US Sup Ct: Will the “Next Big Arbitration Issue” Be Whether Provisions of Arbitration Rules Constitute Clear and Unmistakable Evidence That the Disputing Parties Allocated “Who Decides” Authority to the Arbitrators?

By Mark Kantor

Kantor Photo (8-2012)

The U.S. Supreme Court heard oral argument in two arbitration-related cases on Monday, Henry Schein Inc. v. Archer & White Sales Inc. and Lamps Plus Inc. v. Varela.  The issue before the Court in Henry Schein was whether or not there is a “wholly groundless” exception to the general Federal Arbitration Act caselaw rule that, if the parties have “clearly and unmistakably” allocated the “who decides” question to the arbitrators, then issues of jurisdiction/arbitrability are for the arbitrator to decide in the first instance, not the courts.

The facts of the Henry Schein case involved the relatively commonplace occurrence of a commercial arbitration agreement referencing arbitration rules (here, AAA Commercial Arbitration Rule 7(a)) that grant the arbitrators the power to decide their own jurisdiction.  The lower courts in Henry Schein, like many other Federal courts before them, concluded that provision of the Rules constituted “clear and unmistakable evidence” (as called for by the Supreme Court in First Options of Chicago, Inc. v. Kaplan) allocating the “who decides” authority to the arbitrators, and then proceeded to consider whether or not an exception to that allocation exists if the claim of arbitrability is “wholly groundless”.

The 5th Circuit Court of Appeals ruled below in Henry Schein that such a “wholly groundless” exception does exist.  Further, said the Court of Appeals, that “wholly groundless” exception applied in the dispute such that the Federal courts could refuse to compel arbitration in the circumstances.  The disappointed claimant then sought, and obtained, U.S. Supreme Court review on the question of whether such a “wholly groundless” exception to the “clear and unmistakable evidence” allocation rule exists under Federal arbitration law.

However, Prof. George Bermann of Columbia Law School, known to many of us as inter alia the chief reporter of the ALI’s Restatement of the U.S. Law of International Commercial and Investor-State Arbitration, felt moved to submit an amicus brief in Henry Schein questioning, not the issue expressly before the Court, but instead the underlying principle that incorporation of arbitration rules granting jurisdiction/arbitrability power to the arbitrators satisfies the “clear and unmistakable evidence” test for allocating “who decides” authority to the arbitrators .

Although a majority of courts have found the incorporation of rules containing such a provision to satisfy First Options’ “clear and unmistakable” evidence test, the ALI’s Restatement of the U.S. Law of International Commercial and Investor-State Arbitration has concluded, after extended debate, that these cases were incorrectly decided because incorporation of such rules cannot be regarded as manifesting the “clear and unmistakable” intention that First Options requires.

https://www.supremecourt.gov/DocketPDF/17/17-1272/65270/20181001112810079_REPRINT%20Amicus-GAB.pdf .

Many of the Supreme Court Justices commented that this issue of “clear and unmistakable evidence … due to incorporation by reference” was not part of the Question Presented on which the Supreme Court granted certiorari in Henry Schein.  Based on those comments, it seems unlikely that the eventual decision of the Court in Henry Schein will resolve the issue posed by Prof. Bermann.  Nevertheless, Justices from across the judicial spectrum commented respectfully regarding Prof. Bermann’s amicus argument.  See comments and questions of Justice Ginsburg, Tr. 7:16-23; Justice Breyer, Tr. 49:15-23; Justice Gorsuch, Tr. 42:13-20; Justice Sotomayor, Tr. 38:4-7; Justice Alito, Tr. 35:7-36:4.

Counsel for the Petitioner did take substantive issue with Prof. Bermann’s argument, in addition to arguing that the issue was not within the Question Presented and thus in any event not before the Court.

What is going on in this case, if you look at the four corners of the delegation -of the arbitration agreement **** is that the arbitration agreement by its terms incorporates the rules of the American Arbitration Association and it does so very clearly. That is a quite common arrangement, particularly in commercial arbitrations like the one at issue here.

Then, if you take a look at the rules of the American Arbitration Association, those rules, and, in particular, Rule 7(a), clearly give the arbitrator the authority to decide arbitrability.  And under this Court’s decision in First Options, the relevant inquiry is whether or not the parties were willing to be bound by the arbitrator’s determination on the issue in question.

And so, with all due respect to Professor Bermann and his amicus brief, the position that he propounds has been rejected by every court of appeals to have considered this issue.  And if the Court has any interest in this issue, I would refer the Court to the very thoughtful opinion of the Tenth Circuit in the Belnap case, which discusses this issue in some detail.

Tr. 8:9-9:13.

The transcript of the oral argument in Henry Schein, available at https://www.supremecourt.gov/oral_arguments/argument_transcripts/2018/17-1272_bqmc.pdf, is very much worth reading in this regard.

