Monster Energy and Evident Partiality

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

By Heather Cameron

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

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

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

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

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

The questions presented to the Supreme Court were:

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

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

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

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

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

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

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

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

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

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

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

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

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

Holding There Is No Treaty-FAA Conflict, Supreme Court Permits Equitable Estoppel for International Arbitration Parties

By Russ Bleemer

Philip J. Loree and Richard D. Faulkner discuss the GE Energy v. Outokumpu Supreme Court decision with Alternatives editor, Russ Bleemer

Seeing no conflict between key international arbitration enforcement law implemented by the Federal Arbitration Act and state laws, the U.S. Supreme Court today permitted a company that was not a party to an arbitration contract to make its case in using the doctrine of equitable estoppel to enforce an arbitration agreement.

GE Energy Power Conversion France SAS Corp. v. Outokumpu Stainless USALLC, et al., No. 18-1048 (available at https://bit.ly/2XogerH), reverses and remands an Eleventh U.S. Circuit Court of Appeals decision that said that GE Energy, which provided motors to Outkumpu via a general contractor, could not use the contract between Outokumpu and the general contractor to take the case to arbitration.

A unanimous opinion written by Justice Clarence Thomas held that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (available at https://bit.ly/2ZVazuK), which is codified in United States in the FAA’s second chapter, does not conflict with domestic equitable estoppel doctrines that permit the enforcement of arbitration agreements by nonsignatories.

On remand, GE Energy will be able to use the equitable estoppel doctrine to invoke the arbitration contract between Outokumpu and the general contractor, and argue that the contract contemplates that nonparty suppliers to the general contractor may use arbitration to settle disputes.

Much of the opinion centered on the role of nonparties in invoking arbitration agreements under the international and national laws, deploying, in Thomas’s words, a “textual” analysis of the Convention and the FAA.

The predecessors and affiliates of Outokumpu, a Calvert, Ala., steel manufacturer, signed a contract for the construction of three mills. The contract contained an arbitration clause. The construction company subcontracted for nine motors to run the plants from petitioner GE Energy. When Outokumpu filed suit against GE Energy after it refused repairs on the motors, all of which failed, GE Energy asked a court to compel arbitration under the Outokumpu-general contractor agreement, also objecting to Outokumpu’s attempted federal-court joinder of foreign insurers.

GE Energy was not a party to the Outokumpu construction contract. Still, an Alabama federal district court granted GE Energy’s motion, and Outokumpu appealed to the Eleventh Circuit, which reversed and sent the case back to the trial court.

The Supreme Court today reversed again, remanding the case back for further proceedings, likely eventually to the district court, which had granted GE Energy’s motion to compel arbitration with Outokumpu and an insurer. But the lower court had granted the arbitration request because it said that, in its role as a subcontractor, GE Energy qualified as a party under the contract.

The Supreme Court today used the opinion to uphold the principle of equitable estoppel, which didn’t figure in the trial court’s decision.

The Eleventh Circuit had reversed the trial court, rejecting arbitration, because it said that the Convention required that the party actually sign an arbitration agreement, excluding nonparties’ ability to invoke the contract using a state law doctrine like equitable estoppel.

Thomas’s reasoning started with the FAA, which he wrote “permits courts to apply state-law doctrines related to the enforcement of arbitration agreements.” That would allow the application of states’ equitable estoppel doctrines. 

The opinion states, “Generally, in the arbitration context, ‘equitable estoppel allows a nonsignatory to a written agreement containing an arbitration clause to compel arbitration where a signatory to the written agreement must rely on the terms of that agreement in asserting its claims against the nonsignatory.’” 21 R. Lord, Williston on Contracts §57:19, p. 200 (2017).

The Convention, noted Thomas, focuses almost entirely on enforcement, and the short Article II on agreements “in writing,” which discusses the need for a signature, wasn’t in conflict with the FAA-backed equitable estoppel doctrines.

The opinion notes that the New York Convention is silent on the status of nonsignatories. “This silence is dispositive here,” wrote Justice Thomas, “because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”

The opinion analyzes the treaty’s “negotiating and drafting history,” and says that the Court found “Nothing in the drafting history [that] suggests that the Convention sought to prevent contracting states from applying domestic law that permits nonsignatories to enforce arbitration agreements in additional circumstances.”

The opinion also dodges the need to interpret the significance of the executive branch’s view of the treaty. The United States, which argued in the case in January, backing GE Energy, claimed that the Court should give deference and “great weight” to its amicus interpretation of the treaty, which it had  submitted in another unrelated D.C. Circuit Court of Appeals case. 

