Implications of Henry Schein and New Prime US Supreme Court Decisions

By Mark Kantor

Kantor Photo (8-2012)

As you know, the US Supreme Court has now issued its opinions in two of the three arbitration-related cases it heard this Term, the 8-0 (with an additional short concurrence by Justice Ginsburg) unanimous decision authored by Justice Gorsuch in New Prime Inc. v. Oliveira and the 9-0 unanimous decision authored by Justice Kavanaugh in Henry Schein v. Archer & White Sales.  Only Lamps Plus Inc. v. Varela remains to be decided this Term (Question Presented: whether the Federal Arbitration Act (FAA) overrides a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements).

The headlines in those decisions relate to excluding from the FAA obligation to enforce arbitration any pre-dispute agreements with independent contractor transportation workers (New Prime v. Oliveira) and the rejection of a “wholly groundless” exception to a court’s obligation to allow the arbitral tribunal to decide jurisdictional disputes where the parties have “clearly and unmistakably” allocated that authority to the arbitrators (Henry Schein v. Archer & White Sales).  But there are other implications of those decisions to which we should pay attention.

First, with respect to the decision in Henry Schein and as discussed on the listserv, the lower courts had relied on the competence-competence Rule 7(a) in the AAA Commercial Arbitration Rules to conclude that the parties had “clearly and unmistakably” allocated that decision-making power to the arbitrators, as required by First Options of Chicago, Inc. v. Kaplan.  However, the Henry Schein Court stated:

We express no view about whether the contract at issue in this case in fact delegated the arbitrability question to an arbitrator.  The Court of Appeals did not decide that issue.  Under our cases, courts “should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.” First Options, 514 U. S., at 944 (alterations omitted).  On remand, the Court of Appeals may address that issue in the first instance, as well as other arguments that Archer and White has properly preserved.

As has been explained by others, there is an existing Circuit split as to whether a competence-competence provision in arbitration rules is sufficient to satisfy the First Options standard.  Moreover, Prof. George Bermann’s amicus brief on that issue, reflecting the view of the draft Restatement that a provision within the arbitration rules should not by itself be sufficient, triggered critical questioning by the Justices (particularly Justice Ginsburg) at the case’s oral argument.  That issue was not, however, part of the Question Presented on which the Supreme Court had granted certiorari for review.  It thus appears the Justices are preparing themselves to resolve that Circuit split in a future case.  In that regard, you may recall my October 31 post (see below, triggered by Prof. Bermann’s amicus brief) asking whether that question will be “the Next Big Arbitration Issue”.

Second, the New Prime decision makes clear that independent contractors may nevertheless be transportation “workers” with “employment agreements” who cannot be bound by a pre-dispute arbitration agreement enforceable under the FAA.  Mr. Oliveira himself is an independent trucker.  But I suggest to you the bigger practical impact will be to reinvigorate class actions in US courts brought by Uber and Lyft drivers against their respective ride-sharing employers.  Many of those judicial class actions had been dismissed in favor of arbitration due to mandatory arbitration clauses in the drivers’ independent contracts with the ride-sharing companies.

Similarly, seamen on shipping and fishing vessels and working personnel on cruise ships are not often employees of their shipping companies, fishing vessels or cruise lines etc.  Instead, they are regularly engaged under independent contractor agreements containing arbitration clauses.  There too, we can anticipate a resurgence of claims in US courts, rather than in arbitration, including possible class actions against shipping companies and cruise lines on various compensation, hiring and firing, and working conditions issues.  Unlike ride-sharing companies, though, those maritime companies generally operate internationally.  Consequently, we may anticipate as well that even more of those maritime companies will specify in their employment/independent contractor agreements an arbitration situs outside FAA jurisdiction, such as the many maritime employment arbitrations now being conducted in Caribbean seats.

Rail workers may also employ New Prime to move some disputes from arbitration to courts, although much of that field in the US is unionized under collective bargaining agreements for which arbitration is statutorily authorized outside the FAA.  Independent contractor relationships are less common.

But Justice Gorsuch may have gone further in his opinion.  He wrote:

Given the statute’s terms and sequencing, we agree with the First Circuit that a court should decide for itself whether §1’s “contracts of employment” exclusion applies before ordering arbitration. After all, to invoke its statutory powers under §§3 and 4 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or beyond the boundaries of §§1 and 2. The parties’ private agreement may be crystal clear and require arbitration ofevery question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.

(Emphasis added)

It is certainly possible to interpret that statement to mean that a court must itself determine whether the arbitration agreement falls within or outside §2 of the FAA, not just FAA §1.  FAA Section 1 excludes, according to long-standing precedent, maritime transportation workers from the obligations of the court to stay litigation and compel arbitration.  But FAA §2, the basic provision of the FAA enforcing covered arbitration agreements, contains the well-known savings clause for “such grounds as exist at law or in equity for the revocation of any contract”:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

(Emphasis added)

The quoted language authored by Justice Gorsuch (and endorsed by seven other Justices) can be read to suggest that, regardless of any “clear and unmistakable” delegation of jurisdictional decisions to arbitrators by the contracting parties, a supervising court must itself determine whether a challenge to an arbitration agreement on grounds such as unconscionability, duress or mistake is successful before the dispute proceeds to arbitration; i.e., a challenge under FAA §2 on grounds that exist in law or equity for revocation of any contract.  Certainly, counsel for parties seeking to avoid an arbitral forum in favor of a judicial forum will seize upon that language in New Prime to try to place the dispute in the courts.  We do not know if that was what Justice Gorsuch intended, but we can therefore anticipate a string of US court cases addressing the “who decides” issue again from that perspective, ultimately returning to the US Supreme Court for further clarification.

There is also another important conceptual issue embedded in Justice Gorsuch’s New Prime opinion that may affect many other issues relating to the FAA.  Justice Gorsuch spent considerable effort in his opinion focusing on the original legislative intent in 1925 for the FAA.  For example, these selections from the opinion.

Why this very particular qualification?  By the time it adopted the Arbitration Act in 1925, Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers.  And it seems Congress “did not wish to unsettle” those arrangements in favor of whatever arbitration procedures the parties’ private contracts might happen to contemplate.

****

In taking up this question, we bear an important caution in mind. “[I]t’s a ‘fundamental canon of statutory construction’ that words generally should be ‘interpreted as taking their ordinary . . . meaning . . . at the time Congress enacted the statute.’” Wisconsin Central Ltd. v. United States, 585 U. S. ___, ___ (2018) (slip op., at 9) (quoting Perrin v. United States, 444 U. S. 37, 42 (1979)). See also Sandifer v. United States Steel Corp., 571 U. S. 220, 227 (2014).  After all, if judges could freely invest old statutory terms with new meanings, we would risk amending legislation outside the “single, finely wrought and exhaustively considered, procedure” the Constitution commands. INS v. Chadha, 462 U. S. 919, 951 (1983).  We would risk, too, upsetting reliance interests in the settled meaning of a statute. Cf. 2B N. Singer & J. Singer, Sutherland on Statutes and Statutory Construction §56A:3 (rev. 7th ed. 2012).  Of course, statutes may sometimes refer to an external source of law and fairly warn readers that they must abide that external source of law, later amendments and modifications included. Id., §51:8 (discussing the reference canon).  But nothing like that exists here.  Nor has anyone suggested any other appropriate reason that might allow us to depart from the original meaning of the statute at hand.

****

To many lawyerly ears today, the term “contracts of employment” might call to mind only agreements between employers and employees (or what the common law sometimes called masters and servants).  Suggestively, at least one recently published law dictionary defines the word “employment” to mean “the relationship between master and servant.” Black’s Law Dictionary 641 (10th ed. 2014).  But this modern intuition isn’t easily squared with evidence of the term’s meaning at the time of the Act’s adoption in 1925.  At that time, a “contract of employment” usually meant nothing more than an agreement to perform work.

****

What’s the evidence to support this conclusion?  It turns out that in 1925 the term “contract of employment” wasn’t defined in any of the (many) popular or legal dictionaries the parties cite to us.  And surely that’s a first hint the phrase wasn’t then a term of art bearing some specialized meaning.  It turns out, too, that the dictionaries of the era consistently afforded the word “employment” a broad construction, broader than may be often found in dictionaries today.  Back then, dictionaries tended to treat “employment” more or less as a synonym for “work.”  Nor did they distinguish between different kinds of work or workers: All work was treated as employment, whether or not the common law criteria for a master-servant relationship happened to be satisfied.

What the dictionaries suggest, legal authorities confirm.  This Court’s early 20th-century cases used the phrase “contract of employment” to describe work agreements involving independent contractors.  Many state court cases did the same.  So did a variety of federal statutes.  And state statutes too.  We see here no evidence that a “contract of employment” necessarily signaled a formal employer-employee or master-servant relationship.

****

If courts felt free to pave over bumpy statutory texts in the name of more expeditiously advancing a policy goal, we would risk failing to “tak[e] . . . account of ” legislative compromises essential to a law’s passage and, in that way, thwart rather than honor “the effectuation of congressional intent.” Ibid.  By respecting the qualifications of §1 today, we “respect the limits up to which Congress was prepared” to go when adopting the Arbitration Act. United States v. Sisson, 399 U. S. 267, 298 (1970).

****

When Congress enacted the Arbitration Act in 1925, the term “contracts of employment” referred to agreements to perform work.  No less than those who came before him, Mr. Oliveira is entitled to the benefit of that same understanding today.

****

(footnotes omitted)

As US arbitration practitioners are aware, the US Federal courts have for many decades strayed from the exact text of the FAA in the course of developing US federal arbitration law.  Instead, the Federal courts have developed a sort of “common law” of arbitration, building on their notions of how to fill legislative gaps or to find modern interpretations to effectuate the FAA’s purposes.  The most obvious example lies in the continuing Circuit split over the meaning of arbitrator “evident partiality” as a ground for vacatur of arbitration awards by arbitrators alleged to have conflicts of interest.  So too, the judicial presumption in favor of arbitration itself.  If Justice Gorsuch’s “1925 legislative intent” approach is applied to such issues, US arbitration jurisprudence on arbitrator conflicts, presumptions of arbitration and many other issues may be in for a vigorous shaking up.

Justice Ginsburg was attentive to the implications of this interpretive approach, although I rather doubt her primary focus was on FAA jurisprudence.  In her short concurrence to the unanimous opinion (in which she also joined), Justice Ginsburg pointed out a more flexible view for interpreting legislative meaning.

Congress, however, may design legislation to govern changing times and circumstances. See, e.g., Kimble v. Marvel Entertainment, LLC, 576 U. S. ___, ___ (2015) (slip op., at 14) (“Congress . . . intended [the Sherman Antitrust Act’s] reference to ‘restraint of trade’ to have ‘changing content,’ and authorized courts to oversee the term’s ‘dynamic potential.’” (quoting Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 731‒732 (1988))); SEC v. Zandford, 535 U. S. 813, 819 (2002) (In enacting the Securities Exchange Act, “Congress sought to substitute a philosophy of full disclosure for the philosophy of caveat emptor . . . . Consequently, . . . the statute should be construed not technically and restrictively, but flexibly to effectuate its remedial purposes.” (internal quotation marks and paragraph break omitted)); H. J. Inc. v. Northwestern Bell Telephone Co., 492 U. S. 229, 243 (1989) (“The limits of the relationship and continuity concepts that combine to define a [Racketeer Influenced and Corrupt Organizations] pattern . . . cannot be fixed in advance with such clarity that it will always be apparent whether in a particular case a ‘pattern of racketeering activity’ exists. The development of these concepts must await future cases . . . .”). As these illustrations suggest, sometimes, “[w]ords in statutes can enlarge or contract their scope as other changes, in law or in the world, require their application to new instances or make old applications anachronistic.” West v. Gibson, 527 U. S. 212, 218 (1999).

These different approaches toward divining legislative meaning are part of the basic legal philosophy differences between the conservative and liberal wings of the Supreme Court.  Those differences will play out in many areas of US law but, in light of New Prime, one of them now may be the interpretation of the FAA.

_______________________________________________

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.

Kavanaugh on Arbitration

By Russ Bleemer, Sara Higgins & George Somi

President Trump’s nominee to the U.S. Supreme Court, Brett Kavanaugh, has worked on a healthy dose of arbitration cases during his tenure on the federal appeals court following his confirmation, after a three-year Senate battle, in 2006. In this unusually lengthy post, presented in installments this week, CPR has taken a look at 21 of these cases. 