The arguably positive comments by some Justices in reaction to Prof. Bermann’s amicus argument create the possibility that opportunistic counsel in other cases will see a signal that raising the principle to the Supreme Court in a future case might be worth the effort.  Consequently, I suggest that the “Next Big Arbitration Issue” to come to the U.S. Supreme Court may be whether or not an arbitration agreement incorporating arbitration rules that include within themselves a provision authorizing the arbitrators to rule on their own competence satisfies the “clear and unmistakable evidence” test in First Options for allocating “who decides” authority to the arbitrators in the first instance.

By the way, reading the tea leaves in the Henry Schein oral argument, at least some observers believe the comments/questions of the Supreme Court Justices indicate that the Court is not inclined to validate a “wholly groundless” exception to the allocation of “who decides” authority to the arbitrators.  See, e.g., http://www.scotusblog.com/2018/10/argument-analysis-justices-signal-opposition-to-vague-exceptions-that-would-limit-enforceability-of-arbitration-agreements/#more-276785.

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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.

Amicus Preview, Part 2: The Independent Contractors Want Their FAA Sec. 1 Exemption

By Sara Higgins and Russ Bleemer

The respondents’ amicus briefs urging the U.S. Supreme Court to affirm the First U.S. Circuit Court decision in New Prime Inc. v. Oliveira, No. 17-340, which was argued earlier this month, focus on statutory history and the plain meaning of the Federal Arbitration Act.

They argue that independent contractors are exempt from FAA application like other transportation workers under a “contract of employment.” That exemption is in the act itself, in Sec. 1, which states, “. . . nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

In other words, the unions, scholars and think tanks excerpted below say the protections the 1925 FAA drafters provided to transportation employees also goes to independent contractors.  Some amicus argue that the term “employees” meant something different then than it means now.

One brief tackles the arbitrability issue that is before the Court, too. Though most amicus filers on both sides focused on the merits of whether the FAA applies to independent contractors, the source of the arbitrability decision–on whether the matter will be heard in arbitration to be made by either a court or an arbitrator–also is expected to be a part of the Supreme Court’s opinion.

The material below covers the respondents’ friend-of-the-court briefs backing independent truck driver Dominic Oliveira. For the petitioner’s briefs, which were filed first, as well as for background on the case and links to deeper dives into the facts and the issues, see the immediately previous CPR Speaks feature, Sara Higgins, “Amicus Preview: New Prime’s New Look at Mandatory Arbitration,” CPR Speaks (Oct. 2)(available at https://bit.ly/2zNqYUF).

In support of Respondent Oliveira:

  1. American Association for Justice
  • AAJ, which represents trial lawyers, offers a broad historical argument that says that the FAA Sec. 1 exemption from the law’s application includes all transportation workers, not just seamen and railway workers.
  • The Washington, D.C.-based association is concerned that the Federal Arbitration Act constructions by petitioner New Prime undermine the right of U.S. workers to pursue their statutory and common-law rights in a judicial forum.
  • AAJ believes it is clear that all workers in the transportation sector, whether “employees” or “independent contractors,” were meant to be exempted from the FAA.
  • New Prime’s narrow construction belies the FAA enactment history, Congressional intent, and basic principles of contract construction as applied by the Court and elsewhere. Independent vehicle owner-operators and others contracting to perform work themselves certainly existed at the time the FAA was passed, and had Congress not wished the exemption to apply to all who actually worked in the transportation sector, it would have said so.
  • That Congress meant to exempt all workers in the transportation section from the FAA– not limited or reliant upon how that worker happened to be paid—is consistent with the Court’s decisions and other Congressional action.
  • In historical context, the use of the term “contracts of employment” routinely included the “employment” of “independent contractor” drivers and, hence, is not meant to exclude any drivers from the benefit of the exception. The Sec. 1 exemption, which was urged by American Federation of Labor lobbyists at the 1925 FAA enactment, the brief notes, “would surely have included all members of one of its most important affiliates, the Teamsters.”
  1. Public Citizen, Inc.
  • The Washington consumer advocacy group, a frequent participant in federal arbitration litigation on behalf of consumers and employees, submits its amicus brief to address one of the two issues raised by petitioner New Prime: whether, when a contract contains an arbitration provision including a clause delegating questions of the arbitrability of a matter to an arbitrator, the FAA requires a court to compel arbitration of the issue whether the FAA even applies to the contract.
  • The brief notes that both the amicus and the parties focus more on the merits issue—that is, whether the FAA exemption applies to all transportation workers—and pay insufficient attention to the arbitrability issue before the Court.
  • Although New Prime’s argument—that the FAA requires a court to refer the issue of its own applicability to an arbitrator without first addressing a substantial argument that the FAA doesn’t not apply to the contract containing the delegation clause the court is being asked to enforce—seems counterintuitive, Public Citizen says its amicus brief addressing the issue may assist the Court in reaching a decision that adds clarity to arbitration law and helps define the limits of the Court’s rulings on the subject.
  • The FAA cannot, and does not, require a court to enforce any arbitration agreement unless the court determines that the FAA applies to that agreement.
  • “The requirement that a court decide whether the contract at issue is excluded from the FAA’s coverage by section 1 before ordering arbitration of any issue (including the section 1 issue itself) is critical, because any order compelling arbitration under the FAA is necessarily applying the FAA to give effect to a purported agreement to arbitrate. A court may not apply the FAA where the FAA itself provides that it is inapplicable.”
  • New Prime’s invocation of its delegation clause and the principle of “severability” cannot justify application of the FAA to a contract to which the FAA does not apply.
  1. Sheldon Whitehouse, D., R.I.
  • Whitehouse, a former state attorney general and U.S. Attorney, invokes Alexis de Tocqueville, Blackstone, and Machiavelli at the outset of his brief, which launches a broadside at the Court’s arbitration jurisprudence. He writes that he files the brief “to draw attention to the Court’s steady march of decisions eroding the Constitution’s Seventh Amendment protections and to warn of the Court’s perilous destabilization of its own institutional reputation.”
  • “Over the past decade,” states Whitehouse, “a predictable conservative majority of the Supreme Court has handed down an accommodating string of 5-4 decisions closing off ordinary citizens’ pathways to the courtroom. Corporate victories at the Supreme Court have undermined civil litigants’ constitutional right to have their claims heard before a jury of their peers, and have whittled to a nub the protective role courts and the jury system were designed to play in our society. Such victories have allowed corporations to steer plaintiffs out of courtrooms and into arbitration, where the odds can be stacked in favor of big business. The Court’s recent arbitration decisions regarding the [FAA], aggrandizing its reach and undermining the original purpose of the Seventh Amendment, are an example.”
  • “[T]his grant of certiorari has the same seeming inevitability as those 5-4 decisions in cases preceding it. Accordingly, amicus fears that the outcome of this case may be preordained—not by the FAA’s plain language, but instead by the trajectory of the recent pattern of 5-4 partisan decisions (decisions in which the Court divides 5-4 with the Republican-appointed majority voting as a bloc). With numbingly predictable inevitability, these cases seem to be won by the ‘more powerful and wealthy’ corporate citizens.”
  • Whitehouse’s legal arguments surrounded two key points in urging the Court to back the First Circuit: “A clear policy preference has emerged for denying citizens their day in court,” and the Court “compromises its legitimacy when it jettisons neutral principles to reach a desired outcome.”
  1. Historians
  • The amicus brief was prepared on behalf “scholars of American labor and legal history [who] have a professional interest in accurate and valid inferences from the historical record”: Shane Hamilton, University of York; Jon Huibregtse, Framingham State University; James Gray Pope, Rutgers Law School; Imre Szalai, Loyola University New Orleans College of Law; Paul Taillon, University of Auckland; and Ahmed White, University of Colorado School of Law.
  • By operation of the ejusdem generis canon, which indicates that a statutory provision should be interpreted in accordance with the words nearby—“of the same kind”–the FAA exemption’s residual clause (“any other class of workers”) does not cover only common law employees in the wake of the statute’s enumeration of railroad workers and seamen. If Congress had intended the FAA exemption to cover only common-law employees, as New Prime now reads it, Congress would have disrupted the statutory dispute resolution schemes for “seamen” and “railroad employees” that it had wanted to avoid unsettling.
  • Relying on more than three dozen agency determinations, the brief notes that the Transportation Act covered railroad workers who would not have counted as employees under the common law of agency. Similarly, shipping arbitration “covered ‘any question whatsoever’ in a seaman’s dispute, including those that did not turn on whether the seaman was anyone’s ‘employee’ under the common law of agency.”
  • The FAA would have disrupted the Transportation Act had it only exempted common-law employees. The theory appears to be that the FAA Sec. 1 exemption applies to independent contractors, which the brief barely mentions, though it notes that independent contractors were covered for railway workers disputes under the Transportation Act of 1920 and seamen disputes under the Shipping Commissioners Act of 1872.
  1. Constitutional Accountability Center
  • The Washington, D.C., think tank and public interest law firm, devoted to a progressive interpretation of the Constitution’s text and history, is concerned with “ensuring meaningful access to the courts, in accordance with constitutional text, history, and values.” Heavily citing numerous dictionary definitions, the Center argues that New Prime’s argument badly misinterprets the view of the definition of employees when the FAA was passed. The Center backs affirming the First Circuit interpretation.
  • When Congress enacted the FAA, “employment” was a broad and general term that did not connote a master-servant relationship. Dictionaries of the era, however, defined the word “employment” by consistently giving it a broad meaning—one that encompassed paying another person for his or her work, whether or not the common-law criteria for a master-servant relationship were satisfied. The word “employee” gradually influenced, and limited, the meaning of the term employment, but only well after the FAA was enacted.
  1. Massachusetts, et al.
  • Fourteen states and the District of Columbia filed an amicus brief because they state that they enforce laws that protect the public interest, including those that set fair labor standards and promote the health and safety of all working people. Employees who are misclassified as independent contractors are often denied many basic workplace protections and benefits that they are entitled to receive—and employers who fail to properly classify and pay their workers gain an unfair competitive advantage. The states and the District of Columbia “have an interest in seeing that transportation sector workers such as Respondent Dominic Oliveira get their day in court, as Congress intended.”