Outokumpu countered “that the Executive’s noncontemporaneous interpretation sheds no light on the meaning of the treaty, asserting that the Executive expressed the “opposite . . . view at the time of the Convention’s adoption.”

But Justice Thomas concluded,

We have never provided a full explanation of the basis for our practice of giving weight to the Executive’s interpretation of a treaty. Nor have we delineated the limitations of this practice, if any. But we need not resolve these issues today. Our textual analysis aligns with the Executive’s interpretation so there is no need to determine whether the Executive’s understanding is entitled to “weight” or “deference.”

The Court’s remand order addressed the big issue in the Eleventh Circuit about the New York Convention’s requirement that the agreement in writing needs to be signed by the parties.  Noting that the Convention provisions cited by the Eleventh Circuit address the recognition of arbitration agreements, not who is bound by the agreements, Thomas wrote, “Because the Court of Appeals concluded that the Convention prohibits enforcement by nonsignatories, the court did not determine whether GE Energy could enforce the arbitration clauses under principles of equitable estoppel or which body of law governs that determination. Those questions can be addressed on remand.”

The opinion concluded by limiting the holding to the issue of the Convention and domestic-law equitable estoppel doctrines, finding no conflict between the two.

Justice Sonia Sotomayor concurred separately, agreeing that the Convention “does not categorically prohibit the application of domestic doctrines. She noted, “however, that the application of such domestic doctrines is subject to an important limitation: Any applicable domestic doctrines must be rooted in the principle of consent to arbitrate.”

Sotomayor said that consent is foundational to arbitration practice.  “This limitation is part and parcel of the Federal Arbitration Act (FAA) itself,” she wrote.

For a discussion of the Jan. 21 oral arguments in the case, see David Chung and Russ Bleemer’s post on CPR Speaks, “Tuesday’s SCOTUS Argument: Can Non-Signatories Compel Arbitration in the United States Under the New York Convention?” (January 22) (available at https://bit.ly/2ZVqPfg). For an examination of the GE Energy parties’ and amicus’s briefs, see “The Friends Speak: Here’s What Scotus Will Decide In the GE Energy International Arbitration Case,” 38 Alternatives 2 (January 2020) (available at https://bit.ly/2TXmcO2).

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The author edits Alternatives for the CPR Institute.  CPR Institute Summer 2020 intern Heather Cameron, a second year law student at Fordham University School of Law in New York City, contributed research. 

Supreme Court Declines To Hear Arbitration Case on ‘Equal Footing’

The U.S. Supreme Court this morning declined to hear an appeal in an Oklahoma arbitration case on the so-called equal-footing principle—the idea that the Federal Arbitration Act prevents courts and legislatures from targeting rulings and laws to arbitration agreements, and instead requires  them to place arbitration on an equal footing with other contracts.

The Court denied cert on Tamko Building Products, Inc. v. Williams, Daniel, et al., No. 19-959 (case documents including party briefs available on Scotusblog at https://bit.ly/3dcPrn7).

The Oklahoma Supreme Court case declined to enforce an arbitration agreement between homeowners and shingle manufacturers where the arbitration agreement was “printed on shingle wrapping viewed only by contractors and then discarded.”

Tamko, a Galena, Kansas, building supply company, contended that the Oklahoma court’s decision violated the principle in the Supreme Court case of Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017) (available at https://bit.ly/2YvMji9), which held that the FAA couldn’t be held to higher standards than other contracts.

Tamko, according to its reply brief filed last month with the Court, contended that the Oklahoma Supreme Court “found an agency relationship that empowered contractors buying shingles to bind homeowners to the terms of sale concerning matters such as price and delivery, but not arbitration—because of the importance of the jury-trial right.”

But, it continued, “That decision blatantly violates the FAA’s equal-footing principle.”

As a result of the cert denial, the Oklahoma Supreme Court’s decision that the homeowners “never had an opportunity to make a knowing waiver of access to the courts,” stands, along with its reversal of a trial court order remanding the case for trial.

NY Federal Judge Rejects Trumps’ Motion to Compel Arbitration

By Anne Muenchinger

A New York  Southern District matter accusing President Donald Trump, his company and his family of endorsing an allegedly fraudulent sales scheme is moving forward as litigation after the defendants tried to move the case to arbitration.