Overview

Kavanaugh’s arbitration decisions mostly adhere to the portrait of the nominee recently presented by both his supporters and detractors—that of a deeply conservative justice who leans hard toward business arguments and away from employees’ interests, and harbors a suspicion of government bureaucracy indicated most prominently by his disdain for federal agency law interpretations. See, e.g., Elliott Ash and Daniel L. Chen, “Kavanaugh is radically conservative. Here’s the data to prove it.” Washington Post (July 10)(available at https://wapo.st/2mdYxrf); Jess Bravin and Brent Kendall, “Who Is Brett Kavanaugh?” Wall Street Journal (July 9)(available at https://on.wsj.com/2NGECOf).

But, characteristic of judiciary views of ADR, Kavanaugh’s work in arbitration cases is less predictable on which party gets his backing, because he tends to stick to a narrow statutory interpretation.  For the Federal Arbitration Act cases, he attributes the stance to reflecting Congress’s preference for the practice. In a case involving another 1940’s labor statute, Kavanaugh joined a panel backing union claims in arbitration, reinstating an award against a big employer.

The arbitration-related decisions below are dominated by labor cases, a function of Kavanaugh’s place on the District of Columbia Circuit Court of Appeals, the federal appellate court which is a frequent site for appeals of National Labor Relations Board cases.

Kavanaugh’s views in those cases have received widespread praise from his conservative backers, and have inspired concerns about the future vitality of unions from the oppositions. Jeff Stein, “3 Ways Trump’s Supreme Court pick could transform U.S. labor law,” Washington Post (July 10)(available at https://wapo.st/2LaIBRN).

Kavanaugh’s views of the law on the relationship between management and labor surely will be a flashpoint during his confirmation hearings. See, e.g., Erin Mulvaney, “Brett Kavanaugh ‘Looks for Ways to Rule for Employers’” Nat’l Law Journal (July 12)(available at https://bit.ly/2Ld4qA8).

One of those cases in particular has fired up labor organizations, who looked beyond the ADR implications and cited an erosion of National Labor Relations Act protections in Kavanaugh’s decision. The case, Verizon New England Inc. v. Nat’l Labor Relations Bd., has been cited as emblematic of the nominee’s anti-worker stance. One major union pointed to the arbitration case as soon as Kavanaugh was nominated, calling on the Senate to vote against the nomination. More below.

Kavanaugh’s arbitration views, if confirmed, will emerge early in his tenure. The U.S. Supreme Court already has scheduled three arbitration cases for the 2018-2019 term scheduled to begin Oct. 1. Lewis Tan, “Ready To Reverse? Supreme Court Will Revisit Class Arbitration,” 36 Alternatives 98 (July/August 2018)(available at https://bit.ly/2JnrFWf).

The following are highlights of cases in which Circuit Judge Kavanaugh participated that involve arbitration based on searches of the D.C. Circuit Court of Appeals website and commercial databases. The first three are authored by the nominee, and the remainder are cases in which he was a panel member. The final entry reviews a brief on a regulatory pricing issue that emanated from arbitrations on which Kavanaugh participated as part of a big legal team in a Fourth U.S. Circuit Court of Appeals case.

  1. Verizon New England Inc. v. Nat’l Labor Relations Bd., 826 F.3d 480 (D.C. Cir. 2016) (available at https://bit.ly/2NKd8Yn).

Kavanaugh began the opinion by setting out the parameters of labor arbitration agreements in a simple-to-understand fashion, stating that unions may collectively bargain to waive certain National Labor Relations Act rights, and agree to arbitration.  He noted that the National Labor Relations Board may intervene by reviewing a decision where the loser says it has been deprived of an NLRA right.

“But consistent with the national labor policy favoring arbitration,” Kavanaugh’s first paragraph concluded, “the Board reviews the arbitration decisions under a highly deferential standard.  . . .”

And, consistent with the conservative justice’s suspicion of the reach of administrative agencies’ powers, the opinion restored an arbitrator’s award in favor of the telecommunications company.  The award had been confirmed by an administrative law judge, but overturned by the National Labor Relations Board.

The opinion is controversial because the union had agreed to bar its members from picketing, and was taken to arbitration by the company.  The union lost because its members put signs in their car windows during a dispute.

Rather than focusing on fundamental NLRA rights, Kavanaugh stuck to arbitration procedure in reversing the NLRB—noting the appellate panel’s review is for reasonableness, not de novo—and adopted a stance in which the union had agreed to the picketing restriction.

He wrote that the NLRB violated its own “highly deferential standard” for reviewing an arbitration decision, known as the Spielberg-Olin standard, when it issued its decision.  Olin Corp., 268 N.L.R.B. 573, 574 (1984); Spielberg Manufacturing Co., 112 N.L.R.B. 1080, 1082 (1955).

The NLRB “misapplied its highly deferential standard for reviewing arbitration decisions,” wrote Kavanaugh. “Under that standard, the Board should have upheld the arbitration decision in this case. The Board acted unreasonably by overturning the arbitration decision.”

He added later in the opinion, “All agree that the National Labor Relations Act allows a union to waive its members’ Section 7 right to display pro-union signs in vehicles parked on company property.” Kavanaugh supported a limited inquiry by the panel into the arbitrator’s decision, but says the award should be restored because it “was not a ‘palpably wrong’ interpretation of the collective bargaining agreement.”

Fellow D.C. Circuit panelists concurred in the result but questioned the appropriate NLRB review standards of the arbitration, and the Kavanaugh’s deferral standard toward the NLRB decision.

The case was cited by the Communications Workers of America on Monday in its announcement asking senators to oppose Kavanaugh’s nomination. See https://bit.ly/2uieX6L.

2. Nat’l Postal Mail Handlers Union v. Am. Postal Workers Union, 589 F.3d 437 (D.C. Cir. 2009) (available at https://bit.ly/2zqyEOB).

In an arbitration case between two unions at odds over their respective division of mail-handling duties, Kavanaugh, writing for a unanimous appellate panel, noted that the arbitrator “probably erred as a matter of contract interpretation,” but backed a federal district court ruling upholding the arbitration award.

He wrote, “[I]n light of the deference courts must afford to a labor arbitrator’s contract interpretation—including an arbitrator’s decision on arbitrability where, as here, the parties agree to present that issue to the arbitrator—we agree with the District Court that we must uphold the arbitrator’s decision in this case.”

3. U.S. Dep’t of the Navy v. Fed. Labor Relations Auth., 665 F.3d 1339 (D.C. Cir. 2012) (available at https://bit.ly/2NaiBpX).

Writing for the panel, Kavanaugh overturned an arbitral decision finding that the Navy had a duty to bargain with unions representing civilian employees before removing free bottled water provided to workers at a Newport, R.I., facility, after the Navy determined that water available from water fountains was no longer unsafe.

In 2005, the Navy had issued an email informing base personnel that previously contaminated drinking water was now safe, and that federal appropriations law precluded the Navy from providing bottled water given that safe and drinkable tap water was available.

Civilian employees at the base are represented by two unions: (i) the National Association of Government Employees, Local R1–134, known as NAGE, and (ii) the Federal Union of Scientists and Engineers, Local R1–144, known as FUSE. NAGE negotiated a collective bargaining agreement with the Navy; FUSE had a grievance procedure agreement with the Navy, but no collective bargaining agreement.

These unions filed grievances under their negotiated dispute resolution procedures, arguing that the Navy had a duty to bargain with them before removing the bottled water. When the grievances were not resolved through negotiation, the unions sought binding arbitration.

The arbitrator found that any change regarding the bottled water “required conferring and negotiating between the parties bound by the Collective Bargaining Agreement(s).”

“The arbitrator declined to consider the Navy’s argument that federal appropriations law barred it from providing bottled water,” according to the Kavanaugh opinion, adding, “The arbitrator said that looking to federal appropriations law ‘would be looking outside of the Collective Bargaining Agreement between the parties.’”

The Navy filed exceptions to the arbitration award with the Federal Labor Relations Authority, arguing that (1) the arbitrator refused to consider its argument that federal appropriations law precluded it from providing bottled water, and (2) the arbitrator’s findings drew no distinction between NAGE and FUSE, even though only NAGE had a collective bargaining agreement with the Navy.

The Federal Labor Relations Authority declined the Navy’s exceptions and affirmed the arbitrator’s conclusion that the Navy was obligated to bargain before removing the bottled water. The Navy petitioned for review in the D.C. Circuit.

Writing for the majority, Kavanaugh vacated the arbitrator’s decision on the grounds that federal appropriations law barred Navy from providing free bottled water to employees when safe drinkable tap water was available. After finding that the statute governing federal labor relations explicitly relieves agencies of the duty to bargain over any matter that would be “inconsistent with any Federal law or any Government-wide rule or regulation” 5 U.S.C. § 7117(a)(1), the Court turned to the issue of whether providing bottled water under these circumstances would violate federal appropriations law.  The panel concluded that it did.

Applying the “necessary expense” doctrine in the construction of appropriations laws, Kavanaugh wrote “[p]roviding bottled water when safe and drinkable tap water is available would serve no purpose other than accommodating employees’ personal tastes—a purpose that generally cannot justify the expenditure of appropriated funds.”

Kavanaugh vacated the arbitral award and remanded to the Federal Labor Relations Authority to determine the more fundamental question of whether the tap water is in fact safe to drink. “If the water at the Newport facilities is safe to drink,” wrote Kavanaugh, “then the Authority must rule for the Navy.” 

4. Kelleher v. Dream Catcher L.L.C., 2018 U.S. App. LEXIS 9831, *1.

This per curiam D.C. Circuit panel decision affirmed a lower court ruling that the petitioner contractor had forfeited its contract right to compel arbitration by delaying its request for eight months after a complaint had been filed. The petitioner had, instead, filed an answer, rather than a pre-answer motion to compel. The district court had found that the delay causes substantial prejudice to the respondent and the court.

The appeals panel, in the unpublished opinion, backed the district court and refused to stay the matter or compel arbitration.

5. Leidos Inc. v. Hellenic Republic, 881 F.3d 213 (Feb. 2, 2018)

Kavanaugh joined a unanimous circuit panel in denying a request to modify a large arbitration award related to services provided by the petitioner to Greece during the 2004 Olympics by allowing a currency conversion, to dollars from Euros, where the Euro had been devalued.  The long history in the case contemplated payment in Euros.

6. Nat’l R.R. Passenger Corp. v. Fraternal Order of Police, Lodge 189 Labor Comm., 855 F.3d 335 (D.C. Cir. 2017)(Available at https://bit.ly/2N4SctW).

Kavanaugh was in the majority on a panel that affirmed, 2-1, a district court’s decision to vacate an arbitration award in favor of a police officer on the grounds that it was contrary to law.  He did not write the decision.

In the case, a union–the Fraternal Order of Police, Lodge 189–brought arbitration on an employee’s behalf against Amtrak. The employee was an Amtrak Police Department in the Canine Unit officer who was fired after Amtrak’s Inspector General found that the officer had lied about co-owning a home in Maryland with her supervisor.

After the officer unsuccessfully appealed the decision within Amtrak, she sought arbitration pursuant to the collective bargaining agreement’s grievance procedure. On her behalf, the Fraternal Order of Police claimed that she had been fired without just cause. Without reaching that claim, the arbitrator determined that the officer should be reinstated because the Inspector General’s investigator, when interviewing her, had not fully complied with the contract’s Rule 50 procedures.

The rule provides procedures for investigating officers—the “Police Officers Bill of Rights”– incorporated into the collective bargaining agreement.

The arbitrator ruled that the National Railroad Passenger Corp., better known as Amtrak, must reinstate, with backpay and lost seniority, the fired employee.

Pursuant to the Railway Labor Act, Amtrak brought an action in district court, seeking an order setting aside the arbitrator’s award. The district court, relying on the Inspector General Act of 1978, 5 U.S.C. app. 3, §§ 1-13, and U.S. Department of Homeland Security v. FLRA (DHS), 751 F.3d 665, 672 (D.C. Cir. 2014), agreed with the railroad, vacating the arbitrator’s award to the officer because the Amtrak Inspector General could not legally be governed by Rule 50 of the contract. Nat’l R.R. Passenger Corp., 142 F. Supp. 3d at 90.

The appellate panel decision cited limited grounds on which a court may set aside an arbitration award, specifically where a contractual provision is contrary to “law or public policy.” United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 42 (1987).