  • Because states have limited resources, they rely on individual employees to supplement the efforts of attorneys general through private enforcement actions. “And many transportation companies engage in exploitative labor practices while at the same time using mandatory arbitration agreements with unreasonable forum selection clauses to attempt to prevent their misclassified drivers from pursuing otherwise available legal remedies.”
  • The FAA Sec. 1 language of the transportation workers’ exemption excludes interstate truck drivers from the FAA’s scope, regardless of whether they are employees or independent owner-operators. This conclusion becomes especially clear in light of the history surrounding Congress’s regulation of leases between independent truck drivers and authorized motor carriers.
  • Both of New Prime’s arguments are foreclosed by the FAA’s plain language, read in its proper historical context.
  1. Employment Law Scholars
  • The amicus brief signers are 35 law professors who have taught and written about employment law. They submit this brief because they believe that the FAA should be construed consistent with how all other statutes and related case law treat issues of worker status.
  • Petitioner New Prime and its amicus supporters ask the Court to interpret contracts of employment as used in the FAA based solely on the labels used in particular contracts, drawing distinctions between independent contractors and employees where there is no sound basis to do so.
  • “Allowing worker status to be decided by contract would set the FAA apart from every other federal statute governing workers. It would lead to inconsistency and uncertainty in the workplace because worker status would vary based on contract or the label chosen for each worker.” In New Prime, it could jeopardize the Fair Labor Standards Act’s mission that “prevent[s] parties from contracting away employees’ rights to minimum wages and overtime compensation,” the brief notes, adding that the Court “must not, through the FAA, endorse this type of race to the bottom.”
  • Many federal and state statutory schemes do not distinguish between common law employees and independent contractors.
  • The reality of the working relationship, not the face of the contract, determines workers status under federal employment statutes.
  1. Owner-Operator Independent Drivers Association Inc.
  • The 45-year-old Grain Valley, Mo.-based association submitted its amicus brief to inform the court that owner-operator truck drivers are a class of workers engaged in interstate commerce, and how their lease agreements with motor carriers, such as petitioner New Prime, are contracts of employment as set out in the FAA Sec. 1 exemption.
  • The amicus brief is filed by the largest international trade association representing the interests of independent owner-operators, small-business motor carriers, and professional drivers. The association notes that the question of whether the contracts of owner-operators are subject to the FAA will determine whether owner-operators will continue to have any meaningful opportunity to protect their small businesses from the type of predatory behavior described in defendant Oliveira’s brief. “Especially important,” the association notes, “is the right to bring an action in federal court for damages and injunctive relief specifically granted to owner-operators by Congress in 1995.”
  • Congress looked to two factors when it formed FAA Sec. 1’s scope: “the maintenance of a smooth operating transportation system and Congressional concerns for enacting specific regulations governing the contracts of transportation workers.” The legislative and regulatory history demonstrates that motor carrier/owner-operator contracts are among those Congress exempted from FAA application by Sec. 1 to achieve the goals in the statute’s adoption: The “provision of different procedures and forums to resolve disputes under those contracts demonstrate precisely the type of contract for employment of persons engaged in interstate commerce that Congress intended to exempt from the FAA.”
  1. International Brotherhood of Teamsters, National Employment Law Project Inc., Economic Policy Institute, and National Employment Lawyers Association
  • Like AAJ and the state amicus briefs, the four-party amicus brief also is concerned about the misclassification of independent contractors by employers, which, among other things, cuts off employers’ responsibility for taxes and liability on behalf of and to their workers. The brief is concerned that a ruling in favor of petitioner New Prime would create incentives for more companies to misclassify their employees as independent contractors in order to evade worker protections.
  • The interest in this case by the amicus filers—a big union, an employment lawyers’ association that focuses on plaintiffs’ representation; an employees’ advocacy research organization, and an economics policy think tank–is to ensure that drivers involved in interstate commerce, including those classified as independent contractors, are afforded the FAA Sec. 1 exemption granted to contracts of employment in the transportation industry.
  • The brief also states that Prime’s errant suggestion that employment relationships under the FAA should be identified by the terms of the contract alone may affect misclassification analysis under other statutes.
  • Truck drivers, like respondent Oliveira, “are frequently misclassified by their employers as independent contractors. This treatment excludes drivers from basic labor and employment protections like the minimum wage, health and safety, and discrimination protections, to name a few.”
  • The brief says that the Supreme Court doesn’t need to determine whether Oliveira was misclassified by New Prime, “because he and the company entered into a contract of employment that should be exempt under the plain language of the Federal Arbitration Act.”
  • Alternatively, the brief argues, if the Court decides that the employee versus independent contractor relationship must be decided in order to determine FAA applicability, “it should take into account the independent contractor misclassification problems endemic in the trucking industry, the impacts on workers, other employers, and state budget and tax coffers, and on employers’ economic incentives to misclassify more drivers that will result.”
  • And if the Court finds that the contract-of-employment analysis requires a determination of whether a worker is an independent contractor, that determination must consider all incidents of the relationship and not be limited to the unilaterally imposed terms of the contract.
  • The FAA’s plain text shows that the Court should find that truckers’ independent contractor arrangements are “contracts of employment” and exempt from the FAA’s coverage. The brief emphasizes the policy consequences of a holding to the contrary.
  • Independent contractor misclassification and the unlawful and exploitative working conditions it engenders are rampant across the economy, but particularly prominent in the trucking sector.
  • Bad-actor employers misclassify works in attempts to avoid tax and other liability, imposing significant societal costs on the public, law-abiding employers, and workers.
  1. Statutory Construction Scholars
  • The amicus brief was written on behalf of 14 law school professors engaged in the teaching and study of statutory construction principles. They believe that a “shared commitment” to certain standards of analytical care “leads to only one conclusion in this case–that application of key canons of statutory construction” to the FAA contracts-of-employment language “applies to all transportation workers without exclusion of workers who are deemed to be independent contractors, and without the legally protected status of “employees.”
  • “The First Circuit’s opinion in Oliveira v. New Prime Inc., reflects a well-reasoned, thoughtful approach to statutory construction. Petitioner attempts to upend that decision and contorts the canons of statutory construction beyond their reasonable parameters in a miscarriage of justice.”
  • The petitioner’s conclusion that the FAA’s contracts-of-employment statutory exception is limited to only those with the legal status of “employees” is not sound.
  • First, the words in statutes are read in light of their ordinary, plain meaning. Those words, the brief notes, “are understood from the perspective of what was meant when they were drafted.” [Emphasis is in the brief.] The petitioner’s argument, “which rests on modern dictionary definitions instead of inquiring into the terms’ meaning at the time the FAA was enacted, fails to comply with those canons of statutory construction and should be disregarded.”
  • The ejusdem generis canon (see above) does not support limiting contracts of employment to employees.
  • Reading the residual exclusion of the FAA’s Sec. 1 to include all transportation workers does not negate FAA Sec. 2 language, which must be read independently because it has a different substantive mandate.