U.S. District Judge Lorna G. Scholfield refused the Trump Corp.’s motion to compel arbitration of the claims. Jane Doe, et al. v. Trump Corp., et al., 18 Civ. 9936 (LGS) (S.D.N.Y. April 8) (available at https://bit.ly/2wXWZLh).

The order is the latest development in a claim originally filed in October 2018, against Trump Corp., the president, and his three older children for racketeering and conspiracy to racketeer in violation of federal law, and six state law claims relating to unfair or untrue business practices.

The amended complaint alleged that the Trumps promoted Concord, N.C.’s ACN Opportunity LLC, a non-party to the action.  ACN is a multi-level marketing company which contracts with independent business owners, or “IBOs,” who then sell ACN’s products and services to the wider public. The ACN videophone tanked, and the plaintiffs allege they lost hundreds of thousands of dollars.

The company was endorsed and promoted by Trump Corp. through multiple media advertising channels, including during episodes of the television program Celebrity Apprentice, hosted by Donald Trump and featuring his children Ivanka Trump and Donald Trump Jr.

The anonymous plaintiff, along with other similarly placed complainants, signed up to become IBOs, citing the defendants’ endorsement as a crucial in deciding to contract with ACN.

Their action, brought individually and on behalf of a putative class, alleges that the defendants made false statements in the promotional material that concealed that the Trumps were paid for their promotion, rather than because they believed that ACN “offered a reasonable probability of commercial success.”

The defendants filed a motion to dismiss following a February 2019 amended complaint, which was granted on the racketeering and conspiracy to racketeer claims.  But state law claims of dissemination of untrue and misleading public statements, unfair competition, unfair and deceptive trade practices, deceptive practices, as well as fraud and negligent misrepresentations were permitted to proceed, with the court retaining jurisdiction under the Class Action Fairness Act, 28 U.S.C. § 1332(d).

The Trumps notified the court on July 19, 2019, of their intention to compel arbitration, eight months into litigation. Their motion is based on the contract signed between ACN and each IBO, which includes a clause mandating the resolution of all disputes via binding arbitration under the American Arbitration Association commercial arbitration rules.

In her denial order earlier this month, Judge Scholfield not only firmly rejects the motion, but issued a scathing rebuke of the Trumps’ behavior which she denounces as “substantively prejudicial towards Plaintiffs and seeks to use the [Federal Arbitration Act] as a vehicle to manipulate the rules of procedure to the Defendants’ benefit and Plaintiffs’ harm.” Jane Doe, et al. v. Trump Corp., et al., 18 Civ. 9936 (LGS) at 15.

Scholfield added, “Such tactics undermine a fundamental purpose of the FAA to support the economical resolution of claims.” Id.

The defendants argued that the contractual obligations arising out of ACN’s contract with each IBO equally apply to them under a theory of equitable estoppel, or agency, so the claims must be submitted to arbitration.

The central question for the court to resolve was whether the plaintiffs had in fact agreed to arbitrate any disputes with the defendants under either of the two cited doctrines, since the Trumps were not a party to the plaintiffs-ACN contracts. Additionally, in the event that an agreement was established, the court examined whether the defendants had waived their right to mandatory arbitration of the claims.

On the theory of equitable estoppel, Judge Scholfield wrote that a signatory to an arbitration clause may be compelled to arbitrate a dispute against a non-signatory “where (1) ‘the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed,’ and (2) there is ‘a relationship among the parties of a nature that justifies a conclusion that the party which agreed to arbitrate with another entity should be estopped from denying an obligation to arbitrate a similar dispute’ with the non-signatory.” Id. at 6 (citations omitted).

Because the claim is based upon misleading and unfair statements which allegedly induced the plaintiffs to enter the agreement, Scholfield ruled that the claims are sufficiently intertwined with the agreement.

But the opinion holds that the relationship prong needed to find equitable estoppel is not fulfilled in this case, rejecting the defendants’ proposition that the plaintiffs were aware of the defendants’ paid relationship with ACN.

Rather, the opinion states that the “business relationship was expressly hidden,” and applies Second Circuit precedent denying estoppel to “a defendant aligned with the signatories to allegedly accomplish wrongful business practices”. Id. at 9.

Similarly, the Trump’s failure to disclose their relationship with ACN was central in the court’s reasoning with regard to the agency claim. That basis of the claim was also denied, as arbitration agreements may only apply to non-signatory agents where such agents are disclosed. Id. at 12.

On the waiver, the court examined the time elapsed from the commencement of litigation to the request for arbitration, the amount of litigation to date, and the proof of prejudice. All of these elements, the court explains, lean in favor of the plaintiffs in this case.