The D.C. Circuit panel agreed with the district court’s finding that the arbitrator had improperly applied Rule 50 of the Collective Bargaining Agreement to the Amtrak Inspector General.

The opinion relied on U.S. Department of Homeland Security v. FLRA, 751 F.3d 665, 672 (D.C. Cir. 2014(“DHS”)), which held that under the Inspector General Act of 1978, “public sector unions and agencies can neither add to nor subtract from the OIG’s investigatory authority through collective bargaining.” 751 F.3d at 671.

7. Newco Ltd. v. Gov’t of Belize, 650 F. App’x 14 (D.C. Cir. 2016)(unpublished), cert. denied, 137 S. Ct. 619 (2017) (available at https://bit.ly/2mkxTxj).

Kavanaugh once again joined a panel decision affirming a district court’s order to enforce an international arbitral award.

The dispute between Newco Limited and the Government of Belize over an agreement to develop the country’s international airport was submitted to arbitration. A Miami arbitral tribunal issued an award in favor of Newco for $4.3 million. Belize agreed to pay the award on the condition that payment be made in Belize dollars rather than in U.S. dollars as required by the agreement, and that the parties first subtract unpaid taxes owed by Newco to Belize before paying the award.

Newco brought suit to enforce the award in the D.C. District Court. Belize brought its own suit in the Belize Supreme Court. Belize obtained an anti-suit injunction against Newco from the Belize court, while Newco’s federal court suit was stayed as Newco litigated in Belize.

The Belize Supreme Court ultimately agreed with Belize that the nation could subtract unpaid taxes and pay the remainder of the award in Belize dollars. But Newco refused to agree to the conditions and renewed its effort to enforce the arbitral award in the D.C. federal district court. Belize moved to dismiss the suit on a variety of grounds, including international comity, public policy, and forum non conveniens. The District Court rejected Belize’s arguments and enforced the award. Newco Ltd. v. Belize, No. 08-2010, 2015 WL 9810457 (D.D.C. Aug. 7, 2015).

The D.C. Circuit Court opinion, joined by Kavanaugh, affirmed this decision. The panel first rejected Belize’s request that the award not be enforced on the basis of international comity, finding that it failed to provide support for its assertion that the doctrine of international comity is a “’rule[] of procedure of the territory’ where the enforcement action is brought”—that is, the United States.

The panel noted that the allegations must be one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the New York Convention.

Belize also alleged that the U.S. federal court should have refused to enforce the arbitral award “based on an alleged public policy interest in international comity.” The opinion noted that under the New York Convention, courts may decline to enforce an arbitral award if “enforcement of the award would be contrary to the public policy of that country.” New York Convention art. V(2)(b).

The opinion added that courts should rely on the public policy exception only “in clear-cut cases” where “enforcement would violate the forum state’s most basic notions of morality and justice.” Termorio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928, 938 (D.C. Cir. 2007) (citations omitted). In this case, the panel determined that Belize did not show that enforcement “would violate the most basic U.S. notions of morality and justice.”

Finally, the appellate court found Belize’s contention that the district court should have dismissed the enforcement action on forum non conveniens grounds squarely foreclosed by precedent. See TMR Energy Ltd. v. State Property Fund of Ukraine, 411 F.3d 296 (D.C. Cir. 2005)(forum non conveniens does not apply to U.S. actions to enforce arbitral awards against foreign nations).

8BCB Holdings Ltd. v. Gov’t of Belize, 650 Fed. Appx. 17 (D.C. Cir. 2016)(available at https://bit.ly/2umHHuV).

In another 2016 unpublished opinion concerning a disputed Belize arbitration, D.C. Circuit Judge Kavanaugh was on a panel affirming the D.C. District Court’s enforcement of an international arbitral award, this time made in the U.K.

In 2005, BCB Holdings Limited and Belize Bank Limited—two Belize banking companies—signed an agreement with the nation’s prime minister addressing matters like their tax treatment.

In 2008, the firms invoked the agreement’s arbitration clause when the government repudiated the agreement. In 2009, an arbitral tribunal in London ruled against Belize, ordering that the country pay the banking companies about $20.5 million, plus interest and costs. Belize’s high court prevented the award’s enforcement, holding that it contravened the country’s separation-of-powers system.

BCB Holdings and Belize Bank sought to confirm the foreign arbitral award under the Federal Arbitration Act and New York Convention in the U.S. District Court for the District of Columbia. They also sought recognition and enforcement of the foreign money judgment pursuant to the District of Columbia Foreign Money Judgments Recognition Act and to covert the award and its associated costs and interest to U.S. dollars. The District Court enforced the award.

On an appeal by the Belize government, the D.C. Circuit affirmed the federal district court’s ruling. The court held that under the FAA, the doctrine of international comity was not a “rule of procedure” and, therefore, it did not constitute a basis for denying the arbitral award’s enforcement.

Second, in response to Belize’s contention that there was a corrupt bargain between the former Belize prime minister and the two companies, the panel held that Belize had not demonstrated that enforcement “would violate the most basic U.S. notions of morality and justice.” The court reasoned that the arbitral tribunal didn’t find any corruption and that Belize’s high court never contemplated corruption when it refused to enforce the award.

Finally, the court held that while parties are time-barred to enforce arbitral awards within three years, 9 U.S.C. § 207, “the District Court equitably tolled the statute of limitations so that their claims were not time-barred.” The two companies diligently pursued their rights to the arbitral award in the face of a 2010 Belize criminal statute that imposed imprisonment and fines on those who violated an injunction by the country’s highest court—violations which included pursuing enforcement of an arbitration against Belize. Once that statute was deemed unconstitutional in 2014, BCB Holdings and Belize Bank filed the enforcement action in the U.S. district court within six months.

9. GSS Grp. Ltd. v. Nat’l Port Auth. of Liberia, 822 F.3d 598 (D.C. Cir. 2016)(available at https://bit.ly/2L3c7fe).

D.C. Circuit Judge Kavanaugh was on a panel affirming the district court’s denial of motion to enforce an international arbitral award, but did not write the opinion.

The D.C. Circuit agreed with a Washington, D.C., federal district court finding that issue preclusion barred relitigating personal jurisdiction over the Port Authority, and that GSS failed to demonstrate that the government Liberia was liable for the Port Authority’s alleged contract breach.

Following the end of a second civil war in Liberia in 2003, the Liberian Port Authority, a wholly Liberian-owned corporation that manages, operates and maintains all Liberian ports, awarded GSS a multi-million dollar contract to build a container park at the port in the nation’s capital, Monrovia. GSS is a British Virgin Islands corporation based in Israel.

Although Liberia’s Interim Public Procurement Policy and Procedures mandated that the Port Authority award such contracts through “open competitive bidding,” the Port Authority did not do so. As a result, in 2005, the Liberian Contract and Monopolies Commission informed the Port Authority that the GSS contract was invalid and reminded it that all contracts must result from competitive bidding.

The Port Authority subsequently petitioned the commission for a single-source exemption, which allows a Liberian entity to dispense with competitive bidding if, “there is an urgent need” for the contract and “engaging in bid proceedings . . . is impractical due to unforeseeable circumstances.” The commission granted the exemption on Aug. 12, 2005, and the parties re-negotiated the contract 10 days later.

The contract alarmed the International Contact Group on Liberia, a multinational advisory board including representatives of the United States, the United Nations, the European Union, the Economic Community of West African States and the World Bank. In response to concerns over the contract’s validity and monetary value, the Port Authority and GSS amended the contract again.

Nevertheless, on Dec. 30, 2005, the National Transitional Government’s chairman directed the Port Authority to cancel the GSS contract. A Feb. 16, 2006, letter from the Port Authority notified GSS that the single-source exemption to competitive bidding was mistakenly granted, and therefore the Port Authority considered the contract “null and void ab initio.”

On March 15, 2006, GSS invoked the contract’s arbitration clause, which provided that disputes arising under the agreement were to be arbitrated in London and in accordance with the laws of England and Wales, against the Port Authority, but not against Liberia. “Meanwhile,” the D.C. Circuit opinion notes, “a separate Liberian governmental organization—the Liberian Public Procurement and Concession Commission —sought a Liberian-court declaration that the contract, including the arbitration provision, was invalid.”

Because of the Liberian judicial proceedings, the Port Authority refused to participate in the London arbitration; GSS appointed the sole arbitrator. On Feb. 8, 2008, the Liberian court held that the contract was unenforceable.

But one month later, the arbitrator determined that he had jurisdiction. In June 2008, he concluded that the Port Authority was liable for the cancellation. In May 2009, the arbitrator awarded GSS more than $44.3 million.

GSS filed a June 2009 petition in the D.C. federal district court to confirm the London arbitral award. The petition was dismissed for lack of personal jurisdiction. GSS appealed and the D.C. Court of Appeals affirmed.

In March 2012, GSS filed a second district court to confirm the arbitral award, naming Liberia as the sole respondent, and amending three weeks later to add the Port Authority.

GSS’s second petition claimed that the Port Authority was Liberia’s agent and, therefore, Liberia was liable for the big London award. “Because Liberia, as a sovereign, may not assert a personal-jurisdiction defense,” the D.C. Circuit noted, “GSS believed that its second petition cleared the hurdle that blocked its first.”

The district court disagreed and denied GSS’s motion to enforce the award because, it stated, that GSS failed to prove that the Port Authority acted as Liberian government agent. GSS appealed and the D.C. Circuit panel, joined by Circuit Judge Kavanaugh, affirmed, refusing to enforce the arbitral award on the basis of issue preclusion, lack of subject-matter jurisdiction, and a failure to demonstrate an agency relationship between Liberia and the Port Authority.

10. Cont’l Transfert Technique, Ltd. v. Fed. Gov’t of Nigeria, 603 Fed. Appx. 1, (D.C. Cir. 2015)(unpublished).

D.C. Circuit Judge Kavanaugh was on a panel affirming the District Court’s enforcement of an international arbitral award, but he did not write the unpublished opinion.

In 1999, Continental Transfert Technique Ltd., a Nigerian corporation, initiated arbitration against Nigeria’s Ministry of the Interior in a dispute relating to the creation of a computerized residence permit and alien card system.

In 2008, a London arbitration awarded Continental ₦29.6 billion in Nigerian naira in damages—in today’s dollars, more than $82 million—along with $247,500 in legal fees and expenses, and more than £253,000 in arbitral costs.

Continental sought enforcement under the District of Columbia Uniform Foreign Money Judgments Recognition Act at the U.S. District Court for the District of Columbia.

The U.S. federal court confirmed the arbitral award under the New York Convention pursuant to Federal Arbitration Act, recognized the arbitral judgment under the D.C. Recognition Act, converted the award into U.S. dollars, and awarded Continental pre- and post-judgment interest. Nigeria appealed to the D.C. Circuit, arguing that the U.K. court’s order was not a “judgment” under the D.C. Recognition Act and that the U.K. award was obtained fraudulently because Continental had not informed the London court ordering enforcement about a Nigerian court’s restraining order.

The D.C. Circuit, relying on Church of Scientology of California v. United States, 506 U.S. 9, 12 (1992), held that it had no authority to decide legal questions if its judgments cannot provide redress. Since Nigeria had not presented any challenge to the arbitral award’s confirmation under the New York Convention, the court had no appellate jurisdiction to hear Nigeria’s challenges regarding the District Court’s recognition of the U.K. judgment under the D.C. Recognition Act.

Nigeria’s remaining challenges, the D.C. Circuit held, were without merit. For instance, the court, relying on Rule 54(c) of the Federal Rules of Civil Procedure, held that conversion of arbitral awards from a foreign currency into U.S. dollars was warranted even though such relief was not explicitly requested by Continental in its complaint.

11. Nat’l Treasury Employees Union v. Fed. Labor Relations Auth., 754 F.3d 1031 (D.C. Cir. 2014)(available at https://bit.ly/2KOB6Up).

The union petitioned the court for review of the respondent’s determination that overruled an arbitrator’s finding of unfair labor practices against the employer, the Internal Revenue Service, in a dispute over workloads.

In a unanimous panel decision that Kavanaugh joined, the D.C. Circuit held that the Federal Labor Relations Authority correctly determined “that the IRS did not make any unilateral change” in the work rules, a holding “consistent with the Arbitrator’s factual finding that the IRS ‘divide[d] up an ever-growing pool of cases among virtually the same number of existing Case Advocates without making other reasonable adjustments.’” [Citation to the arbitration decision omitted.]

