Looking for Definitions, the Supreme Court Weighs the Limits of the Federal Arbitration Act’s Sec. 1 Exemption

By Russ Bleemer

Today’s Federal Arbitration Act oral argument in the U.S. Supreme Court gives the justices the opportunity to refine the meaning of the first section of the nearly century-old law designed to discourage bias against arbitration.

They struggled with that task in trying to set the limits of the types of workers who would be exempt from arbitration under the law, at the same time sounding skeptical that a residual exemption would not provide the exemption to some transportation workers.

The justices explored the classes of workers currently exempt from arbitration under the FAA, and discussed expansions to particular jobs in relation to the statute’s wording.  At times the justices appeared sympathetic to arguments from both sides as they tried to divine current application to commercial airline workers—job categories that didn’t exist when the FAA was enacted in 1925.

Southwest Airlines Co. v. Saxon, No. 21-309,  presents a Federal Arbitration Act Sec. 1 question:

Whether workers who load or unload goods from vehicles that travel in interstate commerce, but do not physically transport such goods themselves, are interstate ‘transportation workers’ exempt from the Federal Arbitration Act.

The statute’s defines its application to maritime transactions and commerce. The key section before the Court this morning is the conclusion that notes “nothing [in the statute] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

The Court has interpreted the law to mean that the exception from FAA application is only for transportation workers “engaged in” interstate commerce. Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001) (available at https://bit.ly/2HhwYLu).

The Seventh U.S. Circuit Court of Appeals in the case (available at https://bit.ly/3rRA8Ln) held that the plaintiff was a transportation worker, and therefore exempt from the FAA, and didn’t have to arbitrate her Fair Labor Standards Act claim.

Petitioner Southwest Airlines requires all workers who aren’t covered by collective bargaining agreements to arbitrate workplace disputes, according to court papers which also note that the original plaintiff worked only locally—a “ramp agent supervisor” at Chicago’s Midway Airport.  

For background, see Russ Bleemer, Supreme Court Preview: An Airline and an Employee Will Argue Over the Reach of an Exclusion from the Federal Arbitration Act, CPR Speaks (March 25) (available here).

Southwest Airlines’ lawyer said the FAA carves out the employee, who did not travel, for not being in interstate commerce, and therefore out of the flow of interstate commerce, following “from Circuit City and Section 1’s text and structure.”

Shay Dvoretzky, a Washington, D.C., partner at Skadden, Arps, Slate, Meagher & Flom, told the Court that meant that “an exempted class of workers must perform work analogous to that of seamen and railroad employees,” whose employment was characterized by working on moving ships and trains.

Jennifer Bennett, the lawyer for respondent Latrice Saxon, who heads the San Francisco office of Gupta Wessler, said that railway workers’ class was informed by the treatment of seamen in the statute and the “residual” wording of Sec. 1—“any other class of workers engaged in foreign or interstate commerce”—and that covered the original plaintiff, who therefore was not obligated to arbitrate her case under her employment agreement because of the exemption.

* * *

Dvoretzky opened on behalf of Southwest Airlines noting that petitioner Saxon was like a stevedore, land-based shipping industry cargo loaders who don’t travel, originally perceived as separate from the statute’s arbitration exemption.  “Seamen”, he said, was a term of art, with a long case history, and was based on the fact that they went on “long voyages,” unlike stevedores.

Chief Justice John G. Roberts Jr. told Dvoretzky that he was “very precise” in “emphasizing border crossing in . . . determining interstate commerce” in his opening and in his court papers, and asked whether a border crossing was required for the worker to be in interstate commerce under FAA Sec. 1.

No, Dvoretzky replied, the question “is whether movement of people or goods through the channel of interstate commerce is central to the job of the class of workers.” The inquiry, he explained, was “the job of the class of workers”—here, the ramp agent supervisor. “They all have the same job description,” he said, “and their job description doesn’t involve getting on the plane.”

But Dvoretzky initially added that the work, following Congress’s lead, would have to cross the border.  Even if not going across borders, he said, seamen as a class have the central characteristic of traveling on a ship.  He contrasted the ramp agent supervisors, with their own class characteristics, and which doesn’t include traveling across borders.

Justice Sonia Sotomayor said she didn’t see any difference between the FAA Sec. 1 definition of railway workers, which includes cargo loaders, and stevedores in the shipping industry. Dvoretzky countered that the view incorporated the “the fundamental characteristic of seamen is predominantly spending time on the ship.”