The opinion found probative that Trump Corp. notified the court of its intention to arbitrate eight months after the outset of litigation, and after full adjudication of a motion to dismiss; a motion to proceed pseudo-anonymously; multiple motions to seal, and several discovery disputes.

Prejudice is established, the Scholfield explained, where “the defendant seeks to benefit from information obtained through judicial proceedings that would be unavailable in arbitration,” and where the defendants want to “use arbitration as a means of aborting a suit that did not proceed as planned in the District Court.” Id. at 15 (internal citations omitted).

So the case will continue before the Southern District of New York.

Only a day after the order, Bloomberg reported that in a teleconference hearing, Judge Schofield ordered Hollywood studio Metro-Goldwyn-Mayer, current owner of the Celebrity Apprentice, to release hundreds of hours of unaired footage from the two episodes in which ACN principals were featured. See Erik Larson, “MGM Told to Hand Over Trump’s ‘Apprentice’ Tapes in Scam Suit,” Bloomberg (April 9) (available at https://bloom.bg/3cFNz6q).

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Muenchinger is a CPR Institute Spring 2020 intern, and an LLM student at the Benjamin N. Cardozo School of Law at Yeshiva University in New York City.

 

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

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)

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.

Update: Legislatures on Invalidating Pre-Dispute Arbitration Agreements

By Andrew Garcia

A federal court has slowed the momentum by legislatures—in this case, New York state’s—to bar arbitration in employment cases. A New York U.S. District Court judge has struck down the application of a recent state law which allowed employees to avoid mandatory pre-dispute employment agreements to arbitrate sexual harassment claims.

The statute at issue, NYCPLR § 7515, originally passed and signed into law a year ago, aimed to void arbitration clauses in employment contracts that require the use of arbitration proceedings to resolve workplace sexual harassment claims in New York state. In June, the New York Senate and Assembly passed amendments to § 7515 that expanded this prohibition to agreements that sought to arbitrate all workplace discrimination claims.

This year’s bill, awaiting Gov. Andrew Cuomo’s expected signature (see http://bit.ly/2SKnH0c), was a victory for lawmakers like the sponsor, State Democratic Senator Alessandra Biaggi. (She wrote on Twitter on June 19: “6 months & 2 public hearings later, we passed #BiaggiBill S6577 to expand protections for survivors, & hold New York employers, agencies, & organizations liable for all forms of workplace sexual harassment and discrimination.” See @SenatorBiaggi.)

But any victories may be short-lived. A federal court found that the currently enacted version of § 7515 was preempted by the Federal Arbitration Act and therefore invalid about a week after the amendments passed both New York houses.

On June 26, U.S. District Court Judge Denise Cote issued an opinion that deemed a recently modified New York State law preempted by the Federal Arbitration Act.  Latif v. Morgan Stanley & Co. LLC et al., No. 18cv11528 – Document 52 (S.D.N.Y. 2019) (available at http://bit.ly/2y9w6AL). In Latif, the plaintiff filed a suit against his employer, alleging discrimination and sexual assault claims. At the beginning of his employment, Latif signed an offer letter that incorporated by reference Morgan Stanley’s CARE Arbitration Program Arbitration Agreement.

Judge Cote found that the application of § 7515 to invalidate the parties’ agreement to arbitrate Latif’s claims would be inconsistent with the FAA. The opinion states that § 7515 does not displace the FAA’s presumption that arbitration agreements are enforceable. Judge Cote did not address the viability of § 7515 in purely an intrastate matter where the FAA would not be implicated.

The recently passed amendments to § 7515 are part of a growing trend in state and federal legislatures to pass laws that ban pre-dispute arbitration agreements for sexual harassment claims and more. In 2018, the Maryland legislature passed the Disclosing Sexual Harassment in the Workplace Act, which prohibited employers from enforcing arbitration agreements for sexual harassment or retaliation claims. In Vermont, the legislature passed “An Act Relating to the Prevention of Sexual Harassment,”  which prohibited agreements that prevent an employee from filing a sexual harassment claim in court.

The states have moved faster than Congress, but there is no shortage of proposals at the federal level. In the current session, there have been at least 11 new bills introduced to amend the FAA, the Fair Labor Standards Act, or the National Labor Relations Act to prohibit most employment and consumer pre-dispute arbitration agreements.