That, the opinion said, “was the critical finding,” under authority precedent, and required no notice to the union or opportunity to bargain.  “The IRS responded to outside factors,” according to the D.C. Circuit, “but initiated no change of its own to its policies, practices, or procedures.”  It denied review of the petition and didn’t reinstate the arbitrator’s unfair practices determination.

12. Oakey v. U.S. Airways Pilots Disability Income Plan, 723 F.3d 227 (D.C. Cir. 2013) (available at https://bit.ly/2L3cs1u).

This is another opinion in which Kavanaugh joined a panel decision but did not write it.  The decision affirms a federal district court’s dismissal of a claim arising under the Employee Retirement Income Security Act for lack of jurisdiction because the claim is grounded in the application and interpretation of a collective bargaining agreement, and would need to be arbitrated if it is unable to be resolved informally.

The appeals panel held that the former pilot Oakey’s dispute fell under the Railway Labor Act, which has been applied to disputes between air carriers and their employees since 1936 and includes a mandatory arbitration provision, depriving the district court of jurisdiction.

Petitioner Oakley submitted a claim for disability benefits under a company plan to the retirement board, which approved the claim effective Jan. 30, 2002. In January 2003, US Airways notified Oakey he was to be “furloughed” on Feb. 4, 2003, as part of a fleet reduction. In March 2003, the plan administrator advised Oakey that, based on his furlough date, his disability benefits had terminated on Feb. 4, 2003.

In November 2003, Oakey filed an action under ERISA against US Airways and the plan for benefits allegedly owed to him. Oakey’s complaint asserts that that the 1997 Amendment was ineffective because it was not signed by an Air Line Pilots Association representative, and that as a result, Oakey’s disability coverage was governed by a 1975 Disability Plan, which didn‘t terminate benefits upon an employee’s furlough.

The district court granted the plan’s motion–on the ground that the RLA’s mandatory arbitration provision deprived the district court of jurisdiction–and dismissed the action in March 2012. Oakey v. U.S. Airways Pilots Disability Income Plan, 839 F. Supp. 2d 225 (D.D.C. 2012).

Upon de novo review of the district court’s grant of a motion to dismiss for lack of subject matter jurisdiction, the D.C. Circuit appellate panel, joined by Judge Kavanaugh, affirmed.

The appeals panel cited earlier opinions in which it addressed the interplay between the RLA and ERISA and “concluded that the latter (and later-enacted) statute, notwithstanding its broad preemption of state law remedies, has no preemptive effect on other federal enactments—including the RLA.” Air Line Pilots Ass’n Int’l v. Northwest Airlines Inc., 627 F.2d 272 (D.C. Cir. 1980)(emphasis is in the opinion).

Given the “strong, comprehensive, express statement that ERISA is not to be read as displacing by implication any pre-existing federal legislation,” the Northwest court concluded that ERISA has no effect on RLA Section 204’s “mandate[ that] the carrier or the union [] refer disputes over the application or interpretation of bargaining agreements covering [rates of pay, rules, or working conditions’ terms including employee pensions], if they cannot be resolved informally, to arbitration.” Id. at 275-76 (quoting 45 U.S.C. § 184)(emphasis in the opinion).

Oakey argued that even if Northwest’s preclusion rule survives, it does not apply to his case because, he contended, that for the rule to apply (1) the claim must involve interpretation or construction of the collective bargaining agreement’s terms, and (2) the interpretative issue must be dispositive or conclusive of the claim.

The Court rejected this argument, holding that Oakey’s dispute, over which version of the plan agreement controls, is plainly such a dispute: regardless of the version of the plan agreement is controlling, its interpretation or application governs the outcome.

13. Belize Soc. Dev. Ltd. v. Gov’t of Belize, 668 F.3d 724 (D.C. Cir. 2012)(available at https://bit.ly/2ufkwTa).

Kavanaugh was in the minority in a 2-1 panel decision backing a writ of mandamus to end a stay of enforcement for an arbitration award.

In his dissent, Kavanaugh wrote that he would dismiss the appeal for lack of appellate jurisdiction and deny the petition for a writ of mandamus.

The case involved a petition to confirm and enforce a London arbitration award against the Government of Belize. The D.C. Circuit panel reversed a federal district court order to stay the proceeding pending the outcome of related litigation in Belize.

Following the respondent’s request, the appellate court opted to treat the appeal as an application for a writ of mandamus. The circuit court concluded that the stay order exceeded the district court’s proper exercise of authority and remanded the case for further proceedings.

In his dissent, Kavanaugh wrote that a mandamus order by the court was an unnecessary step that should be reserved for extraordinary situations. “Even if we think the District Court erred under the Federal Arbitration Act by entering a temporary stay,” he wrote, “its error was hardly ‘extraordinary.’ Mandamus for this case is akin to using a chainsaw to carve your holiday turkey. Indeed, if you ask me which is the more extraordinary–the District Court’s temporary stay or this Court’s invocation of mandamus jurisdiction under these circumstances–I would say the latter.”

14. New York & Presbyterian Hosp. v. N.L.R.B., 649 F.3d 723 (D.C. Cir. 2011) (available at https://bit.ly/2uBhNDd).

 A unanimous D.C. Circuit panel in which Kavanaugh joined rejected arguments by a New York hospital that an NLRB review of an arbitration agreement, backing a finding of a National Labor Relations Act violation, was erroneous. Kavanaugh was not the author of the opinion which supported a determination in favor of a union.

The case provided an interesting look at pre-ADR discovery.

The panel unanimously rejected the New York & Presbyterian Hospital’s petition for review of a decision and order by the NLRB, which found the Hospital in violation of National Labor Relations Act Section 8(a)(5) (at 29 U.S.C. § 158(a)(5)), for failing to produce information requested by the labor union with which the hospital has a collective bargaining agreement, the New York State Nurses Association.

The petition arose from an alleged violation of the collective bargaining agreement. In 2004, the union filed a grievance alleging that the hospital hired nurse practitioners in a nonunion capacity to do bargaining unit work. The employer denied the grievance on May 18, 2005, explaining that the nurse practitioners were “not Hospital employees” and thus did “not fall within the Hospital’s span of control nor [were] they governed by the Hospital’s Policies and Procedures.

NYSNA subsequently filed an unfair labor practice charge with the NLRB against both the Hospital and Columbia University. (The Hospital is affiliated with Columbia University School of Medicine, the opinion notes, adding that nearly all of its physicians are members of Columbia’s faculty and employed directly by Columbia.)  The charged alleged that they were “a single employer or alter egos of one another” responsible for “restrain[ing] and coerc[ing] nurse practitioners at [the Hospital] in exercising their Section 7 rights by employing nurse practitioners to work at [the Hospital] under terms and conditions of employment different from those specified in the collective bargaining agreement . . . covering nurse practitioners who work at the hospital.”

Acting pursuant to board policy, the NLRB’s regional director deferred consideration of the union’s unfair labor practice charge to the arbitration over NYSNA’s grievance. Columbia then informed the union and the hospital that, as a nonsignatory to the collective bargaining agreement, it did not intend to participate in the arbitration.

In preparing for the arbitration, the union made a number of information requests concerning the employment of nurse practitioners who were not designated as union-represented employees working on the hospital premises, but the hospital refused to provide the documentation.  And the arbitrator apparently failed to decide whether the hospital was obligated to produce the requested information.

An administrative law judge subsequently determined that the hospital was obligated to turn over the requested information. The hospital sought review in court, and the NLRB cross-applied for enforcement of its decision and order.

The hospital argued that union failed to demonstrate the relevance of its request; attacked the evidentiary foundation of the Board’s decision and order, and raised a number of additional arguments. But the majority, joined by Kavanaugh, rejected the Hospital’s arguments and denied its petition for review.

15. Winston & Strawn, LLP v. Doley, 384 F. App’x 1 (D.C. Cir. 2010) (unpublished decision available on Westlaw https://bit.ly/2LbfPn9).

Kavanaugh joined a panel decision that affirmed a district court order denying a motion for reconsideration of its summary judgment ruling. In the unpublished opinion, the Court rejected the contention of clients of the Winston & Strawn law firm that the district court erred in not staying the litigation proceedings to allow arbitration to go forward.

The Court held that this argument failed under the rule established in Khan v. Parsons Global Services, Ltd., 521 F.3d 421 (D.C.Cir.2008)–that a party is deemed to have waived the right to compel arbitration if it actively participated in the lawsuit.

Because at the time the client-appellants filed their motion to stay proceedings they already had filed a Federal Rule of Civil Procedure 12(b)(6) motion, the appellants already were actively participating in the suit, and the district court did not err in holding that they had waived their right to compel arbitration.

16. Verizon Washington, D.C. Inc. v. Communications Workers of Am., AFL-CIO, 571 F.3d 1296 (D.C. Cir. 2009) (available at https://bit.ly/2L3un8b).

A panel opinion in which Kavanaugh joined but didn’t write reinstated an arbitrator’s award in favor of union employees which had been overturned by a federal district court. The opinion said that the arbitrator’s award for the union and against Verizon had properly drawn its essence from the collective bargaining agreement in a case under a section of the Labor Management Relations Act of 1947 at 29 U.S.C. § 185(a).

17. Cephas v. MVM Inc., 520 F.3d 480 (D.C. Cir. 2008).

This unanimous panel decision Kavanaugh joined was about a statute of limitations issue that would allow a worker to proceed with a grievance against his employer under a collective bargaining agreement.

A federal district court rejected the filing as out-of-time under, respectively, the Labor Management Relations Act, because it “preempts a claim for breach of a CBA cast in terms of state contract law,”  and the National Labor Relations Act.

But the panel said that the lower court got the applicable limitation period wrong, and ruled it was in the District of Columbia Code. The ruling allowed the grievance by the employee—a federal court worker employed by a government contractor–to proceed, possibly to arbitration. 

18. Am. Postal Workers Union v. U.S. Postal Serv., 550 F.3d 27 (D.C. Cir. 2008)(available at https://bit.ly/2mdhomh).

In a case involving the arcane collective bargaining issue of classifying work roles in bargaining units, a unanimous panel in an opinion in which Kavanaugh joined but did not write conducted a de novo review supporting the arbitrator’s classification. The question was about the interpretation of the award, not its validity. The opinion noted the award was on the classification, not the work undertaken by the jobholder. It stated that the award had that focus, but, ultimately, the panel reversed the district court determination for a further inquiry on whether the award excluded disputed work, rather than the position, from the bargaining unit. 

19. Lessin v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 481 F.3d 813 (D.C. Cir. 2007)(available at https://bit.ly/2uclfVp).

Kavanaugh joined a panel decision affirming the District Court’s denial of petitioner’s motion to vacate an arbitral award in his favor because it didn’t approach the damages he sought, in a straightforward application of the Federal Arbitration Act.

In January 2000, the plaintiff transferred almost $5.3 million in Yahoo! Securities and a $2.1 million margin balance to his Merrill Lynch brokerage account. At Merrill Lynch he executed a Retail Account Profile stating that his investment objective was “growth” and that his risk tolerance was “aggressive.” Less than a year later, by October 2000, Lessin’s account had lost almost 100% of its value.

In February 2003, pursuant to a standard brokerage contract to arbitrate disputes before a panel of the National Association of Securities Dealers, plaintiff Lessin filed a statement of claim against Merrill Lynch and his broker for between $5 million and $10 million in compensatory damages as well as for punitive damages. The three-arbitrator NASD panel heard evidence over a six-day period. The panel found Merrill Lynch, but not the broker, liable to Lessin for nearly $33,000 in compensatory damages, and Lessin filed a motion to vacate the award in the D.C. Superior Court, which Merrill Lynch removed to the federal district court.

Reviewing the district court’s confirmation of the arbitration award for clear error as to findings of fact and de novo questions of law, the D.C. Circuit affirmed the district court’s denial of Lessin’s motion to vacate. The Court noted its limited jurisdiction to review arbitral awards under the Federal Arbitration Act, and rejected Lessin’s contention that the arbitration panel engaged in misconduct by refusing to hear pertinent and material evidence from one of his designated expert witnesses.

The panel also found no evidence on the record that the panel’s refusal to hear testimony from Lessin’s second expert deprived Lessin of a fair hearing, concluding that, given the evidence before the panel, Lessin failed to demonstrate that the award violated an explicit public policy.

