Next at the Supreme Court: Badgerow’s Attempt to Reevaluate FAA Jurisdiction

By Bryanna Rainwater

The U.S. Supreme Court has set the oral argument for Nov. 2 in Badgerow v. Walters, No. 20-1143, now the sole remaining arbitration case on the docket for the new term beginning next month.

The issue the nation’s top Court will examine is whether federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the Federal Arbitration Act when the only basis for jurisdiction is a dispute regarding a federal question.

Section 9 deals with confirming an award, and Section 10 provides the limited grounds that can overturn an award and thereby defeat a move to confirm.

Last week, the Court removed the first arbitration case it had taken for the term from its argument schedule and dismissed the case after a party request.  The case, Servotronics Inc. v. Rolls-Royce PLC, et al., Docket No. 20-794, would have examined the parameters of the discretion granted to district courts under 28 U.S.C. §1782(a) to render assistance in gathering evidence for use in “a foreign or international tribunal” by determining whether the statute includes private commercial arbitral tribunals.

For more details on the dismissal on this blog, see Bryanna Rainwater, “Case Dismissed: Supreme Court Lightens Its Arbitration Load as Servotronics Is Removed from 2021-22 Docket,” CPR Speaks (Sept. 8) (available at https://bit.ly/39oFdAx).

The Fifth U.S. Circuit Court of Appeals in Badgerow affirmed the district court’s decision that exercised subject-matter jurisdiction over the plaintiff’s petition to vacate an arbitral award stemming from an employment dispute, denying remand of the issue. Badgerow v. Walters, 975 F.3d 469 (5th Cir. Sept. 15, 2020) (available at https://bit.ly/394xUh3).

Petitioner Denise Badgerow–a former employee of REJ Properties Inc., a Louisiana-based financial services firm that was a unit of Ameriprise Financial Services Inc.–signed an agreement to arbitrate any employment disputes with Ameriprise and any of its affiliates.

She was terminated and initiated arbitration against company officials alleging gender discrimination and other Title VII and equal pay claims before a Financial Industry Regulatory Authority panel. Ameriprise successfully moved to compel arbitration in a separate federal suit and Badgerow added a declaratory judgment claim against Ameriprise to the FINRA arbitration. 

Badgerow sought damages against the REJ principals for tortious interference of contract for a violation of Louisiana’s “whistleblower” law. Id. at 471. The FINRA panel dismissed all of Badgerow’s claims against the principals and Ameriprise with prejudice.

In May 2019, Badgerow brought a new Louisiana state court action to vacate the FINRA award that dismissed her complaints, alleging fraud by the principals against the FINRA arbitrators. The principals removed the case to Louisiana’s Eastern U.S. District Court. Badgerow filed a motion to remand, asserting the lack of federal subject-matter jurisdiction.

The district court held that there was federal subject matter jurisdiction, and Badgerow appealed the denial of her motion to remand to state court.

The Fifth Circuit relied upon the approach in Vaden v. Discover Bank, in which the Supreme Court adopted the “look through” approach to determining federal jurisdiction in actions that compel arbitration under FAA Section 4. Vaden v. Discover Bank, 556 U.S. 49 (2009) (available at https://bit.ly/3Ca42MA). Under this approach, a federal court should “look through” the Federal Arbitration Act claims to the “substantive controversy” to determine if they could have been brought in federal court.

Badgerow disagreed with the district court’s four-step analysis for conveying federal jurisdiction in her case because she did not include Ameriprise in her state-court action, but the district court rejected this argument, holding, “’Badgerow cannot deprive the Court of subject matter jurisdiction over an action to vacate the award by stripping off a single state law claim.’” Id. at 474 (quoting the district court opinion).

The Fifth Circuit noted that a close reading of Vaden vindicated the district court’s reasoning. Since Vaden’s rule is “if, save for” the arbitration agreement, a claim could be held in federal court, then there is federal jurisdiction.

The Fifth Circuit agreed that this analysis does not fail in an action to vacate the award by “stripping off a single state law claim.” Id. The court decided that since Badgerow’s claims “all arose from the same common nucleus of operative fact” that “the district court correctly found that the federal claim against Ameriprise in the FINRA arbitration proceeding meant that there was federal subject-matter jurisdiction over the removed petition to vacate the FINRA arbitration dismissal award.” Id.

The case now stands before the Supreme Court, which granted cert on May 17.

In her petition, Badgerow lays out the clear question of “whether Vaden’s ‘look through’ approach applies to motions to enforce or vacate arbitration awards under [FAA] Sections 9 and 10.”

The petitioner noted that there is disagreement among district judges regarding the Vaden analysis as it relates to FAA enforcement of arbitral awards, and that the Fifth Circuit itself divided 2-1 on the Vaden look-through approach for motions to confirm in a case addressed while Badgerow was pending. Quezada v. Bechtel OG & C Constr. Servs. Inc., 946 F.3d 837 (5th Cir. 2020) (available at https://bit.ly/3lrMZ1X).