Table 1: 116th Legislative Session Bills Pertaining to Arbitration (Senate = S; House = HR)

Bill Name Bill Number Sponsors Current Status
Forced Arbitration Injustice Repeal (FAIR) Act S. 610 Sen. Richard Blumenthal, D., Conn. 2/28/19: Introduced
H.R. 1423 Rep. Hank Johnson, D., Ga. 4/8/19: Referred to the Subcommittee on Antitrust, Commercial, and Administrative Law
Bringing an End to Harassment by Enhancing Accountability and Rejecting Discrimination (BE HEARD) in the Workplace Act S. 1082 Sen. Patty Murray, D. Wash. 4/9/19: Introduced
H.R. 2148 Rep. Katherine Clark, D. Mass. 5/3/19: Referred to the Subcommittee on the Constitution Civil Rights, and Civil Liberties
Restoring Justice for Workers Act S. 1491 Sen. Patty Murray D., Wash. 5/15/19: Introduced and referred to the Committee on Health, Education, Labor, and Pensions.
H.R. 2749 Rep. Jerrold Nadler, D., N.Y. 6/26/19: Referred to the Subcommittee on Antitrust, Commercial, and Administrative Law
Ending Forced Arbitration of Sexual Harassment Act H.R. 1443 Rep. Cheri Bustos, D. Ill. 4/8/19: Referred to the Subcommittee on Antitrust, Commercial, and Administrative Law
Restoring Statutory Rights and Interests of the States Act S. 635 Sen. Patrick Leahy, D., Vt. 2/28/19: Introduced
Preventing Risky Operations from Threatening the Education and Career Trajectories of (PROTECT) Students Act S. 867 Sen. Margaret Wood Hassan, D. N.H. 3/26/19: Referred to the Committee on Health, Education, Labor, and Pensions
Court Legal Access and Student Support (CLASS) Act S. 608 Sen. Richard Durbin, D., Ill. 2/28/19: Referred to the Committee on Health, Education, Labor, and Pensions
H.R. 1430 Rep. Maxine Waters, D. Calif. 4/8/19: Referred to the Subcommittee on Antitrust, Commercial, and Administrative Law
Safety Over Arbitration Act S. 620 Sen. Sheldon Whitehouse, D., R.I. 2/28/19: Referred to the Committee on the Judiciary
Arbitration Fairness for Consumers Act S. 630 Sen. Sherrod Brown, D., Ohio 2/28/19: Referred to the Committee on Banking, Housing, and Urban Affairs
Justice for Servicemembers Act H.R. 2750 Rep. David Cicilline, D. R.I. 6/26/2019: Referred to the Subcommittee on Antitrust, Commercial, and Administrative Law

 

Ending Forced Arbitration for Victims of Data Breaches Act H.R. 327 Rep. Ted Lieu, D. Calif. 1/25/19: Referred to the Subcommittee on Consumer Protection and Commerce

The bill with the most co-sponsors (215 House members and 34 Senators) and the most prominent media coverage is the Forced Arbitration Injustice Repeal (FAIR) Act, which would ban pre-dispute arbitration in employment, consumer, antitrust, and civil rights disputes. Introduced in both the House and the Senate, the FAIR Act was recently referred to the House Subcommittee on Antitrust, Commercial, and Administrative Law.

Another bill with growing support (96 House members and 18 Senators co-sponsoring) is the Bringing an End to Harassment by Enhancing Accountability and Rejecting Discrimination (BE HEARD) in the Workplace Act. The BE HEARD in the Workplace Act bans all pre-dispute arbitration agreements that require arbitration of a work dispute, and all post-dispute arbitration agreements where an employee’s consent was coerced, or if the agreement was not in sufficiently plain language likely to be understood by the average worker.

The BE HEARD in the Workplace Act would also amend the NLRA to expand “Unfair Labor Practices” to situations where an employer enters into or attempts to enforce any agreement that prevents litigation, or support of joint, class, or collective claims arising from or relating to the employment of a worker, coerces the worker to enter into such an agreement, and retaliates against a worker for refusing to enter into such an agreement. The House bill, sponsored by Rep. Katherine Clark, D., Mass., is currently in the Subcommittee on the Constitution, Civil Rights, and Civil Liberties.

Another key bill, with 48 members of the House and 18 Senators co-sponsoring, is the Restoring Justice for Workers Act. This bill would amend the NLRA to prohibit pre-dispute arbitration agreements that require arbitration of work disputes, retaliation against workers for refusing to enter into arbitration agreements and ensure that post-dispute arbitration agreements are “truly voluntary.” The House bill, sponsored by Rep. Jerrold Nadler, D., is currently in the Subcommittee on Antitrust, Commercial, and Administrative Law.