Justice Neil Gorsuch turned to the FAA Sec. 1 language, and asked repeatedly what evidence Dvoretzky could use to indicate that some railway workers were not covered by the statutory exclusion. “I know you like to talk about people who travel,” said Gorsuch, “What about the fellow who unloads cargo that’s come in interstate commerce from the railroad and hands it off to a carrier locally.  . . .  [W]hy isn’t the same person unloading cargo from a plane in the same position?”

Dvoretzky said those workers weren’t covered by the FAA Sec. 1 exemption. He said there are many types of railway workers, suggesting that many would not be part of the class of workers in the statute.

Gorsuch pressed for more. Dvoretzky conceded there was nothing that directly answers the FAA Sec. 1 definition limits, but insisted there were multiple solid indicators: statutory context, which shows that less than all railroad employees were included; the treatment of “seamen” engaged in interstate context, not all maritime employees; and the texts “engaged in foreign or interstate commerce” and “class of workers,” noting “the workers in particular have to be engaged in foreign or interstate commerce.”

Gorsuch responded, “I’m going to take all that as, ‘No, we don’t have any evidence.  . . .’”

Justice Brett Kavanaugh pressed the point in a different way, noting an old case just before the 1925 FAA enactment that similarly classified workers loading and unloading shipments under the Federal Employers’ Liability Act to be a part of interstate commerce.

The question began a long exchange. Dvoretzky strongly contested the FELA cases’ view of interstate commerce as focusing on the businesses themselves, not on the workers.  FAA Sec. 1 provides a narrower standard, he said.

He said that the view that seaman doesn’t include everyone involved in shipping should be applied to railway workers, too, under the FAA Sec. 1 exemption, noting that, for example, railway management is excluded.  “The most natural reading,” he said, “isn’t everybody who works for the railroad.”

Later, at the conclusion of his argument, Kavanaugh returned to the FELA cases, but Dvoretzky deflected, noting that the case’s dormant Commerce Clause challenges were analyzed differently.  Those cases characteristically looked at local laws prejudicing interstate commerce.  “That is simply answering a different question on whether the people doing the loading and unloading are engaged in interstate commerce as [FAA] Sec. 1 uses that term,” he said.

Before Kavanaugh’s final questions, Justice Elena Kagan asked Dvoretzky to concede that if the Court found that baggage handers are included in interstate commerce, Southwest Airlines would lose the case.  But he countered that Congress didn’t mean “to exempt the airline industry,” and returned to stevedores’ exclusion from the seaman definition as the proper ruling point for the Court.

Circuit City, he emphasized, supports the exclusion of the ramp supervisors and baggage handlers. “You still look at ‘engaged in foreign or interstate commerce,’” he said, “which, under Circuit City, is supposed to be a narrow construction.”

Justice Clarence Thomas, returning to the Court after missing last week, hospitalized for an unspecified infection, participating remotely, also pressed Dvoretzky on whether an individual seaman would have to travel interstate or internationally to qualify.  The Southwest Airlines attorney said yes, the seaman would be part of the class even if the worker didn’t make such travels as part of the class of worker specifically cited in FAA Sec. 1.

Kagan returned to particular jobs.  She asked whether railway signal operators would be considered railway employees for the Sec. 1 exclusion, and Dvoretzky said “they’re not riding the train,” so they wouldn’t be included. 

She asked whether the test is that the employee is moving. Yes, replied Dvoretzky, “through the channels of interstate commerce.”

* * *

Respondent’s attorney Bennett, representing original plaintiff Saxon, told the Court that her client engaged in interstate commerce, and made historical arguments via the FAA’s legislative history of the FAA.

“Southwest contends that workers who load and unload airplanes are not part of any class of workers engaged in commerce for purposes of the FAA,” said Bennett in her opening, adding, “There’s no support for this contention in the text of the statute. Southwest can’t point to even a single example from any time period in which the phrase ‘engaged in foreign or interstate commerce’ has ever been given the meaning it proposes.”

She suggested that Congress intended to exempt cargo workers from the statute, at least under the residual clause, discussed above. The Court and Bennett explored—and struggled–putting limits on a definition as to who was included under the exemption, with Bennett conceding that some examples were borderline.