20. Democratic Republic of Congo v. FG Hemisphere Assocs. LLC, 508 F.3d 1062 (D.C. Cir. 2007)(https://bit.ly/2Ji1L6p).

D.C. Circuit Judge Kavanaugh joined a panel affirming a federal district court’s denial of motions to vacate default judgments surrounding the enforcement of international arbitration awards, but he did not write the opinion.

FG Hemisphere’s predecessor-in-interest brought action in the district court against the Democratic Republic of Congo under the Foreign Sovereign Immunities Act, seeking to confirm arbitration awards it had secured against the DRC. The DRC failed to appear in court, and default judgment was entered against it in the cases September 2004 and January 2005. The district court denied the DRC’s subsequent motions to vacate the judgments. The D.C. Circuit reversed and remanded for further proceedings.

At that point, the DRC raised its objections about service of process. The lower court denied motions to vacate for faulty service.

The D.C. Circuit Court of Appeals affirmed the district court’s ruling, reasoning that the DRC had waived its right to challenge service of process pursuant to Rules 12(g) and 12(h)(1) of the Federal Rules of Civil Procedure. The DRC had participated in 13 months of post-default judgment litigation to hold off the judgment creditor’s execution against its properties before finally claiming inadequate service of process and making any mention of personal jurisdiction issues.

21. GTE South Inc. v. Morrison, 199 F.3d 733 (4th Cir. 1999)(available at https://bit.ly/2KRa8LT).

In addition to service in the White House under President George W. Bush, Kavanaugh was an attorney at Kirkland & Ellis before ascending to the D.C. Circuit. He participated as one of five Kirkland attorneys named on the brief for the appellant, GTE South Inc., in a Fourth Circuit case, GTE South, Inc. v. Morrison.  A total of 13 attorneys appeared on the brief from Kirkland, co-counsel Hunton & Williams, and the company. Kavanaugh was a team member and not the counsel of record.

At issue was the Virginia State Corporation Commission’s determination of prices in arbitration proceedings brought by new entrants into Virginia’s telephone markets. In an effort to end monopolies by local exchange carriers, Congress enacted the Telecommunications Act of 1996, which required local telephone companies that were monopolies to make available their facilities and services to would-be competitors at “just, reasonable, and nondiscriminatory” negotiated prices. If such negotiations failed, prices would be determined in arbitration before a state utility commission, such as the Virginia state corporation.

GTE, an incumbent company in this scenario, challenged the results of arbitration and filed suit against would-be competitors, Cox Fibernet Commercial Services Inc., AT&T Communications of Virginia Inc., and two MCI units, as well as the Virginia corporation’s commissioners, alleging that the state’s pricing decisions failed to meet the Telecommunications Act requirements. The district court granted summary judgment against GTE.

In its amended brief to the Fourth Circuit, the Kirkland team addressed the Supreme Court’s decision in AT&T Corp. v. Iowa Utils. Bd., 522 U.S. 366 (1999) (confirming FCC rulemaking power with respect to the Telecommunications Act) by arguing that the Federal Communication Commission’s pricing rules could not be applied retroactively.

Second, the team argued that Virginia pricing decisions violated the Telecommunications Act because the act’s plain terms required prices based on all of GTE’s costs, including the recovery of historical costs.

Third, if the rules applied retroactively to GTE, a remand to the Virginia corporation would be necessary.

Fourth, GTE argued that the court had to determine whether the FCC’s pricing methodology was at odds with the Telecommunications Act; if the court were to decide it lacked such jurisdiction, it should stay the appeal until deliberations on the substantive challenges to the rules were completed in the Eighth Circuit.

Finally, the amended brief contended that the Virginia corporation’s “Hatfield Model” pricing—a forward-looking methodology for estimating costs, differing from projections based on GTE’s actual past costs—violates the FCC’s requirements.

The brief was unsuccessful.  The Fourth Circuit affirmed the federal district court’s ruling for summary judgment against GTE, upholding arbitration agreements issued by the Virginia state corporation.  It held that the FCC’s pricing methodology and determinations were not precluded by any retroactivity principles and that the Virginia corporation appropriately relied on the best available information to set prices.

Bleemer edits Alternatives for the CPR Institute; Higgins is a student at the Northeastern University School of Law in Boston and a CPR Institute Summer 2018 intern. Somi, a student at Brooklyn Law School, also is a CPR Institute Summer 2018 intern.

District Court Overrules Arbitrator’s Authority on Class Certification

By Ginsey Varghese

A recent decision in a long-running New York case permitting federal review of an arbitrator’s authority in class arbitration may have substantial implications for arbitration law.

In January, a New York Southern District Court decision vacated an arbitrator’s class certification award to protect the due process rights of more than 70,000 absent class members in a gender discrimination matter, Jock v. Sterling Jewelers Inc., No. 08 CIV. 2875, 2018 WL 418571 (S.D.N.Y. Jan. 15, 2018) (available at http://bit.ly/2EjEQWp).

U.S. District Court Judge Jed Rakoff held that the arbitrator exceeded her powers under the Federal Arbitration Act because an arbitrator cannot bind non-parties when the arbitration agreement does not allow class-action procedures. Id. at 2018 WL 418571, at *5; 9 U.S.C. §10(a)(statute available at http://bit.ly/120BmfV).

The FAA authorizes vacatur in four limited circumstances, one of which Rakoff employed in this case, “where the arbitrators exceeded their powers, or so imperfectly executed them that a . . . final and definite award upon the subject matter was not federal made.” 9 U.S.C. §10(a).

The case began in March 2008 with several female Sterling employees filing a class action discrimination suit against the company. The district court compelled arbitration. Jock v. Sterling Jewelers, Inc., 564 F. Supp. 2d 307, 310-12 (S.D.N.Y 2008).

The case has since endured several procedural appeals, with the latest decision resting in part on U.S. Supreme Court Associate Justice Samuel A. Alito Jr.’s concurrence in Oxford Health Plans LLC v. Sutter, where Alito distinguished “absent members,” reasoning that “it is far from clear [whether] they will be bound by the arbitrator’s ultimate resolution of the dispute.” 569 U.S. 564, 574 (2013).

This case appears to be the first time that Alito’s concurrence has been used to overrule an arbitrator’s authority. See Andrew C. Glass, Robert W. Sparkes III, Roger L. Smerage, and Elma Delic, “A First in Second (Circuit): On Remand, District Court Breaks New Ground by Vacating Arbitrator’s Class Certification Award,” K&L Gates blog (Feb. 1, 2018)(available at http://bit.ly/2ELn66I).

At this stage, Rakoff’s decision provides protection for companies with arbitration provisions that are silent on class action procedures, but it undermines and challenges arbitrator authority.

As has been a constant in the litigation, there’s more to come. Rakoff’s decision is the subject of a Jan. 18 notice of appeal, and is now, once again, pending review before the Second U.S. Circuit of Appeals. Jock v. Sterling Jewelers Inc., 18-153.

More on Jock, including its long history and pending appeal will appear in the April issue of Alternatives. March is out now, free here for CPR members, and here for the public.

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

U.S. Supreme Court Grants Cert to Decide “Who Decides” “Independent Contractor” Employment Arbitration Case

Kantor Photo (8-2012)By Mark Kantor

On February 26, the US Supreme Court granted certiorari to hear New Prime Inc. v. Oliveira, Case No. 17-340, a 1st US Circuit Court of Appeals decision in which the appeals court ruled on two questions: (1) Whether, under a contractual arrangement where the parties have delegated arbitrability questions to the arbitration, a court facing a motion to compel arbitration must first decide whether the US Federal Arbitration Act (FAA) covers or excludes the dispute or instead leave that question to be decided first by the arbitrators and (2) does the provision of Sec. 1 of the FAA excluding contracts of employment of transportation workers  from arbitration apply to an agreement that purports to establish an independent contractor relationship rather than an employer-employee relationship.

This case raises two questions of first impression in this circuit. First, when a federal district court is confronted with a motion to compel arbitration under the Federal Arbitration Act (FAA or Act), 9 U.S.C. §§ 1-16, in a case where the parties have delegated questions of arbitrability to the arbitrator, must the court first determine whether the FAA applies or must it grant the motion and let the arbitrator determine the applicability of the Act? We hold that the applicability of the FAA is a threshold question for the court to determine before compelling arbitration under the Act. Second, we must decide whether a provision of the FAA that exempts contracts of employment of transportation workers from the Act’s coverage, see id. § 1 (the § 1 exemption), applies to a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship. We answer this question in the affirmative.

Oral argument in the matter will occur during the Fall term of the Supreme Court.

The underlying contractual agreements are easily summarized (footnotes omitted):

Among the documents Oliveira signed was an Independent Contractor Operating Agreement (the contract) between Prime and Hallmark.3 The contract specified that the relationship between the parties was that “of carrier and independent contractor and not an employer/employee relationship” and that “[Oliveira is] and shall be deemed for all purposes to be an independent contractor, not an employee of Prime.”4 Additionally, under the contract, Oliveira retained the rights to provide transportation services to companies besides Prime,5 refuse to haul any load offered by Prime, and determine his own driving times and delivery routes. The contract also obligated Oliveira to pay all operating and maintenance expenses, including taxes, incurred in connection with his use of the truck leased from Success. Finally, the contract contained an arbitration clause under which the parties agreed to arbitrate “any disputes arising under, arising out of or relating to [the contract], . . . including the arbitrability of disputes between the parties.”6

Ultimately, Oliveira filed a class action in US District Court against Prime notwithstanding the arbitration clause.  Oliveira alleged that Prime violated the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201-219, as well as the Missouri minimum-wage statute, by failing to pay its truck drivers minimum wage. Oliveira also asserted a class claim for breach of contract or unjust enrichment and an individual claim for violation of Maine labor statutes.  Prime moved to compel arbitration under the FAA.

The provision of the FAA at issue in this dispute is Section 1, which excludes from the coverage of the FAA “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

Section 1 of the FAA provides that the Act shall not apply “to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Id. § 1. The Supreme Court has interpreted this section to “exempt[] from the FAA . . . contracts of employment of transportation workers.”

On the “who decides” issue, the Court of Appeals held in New Prime Inc. v. Oliveira that the courts, rather than the arbitrators, are the proper place to decide whether these disputes are covered by, or exempted from, the FAA.  Having decided the “who decides” question to place the resolution in the courts, the appellate judges then concluded that, on the particular facts of the case, “a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship is a contract of employment under § 1,” and thus excluded from the FAA.

Given the dramatic increase in “independent contractor” agreements in the workplace over the last decades, this case may determine whether a large variety of labor disputes are heard in court or may instead be subjected to mandatory arbitration agreements.  The Scotusblog.com case page with the appellate decision and cert filings is here – http://www.scotusblog.com/case-files/cases/new-prime-inc-v-oliveira/.

 

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.

The Class Waiver-Arbitration Argument: The Supreme Court Transcript

By Russ Bleemer

There’s no indication, yet, that the newest U.S. Supreme Court Justice, Neil M. Gorsuch, will be the swing vote in the employment arbitration cases that kicked off the Court’s 2017-2018 term yesterday morning.

The justice—who had been active in oral arguments after he was seated in April to fill the Court vacancy created by the death of Justice Antonin Scalia in February 2016—didn’t say a word.

But the liberal and conservative wings of the Court had their say. The former posed tough questions to the employers’ representative and the government, who are fighting against employees joining together under the National Labor Relations Act to file class action suits for workplace disputes, despite the presence in their employment agreements of class waivers and a requirement of individual arbitration.

The Court conservatives who spoke at the hearing seemed skeptical that the NLRA could override the Court’s strong historical backing of the Federal Arbitration Act, and defeat the employers’ requirement that matters proceed one at a time, in arbitration.

Though Justice Clarence Thomas also maintained his customary silence during the arguments, observers saw a 5-4 split yesterday assuming he and Gorsuch joined the conservative block, with Justice Anthony Kennedy leaning toward the business side.

Washington, D.C. neutral and Georgetown University Law Center adjunct Mark Kantor gathered reports and added analysis on CPR Speaks yesterday, here. See also Adam Liptak, “Supreme Court Divided on Arbitration for Workplace Cases,” N.Y. Times (Oct. 2)(available at http://nyti.ms/2fHZ8ya).

The dispute has been running since the National Labor Relations Board ruled that class waivers accompanied by mandatory arbitration provisions were illegal under the NLRA in 2012, and eliminated by the FAA’s Sec. 2 savings clause, which enforces arbitration agreements “save upon such grounds as exist at law or in equity for the revocation of any contract.”