The Latif holding that the FAA preempts § 7515 might push federal and state lawmakers to accelerate the momentum of the pending federal legislation. Judge Cote in Latif notes that the law already had been cited by the U.S. Supreme Court, in dissent, as an example of state action that seeks to protect workers’ ability to bring sexual harassment suits in court in the wake of other top court decisions backing employment arbitration. See Lamps Plus v. Varela, 139 S. Ct. 1407, 1422 (2019) (Ginsburg, J., dissenting) (available at http://bit.ly/2GxwFbC).

Although legislation that has sought to ban fully pre-dispute arbitration agreements has not been successful, this could change given the political landscape and outcome of the 2020 election.

The author, a Summer 2019 CPR Institute intern, is a law student at Brooklyn Law School.

 

 

Was It Really a Foreign Arbitral Award? Ninth Circuit Says No.

By Brian Chihera

The Ninth U.S. Court of Appeals has reversed a district court’s order which had treated an order made by a Philippines arbitrator as a foreign arbitral award.

The appeals court ruled on an unusual situation.  It found that the case had been settled, and there was no outstanding dispute to arbitrate by the time the arbitrator got the case, and therefore nothing for the federal district court to confirm.

In Castro v. Tri Marine Fish Co., No. 17-35703 (Feb. 27) (available at http://bit.ly/2Zwoa8x), the three-judge appellate panel said that the arbitration decision was not a decision at all and should not be enforced under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, best known as the New York Convention.

“We review foreign arbitral awards deferentially, but we do not blind ourselves to reality when presented with an order purporting to be one,” concluded Circuit Judge M. Margaret McKeown, writing for a unanimous Ninth Circuit panel. “To cloak its free-floating settlement agreement in the New York Convention’s favorable enforcement regime, Tri Marine asked an arbitrator to wave his wand and transform the settlement into an arbitral award. That is not sufficient to produce an award subject to the Convention.”

At the heart of the convention and related federal law, notes Circuit Judge McKeown, “is the principle insulating foreign arbitral awards from second-guessing by courts. But this appeal involves an even more fundamental question—whether we are presented with a foreign arbitral award at all. In the mine run of cases, the answer is uncontroversial: when it looks, swims, and quacks like an arbitral award, it typically is. Yet, in this unusual appeal, we have an arbitral award in name only. There was no dispute to arbitrate, as the parties had fully settled their claims before approaching an arbitrator.”

Michael Castro, a Philippines citizen, moved to American Samoa where he lived with his fiancé. Castro was employed by Tri Marine and worked in the company’s warehouse. He was offered a deck-hand position on a fishing vessel it owned, which he accepted.

The dispute between Castro and his employer started with an employment contract that was signed just before the fishing expedition launched. Both parties dispute the contents of what was signed. Castro said he believed that he was only signing a “a half sheet of paper with a few sentences on it” that designated the pay rate, and the employer contended that Castro signed an employment contract.

Castro, however, said that he signed the employment contract when he appeared before an arbitrator. The contract contained a clause which was applicable to all disputes or claims arising out of the employment on the vessel.

Castro injured his knee after falling down ship stairs two weeks into the trip, and immediately requested to be returned to American Samoa so he could travel to Hawaii for medical care. Tri Marine arranged for Castro to be treated in the Philippines, where he also underwent surgery for a torn anterior cruciate ligament and a torn meniscus. Castro also received physical therapy and his employer paid for the medical expenses and his monthly maintenance.

Castro approached Rhodylyn De Torres, a Tri Marine agent in the Philippines after his father had been diagnosed with kidney cancer. He negotiated a settlement of his disability claims in exchange for an advance of $5,000 to help pay for his father’s care. This was followed by an agreement in principle to release Castro’s claims in exchange for an additional $16,160.

Castro was accompanied by his fiancé when he went to see De Torres at her office to finalize the settlement. Castro was not aware of the fact that he was participating in an arbitration. Castro and De Torres both gave different versions of events of their meeting. Castro is not fluent in English and disputes that De Torres translated documents into Tagalog, the Philippine language. There was a dispute as to when the agreement was signed, although Castro did not dispute signing the agreement.

The settlement agreement signed between Castro and De Torres meant that he had released himself from any and all liability or claims. After the meeting on the release, Castro was told that he had to pick up the settlement receipt at the National Conciliation and Mediation Board, but in fact he was led to an arbitration.