 Bennett told Chief Justice Roberts that railroad ticket workers in 1925 would be exempt-from-arbitration transportation workers under FAA Sec. 1, as well as station employees. “[T]he ordinary meaning was those people who did the customary work of the railroad at that time” were exempt from FAA arbitration, she said.

But she stopped short of office workers, noting that a general counsel, and executives, were not included in the statute, agreeing with her adversary.  Both Bennett and the Court wrestled with airline workers’ fit with the statute.

Justice Gorsuch said that Southwest Airlines’ strongest argument was that “seamen were people who rode the waves and did not include stevedores,” who therefore weren’t in interstate commerce, which would be analogous to Saxon’s airline role in Chicago. Bennett countered on the differences under the statute between railway workers and seamen in separate industries, and said the lack of “commonality” in the statute—referring to the specificity of “seamen”–also pointed to respondent Saxon’s distinct job at an airline.

She conceded that Southwest’s credit card points program workers aren’t doing FAA Sec. 1 transportation work, but under questioning said that schedulers would be doing the customary work under the statute.

Justice Kagan asked about website designers. “That’s a difficult question,” replied Bennett, “but it’s at the outer edge.”

Bennett earlier declined to extend the rule to Lyft and Uber drivers who may not cross state lines, but might pick up goods and travelers who have come from interstate commerce.  She told Gorsuch, that the question would be “[I]s it part of this continuous journey . . . [or] is it really a separate sort of local transportation?”

Both of the shared ride companies, along with Amazon.com, filed amicus briefs in the case asking the court to exclude local workers from the FAA Sec. 1 exemption. (The briefs are available at the Supreme Court docket link above.) But Bennett leaned toward a narrower definition in a discussion with Kagan.

That discussion continued with Kagan and Alito on bright line exemption rules by industry or, alternatively, more narrowly, in interstate commerce for classes of workers under Sec. 1.

Alito asked if the rule covered industries, which besides airlines would be subject to the exemption. Bennett she said two major industries would be trucking and busing, and perhaps space travel, but still likely with the narrower test under FAA Sec. 1. That was followed by a discussion led by Chief Justice Roberts on shipped goods, and the status of warehouse workers.

The exploration of the variations, without definitive views from the Court, suggested that the FAA Sec. 1 exemption fate of local Lyft and Uber drivers, and warehouse and local driver Amazon workers, may be left for future cases.  Bennett pushed for workers at warehouses to be included in the FAA Sec. 1 exemption—” you know, a warehouse that is in the middle of . . . the goods journey.”

Justice Samuel A. Alito Jr. questioning potential FAA Sec. 1 exemptions and exclusions, told Saxon attorney Jennifer Bennett that her arguments shifted back and forth, with just about every commercial activity included today, but under a statute which is narrow. He said he couldn’t see how a Queen Mary cruise ship ticket seller could be included, and the FAA Sec. 1 foreign and interstate commerce meaning “has to have a narrower meaning.”

Bennett strongly disagreed.  She said the language wasn’t “surplusage” as Alito suggested, because under Circuit City, being engaged in commerce was in the transportation requirement. She added that the two classes of workers cited in the statute, which also had preexisting dispute resolution statutes, “were commonly understood categories” illustrative of classes of workers.

It wasn’t thoroughly job specific, she explained. “Here, it doesn’t say seamen, you know, flagmen, railroad conductors,” said Bennett, “It says seamen and railroad employees. And so we’re talking about the classes of workers that are specific to the industry.”

She closed noting the distinctions between seamen and railroad employees, and the residual clause.

* * *

Today’s case is expected to be decided before the Court’s term ends at the end of June. The transcript and audio of the Sec. 1782 arguments are available on the Supreme Court’s website here. Justice Amy Coney Barrett was not present on the audio stream today.  The Court earlier announced she took no part in the consideration or decision of the certiorari petition in the case.

* * *

The author edits Alternatives to the High Cost of Litigation for CPR at altnewsletter.com. Andrew Ling, a third-year law student at the University of Texas School of Law, in Austin, Texas, and a CPR 2022 Spring Intern, contributed to the research and writing of this post, which was based on the live audio stream provided by the Court Monday morning, March 28.

[END]

Supreme Court Preview: An Airline and an Employee Will Argue Over the Reach of an Exclusion from the Federal Arbitration Act

By Russ Bleemer

The U.S. Supreme Court reconvenes Monday morning to hear oral arguments in the third of four arbitration matters before the justices in a nine-day period.