Last winter, the Court accepted three cases on the issue, including one in which the NLRB is a party.  It consolidated them, then announced the argument would be held until the term that began yesterday—presumably to await the new justice for the vacancy eventually taken by Gorsuch, rather than risking a 4-4 split on the issue, which has divided the federal circuit courts that have tackled the issue.

The unusual hour-long argument was notable for other reasons: The federal government was facing off against one of its own agencies. In a June amicus filing, the Justice Department’s acting solicitor general, Jeffrey Wall, told the Court the Trump administration had “reconsidered the issue and has reached the opposite conclusion” from the stance the department had taken under President Obama on the NLRB’s behalf.  [For more information on Justice’s position, see the October issue of Alternatives, which will be posted later soon at https://www.cpradr.org/news-publications/alternatives and http://bit.ly/2kh91YT.]

Wall presented an amicus argument yesterday, facing off against the NLRB’s general counsel, two of four advocates in the argument.

The discussion highlights below come from the Court’s transcript, posted late yesterday, available at http://bit.ly/2yFDsKA.

* * *

First, frequent Supreme Court argument participant and former U.S. Solicitor General Paul D. Clement, a Washington, D.C. partner at Kirkland & Ellis, faced tough questions and skepticism from the Court in his argument on behalf of the petitioner-employers in Epic Systems Corp. v. Lewis, No. 16-285 and Ernst & Young LLP v. Morris, No. 16-300, as well as the respondent employer in NLRB v. Murphy Oil USA Inc., No. 16-307.

Clement opened by noting the employees’ claims that arbitration agreements providing for individual arbitration that are enforceable under the Federal Arbitration Agreement are invalidated by another federal statute, the National Labor Relations Act.

But, he said, ‘this Court’s cases provide a well-trod path for resolving such claims.” Clement explained that “[b]ecause of the clarity with which the FAA speaks to enforcing arbitration agreements as written, the FAA will only yield in the face of a contrary congressional command[,] and the tie goes to arbitration.”

Justice Stephen G. Breyer soon said that he didn’t accept the argument, or the premise. “You started out saying this is an arbitration case,” said Breyer.  “I don’t know that it is. I thought these contracts would forbid . . . joint action, which could be just two people joining a case in judicial, as well as arbitration forums.”

Breyer continued: “Regardless, I’m worried about what you are saying is overturning labor law that goes back to, for FDR at least, the entire heart of the New Deal.”

The justice explained that the NLRA “protects the worker when two workers join together to go into a judicial or administrative forum for the purpose of improving working conditions, and the employers here all said, we will employ you only if you promise not to do that.”

Breyer concluded, “I haven’t seen a way that you can . . . win the case, . . . without undermining and changing radically what has gone back to the New Deal.”

“For 77 years,” countered Paul Clement, “the NLRB did not find anything incompatible about Section 7 and bilateral arbitration agreements, and that includes in 2010 when the NLRB general counsel looked at this precise issue.”

NLRA Sec. 7 permits concerted action by employees “for the purposes of collective bargaining or other mutual aid or protection.”

Clement also explained, at length, that “from the very beginning, the most that has been protected is the resort to the forum, and then, when you get there, you are subject to the rules of the forum.”

He later added, “[T]he NLRA in no other context extends beyond the workplace to dictate the rules of the forum.”

Said Clement, “I think the way to think about the Section 7 right is it gets you to the courthouse, it gets you to the Board, it gets you to the arbitrator. But once you are there.  . . .”

* * *

Deputy Solicitor General Jeffrey B. Wall, who led the Justice Department’s reversal of position in the case, followed Clement with an amicus argument supporting the employers. “[I]f you understand Section 7 to protect you from retaliation when you seek class treatment but not to give you an entitlement to proceed as a class in the forum, then . . . everything fits together perfectly fine, and these arbitration agreements are enforced.”

Wall concluded, “[O]ur simple point is this case is at the heartland of the FAA. It is, at best, at the periphery of the NLRA, on the margins of its ambiguity, and you simply can’t get there under the court’s cases.”

* * *

Under questioning from Chief Justice John G. Roberts Jr. at the beginning of his argument, NLRB General Counsel Richard F. Griffin Jr., arguing in support of the employees, said that the employers needed to keep open access in the forum so that the employees can proceed jointly—in arbitration or litigation.

But Roberts pressed, and Griffin agreed, that judicial options can be waived because the Court has recognized the equivalence of arbitration.  “I don’t understand how that is consistent with your position that these rights can’t be waived,” said the Chief Justice.

Griffin countered that the NLRB’s position that the right to a class process can’t be waived “takes into account this Court’s view with respect to the ability to effectively vindicate these rights in an arbitral forum.”

Justice Anthony Kennedy said that Griffin’s argument meant that employers “are now constrained in the kind of arbitration agreements they can have.” Griffin responded that they are “constrained with respect to limiting employees’ ability to act concertedly in the same way that, from the beginning of the National Labor Relations Act, individual agreements could not be used to require employees to proceed individually in dealing with their employers.”

Under tough questioning by Roberts and Kennedy, Richard Griffin stuck to his positon that the rules of the forum—arbitral or court—must be followed, but an arbitration agreement that violates the NLRA by limiting the employees’ right to proceed must fall. He suggested that ADR provider rules could limit the procedures, but the employers couldn’t because if they did, it would be limiting employees’ access to justice.

* * *

The employees’ attorney, Daniel R. Ortiz, director of the Supreme Court Litigation Clinic at the University of Virginia School of Law in Charlottesville, Va., began his argument by addressing an earlier question posed by Justice Sonia Sotomayor to Richard Griffin.  Ortiz said that about 55% of nonunion private employees have contracts with mandatory arbitration agreements, covering 60 million workers, with about 25 million people covered by the equivalent of class wavers.

The key part of Ortiz’s argument, which emerged in discussions with a skeptical Chief Justice Roberts, was that the employers’ conduct was clearly illegal under NLRA Sec. 7, and thereby removed the enforcement of the arbitration agreement under FAA Sec. 2’s savings clause, because the section makes illegality of a contract provision a basis for striking an obligation to arbitrate.

* * *

In his rebuttal, Paul Clement picked up on comments by Justice Kennedy earlier that, even if they have waived class litigation and arbitration, employees still have the right to concerted activity by choosing the same lawyer to represent them in an arbitral forum, even if they proceeded individually.  He also said that they can take their pay claims to the Labor Department, which would allow employees to proceed without arbitration.

In response to a question by Justice Ruth Bader Ginsburg, Clement said that confidentiality agreements wouldn’t affect a lawyer’s ability to take multiple arbitration matters.

 

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

Third Circuit Clarifies its Standard on Motions to Compel

By Ugonna Kanu

The Third U.S. Circuit Court of Appeals recently held that a federal district court had erred when it denied an employer’s motion to dismiss a suit before the court had determined the fate of its motion to compel arbitration. The case was Silfee v. Automatic Data Processing Inc.; ERG Staffing Service LLP, No. 16-3725 (3d. Cir. June 13, 2017)(unpublished)(available at http://bit.ly/2rUZpln).

A unanimous Third Circuit panel ruled, in an unpublished decision, that the trial court first must determine the motion to compel arbitration before the motion to dismiss.

The plaintiff in Silfee filed suit against his former employer for violating Pennsylvania law on payroll practices. ERG, a Dickson City, Pa.-based employment agency, filed a motion to compel arbitration “arguing that the arbitration agreement between Silfee and ERG’s payroll vendor precluded Silfee’s suit against ERG,” according to the opinion.

ERG moved to dismiss Silfee’s suit. The district court, however, placed a hold on compelling arbitration, and denied the motion to dismiss the suit.

The Third Circuit panel opinion, written by Circuit Judge Thomas M. Hardiman, of Pittsburgh, distinguished between the case and Guidotti v. Legal Helpers Debt Resolution L.L.C., 716 F.3d 764, 771 (3d Cir. 2013)(available at http://bit.ly/1pXcNnD), in which the Third Circuit held that where it is apparent that a party’s claims are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered without discovery delay under Federal Rule of Civil Procedure 12(b)(6).

But, where the agreement to arbitrate is unclear, or the plaintiff facing the motion to compel has provided “additional facts sufficient to place the agreement to arbitrate in issue,” then the court may order limited briefing and discovery on the issue of arbitrability, and assess the question under a summary judgment standard of Rule 56, the opinion explained.

Before Guidotti’s application, the panel opinion noted that the FAA provides a gateway test. It says that a trial court must make an inquiry under Federal Arbitration Act Section 4 where there is a motion to compel arbitration.

Section 4, the opinion emphasized, provides that “[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement.”

Plaintiff Silfee didn’t produce “additional facts sufficient to place the agreement to arbitrate in issue”—the Guidotti standard to get past a motion to dismiss. As a result, the Third Circuit ruled, the court should have applied the Rule 12(b)(6) standard.

While the appeals panel stopped short of dismissing Silfee’s suit and compelling arbitration, it remanded the case to the U.S. District Court with an order to consider the parties’ “competing arguments regarding arbitrability” under ERG’s motion to compel.

The author is a CPR Institute Summer 2017 intern.

CASE SUMMARY: Pershing LLC v. Kieback et al – Rare US Federal Court Ruling Assessing When Tribunal’s Rejection of Discovery Request May Constitute Improper Refusal to Hear Evidence Justifying Vacatur

Kantor Photo (8-2012)By Mark Kantor

Last week, the US District Court for the District of Louisiana issued a ruling in Pershing LLC v. Kieback et al (Judge Lance M. Africk, Civ. Act. No. 14-2549, May 22, 2017, available at https://scholar.google.com/scholar_case?case=5882751863819676163&hl=en&as_sdt=20006) confirming the arbitration award by a Financial Industry Regulatory Authority (“FINRA”) arbitration panel, notwithstanding efforts to vacate the award on grounds that the arbitral panel’s failure to require production of certain documents in discovery, or to even review those documents in camera before denying a motion to compel production, constituted “misconduct … in refusing to hear evidence pertinent and material to the controversy” under the US Federal Arbitration Act (FAA), “evident partiality” on the part of the arbitrators, and “manifest disregard of the law.”

This decision is one of the rare US Federal court rulings assessing when a tribunal’s rejection of a discovery request may constitute an improper refusal to hear evidence justifying vacatur.  As you will see, the Louisiana Federal District  Court set the standard high.

The dispute arose out of R. Allen Stanford and Stanford Financial Group’s fraudulent Ponzi scheme (https://en.wikipedia.org/wiki/Allen_Stanford) resulting in Stanford being ordered by law enforcement agencies to disgorge $6.7 billion  and pay a $5.9 billion fine.

A number of retired individuals living in Louisiana (the “Louisiana Retirees”) who had invested in Stanford certificates of deposit brought FINRA arbitrations for an aggregate of about $80 million in damages against Pershing LLC (“Pershing”), the clearing broker for the Stanford Group, alleging due diligence and non-disclosure theories on the basis of which the clearing broker might be held liable for a portion of the damages caused by the fraud (footnotes and many citations omitted from quotations).

They claim that Pershing, as Stanford Group Company’s clearing broker, failed to exercise due diligence in its business relationship with Stanford Group Company and failed to disclose adverse financial information which would have resulted in the Ponzi scheme being uncovered sooner than it was.

Pershing naturally presented defenses to those claims.

The Retirees’ claims were all consolidated into a single arbitration hearing, a process that (by the way) may be worth exploring by readers interested in the relationship between consolidation in arbitration and class arbitration.

During the arbitration, the Louisiana Retirees sought discovery, including document production.  As to certain of the documents covered by a discovery demand, Pershing asserted two privileges; the attorney-client privilege and a US financial services regulatory privilege known as the “Suspicious Activity Report (“SAR”) privilege” established by US Federal regulation to protect financial institutions who are required to report suspicious financial activities to Federal enforcement officials.  The arbitration panel upheld those assertions of privilege.

The arbitration panel held that Pershing was not required to produce to the Louisiana Retirees certain categories of documents which Pershing claimed were privileged. The documents consist inter alia of emails which Pershing claimed were protected under the attorney-client privilege and “Incident Reports” which Pershing says it uses to begin the process of internally investigating potential suspicious activity. Pershing claims the second category of documents are protected by the SAR privilege.

After extensive hearings, the arbitral panel ruled in favor of Pershing on the merits.