Gregorio Biares was present as the arbitrator. This was the first time for Castro to be in an arbitration hearing and he was not aware of any dispute between himself and his former employer. Castro asserted that Biares hurriedly flipped through papers asking Castro to sign  and stating that the settlement was favorable to Castro. Biares reportedly told Castro that the settlement papers were “just a first payment.”

But there was no arbitral case filed by either party. Tri Marine provided Biares the release paperwork signed by Castro and a joint two-page motion to dismiss.

The New York Convention recognizes the enforcement of foreign arbitral awards. A court is obliged to confirm a foreign arbitral award unless the party resisting enforcement meets the substantial burden of proving one of the seven interpreted defenses.

The major question for the U.S. courts was whether there was an “arbitral award” that would fall under the New York Convention. In coming to its decision, the courts had to look at the definitions of “arbitration” and “arbitral award”.

The two terms, however, do not have definitions under the New York Convention and in the Federal Arbitration Act. Case law provided direction.  Using the definitions from American Law Institute’s Restatement, the Ninth Circuit decided that there was no arbitral award, tribunal or arbitration because the requirements of the parties’ arbitration agreements and the forum were not met.

Although the order was issued as an arbitral order, there were aspects of it that indicated otherwise. First, there was no dispute between Castro and his former employer Tri Marine. There was no genuine disagreement between the parties.  Therefore, they reached an agreement and there was no arbitral award handed down. Castro and Tri Marine had settled their dispute before they visited the arbitrator, with Castro releasing Tri Marine of any liability and all claims.

Arbitration is a consensual procedure, and there was no consent between Castro and Tri Marine to participate in an arbitration that was a meeting with a third party. Parties may waive contractual terms, but by his conduct, Castro did not have any intent to arbitrate the dispute in the Philippines. The meeting between the parties did not follow Philippines arbitral procedures.

The Ninth Circuit opinion stated that the parties’ free-floating settlement agreement did not transform into an arbitral award and the fact that there was an arbitrator present does not make it an arbitral award. The appeals court concluded that Tri Marine could seek to enforce the release as a contract matter, but the arbitrator’s order was not an award and it did not fall under a foreign arbitral award.

The author, a CPR Institute Summer 2019 intern, graduated last month with an LLM in dispute resolution from the University of Missouri School of Law in Columbia, Mo.

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

By Echo K.X. Wang and Russ Bleemer

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

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

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

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

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

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

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

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

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

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

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

Roberts continues:

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

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

* * *

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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

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

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

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

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

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

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

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

* * *

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

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

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

* * *

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

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

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

* * *

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

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

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

 

* * *

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

 

US District Court Grants Appellate Arbitration Panel Award the Same Deference under FAA Jurisprudence

By Mark Kantor

Kantor Photo (8-2012)

There are very few court decisions addressing the impact of an appellate review process administered by the arbitral institution that administered the underlying arbitration.  On February 14, Judge Paul Crotty of the U.S. District Court for the Southern District of New York issued an opinion in a case in which an American Arbitration Association (AAA) appellate arbitration panel had reversed the decision of the AAA original arbitrator, Hamilton v. Navient Solutions, LLC., No. 18 Civ. 5432 (PAC) (S.D.N.Y. February 14, 2019), available on TDM at https://www.transnational-dispute-management.com/legal-and-regulatory-detail.asp?key=21638 (subscription required).  Judge Crotty upheld the decision of the appellate arbitral panel, giving it the same deference as is customary for arbitration awards generally under the Federal Arbitration Act.

The underlying dispute involved a situation in which Ms. Hamilton, a student loan borrower, claimed that Navient, a collection company, had breached a U.S. Federal statute limiting collection calls relating to unpaid loans (the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227).  After Ms. Hamilton had expressly sought to revoke her consent to such calls, Navient nevertheless made an additional 237 calls to her (yikes!) using autodialer technology.

Ms. Hamilton brought an arbitration claim against Navient for harassment under the AAA arbitration agreement in her student loan documents.  That arbitration agreement included a reference to the AAA’s Optional Appellate Arbitration Rules (available at https://www.adr.org/sites/default/files/AAA%20ICDR%20Optional%20Appellate%20Arbitration%20Rules.pdf).

Ms. Hamilton had apparently consented in her student loan documents to being called by a collection company.  After she defaulted on her loan payments, Navient then began using an autodialer to call her repeatedly as part of its collection efforts.  However, after being called a number of times, Ms. Hamilton contacted Navient and sought to revoke her consent to be called.  Navient [here, NSL] and Ms. Hamilton stipulated as follows.

