S. Supreme Court this fall.

At the same time, the U.S. Department of Justice, which had been representing the board in NLRB v. Murphy Oil USA Inc., No. 16-307 (U.S. Supreme Court docket page at http://bit.ly/2kOPxal) until last week, switched sides in the case, filing an amicus brief backing the employer in the matter.

Justice, via the friend-of-the-court briefs, is now advocating against the NLRB, and against its previous position.

The case—along with its companions, Ernst & Young v. Morris, No. 16-300 (Docket page at http://bit.ly/2kLxCEg) and Epic Systems Corp. v. Lewis, No. 16-285 (Docket page at http://bit.ly/2kFVxm6)—asks whether mandatory arbitration clauses as a condition of employment bar individual employees from pursuing work-related claims on a collective or class basis under the National Labor Relations Act (NLRA). Mandatory arbitration clauses are used throughout employment settings and apply to employees regardless of titles or union affiliation; two of the three cases involve white-collar office workers.

The Supreme Court will hear the consolidated cases in the term beginning in October.

The issue in the consolidated cases is whether employers can continue to unilaterally require that employees agree to a mandatory arbitration clause in employment contracts. Often, these clauses are non-negotiable: either employees accept the employer’s terms or the employer finds someone else to hire.

The Supreme Court must decide which of two laws controls: the National Labor Relations Act, 29 U.S.C. § 151, et seq., or the Federal Arbitration Act, at 9 U.S.C. § 1 et seq. Under the NLRA, an employee’s rights to collective bargaining and action are protected. Under the FAA, however, an employment contract that includes a mandatory arbitration clause binds the worker to arbitrate with the employer instead of litigating in court, and is accompanied by a waiver barring the employee from bringing a class-action suit in favor of an individualized process.

As a result, arbitration clauses can deliver a one-two punch: (1) workers arbitrating individually may have less power, because they are not operating as part of a collective whole as contemplated by the NLRA, and (2) a worker may be less likely to find counsel because arbitration awards are perceived to be much smaller than court and class-action outcomes—meaning a lawyer working for a portion of the settlement would be less likely to take the case.

On the other hand, employers contend that mandatory arbitration clauses protect the company and benefit the employee. They argue that arbitration clauses ensure a speedier and more cost-effective conclusion to conflicts: class actions are harder and more costly to fight than arbitrations.

The disagreement over the use of mandatory arbitration clauses has arisen in the political arena, too. While the Obama Administration focused on pro-employee, anti-mandatory arbitration policies that prohibited employers from unilaterally waiving workers’ rights to concerted action under the NLRA, the Trump Administration is leaning toward an employer-centric policy by permitting mandatory arbitration clauses in employment contracts and as a condition of hiring.

This drastic shift in policy culminated with Friday’s news that the NLRB will represent itself, and that the Department of Justice would switch sides. The NLRB, as an autonomous government entity, is tasked with protecting “the right of employees to engage in protected concerted activities—group action to improve wages, benefits, and working conditions and to engage in union activities and support a union,” according to its website, as well as protecting the right of workers to refrain from engaging in protected concerted or union activities.

While the Justice Department prosecutes on behalf of the nation as well as defends government agencies, it is exceedingly rare for it to withdraw its representation of an agency it had been representing and subsequently file a brief in opposition to the position had it previously taken.

The Justice Department amicus brief switching sides in Murphy Oil is available at http://bit.ly/2sUnFbL.  The NLRB’s June 16 announcement that it would represent itself without Justice Department support can be found on the board’s website at http://bit.ly/2traH2s.

The move, however, is consistent with another recent Trump Administration policy shift on arbitration. In early June, the Centers for Medicare and Medicaid Services, an arm of the U.S. Department of Health and Human Services, withdrew a 2016 Obama Administration position prohibiting mandatory arbitration clauses in long-term care nursing home contracts.

CMS’s new position allows arbitration agreements provided that the provisions are written in plain language, and explained to and accepted by the applying resident.  Among other conditions, the CMS requires that the nursing home retain a copy of the signed agreement and post a notice that details the nursing home’s arbitration policy.

In addition, House Republicans introduced the “Financial CHOICE Act” earlier this month, a proposed law that aims to dismantle the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank is an extensive law that was passed to ensure higher accountability in the U.S. financial sector after the economic recession of 2008 and it was endorsed by former President Obama.

Among its many goals, Dodd-Frank pointed its then-new Consumer Financial Protection Bureau at pre-dispute mandatory arbitration clauses in consumer finance contracts. A lengthy study concluded last year by the CFPB resulted in a promise to finalize regulations that would ban the use of predispute mandatory arbitration in consumer financial contracts, such as cellphone agreements.