Southwest Airlines Co. v. Saxon, No. 21-309, may have the biggest impact on workers of any of the cases.  It presents a Federal Arbitration Act Sec. 1 question:

Whether workers who load or unload goods from vehicles that travel in interstate commerce, but do not physically transport such goods themselves, are interstate ‘transportation workers’ exempt from the Federal Arbitration Act.

The distinction of whether a worker is operating in interstate commerce has a knotty history.  A restrictive reading could eliminate a workplace dispute arbitration obligation for many employees nationwide. An expansive reading could eviscerate employment agreement dispute resolution clauses.

The Court hasn’t been sympathetic to workers avoiding arbitration.  But the view isn’t categorical. A notable exception is the three-year-old FAA Sec. 1 case, New Prime Inc. v. Oliveira, 139 S. Ct. 532 (2019) (available here), in which an 8-0 opinion by Justice Neil Gorsuch held that an independent contractor—a long-haul truck driver—was exempt from arbitration because there was no employer-employee relationship.

FAA Sec. 1 defines the statute’s application to maritime transactions and commerce. The section ends noting that “nothing [in the statute] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

Southwest Airlines likely will require a similar textual analysis of the so-called Sec. 1 residual clause–which New Prime needed for “contracts of employment”–on “interstate commerce” characteristics.

The Court has interpreted the law to mean that the exception from FAA application is only for transportation workers “engaged in” interstate commerce. Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) (available at https://bit.ly/2HhwYLu).

Original plaintiff Latrice Saxon, now the Supreme Court case respondent, is a “Ramp Agent Supervisor for Southwest Airlines who occasionally loads and unloads passenger baggage from airplanes,” according to Southwest Airlines’ cert petition, which is available at the docket link above.

Saxon works at Chicago’s Midway Airport. She filed a class-action suit against her employer for overtime she contended that the employees were owed under the Fair Labor Standards Act.

The Seventh U.S. Circuit Court of Appeals in the case (available at https://bit.ly/3rRA8Ln) held that the plaintiff was a transportation worker, and therefore exempt from the FAA, and didn’t have to arbitrate. Southwest Airlines requires all workers who aren’t covered by collective bargaining agreements to arbitrate workplace disputes, according to court papers.

Noting a circuit split, Southwest Airlines appealed, and the nation’s top Court agreed to decide whether the local worker was FAA-exempt, which suggests the examination of the plaintiff’s work in relation to interstate commerce.

* * *

That’s the key inquiry for the amicus filings on both sides. The briefs supporting petitioner Southwest Airlines echo the carrier’s position seeking to have a narrow FAA Sec. 1 definition and define being “engaged in foreign or interstate commerce” as meaning moving goods or people across borders. Southwest Airlines and the amicus parties want the Seventh Circuit decision reversed.  Joining the petitioner are six amicus briefs, from the

  • The U.S. Chamber of Commerce and the National Association of Manufacturers;
  • Lyft Inc.;
  • Uber Technologies Inc.;
  • Amazon.com;
  • Washington Legal Foundation, a conservative, free-market think tank and public interest law firm (which notes that “The FAA contains a discrete exemption, in § 1, for a few categories of transportation workers. Congress included the exemption not to excuse these classes of workers from arbitration, but merely to enable them to arbitrate through other congressionally created channels. The respondent here is not subject to an alternative channel of this sort; she just wants to avoid arbitration altogether. She seeks to gut the federal policy in favor of arbitration by expanding the § 1 exemption far beyond its proper bounds.”), and
  • Airlines for America, an 86-year-old trade association, which discusses FAA Sec. 1 but also emphasizes the benefits of arbitration for the airline industry.