After a two week hearing at which the panel heard over 1,600 pages of testimony from fifteen witnesses and considered over 900 separate exhibits, the panel ruled in Pershing’s favor.

Pershing then sought confirmation of the FINRA award in the District Court.  The Louisiana Retirees sought vacatur.  The District Court was therefore faced with the need to balance two oft-argued principles in confirmation/vacatur proceedings; “an arbitration panel’s decision cannot be overturned simply because it was incorrect. …. But under the Federal Arbitration Act (FAA), an arbitration panel’s refusal to hear evidence material and pertinent to the controversy can result in vacatur of the arbitration award when the refusal deprived a party of a fundamentally fair hearing.

The Louisiana Retirees primarily argued that the arbitration was “fundamentally unfair” due to their inability to obtain and present the documents withheld by Pershing from document production.

The Louisiana Retirees first argue that the panel’s decision should be vacated pursuant to section 10(a)(3) of the FAA because the panel denied the Louisiana Retirees access to key documents, and the withholding of the documents was prejudicial to the Louisiana Retirees to the extent it rendered the arbitration proceeding fundamentally unfair. Their position is essentially that the Louisiana Retirees were unable to prove their case and were unable to refute false testimony offered by Pershing witnesses during the arbitration proceeding because they did not have certain documents which they have now had an opportunity to review.

In particular, the Retirees pointed to the decision by the arbitral panel not to review the documents in camera before upholding the privilege claims and to their substantive privilege rulings.

The prejudice claimed by the Louisiana Retirees really stems from two separate decisions of the arbitration panel: (1) the decision not to review the documents in camera before deciding whether Pershing should produce them; and (2) the decision on the merits of the claimed privileges.

In an earlier decision in the judicial confirmation/vacatur proceedings, Judge Africk of the District Court had previously allowed limited discovery by the Louisiana Retirees.  When faced with the same assertions of privilege by Pershing, the Court itself reviewed the documents in camera (unlike the arbitral panel) to determine whether they were covered by the SAR privilege under federal law.  In its consequent ruling on privilege (available at https://scholar.google.com/scholar_case?case=17082729013022954526&hl=en&as_sdt=20006), the District Court upheld most of Pershing’s privilege assertions but concluded that some of the documents (or parts thereof) were not privileged and should have been disclosed.

After closely reviewing the documents produced for in camera review by Pershing, the Court finds that the Incident Reports at Tabs 1-67 bear no arguable relationship to the claims or defenses in this case and are not discoverable for that reason. On the other hand, the Court finds that the Incident Reports at Tabs 68-74 should be produced, as they are relevant to the claims and/or defenses of the Defendants in this case and are not privileged. Additionally, the redacted version of the Summary Reports that correlate to Tabs 68-74 should be produced, as should the redacted versions of Tabs 1-14 of the Summary Reports produced in Pershing’s third production on March 14, 2017.

Judge Africk ordered those documents turned over to the Louisiana Retirees as part of the judicial vacatur proceedings.  The Retirees then relied upon the fact that the arbitral tribunal had neither reviewed those documents in camera nor required them to be produced in document production as their basis for arguing fundamental prejudice.  As the Court noted in its subsequent decision last week, “Now the question is simply whether, considering the produced documents in conjunction with the record of the arbitration proceeding, the Louisiana Retirees have satisfied one of the recognized grounds for vacating an arbitration award.”

The Louisiana Retirees assert three bases for vacatur in this lawsuit. According to their motion, they contend “(1.) that the arbitration proceeding was fundamentally unfair because severe prejudice occurred to the Louisiana Retirees when Pershing did not disclose to the Louisiana Retirees [certain documents which were not produced by Pershing until this Court ordered them produced in this lawsuit]; (2.) the obvious partiality and bias of the arbitrators because of the apparent `assumed veracity’ of Pershing when the Panel allowed Pershing to serve as the judge and jury on defining the scope of the documents withheld under attorney client privilege and the SARs/AML privilege; and (3.) that the Panel committed manifest error reviewing the evidence that was actually presented to the arbitration hearing based upon the review standard of the Second Circuit because of the application of New York Law.”

Judge Africk addressed the Retirees’ “fundamentally unfair” presentation first.  He rejected the Retirees’ arguments.  The Judge began by repeating the commonly-accepted “exceedingly narrow” standard for vacatur of an arbitration award in FAA jurisprudence.

“In light of the strong federal policy favoring arbitration, judicial review of an arbitration award is extraordinarily narrow.” …. “Under this review, an award may not be set aside for a mere mistake of fact or law.” …. “Instead, Section 10 of the FAA provides the only grounds upon which a reviewing court may vacate an arbitrative award.”

Looking at the argument that the panel’s failure to review the documents in camera before ruling on the privilege justified vacatur, the District Court ruling noted that the FINRA arbitration rules do not require in camera review.  Moreover, commented the Court, the overall discovery process was not fundamentally unfair (“A FINRA arbitration panel has great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings.”).

With respect to the first decision—not to review the documents in camera—the Court observes that nothing in the FINRA arbitration rules requires in camera review prior to ruling on a discovery motion. To the extent the Louisiana Retirees claim that the manner in which the panel resolved discovery issues rendered the proceeding fundamentally unfair, the Court rejects that argument. Even if this Court would have proceeded differently, this Court cannot conclude that the entire arbitration proceeding was tainted because of it. See Bain Cotton Co. v. Chesnutt Cotton Co., 531 F. App’x 500, 501 (5th Cir. 2013) (“Regardless whether the district court or this court—or both—might disagree with the arbitrators’ handling of Bain’s discovery requests, that handling does not rise to the level required for vacating under any of the FAA’s narrow and exclusive grounds.”).

“A FINRA arbitration panel has great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings.” …. Indeed, even in federal court the decision whether to conduct an in camera inspection is wholly within the discretion of the district court. …. The record reveals that discovery was extensively litigated before the panel, which decided six motions to compel, received multiple rounds of briefing from the parties, and held a telephonic hearing to address the SAR privilege and the request for an in camera review. …. Ultimately, the Louisiana Retirees received over 121,000 documents from Pershing totaling over 635,000 pages. …. The discovery process was not fundamentally unfair. See Prestige Ford v. Ford Dealer Computer Servs., Inc., 324 F.3d 391, 395 (5th Cir. 2003) (abrogated on other grounds) (“In the case at hand, hearings were held and each disputed item was given consideration by the panel; thus, more than adequate opportunity was afforded to the parties and the minimum standards of fundamental fairness were met.”).

Having disposed of the Retirees’ complaint based on the failure of the panel to review the documents in camera before ruling, the Court then turned to the second assertion of fundamental unfairness – the panel’s merits decision that the attorney-client privilege and the SAR privilege shielded all of the documents withheld by Pershing.  Here too, Judge Africk was not persuaded that the tribunal’s decision deprived the Retirees of a fair hearing. The District Court considered that the documents not disclosed during the arbitration were cumulative of documents that were produced (“The documents produced to the Louisiana Retirees in this litigation are cumulative of the documents produced to the Louisiana Retirees in the arbitration proceeding. …  There is no reasonable basis to suggest that if the new documents had been produced during the arbitration proceeding, the result would have been different.”).

With respect to the second decision complained of by the Louisiana Retirees— the panel’s decision that the attorney-client privilege and the SAR privilege shielded all of the documents withheld by Pershing—the Court also concludes that the decision did not render the arbitration proceeding fundamentally unfair. …. Even if this Court disagrees with the arbitration panel regarding the appropriate scope of those privileges, the Court does not find that the Louisiana Retirees were deprived of a fair hearing as a result of the decision.

The documents produced to the Louisiana Retirees in this litigation are cumulative of the documents produced to the Louisiana Retirees in the arbitration proceeding. A review of the record shows that Pershing produced a vast amount of material during the arbitration proceeding which evidenced that high-level Pershing employees were aware as early as 2006, to one degree or another, of potential “red flags” regarding Stanford Group Company. …. The Louisiana Retirees marshaled this evidence in support of their position that Pershing knew or should have known that there were serious questions about Stanford Group Company’s legitimacy during the period that the Ponzi scheme was in operation, and that Pershing should have done more sooner to raise the alarm regarding Stanford Group Company. The arbitration panel rejected the Louisiana Retirees’ arguments. There is no reasonable basis to suggest that if the new documents had been produced during the arbitration proceeding, the result would have been different.

Because the Louisiana Retirees were able to introduce comprehensive evidence supporting their theory of the case, the deprivation of additional arguably relevant evidence did not deprive the Louisiana Retirees of a fair hearing.

The Judge in any event also assessed whether the evidence in the withheld documents about Pershing’s knowledge regarding Stanford’s suspicious behavior was a primary focus of the arbitration.  Judge Africk ruled it was not.  Moreover, the additional evidence would not have shown a direct conflict with testimony of Pershing witnesses.

To the extent the Louisiana Retirees argue that the newly produced documents directly contradict the testimony of Pershing witnesses in the arbitration, the Court finds the Louisiana Retirees’ position to be a mischaracterization of the record. Pershing witnesses acknowledged that there were concerns raised regarding Stanford Group Company as early as 2006. The primary focus of the arbitration proceeding was not whether Pershing had notice of suspicious behavior by Stanford Group Company, but rather whether Pershing acted reasonably to address their concerns and—more importantly—even if Pershing acted unreasonably, whether Pershing violated any legal duty owed to the Louisiana Retirees. (Pershing argued during the arbitration that Pershing could have no liability for fraud committed by Stanford Group Company even if Pershing should have discovered that fraud or done more to prevent it). All of these issues were exhaustively litigated.

Importantly, the Court also pointed out that, if there were ambiguities in the record, any “doubts or uncertainties must be resolved in favor of upholding the arbitration award.”  Applying this legal standard, the Court rejected the Retirees’ vacatur argument.

The Louisiana Retirees also packaged the same underlying situation as an argument that, by not reviewing the withheld documents in camera, the arbitrators evidenced partiality on the part of the arbitrators. The Retirees’ “evident partiality” attack actually involved three separate issues; (1) the in camera issue, (2) the fact that the then-CEO of Pershing had been a member of the FINRA Board of Governors, and (3) the fact that Pershing had presented a defense in the arbitration (the so-called “FINRA defense”) that regulatory examination and enforcement failures (i.e., alleged misconduct by FINRA and the Securities Exchange Commission (SEC) in failing to promptly identify the Stanford Ponzi scheme) meant that FINRA and the SEC should be held equally responsible for the failure to discover the Ponzi scheme earlier.

The Louisiana Retirees next argue that the panel’s decision should be vacated pursuant to section 10(a)(2) of the FAA because there was evident partiality or corruption by the arbitrators. They say the bias was made evident in three ways. First, the Louisiana Retirees claim that the panel’s failure to conduct the in camera review proves the panel was biased in favor of Pershing. Second, the Louisiana Retirees argue the panel was biased because the CEO of Pershing during the relevant time period, Richard Brueckner, was a former member of the FINRA Board of Governors. Third, the Louisiana Retirees contend that the panel was inclined to rule in favor of Pershing because Pershing asserted a so-called “FINRA defense,” in which Pershing supposedly argued to the panel that regulator misconduct or negligence served as a defense to Pershing, i.e. that if Pershing was liable to the Louisiana Retirees then FINRA and the SEC must be deemed equally culpable for failing to discover the Ponzi scheme sooner.

Judge Africk did not accept any of these arguments by the Retirees.  With respect to the claim that the the arbitrators showed bias by declining in camera review, the Judge referred back to his conclusion that the tribunal’s conduct did not produce an unfair hearing.

The Court has already addressed the Louisiana Retirees’ argument that the panel should have reviewed Pershing’s documents in camera. The FINRA rules do not require such an in camera review, and placed in the context of the lengthy discovery proceedings as a whole the panel’s decision not to review the documents does not suggest bias.

The Court then disposed of the other two assertions of bias (“that they strenuously objected to Mr. Brueckner [the former Pershing CEO who had been on the FINRA Board] not testifying in person in the order desired by the Louisiana Retirees during the arbitration proceeding, and that they objected to Pershing advancing the FINRA defense”).  With respect to the issue of the former CEO not be compelled to testify, Judge Africk declined to consider that the former CEO’s position on the FINRA Board produced any partiality on the part of the arbitrators appointed by FINRA.