Steve Viscelli, et al.

  • Steve Viscelli is a University of Pennsylvania sociologist who studies work, labor markets, and public policy related to freight transportation, automation and energy. He submitted the brief to provide a better picture of the economic incentives at work in the trucking industry. He provides an analysis of trucking industry’s employment evolution to a “Lease-Operator” model from owner-operators in urging the Court to avoid requiring arbitration to settle employment disputes in the industry.
  • Viscelli is joined by six current or former owner-operators or Lease-Operator truck drivers, whose situations are used as examples in the brief. Also joining the brief as amicus parties is two nonprofits, the Wage Justice Center, a Los Angeles advocacy group for economic justice and fair pay, and REAL Women in Trucking Inc., a trade group that advocates for better working conditions (see http://www.realwomenintrucking.com).
  • The brief explains that New Prime, like other trucking firms, mostly now operates under a relatively new economic structure, the Lease-Operator model. The drivers lease their rigs directly from the company they work for, and often still may owe the company after they are paid for runs. The system often harms employees by misclassifying them as independent contractors.
  • “Because Lease-Operators lease a truck and pay for fuel, maintenance, and insurance, firms can potentially shift a significant amount of capital and operating costs to them, translating into much lower labor costs per unit of work. And, though Lease-Operators are often nominally free to choose what loads they haul, they are generally under greater pressure than employees to accept whatever work is offered to them and to spend more days working because they need to work many more hours per day and days per year to meet fixed expenses and then earn take-home pay at levels even close to what they would earn as company drivers.”
  • The FAA Sec. 1 exclusion prohibits courts from applying the statute to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. The brief says that the Court should include the employment arrangements of drivers like respondent OIiveira, who are misclassified by their employers within the definition of contracts of employment.
  • “Workers who must arbitrate their claims are 59% less likely to win than those who take their case to federal court and 38% less likely to win than workers litigating in state courts. The median award in mandatory arbitration is 21% of the median award in the federal courts and 43% of the median award in the state courts. [Citations omitted.] . . . Employers who misclassify employees stand to gain significantly by using forced arbitration to resolve disputes. This Court should not read the FAA in a way that allows them to require arbitration of disputes about the nature of employment in the industry.”

Higgins was a 2018 CPR Institute summer intern and is a student at Northeastern University School of Law. Bleemer edits Alternatives to the High Cost of Litigation, published by the CPR Institute with John Wiley & Sons (see http://www.cpradr.org/news-publications/alternatives and altnewsletter.com).

US Sup Ct Grants Cert to Review Whether Courts Can Decline to Enforce Delegation of Arbitrability to Arbitrators When Court Concludes Arbitrability Claim is Wholly Groundless

By Mark Kantor

Kantor Photo (8-2012)

Continuing their now years-long effort to mold the relationship between the courts and arbitrators, the US Supreme Court today granted certiorari in Henry Schein Inc. v. Archer and White Sales Inc., No. 17-1272, to answer the question of “[w]hether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is “wholly groundless.””  In the lower appellate phase of this dispute, the US Court of Appeals for the 5th Circuit had ruled last December that Federal courts did indeed have the authority to do so.