There are seven amicus filings backing respondent/original plaintiff Latrice Saxon in asking the Court to uphold the Seventh Circuit and retain the ruling that her Chicago-based transportation work was a part of interstate commerce and she is therefore exempt under FAA Sec. 1 from arbitration in her employment agreement. The briefs are from

  • The National Employment Lawyers Association, whose members focus on representing individual workers;
  • The American Federation of Labor and Congress of Industrial Organizations–the AFL-CIO;
  • The American Association for Justice, a trial lawyers’ professional organization;
  • A brief on behalf of 17 states, their attorneys general, and the District of Columbia;
  • Public Justice, a Washington, D.C., nonprofit law firm, consumer advocacy group, and left-leaning think tank;
  • The National Academy of Arbitrators and the National Association of Railroad Referees, whose brief states, “It may appear puzzling that organizations of professional arbitrators oppose petitioner’s proposal to increase the use of arbitration under the FAA, but it is not. Amici’s position is grounded in their fundamental fidelity to the institution of arbitration, to a clear understanding of Congress’ legislative intent . . ., and to judicial precedent,” and
  • Three legal historians who maintain that the Court has recognized that Congress enacted the FAA Sec. 1 exemption “to avoid unsettling then-established dispute-resolution schemes covering workers like ‘railroad employees’ under Title III of the Transportation Act of 1920 and ‘seamen’ under sections 25-26 of the Shipping Commissioners Act of 1872,” regardless of whether the transportation workers crossed state lines in their employment, relying on Circuit City reasoning. The professors are James Pope, Rutgers Law School, Newark, N.J.; Imre Szalai, Loyola University New Orleans College of Law, and Paul Taillon, University of Auckland, in Auckland, New Zealand.

The parties’ and the amicus briefs are available on the Supreme Court’s docket page, linked at the top of this article.

* * *

While Southwest Airlines may have the biggest direct impact on workers of the 2021-2022 Supreme Court caseload, it isn’t alone in its arbitration consequences. Four of the six matters before the U.S. Supreme Court involve employment cases at their core, though often arcane legal points have brought them to the Court and will be the focus of the decisions, as well as in the two arguments still to be heard. The effect of the opinions could have a profound effect on workplace disputes . . .  or boost Congressional efforts to change arbitration in Congress. (See report on the recently signed-into-law Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 and the push for further reforms on CPR Speaks here.)

In addition to Southwest Airlines,  on Nov. 2 the Court heard Badgerow v. Walters, No. 20-1143, which awaits decision. The case focuses on the limits of state court jurisdiction and the reach of federal court jurisdiction over the provisions of the Federal Arbitration Act.  The case was brought by a financial services employee against her bosses and company for harassment and other workplace claims.  More on the November argument on CPR Speaks here.

Last Monday, the Court examined a suit by a former Taco Bell employee who claimed that the franchise company had waived its right under her employment agreement to arbitrate their wage dispute.  The original plaintiff was contesting an Eighth U.S. Circuit Court of Appeals decision that found for the company because the employee had not been prejudiced by the company’s conduct.  The former employee challenged the prejudice requirement and asked the Court to focus on the company’s actions. The case of Morgan v. Sundance Inc., No. 21-328,  is expected to be decided before the current Court term ends in June; more on the argument earlier this week on CPR Speaks here.

Next Wednesday’s Viking River Cruises v. Moriana, No. 20-1573, focuses on the relationship between the FAA and California’s Private Attorneys General Act. The Court will likely revisit its extensive history on federal preemption of state laws.

The PAGA law enables an individual employee to seek a court judgment for breach of California labor laws as a “private attorney general” on behalf of the state of California. Thousands of cases have been filed under the law and, many employers say, skirt employment agreements requiring arbitration for workplace disputes. For background on Viking River, see Mark Kantor, “US Supreme Court to Review Whether Private Attorney General Action Can Be Waived by an Arbitration Agreement,” CPR Speaks (Dec. 16) (available here).

* * *

A preview and an analysis of the 2021-2022 Supreme Court arbitration docket can be found at Russ Bleemer, “The Supreme Court’s Six-Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022), and Imre Szalai, “Not Like Other Cases: SCOTUS’s Unique Arbitration Year,” 40 Alternatives 28 (February 2022), both available for free at https://bit.ly/3GDEJEK.

* * *

A live audio stream of Monday’s argument will be available at the Court’s home page, here. Archives of recordings and transcripts for cases this term, including the three arbitration cases argued so far, are available on the Court’s website here.

* * *

The author edits Alternatives to the High Cost of Litigation at altnewsletter.com for CPR.

[END]

Supreme Court Reviews the Role of Prejudice to a Party in Determining Arbitration Waiver

By Russ Bleemer

This morning’s U.S. Supreme Court arbitration arguments in Morgan v. Sundance Inc., No. 21-328, reviewed what appeared to be a simple case of whether a plaintiff needs to show prejudice as a pivotal factor in claiming that a defendant has waived its right to arbitration.