As for Mr. Brueckner’s relationship with FINRA, the U.S. District Court for the Southern District of New York recently rejected an identical argument by a losing party to an arbitration, and the Court finds its reasoning persuasive and applicable here. See Freedom Inv’rs Corp. v. Hadath, 2012 WL 383944, at *5 (S.D.N.Y. Feb. 7, 2012) (“Blumenschein’s service on FINRA’s Board of Governors is insufficient to meet the objective test for assessing bias. Pinter has not made any showing that an individual member of the FINRA Board of Governors, or indeed the Board of Governors as a whole, has any influence over the selection of FINRA [Dispute Resolution] arbitrators, their compensation, or their assignment to panels. At the very most, he has raised the specter of an appearance of bias, insufficient grounds for disturbing an arbitration award.”).

The last bias claim put forward by the Louisiana Retirees, based on the “FINRA defense,” fared no better (“Even if Pershing had notified the regulators of any concerns it had regarding Stanford Group Company, it would not have made a difference in terms of shutting down the Ponzi scheme because the regulators and law enforcement agencies already knew far more about Stanford Group Company than anything Pershing could have reported.”).

Finally, with respect to the alleged bias created by the FINRA defense, the Court finds the Louisiana Retirees’ characterization of the defense somewhat misleading. This defense—one of many advanced by Pershing—was essentially a causation argument: Even if Pershing had notified the regulators of any concerns it had regarding Stanford Group Company, it would not have made a difference in terms of shutting down the Ponzi scheme because the regulators and law enforcement agencies already knew far more about Stanford Group Company than anything Pershing could have reported. However the defense is characterized, the Court is not at all convinced that Pershing’s assertion of a particular legal theory demonstrates that the arbitration panel was biased.

Notably, the District Court independently ruled that these “evident partiality” arguments had been waived by the Louisiana Retirees.  Once again, a positive response by counsel to the formula question put by the arbitral panel at the end of the hearings (did they receive “a full and fair opportunity to present their case”) played an important role.

At the beginning of the arbitration hearing, counsel for the Louisiana Retirees stated that they accepted the panel. At the end of the arbitration hearing, counsel for the Louisiana Retirees agreed that they had enjoyed “a full and fair opportunity” to present their case. …. Counsel for the Louisiana Retirees even thanked the panel for its time. … (“We appreciate y’all’s efforts.”). At that point, the Louisiana Retirees already knew of all the panel’s decisions described above, yet they failed to object. It was only once the arbitration panel ruled against them that the bias argument emerged. The waiver rule is designed to prevent just such a circumstance from occurring.

The Louisiana Retirees also made a “manifest error” argument, arguing that, by operation of choice of law principles, the judge-made New York law “manifest error” ground for vacatur was applicable in the Louisiana District Court.  The District Court rejected the choice of law argument, holding instead that the position in the US Circuit Court of Appeals for the 5th Circuit against any “manifest error” vacatur ground was binding.  Moreover, in a brief footnote, Judge Africk also held that “Regardless, this Court finds no circumstances evidencing manifest disregard of the law by the arbitration panel.”

The principal import of this ruling lies in the willingness of the District Court to conclude, in the face of its own prior ruling that some of the withheld documents should have been produced, that vacatur was still not appropriate.  But, to reach that conclusion, the Court found it necessary to rely in part on its own conclusion that the information in those documents was cumulative of information already in the arbitration record so that no fundamental unfairness had occurred.  The decision therefore has something for everyone in future disputes on each side of this issue.  Of course, it is not unlikely the Louisiana Retirees will appeal Judge Africk’s decision to the for the 5th Circuit Court of Appeals.  So, there may very well be more to come later this year.

 

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.

CASE SUMMARY: Ann Eleanor Ploetz, as Trustee For the Laudine L. Ploetz, 1985 Trust v. Morgan Stanley Smith Barney, LLC

Kantor Photo (8-2012)By Mark Kantor

A decision last Thursday from the US District Court for the District of Minnesota is worth a brief report, as an example of the rejection by US Federal courts of the argument that an arbitrator’s failure to disclose is an automatic basis alone for vacating the resulting arbitration award.  In Ann Eleanor Ploetz, as Trustee For the Laudine L. Ploetz, 1985 Trust v. Morgan Stanley Smith Barney, LLC, Civ. No. 17-1112 (PAM/DTS)(May 25, 2017, available at https://scholar.google.com/scholar_case?case=14229967613986037394&hl=en&lr=lang_en&as_sdt=20003&as_vis=1&oi=scholaralrt), the District Court (Paul Magnuson, District Judge) concluded that “every Court of Appeals to have addressed the issue has rejected Ploetz’s interpretation of Commonwealth Coatings that “the fact of the nondisclosure alone mandates vacatur under either a `reasonable impression of bias’ or `appearance of bias’ standard.”.

Ploetz does not cite any case decided after Commonwealth Coatings [Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968)] interpreting that decision to require vacatur of an award solely because an arbitrator failed to disclose relevant party contacts.  This is likely because there are no such cases.  It appears as though every Court of Appeals to have addressed the issue has rejected Ploetz’s interpretation of Commonwealth Coatings that “the fact of the nondisclosure alone mandates vacatur under either a `reasonable impression of bias’ or `appearance of bias’ standard.” Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d 640, 644 (6th Cir. 2005); see also id. at 645 (explicitly rejecting “as dicta . . . the appearance of bias standard espoused in the [Commonwealth Coatings] plurality opinion”).

In Ploetz, the losing party in a 2016-2017 FINRA arbitration sought vacatur of the adverse arbitration award on the ground that one of the arbitrators (Goldman) had failed to disclose his 2012 participation as mediator in an unrelated FINRA matter involving the respondent in the arbitration, MSSB.  Goldman had, however, disclosed his service as arbitrator in 6 arbitrations involving Morgan Stanley Smith Barney (MSSB).  The parties in the instant arbitration had not objected on the basis of those disclosed matters.

FINRA requires that arbitrators disclose any potential conflicts, including past service as an arbitrator or mediator. ….  Goldman disclosed that he had served as an arbitrator in proceedings involving MSSB on four occasions and was currently serving as an arbitrator in two pending MSSB arbitrations. …  Neither party sought to disqualify him on the basis of these contacts with MSSB.  After a two-day hearing, the panel unanimously determined that Ploetz’s claims were without merit. …

In February [2017], Ploetz’s attorney learned that Goldman had served as a mediator in a 2012 proceeding in Michigan involving MSSB. ….   Mediation under FINRA is voluntary and private, akin to settlement discussions, and thus there was no record of this proceeding and it was handled by attorneys not involved in the instant arbitration.  The 2012 mediation was unsuccessful and that case eventually proceeded to arbitration, with the arbitration panel finding for the claimant and against MSSB. …  There is no indication that Goldman was involved in the case after the unsuccessful mediation.

Petitioner Ploetz argued that Goldman’s failure to disclose his service as mediator in the earlier MSSB matter required vacating the 2017 arbitration award for “evident partiality”.  She contended that the US Supreme Court’s 1968 decision in Commonwealth Coatings [MK: the only, and famously internally inconsistent, set of Supreme Court opinions seeking to apply the “evident partiality” vacatur grounds in the US Federal Arbitration Act] “sets forth a bright-line rule that when the parties bargain for disclosure of conflicts and the arbitrator fails to disclose a conflict, the arbitration award must be vacated.”  Vacatur was required, said Ploetz, “because the parties agreed to be bound by the FINRA rules, and because the FINRA rules provide that failure to disclose is a “circumstance[] which might preclude the arbitrator from rendering an objective and impartial determination …, a refusal to vacate the award would frustrate the parties’ bargained-for legitimate expectations, not to mention the FAA’s standards.”

For that purpose, Ploetz also asserted that “it is inappropriate for the Court to consider any more recent appellate court interpretations of Commonwealth Coatings because the Supreme Court itself has not changed the Commonwealth Coatings holding.”

Judge Magnuson of the Federal District Court in Minnesota criticized that argument for treating the common-law system as “sclerotic.”

Her position that the law on this issue is sclerotic and may only be refined by the Supreme Court is not supported by either subsequent caselaw or by our legal system’s precedent-based jurisprudence, which relies on the evolution of legal principles through subsequent interpretations of Supreme Court opinions.

Automatic vacatur for arbitrator non-disclosure was not, therefore, mandatory.  Instead, said the Judge, the party seeking vacatur must still satisfy the “heavy burden” of showing “evident partiality”; “Even if an arbitrator fails to make a disclosure regarding potential conflicts of interest, a party must still “demonstrate evident partiality” on the arbitrator’s part.”  Moreover, “a party contending that an arbitration award should be vacated because of an arbitrator’s “evident partiality” bears a “heavy burden.””

Judge Magnuson then concluded that the failure by Goldman to disclose the 2012 MSSB mediation was not sufficient to show “evident partiality” in circumstances where the arbitrator had already disclosed 6 MSSB arbitrations without objection and the prior mediation had no demonstrated effect on the 2016-2017 arbitration.

Here, there is simply no evidence that Goldman’s prior mediation with MSSB had any effect on the resolution of Ploetz’s claim.  Indeed, Goldman disclosed six other MSSB-related proceedings over which he had presided and those proceedings did not cause Ploetz to question his impartiality.

 

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.

SCOTUS Says States Can’t Discriminate Against Arbitration, Directly or Indirectly

Adding to its line of pro-arbitration decisions led by AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011)(available at http://bit.ly/1Sf42Bm), the U.S. Supreme Court on Monday reaffirmed in a 7-1 ruling written by Justice Elena Kagan that the Federal Arbitration Act (FAA) both “preempts any state rule discriminating on its face against arbitration” and “displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.” Kindred Nursing Centers v. Clark, No. 16-32 (May 15)(available at http://bit.ly/2pCk94L ).

Kindred came to the Supreme Court after the Kentucky Supreme Court refused to enforce arbitration agreements signed on behalf of two residents of the Kindred Nursing Center, by relatives to whom the residents had given power of attorney. The two residents died, their families alleged, from substandard care provided by the nursing home.

The nursing home moved to dismiss the complaints on the grounds that the parties had agreed to arbitrate their claims. The trial court initially sent the cases to arbitration, but reconsidered later in light of a Kentucky Supreme Court opinion, and denied these motions. The Kentucky Court of Appeals agreed that the suits could proceed. The Kentucky Supreme Court consolidated the cases and affirmed, holding that a power of attorney must explicitly authorize the attorney in fact to waive jury trials in order to include arbitration agreements under the power.

As the Justices’ questioning during oral arguments earlier this year acknowledged, the facts of this case involved something more important and sensitive than a mere dispute over the arbitrability of a telephone or cable bill. But, with Monday’s ruling, the Supreme Court seemed to be implying that, no matter how emotional the backdrop, the states cannot attack federal law that applies to that contract, even indirectly.

The Kentucky Supreme Court, wrote Kagan in the Kindred opinion, “did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial.”

With this recent line of cases, the U.S. Supreme Court has made clear that the presence of unequal treatment of arbitration will control the results in these cases.

“There is no doubt that mandatory arbitration procedures, when abused, can be used to stack the deck in favor of companies against individuals, and the original case’s underlying facts are upsetting,” said CPR President & CEO, Noah J. Hanft. “But in ruling that the FAA precludes states from imposing rules that negatively single out arbitration agreements, the Supreme Court in Kindred has correctly protected a process that is fundamentally no less fair or favorable to individuals than a trial might be–and which arguably has the potential to offer many additional benefits. One can, and must, advocate simultaneously both for a robust arbitration option, and for its fair application.”

Justice Kagan’s majority opinion was joined by Chief Justice Roberts, and Justices Kennedy, Ginsburg, Breyer, Alito and Sotomayor. Justice Gorsuch, who had not yet been confirmed when the case was argued, did not participate.

Justice Clarence Thomas dissented–the seventh time he has issued a solo dissent noting that the FAA doesn’t apply to state court proceedings.  He would have backed the Kentucky Supreme Court, writing that in state courts, “the FAA does not displace a rule that requires express authorization from a principal before an agent may waive the principal’s right to a jury trial.”

Gorsuch on Arbitration

By Russ Bleemer

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

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

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

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

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

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

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

Possible Role in Employment Contract Class Action Waiver Cases

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

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

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

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

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

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

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

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

Gorsuch on Class Actions

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

Two Opinions, One Dissent

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

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

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

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

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

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

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

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

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

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

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

Taking a Broader FAA View

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

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

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

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

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

Additional Arbitration Work

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

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

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

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

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

*Updated at 12 p.m.