Granting this cert petition will allow the Supreme Court to resolve a “Circuit split” on the issue between the Fourth, Fifth, Sixth, and Federal Circuits, holding on the one hand that Federal courts may decide an arbitrability issue if the claim for arbitrability is “wholly groundless,” and the Tenth and Eleventh Circuits, holding on the other hand that if there is a contractual delegation of arbitrability to the arbitrators then the courts must compel arbitration to resolve the arbitrability issue even if it appears to the court that the claim of arbitrability is entirely groundless.

The dispute will be argued in the October Term of the Court.

The case record for this matter, including the appeals court decision and the filings relating to certiorari, can be found on www.Scotusblog.com at http://www.scotusblog.com/case-files/cases/henry-schein-inc-v-archer-and-white-sales-inc/.

 

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.

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

By Russ Bleemer

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

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

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

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

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

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

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

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

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

 

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

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.

Predispute Arbitration Would be Barred for Sex Harassment Claims Under Legislative Proposal

By Elena Gurevich

The Federal Arbitration Act is being targeted in Congress in a bill that seeks to ban predispute arbitration in matters involving sexual harassment.

Last month, Sen. Kirsten E. Gillibrand, D., N.Y., along with 13 co-sponsors., introduced U.S. Senate bill S-2203, titled “Ending Forced Arbitration of Sexual Harassment Act of 2017.”

The act makes predispute arbitration agreements unenforceable for sex discrimination disputes.  It would put the responsibility for determining arbitrability on courts, not arbitrators.

The Dec. 6 proposal was immediately referred to the Committee on Health, Education, Labor, and Pensions.  It was introduced in the House by Rep. Cheri Bustos, D. Ill., on Dec. 26, with seven co-sponsors, and sent to the Judiciary Committee.

The act would amend United States Code Title 9—the FAA—by adding a new Chapter 4 “Arbitration of Sex Discrimination Disputes” at the end.

In a proposed Section 401, the legislation would define “predispute arbitration agreement” as “any agreement to arbitrate a dispute that had not yet arisen at the time of the making of the agreement,” and “sex discrimination dispute” as “a dispute between an employer and employee arising out of conduct that would form the basis of a claim based on sex under title VII of the Civil Rights Act of 1964 [citation omitted] if the employment were employment by an employer [as defined in the act], regardless of whether a violation of such title VII is alleged.”

Proposed Section 402, on validity and enforceability, states that “no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of a sex discrimination dispute.”

According to a blog by employment attorneys at the law firm of Orrick, Herrington & Sutcliffe, if the act is passed into law, it “would not make employment arbitration agreements altogether unenforceable.” Joe Liburt, Allison Riechert Giese and Akasha Perez, “The Ending Forced Arbitration of Sexual Harassment Act: A Legislative Response to #MeToo,” Orrick Employment Law and Litigation blog (Dec. 14) (available at http://bit.ly/2rmpHSx).

The blog post notes that the proposal “would require employers and employees to litigate sexual harassment claims, while leaving unaffected all other arbitration-eligible claims.  This could potentially require employees who bring both harassment and non-harassment legal claims to litigate some claims in court while simultaneously submitting other claims to arbitrators.”

The proposed law, however, does not prohibit workers and employers from agreeing to arbitration after a dispute arises.

The Orrick blog notes that the legislative proposal “has a long journey” before it is signed into law, explaining that “the bill must be assigned to a committee for consideration, withstand debate” and “pass a vote.” The blog post predicts that it “could take months or even years to complete, if ever.”

A USA Today article notes that Congress also “is wrestling with incidents of sexual harassment,” referring to a resolution passed by the Senate that requires sexual harassment training for senators and staff.

The article discusses a bipartisan bill that was introduced in November that would “overhaul the congressional complaint process and provide better protections for accusers.” The article also notes that “other lawmakers are looking to reform the secret process lawmakers have used to settle numerous workplace harassment and discrimination claims.” See Jessica Guynn, “‘Enough is enough’: Gretchen Carlson says bill ending arbitration would break silence in sexual harassment cases,” USA Today (Dec. 6)(available at https://usat.ly/2ynUM6y).

Some companies already have taken action in the light of the proposed legislation. Last month, Microsoft became the first Fortune 100 company to support the bill. Microsoft President and Chief Legal Officer, Brad Smith, stated that the company should “act immediately and not wait for a new law to be passed.” Brad Smith, “Microsoft endorses Senate bill to address sexual harassment,” Microsoft blog (Dec. 19)(available at http://bit.ly/2mR65jR).

The author is a CPR intern.

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.”

2nd Update*: Class Waivers and Arbitration: The Battleground Focus Moves to Labor and Employment Law

*The area of class action waivers and employment law saw an absolutely whirlwind close to 2015, with the NLRB releasing yet another decision midday, on 12/31, following two weeks that saw 16 decisions restricting arbitration practices. Please see below for an up-to-date summary of these rapidly breaking developments.