But should the “Financial CHOICE Act” become law, it likely would allow financial institutions to include mandatory arbitration clauses in their consumer contracts and agreements, and negate the CFPB efforts.

President Trump’s stance on mandatory arbitration clauses is becoming clear. Whether the clauses are legal in the employment context, and whether they will withstand Supreme Court scrutiny, are developing issues that are expected to be answered within the year. Watch CPR Speaks for updates.


The author is a CPR Institute Summer 2017 intern.

Gorsuch on Arbitration

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By Russ Bleemer

A review of the arbitration opinions involving Tenth U.S. Circuit Court Judge Neil M. Gorsuch, who last night was nominated to fill the U.S. Supreme Court vacancy, doesn’t provide a definitive indication on how his arbitration votes might fall if the U.S. Senate approves of his nomination.

The 49-year-old Gorsuch, who has been on the Tenth Circuit bench since President George W. Bush nominated him and he was confirmed by the Senate in 2006, has participated in appellate panels that have backed awards, compelled arbitration and reversed a failure to compel arbitration.

But the narrow scope of arbitration cases in which the circuit judge has participated, and the issues on which the cases were decided, don’t show a pronounced tilt toward business or consumers.

Adherence to Contract Law Principles, Combined with Customary View of FAA

In his most arbitration-centric decision, Gorsuch’s preferred path is adherence to contract law principles, combined with a customary view of the Federal Arbitration Act among federal judges.

“Everyone knows the Federal Arbitration Act favors arbitration,” Gorsuch wrote in the opening to Howard v. Ferrellgas Partners, No. 13-3061 (10th Cir. April 8, 2014)(available at http://bit.ly/2jTm6Wi), but, he emphasized, “before the Act’s heavy hand in favor of arbitration swings into play, the parties themselves must agree to have their disputes arbitrated.”

He continued, “While Congress has chosen to preempt state laws that aim to channel disputes into litigation rather than arbitration, even under the FAA it remains a ‘fundamental principle’ that ‘arbitration is a matter of contract,’ not something to be foisted on the parties at all costs.”

Possible Role in Employment Contract Class Action Waiver Cases

There is little in the 38 arbitration opinions that the Tenth Circuit website produces in a search of Gorsuch’s work—mostly incidental mentions–that rises to the level of significance of the preemption of state law and class waiver issues that have steadily appeared at the U.S. Supreme Court in its recent history.

But if confirmed quickly, Gorsuch could find himself participating in the decisions on three cases taken by the Court on Jan. 13 that will be argued together this term, and will settle whether employees can be required as a condition of employment to arbitrate their workplace disputes individually, while waiving their rights to a class process.

The long-simmering group of cases is a clash between the National Labor Relations Act and the Federal Arbitration Act, and an extension to the employment arena of the leading class waiver/mandatory arbitration case in consumer contracts, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which Gorsuch was quoting directly in the passage above.

Arbitration watchers who want to try to handicap the Court’s path likely will need to become acquainted with Gorsuch’s by now well-publicized animosity toward the so-called Chevron Doctrine, in which the U.S. Supreme Court has backed deference to administrative agency determinations.  See Chevron v. National Resources Defense Council, 467 U.S. 837 (1984)(available at http://bit.ly/1EirXXt).

In an immigration law decision last year, Gutierrez-Brizuela v. Lynch, No. 14-9585  (Aug. 23, 2016)(available at http://bit.ly/2kPDvh5), Gorsuch blasted Chevron in a concurrence, writing that its deference to the executive branch agencies in derogation of legislative power runs counter to the Constitution’s separation of powers checks-and-balance system.

The issue could control the arbitration outcome in the three employment arbitration cases at the Court, which currently are being briefed and not yet scheduled for oral argument. They emanate from a January 2012 opinion by the National Labor Relations Board.

In one of the three cases, the Board itself is a party, appealing a Fifth Circuit decision which overturned its earlier administrative decision. See NLRB v. Murphy Oil USA Inc., No. No. 16-307 (U.S. Supreme Court case page is available here: http://bit.ly/2kOPxal. Scotusblog’s page including briefs and a link to the Fifth Circuit opinion is available here: http://bit.ly/2kPvTyi).

If the Chevron Doctrine doesn’t figure in a Gorsuch view of the current arbitration cases, the NLRB’s moves to preserve class actions by forbidding mandatory arbitration may be another hot button for the former U.S. Supreme Court clerk.