  1. On April 21, 2016, Ms. Hamilton instructed one of NSL’s call-center agents to stop calling her on her cellular telephone.  She was advised that she would be “taken off the autodialer.”
  2. On April 21, 2016, NSL’s call-center agent updated NSL’s system of record to update Ms. Hamilton’s autodial consent permission from “Y” to “N.”
  3. After the conversation on April 21, 2016 NSL no longer possessed Ms. Hamilton’s consent to place calls to her cellular telephone using an automatic telephone dialing system.
  4. NSL called Ms. Hamilton’s cellular telephone number two hundred thirty-seven (237) times after April 21, 2016.

In reliance on that stipulation, the sole arbitrator in the arbitration decided that Ms. Hamilton had properly revoked her consent for Navient to call, consistent with the TCPA.  The arbitrator therefore held Navient liable for damages on that basis.  However, after the hearing in the arbitration but before the arbitrator had issued the award, the U.S. Court of Appeals for the Second Circuit issued an opinion concluding that the TCPA did not permit unilateral revocation of a prior consent to be called.

On June 22, 2017, the U.S. Court of Appeals for the Second Circuit held in Reyes v. Lincoln Automotive Financial Services, 861 F.3d 51 (2d Cir. 2017), that the TCPA does not permit a party to unilaterally revoke consent that was made as part of a bargained-for exchange, rather than gratuitously.

Promptly after the Reyes decision was released, Navient emailed the arbitrator, asking that the record in the arbitration be reopened to consider the potentially dispositive effect of Reyes on Ms. Hamilton’s claim.  The arbitrator, though, denied Navient’s request and, the next day, issued the award in favor of Ms. Hamilton.

On June 27, 2017, the arbitrator denied Navient’s request to reopen the record because Navient had stipulated that it “no longer possessed Ms. Hamilton’s consent to place calls to her cellular telephone using an automatic telephone dialing system” and “[r]evocation of consent by [Hamilton] [wa]s . . . not an issue presented for decision in this arbitration.”

Navient appealed under the AAA Optional Appellate Procedure.  Considering the impact of Reyes on the stipulation, the 3-person appellate arbitration panel held that Ms. Hamilton’s consent was, by operation of the Reyes decision, not unilaterally revocable.  The appellate panel therefore overturned the part of the initial arbitrator’s award giving effect to that revocation of consent, and awarded in favor of Navient.

On July 5, 2017, Navient filed a Notice of Appeal of the award to a three-judge arbitration panel, and on November 17, 2017, the arbitration panel denied Hamilton’s motion to dismiss the appeal. …  The arbitration panel issued a final award on March 19, 2018, finding that under Reyes, Hamilton’s “consent was not revocable, and her withdrawal of consent was null and void,” reversing and vacating the portion of the initial award ruling in Hamilton’s favor, and affirming the initial award ruling in favor of Navient the outstanding balance of the Loan — $12,512.72.

Ms. Hamilton then turned to the District Court seeking to vacate the appellate award, arguing that the appellate arbitration panel had exceeded its powers and manifestly disregarded the law by vacating the initial award in her favor and awarding instead in Navient’s favor.  Judge Crotty, however, applied the traditional test under Federal Arbitration jurisprudence, that “a district court’s role in reviewing an arbitral award is “narrowly limited,” and requires “great deference” to arbitrators’ determinations.”  He declined to vacate the appellate arbitration award.

Navient did not believe or agree that Hamilton was permitted to unilaterally revoke the consent she gave in her student loan agreement.  The arbitration panel did not exceed its powers or act improperly in applying Reyes.

The arbitration panel also did not manifestly disregard the law in this case.  To the contrary, rather than “willfully flout[ing] the governing law by refusing to apply it,” …, the arbitration panel applied a Second Circuit holding to conclude that the factual stipulation regarding withdrawal of consent had no legal impact.   The arbitration panel did not ignore a clear law, but rather obeyed one. ….   Moreover, even if the Court believed that Reyes was ambiguous (it does not), application of an ambiguous legal standard would still not constitute manifest disregard.

(Citations and footnotes omitted.)

The District Court therefore confirmed the award as modified by the appellate arbitration panel.

The noteworthy aspect of Hamilton v. Navient for us is that the District Court made no distinction for purposes of judicial review between an initial arbitration award and an award as modified by an appellate arbitration panel.  The appellate panel had the last word under the AAA’s Optional Appellate Arbitration Rules, and the Court gave effect to that structure without a second thought.

_______________________________________________

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

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