By Russ Bleemer

The emphasis on the law and politics of consumer arbitrations, and their relationship to class waivers, has overshadowed developments in another closely related area of conflict resolution law.

But the time has come for finality on the legality of employment law class-action waivers.  Developments in 2015’s final quarter indicate that decisive events are coming in the area, which involves the intersection of U.S. labor law and the Federal Arbitration Act.

On the first day of December, the National Labor Relations Board issued two decisions finding labor law violations against companies for using mandatory pre-dispute class action waivers with their arbitration agreements requiring individual processes.  The waivers, the NLRB said, violate Sections 7 and 8 of the National Labor Relations Act, which allows employees, among other things, “to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

That was only the beginning:  By Christmas, the NLRB had issued at least 16 more decisions striking down mandatory pre-dispute arbitration clauses that coupled class waivers as a condition of employment.

The decisions are crucial because the rights of collective action under the NLRA address far more than union workplaces. The law applies to most employees, and key cases that have arisen in this area focus on white-collar employees.

It’s a major statement by the Board. The NLRB decisions’ reasoning—that the NLRA and the FAA co-exist compatibly but the latter isn’t preferred over workers’ rights to act in concert—had already been rejected by the Fifth U.S. Circuit Court of Appeals.  Twice, in fact, including in a decision just five weeks before the December Board decisions, in Murphy Oil Inc. v. NLRB, No. 14-60800, 2015 WL 6457613 (5th Cir. Oct. 26, 2015).

The Fifth Circuit relied on the U.S. Supreme Court’s high-profile consumer-contract arbitration decision–AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), along with the business-to-business class waiver in American Express Co., et al. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013)—to justify rulings that mandatory individualized arbitrations are authorized by the FAA.

Consumer arbitration controversy has rolled over into politics in 2015, when the Consumer Financial Protection Bureau moved to regulate the process by barring waivers of all class processes. Congressional Republicans introduced legislation to hamper the regulation efforts directly, as well as defund the federal agency.

In November, the NLRB said it would request a rehearing in Murphy Oil, but it did not appeal the Fifth Circuit reversal of its first case on the subject, D.R. Horton Inc., 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012), enforcement denied in relevant part, 737 F.3d 344 (5th Cir. 2013) (Graves, J., dissenting), reh’g denied, No. 12-60031 (Apr. 16, 2014).

December’s stream of cases from Board decisions backing its Murphy Oil and D.R. Horton decisions mostly occurred mid-month, leading up to Christmas.  But for good measure, just hours before the close of business on Dec. 31, the Board added its final 2015 decision, again affirming its view in the cases already rejected by the Fifth Circuit.  The decision, GameStop Corp., 363 NLRB No. 89, 20-CA-080497 (Dec. 15, 2015), went even further, affirming a line in those cases barring class waivers in employment arbitration agreements that provide an “opt out” allowing employees to waive participation in the ADR scheme.

“Regardless of the procedures required, the fact that employees must take any steps to preserve their Section 7 rights burdens the exercise of those rights,” the decision states.

It’s clear that the NLRB, an independent federal agency that oversees workplace conduct by enforcing the National Labor Relations Act, is picking and choosing its battles, which experts on both sides of the argument agree will be finalized by a U.S. Supreme Court decision.  The NLRB appears to be seeking a suitable case to ask the Supreme Court to hear, unloading years of litigation in December sourced from a variety of forums that reject the FAA’s predominance over the NLRA.

And while it awaited Murphy Oil’s Fifth Circuit fate, and while preparing the Board decisions it released in December maintaining its insistence on the NLRA’s vitality in the face of required arbitration clauses, the NLRB for the first time filed an amicus brief in a court case on the subject in the Ninth U.S. Circuit Court of Appeals, in Morris v. Ernst & Young LLP, No. 13-16599.

The November filing, just a week after the Fifth Circuit decided Murphy Oil, noted that the Board would seek en banc review of that decision, and strongly defended its own D.R. Horton/Murphy Oil lineage.

At the oral argument on Nov. 18, Ninth Circuit Judge Andrew D. Hurwitz prodded the attorneys on both sides to come up with a formula for NLRA and FAA co-existence.  He suggested severing the waiver clause, but keeping arbitration decisions for a tribunal, rather than blowing up the entire ADR process in favor of litigation.

The Ninth Circuit argument also dissected the class rights being waived by the pre-dispute mandatory arbitration agreement in the context of Federal Rule of Civil Procedure 23, which establishes the ground rules for court class actions.

The details on the December NLRB decisions; the Fifth Circuit’s Murphy Oil reversal; the NLRB Morris amicus filing, and highlights of the Morris oral argument are the subject of the January 2016 cover article in Alternatives, out this week.

Alternatives is available HERE for CPR Institute members after logging into the CPR website.  The newsletter, marking its 33rd year of publication with the January issue, is available to nonmembers at altnewsletter.com.