Gorsuch on Class Actions

Gorsuch has problems with class actions in securities cases.  When he was in private practice, he wrote that “economic incentives unique to securities litigation encourage class action lawyers to bring meritless claims and prompt corporate defendants to pay dearly to settle such claims.” Neil M. Gorsuch and Paul B. Matey, “Settlements in Securities Fraud Class Actions: Improving Investor Protection,” Critical Legal Issues–Working Paper Series No. 128 (Washington Legal Foundation April 2005)(available at http://bit.ly/2kTBDCZ).

Two Opinions, One Dissent

Despite involvement as a panel member in cases producing about a dozen opinions or orders, the Howard case discussed above is one of only three arbitration writings exclusively by Gorsuch in his decade-long tenure on the court.  One of the three is a dissent.

The Tenth Circuit website revealed Gorsuch’s opinions, and orders with judgments, but didn’t produce unpublished opinions in which Gorsuch may have participated.

In Howard, Gorsuch wrote that the customarily swift determination by a lower court of whether the parties in the suit agreed to arbitration didn’t take place—fast or slow.

The plaintiff had filed a class action for overcharges against the propane supplier defendant.  The defense asked for arbitration, and Gorsuch described how the lower court botched its inquiry.  He first noted that the district court, “[u]nsure whether [defendant] Ferrellgas had shown an agreement to arbitrate in its initial motion, . . . entertained discovery and further motions practice.”

The trial court, Gorsuch reported, found “too many unresolved factual questions remained and proceeded to invite yet more discovery followed by yet more motions practice.”

Nearly a year and half after the defendant filed its motion to compel arbitration, the district court, Gorsuch wrote, “issued an order in which it found that material disputes of fact still prevented it from saying for certain whether or not the parties had agreed to arbitrate. But rather than proceeding to resolve the conflicting factual accounts through trial as the Act requires, the court entered an order denying arbitration outright.” [Emphasis is Circuit Judge Gorsuch’s.]

“That was error,” continued Gorsuch, exhibiting his breezy writing style in an area dry even by circuit law standards, explaining, “In these circumstances, the [Federal Arbitration] Act’s summary trial can look a lot like summary judgment. But when, as in this case, a quick look at the case suggests material disputes of fact do exist on the question whether the parties agreed to arbitrate, round after round of discovery and motions practice isn’t the answer. Parties should not have to endure years of waiting and exhaust legions of photocopiers in discovery and motions practice merely to learn where their dispute will be heard. The Act requires courts process the venue question quickly so the parties can get on with the merits of their dispute in the right forum. It calls for a summary trial—not death by discovery.”

Then, Gorsuch spread the blame around for arbitration disaster.  “Of course, the parties here didn’t exactly help themselves,” he wrote, adding, “They were anything but quick to seek the trial promised by the Act. In fact, they seemed content enough to haggle along together in the usual way of contemporary civil litigation, all about discovery disputes and motions practice and with only the most glancing consideration given to the possibility of trial.”

The case is a war over a contract, and whether and when it took effect.  Gorsuch explained that it was unclear from the record whether an oral contract for the propane tank and initial delivery was followed by a written contract for future deliveries containing the arbitration clause—and restricting it to the subsequent deliveries.

Regardless, Gorsuch–joined by his two fellow appeals panel members–ruled that with material facts in dispute, the district court should have proceeded to a trial on whether an arbitration agreement existed, and should not have denied the request to arbitration.

He wrote that the Federal Arbitration Act should have shown the path to the case’s resolution.  “We appreciate both sides’ evident frustration at how long this case has lingered at the transom without having entered either the door into arbitration or litigation,” Gorsuch concluded, adding, “It’s understandable that everyone might want us to give the case a firm nudge (one way or the other) so the parties’ dispute can finally progress past preliminary venue questions to the merits. But unresolved material disputes of fact block our way—disputes that could and should have been resolved years ago according to the procedures the FAA provides.”

Taking a Broader FAA View

Gorsuch took a broader FAA view in a dissent in a 2-1 Tenth Circuit arbitration case, Ragab v. Howard, No. 15-1444 (Nov. 21, 2016)(available at http://bit.ly/2gCL3pn).  The dissent—in a case where his panel affirmed a lower court’s ruling that conflicting arbitration agreements in six contracts between two parties should not be arbitrated because there was no meeting of the minds as to conducting the arbitration—appears to be is his most demonstrative view of the FAA’s effect on state laws.

Gorsuch strongly rejects the majority’s use of a New Jersey case that struck arbitration where multiple contracts conflicted on the terms of arbitration.  He notes that the New Jersey ruling had little application to Colorado laws, but also explains that it may not pass muster with the Supreme Court for its disregard of the FAA.