The cert petition says that the divisiveness between the courts and the confusion surrounding the FAA language are reasons to question the Fifth Circuit’s decision in asking the Supreme Court to clarify whether Vaden’s approach to federal jurisdiction extends from FAA Section 4 to Sections 9 and 10.

While the steady stream of Supreme Court arbitration cases has generated a concurrent steady stream of regularly appearing parties as amicus curiae, oddly, at this writing, less than two months ahead of arguments, no friend-of-the-court briefs have been filed either on the successful cert petition or the case itself. The case documents, including the party briefs and any future amicus filings, can be found on the Supreme Court docket page at https://bit.ly/3zfSqps.

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The author, a second-year student at Brooklyn Law School, is a 2021 CPR Fall Intern.

[END]

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

By Mark Kantor 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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

[END]

Supreme Court Again Declines a “Who Decides?” Case in Class Arbitration

By Russ Bleemer

The U.S. Supreme Court this morning declined to hear a case that would have covered two issues that are familiar arbitration turf at the nation’s top court—whether rules incorporated into an ADR agreement are a specific-enough designation for the arbitration to go forward, and whether arbitrators can invoke class processes.

The court denied cert in Shivkov v. Artex Risk Solutions Inc., 20-1313, where an appeals court, compelling arbitration, also held that “the availability of class arbitration is a gateway issue that a court must presumptively decide,” but because the agreements “do not clearly and unmistakably delegate that issue to the arbitrator,” and “[b]ecause the Agreements are silent on class arbitration, they do not permit class arbitration.” Shivkov v. Artex Risk Sols. Inc., 974 F.3d 1051 (9th Cir. 2020) (available at https://bit.ly/3y6e9jL).

This morning’s order can be found here.

The issues presented challenging the Ninth Circuit petition to the Supreme Court by the petitioners—more than 80 individual and business plaintiffs who had filed suit against insurance management companies that set up captive insurance firms for the petitioners that were audited and held liable for unpaid federal taxes—covered the incorporation by reference rules question, and class arbitration.  The specific questions presented by the petitioners that the Court declined today were:

1. The parties’ arbitration clause expressly designates the American Arbitration Association (“AAA”) as their default dispute-resolution method. The clause did not also specifically mention the AAA Rules themselves, which, according to the AAA, apply whenever parties select a AAA arbitration. Must an agreement that specifies arbitration before the AAA as the default dispute-resolution method also specifically mention the AAA Rules to avoid being considered ambiguous about whether the parties intended to apply the AAA Rules?

2. Under the plain text of the Federal Arbitration Act, courts—not arbitrators—decide gateway issues, such as whether there is an agreement to arbitrate and what controversies does it cover. Procedural questions, however, are reserved for arbitrators. Is the availability of class arbitration a matter for an arbitrator to decide, or for a court to decide?

The Shivkov cert denial isn’t surprising because the incorporation of AAA rules issue that the petitioner attempted to have the Court examine already was rejected, indirectly, in a startling move earlier this term.  The Court heard arguments in December in Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963 on whether a contract’s delegation agreement sending a matter to arbitration “clearly and unmistakably” designated the case for arbitration because the contract had a carve-out provision from arbitration for injunctions.

But in January, just a month after the oral arguments, the Court dismissed the case as improvidently granted, after justices at the hearing appeared to get stuck on whether the incorporation by reference to the AAA rules was sufficient for the clear and unmistakable delegation to arbitration.

The Court a year ago, in focusing on the Henry Schein contract carve-out language in granting certiorari, had denied a cross petition in the case on the incorporation-by-reference issue. The cross petition had asked the Court to address the AAA rules that encompassed a provision that arbitrators decide arbitrability. That denial appeared to have a hand in the Court’s January dismissal of the carve-out language interpretation issue.

At the same time in Shivkov, on the petitioners’ second issue, there have been attempts to revisit class arbitration at the U.S. Supreme Court periodically since the Court’s recent seminal cases reviewing and restricting arbitrators’ power to use a class process without a contract authorization. See Lamps Plus Inc. v. Varela, 139 S. Ct. 1407 (2019); Oxford Health Plans LLC v. Sutter, 569 U.S. 564 (2013); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).

The Shivkov petitioners contended that the Court has left open the class arbitration determination. They urged the Court to preserve the decision for judges.

For example, last year, the Court declined to hear a case asking whether an arbitrator may compel class arbitration—binding the parties and absent class members—without finding actual consent, instead based only on a finding that the agreement does not unambiguously prohibit class arbitration and should be construed against the drafter. See Cristina Carvajal, “Supreme Court Rejects Decade-Old Class Arbitration Employment Discrimination Case,” CPR Speaks (Oct. 5, 2020) available at https://bit.ly/35WsvHm) (discussing the Court’s second cert denial in the history of Jock v. Sterling Jewelers Inc., 942 F.3d 617 (2d Cir. 2019) (available at https://bit.ly/30yP3eZ)).