 

* * *

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

U.S. Supreme Court’s 2015-2016 Term Has Early Arbitration Focus

U.S. Supreme Court’s 2015-2016 Term Has an Early Arbitration Focus

By Russ Bleemer

The U.S. Supreme Court began its new term with an early arbitration argument—the fourth case argued on the term’s second day, Oct. 6.

The argument followed a week after the nation’s top court agreed to hear a second arbitration case sometime this term.

Both of the cases involve California arbitration practice.  The new case on the docket–which started out focused on unconscionability but will be argued on whether a problematic arbitration clause is salvageable–is a federal case appeal from the Ninth U.S. Circuit Court of Appeals, which covers the state.

The state-court matter that was the subject of the early-term argument, DirecTV Inc. v. Imburgia, No. 14-462, returned to an issue that already had been covered and decided by the Court: federal preemption of conflicting state law that affected arbitrability.

Or so it seemed.

The official issue in the case was “[w]hether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.”

The parties—a satellite television provider and an individual subscriber who filed a class action suit over early cancellation fees—had an agreement that provided for individual arbitrations. The form contract waived class arbitration, and was part of a purchase agreement before another California-derived case, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), backed class waivers.

In AT&T Mobility, the U.S. Supreme Court invalidated a rule from a California Supreme Court case, Discover Bank v. Superior Court, 113 P.3d 1100 (2005), which forbid class processes. The split AT&T Mobility Supreme Court overturned California’s Discover Bank rule because it interfered with the Federal Arbitration Act.

The DirecTV customer agreement the Court reviewed had hedged its terms about class waivers and arbitration in the wake of the then-pending litigation.  Under the purchase agreement, the parties were bound by the FAA.

But the contract stated that if “the law of your state would find this agreement to dispense with class arbitration procedures unenforceable,” then the entire arbitration provision would be stricken from the purchase agreement.

Seemingly flying in the face of the since-decided AT&T Mobility, the California state Court of Appeal in DirecTV had concluded that the contract provision on “the law of your state,” in the words of the DirecTV petition to the Supreme Court, was a non-severable clause that “nullif[ied] the parties’ arbitration provision, even though [the Discover Bank] rule is concededly inconsistent with, and thus preempted by, the FAA under [AT&T Mobility], and even though the arbitration agreement here is concededly governed by the FAA.”

The petition said that the state appellate court had meant the phrase “the law of your state” to mean “state law immune from the preemptive force of federal law.”

It appeared that the U.S. Supreme Court took the case to reverse it and put it in line with its AT&T Mobility precedent.

At the argument, both conservative and liberal justices found the state appeals court’s reading of the contract, in refusing to enforce arbitration, puzzling.  Associate Justice Antonin Scalia said the state appeals court holding “flouts well-accepted universal contract-law principles.”  Associate Justice Elena Kagan lamented “the extent you can find reasoning in this opinion—which you have to search to find.”  The opinion under review is Imburgia v. DirecTV Inc., No. B239361 (Cal. 2nd App. Dist. April 7, 2014)(available at http://ow.ly/Tg4Mi).

The defense of the California state court opinion was that it must be maintained to prevent federal law from usurping state courts’ ability to interpret contract terms.

But the satellite television provider’s slam-dunk argument ran aground when the Court insisted DirecTV’s lawyer set a standard as to how the Court should evaluate state court contract interpretations.

Still, that argument was far simpler than the plaintiff’s argument, which faced a Court mostly unsympathetic to collective actions and which was looking at odd reasoning in the California appellate opinion.

The argument transcript is available at http://ow.ly/TfFui; the November Alternatives, available here on or before Nov. 9, has a full analysis.

* * *

The November Alternatives also will discuss the case that the Court accepted on Oct. 1, MHN Government Servs. Inc. v. Zaborowski, 14-1458, another matter with allegations of California hostility to arbitration.

The case focused originally on unconscionability.  MHN, a San Rafael, Calif., military contractor that provides life consulting services to military members and their families, sought to compel arbitration against the respondents, who were consultants in MHN’s network.

MHN’s motion to compel arbitration lost in both a California federal district court and in the Ninth U.S. Circuit Court of Appeals.

The Ninth Circuit, in an unpublished opinion, agreed with the lower court that MHN’s consulting contract was both procedurally and substantively unconscionable.

MHN avoided the unconscionability arguments in its successful U.S. Supreme Court cert petition, and instead counters with a focus on severability.  It tells the nation’s top Court that California has a rule on severability for contracts that operates differently when the contract is for arbitration, and the state is biased against arbitration.

The original plaintiffs counter that the federal court opinions exercised appropriate discretion in declining to sever clauses in an arbitration agreement that has been refused to be enforced “by over a dozen judges,” including in a 9-0 Washington state Supreme Court opinion that similarly refused to sever.

Full details, cites, links and analysis will be available in the November Alternatives at the link above.

Russ Bleemer is a CPR Consultant and the Editor of CPR’s award-winning publication, Alternatives