The New Jersey ruling, he explains, was a deep dive into the state’s consumer protection laws, in a case where the Tenth Circuit Colorado plaintiff more closely resembled a merchant.  But he noted that federal preemption is a big issue:  “Whether or not the FAA would preempt New Jersey’s special ‘extra clarity’ rule for certain kinds of arbitration agreements, that possibility undoubtedly exists and seems to me to counsel against endorsing it without a good deal more careful investigation than the parties offer us in this case.”

He wrote that with six of the parties’ interrelated commercial agreements containing arbitration clauses, and other circumstances, “In my view, parties to a commercial deal could have hardly demonstrated with greater clarity an intention to arbitrate their disputes and I see no way we might lawfully rescue them from their choice.”

Procedural holes are frequently filled by the parties, he explained, in providing “two easy workarounds that I believe would be more consistent with the parties’ expressed purposes than the course my colleagues chart.”

Additional Arbitration Work

Gorsuch was the author of one additional unanimous panel order and judgment on the Tenth Circuit’s website that backed a lower court’s refusal to compel arbitration for a former top executive who was fired by a pharmaceutical company. Genberg v. Porter, No. 13-1140 (May 12, 2014)(available at http://bit.ly/2kpuRs7).

The bulk of Gorsuch’s arbitration work appearing on the Tenth Circuit website, at www.ca10.uscourts.gov, was as part of a panel where others wrote the opinion or order. Among the opinions, Gorsuch joined his fellow circuit judges in backing a lower court ruling that a suit by a union under the Railway Labor Act  belonged in mandatory arbitration (BMWE v. BNSF Railway, No. 12-3061 (March 2, 2010)(available at http://bit.ly/2kpIwif).

In addition, he participated in panels in the following cases but didn’t write the unanimous opinion or order and judgment:

  • An order noting that an arbitration acts as a res judicata bar against a subsequent suit related to the wrongful discharge suit by an ex-Department of Veterans Affairs employee, backing a Merits Systems Protection Board order. Johnson v. DOVA, No. 14-9619 (May 22, 2015)(available at http://bit.ly/2kOYaBK).
  • An order strongly backing a major defense contractor’s mandatory arbitration clause contained in its employment dispute resolution program. Pennington v. Northrop Grumman Space & Mission Systems Corp., No. 07-2250 (March 14, 2008)(available at http://bit.ly/2jTh49F).
  • An affirmance of a Colorado court that overturned an arbitration award against a company which claimed that an arbitration notice presented by its Chinese business partner didn’t put the company on notice of a deadline it missed to participate in the ADR process. CEEG (Shanghai) Solar Science v. Lumos, No. 15-1256 (July 19, 2016)(available at http://bit.ly/2kOUorT).
  • An nonprecedential order and judgment as to arbitration backing a lower court that refused to compel arbitration, noting that the defendants seeking ADR didn’t establish that an arbitration agreement existed. Bellman v. i3Carbon, No. 12-1275 (May 2, 2014)(available at http://bit.ly/2kp3FJT).
  • An order, also nonprecedential as to the FAA, sending a case to arbitration and entitling the party to attorneys’ fees and costs “incurred in enforcing its right to arbitrate.” The order reversed a federal district court denial of arbitration. The winning defendant in the Tenth Circuit was a builder that sold the plaintiffs two condominiums with a mediation and arbitration clause in the sales agreement. Lamkin v. Morinda Properties Weight Parc, No. 11-4022 (Sept. 19, 2011)(available at http://bit.ly/2jTdKeS).
  • A case affirming dismissal of an employee’s wrongful termination suit after it had been arbitrated, citing claims preclusion under the arbitration award. Lewis v. Circuit City Stores, 05-3383 (Aug. 31, 2007)(available at http://bit.ly/2keVY6J).
  • A decision reversing two federal district court denials of arbitration against an employer charged by workers with violations of the Fair Labor Standards Act and an Oklahoma labor law, focusing on the scope of an arbitration clause, but in the remand order asking the lower court to consider whether the arbitration agreement preserves FLSA rights. Sanchez v. Nitro Lift Technologies, 12-7046 (Aug. 8, 2014)(available at http://bit.ly/2kT2Ple).
  • A determination that one of “two factually distinct injuries” related to a commercial contract fell under an arbitration clause, reversing in part a magistrate judge and a federal district court which had found that the case couldn’t be arbitrated. Chelsea Family Pharmacy PLLC v. Medco Health Solutions Inc., No. 08-5103 (June 2, 2009)(available at http://bit.ly/2jtiefT).

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

*Updated at 12 p.m.