The Shivkov petition contended that the agreement to use the AAA means agreeing to the AAA rules, which put the arbitrability question in the arbitration tribunal’s hands–a cousin to the Jock argument, and which achieved the same cert-denied result. 

The Ninth Circuit Shivkov decision linked above stands, and the case, at least for now, is headed for arbitration under the AAA rules, with the appeals court, not the arbitration tribunal, determining that there will not be a class process.

* * *

The author edits Alternatives to the High Cost of Litigation, which CPR Speaks’ owner, the International Institute for Conflict Prevention & Resolution publishes with John Wiley & Sons.

[END]

Supreme Court Denies Review on the Interplay Between the U.S. Bankruptcy Code and the Federal Arbitration Act

By Amy Foust

The Supreme Court today denied certiorari in GE Capital Retail Bank v. Belton, No. 20-481, an arbitration case in a bankruptcy matter.  The question presented by petitioner GE Capital, and rejected in this morning’s order list by the Court, was “whether provisions of the Bankruptcy Code providing for a statutorily enforceable discharge of a debtor’s debts impliedly repeal the Federal Arbitration Act, 9 U.S.C. § 1 et seq.”

The U.S. Bankruptcy Code section in question, 11 U.S.C. § 524(a)(2), provides in part:

A discharge in a case under this title— …

(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived[.]

The case, on cert petition from the Second U.S. Circuit Court of Appeals in New York, suggests a tension between this section of the bankruptcy code and the Federal Arbitration Act, which provides that written agreements to arbitrate are “valid, irrevocable, and enforceable” (9 U.S.C. §2), and that if there is no issue with the making of the agreement, a court “shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.” 9 U.S.C. §4. 

The underlying dispute was a putative class action related to GE Capital’s efforts to collect debts discharged in bankruptcy.  The plaintiffs–the discharged debtors–brought contempt proceedings under § 524 arguing a violation of the injunction against continued recovery.  GE Capital moved to have the dispute referred to arbitration. 

The case of Respondent Belton and two others similarly situated were addressed in a consolidated decision by the federal bankruptcy court in New York’s Southern District, finding that referring these cases to arbitration would defeat the purpose of seeking bankruptcy protections.  The U.S. District Court for the Southern District reversed the bankruptcy court and sent Belton’s case to arbitration. 

But around the same time, the Second Circuit decided Anderson v. Credit One Bank, N.A., 884 F.3d 382 (2d Cir. 2018), a case involving similar facts to GE Capital. In Anderson, an appeals panel found an inherent conflict between § 524 and the FAA because the discharge injunction is critical to the bankruptcy code’s purpose; the contempt claim requires the bankruptcy court’s continuing supervision, and denying the court the power to enforce its own injunctions would undermine bankruptcy code enforcement. 

In response to a request for reconsideration in view of Anderson, the U.S. District Court reversed itself and denied the motion to compel arbitration.  GE Capital appealed to the Second Circuit, which affirmed the district court. 

GE Capital then appealed to the Supreme Court, framing the issue as an implied repeal of the FAA, citing the Court’s support from Epic Systems v. Lewis, 138 S. Ct. 1612, 1627 (2018), where the Court rejected a request to have the National Labor Relations Act override the Federal Arbitration Act. 

In a response to GE Capital’s request asking the nation’s top court to decline to hear the case, Respondent Belton had argued that the Second Circuit was correct in its analysis of this narrow issue, which is not the subject of any circuit split and did not merit the Court’s attention.

So the Second Circuit decision stands, allowing the respondents to proceed with contempt sanctions against major banks for continuing attempts to recover debts that had been subject of a bankruptcy discharge.

* * *

The author is an LLM candidate studying dispute resolution at the Straus Institute, Caruso School of Law at Malibu, Calif.’s Pepperdine University, and an intern with the CPR Institute through Spring 2021.

[END]

Monster Energy and Evident Partiality

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

By Heather Cameron

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

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

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

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

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

The questions presented to the Supreme Court were:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

loreejrII

By Philip J. Loree Jr.

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

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

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

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

Making an End Run Around Schein?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

loreejrIIBy Philip J. Loree Jr.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Fifth Circuit’s 20/20 Comm. Decision

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

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

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

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

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

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

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

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

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

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

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

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

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

(Emphasis added.)

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

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

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

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

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

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

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

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

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

Update: Legislatures on Invalidating Pre-Dispute Arbitration Agreements

By Andrew Garcia

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

 

 

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

By Echo K.X. Wang and Russ Bleemer

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

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

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

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

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

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

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

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

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

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

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

Roberts continues:

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

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

* * *

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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

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

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

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

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

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

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

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

* * *

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

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

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

* * *

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

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

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

* * *

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

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

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

 

* * *

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

 

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

By Mark Kantor

Kantor Photo (8-2012)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Citations and footnotes omitted.)

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

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

_______________________________________________

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

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