But it wasn’t so simple. The arguments ranged over multiple possible standards for including the factor, as well as how to do so if it stays.

The question of whether the Federal Arbitration Act supports prejudice as a factor in waiving the right to arbitration stood next to evaluating the defendant’s actions for waiver in the arguments, with the petitioner soon attacking whether prejudice should be a part of the determination.

The solution likely will be anything but simple. Today expansive arguments lasted nearly an hour and a half–wiith just two attorneys–showed the Court wrestling with the need and content of a prejudice evaluation that has split the circuits.  The Eighth U.S. Circuit Court of Appeals decision on review today had held that “[a] party waives its right to arbitration if it: (1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts.” 

In its summary ahead of the question presented, the Supreme Court noted that eight other federal courts of appeals and most state supreme include the requirement that the waiving party’s inconsistent acts caused prejudice in the waiver analysis, while three federal courts of appeal, and at least four state supreme courts  “do not include prejudice as an essential element of proving waiver of the right to arbitrate.

With nearly everyone in the courtroom stressing the need for a simple evaluation, both sides missed opportunities to offer one.  Karla Gilbride, co-Director of the Access to Justice Project at Washington, D.C., a nonprofit public interest law firm Public Justice, and attorney for petitioner Robyn Morgan, compellingly noted that the prejudice requirement was “atextual” and “all over the place.”

But she didn’t draw a bright line by noting that employees would be prejudiced by expending time or money on cases where employers delayed their arbitration requests until after they took litigation steps.

Former U.S. Solicitor General Paul D. Clement, a partner in the Washington office of Kirkland & Ellis, facing Justice Neil Gorsuch’s option that the Court eschew a Federal Arbitration Act analysis and send the case back to the lower court for a pure Iowa state law analysis, said that if that path is taken, the Court instead of offering a ruling, should dismiss Morgan entirely as improvidently granted.

And the Court wasn’t helping the advocates by invoking layers of state contract law doctrines, federal statutes, and case interpretations in order to establish a standard for evaluating waiver and whether to include prejudice.

Every member of the Court had pointed questions for the advocates in today’s arguments.  Justice Clarence Thomas didn’t participate, however; the Court announced Sunday that he had been hospitalized with an infection, but it noted this morning that he would participate in the case based on the filings and the arguments’ transcript.

Petitioner attorney Gilbride opened, with an argument that centered around the case issue of whether the the Eighth Circuit ruling favored arbitration, in violation of AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011), and FAA Sec. 2, which says that arbitration contracts are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

She maintained that the prejudice requirement has become specific to arbitration. She said there was a lot of discussion in the briefs about waiver and default, but the Eighth Circuit should have applied generally applicable Iowa law.  Then, she explained, if it found waiver, the court would still have to assess if the actions of employer Sundance, which owns Taco Bell franchises, were in default of proceeding.

“So whether Sundance’s actions constituted default is a secondary question,” said Gilbride, “not a replacement for the first-order waiver inquiry.”

Gilbride was moving from her FAA Sec. 2 analysis to FAA Sec. 3, and urging the Court to adopt a two-step analysis for evaluating waiving a right to arbitration. She was countering an argument made by Paul Clement in his Court briefs, who maintained that FAA Sec. 3 could be dispositive.

FAA Sec. 3 deals with motions to stay proceedings in favor of arbitration:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

“Prejudice,” declared Gilbride, “has no part to play in either of these inquiries.”

Under initial questioning from Chief Justice John G. Roberts Jr. and Justice Elena Kagan, Gilbride offered that the Court could remand for analysis of Iowa’s generally applicable waiver doctrines, but instead the Eighth Circuit looked at federal law and erroneously required prejudice. See Morgan v. Sundance Inc., 992 F.3d 711 (8th Cir. 2021) (available at https://bit.ly/3nqL7sJ). She conceded that prejudice could be a part of the state contract law, and that each case needed individual determination at the trial court level. 

At the same time, she noted that there could be a statutory default under federal law in FAA Sec. 3.

Justice Samuel A. Alito Jr. pressed Gilbride on how state law would affect the analysis if it in some way provided something different for arbitration cases than for other contract cases. She warned that arbitration-specific standards wouldn’t likely survive in analyzing three hypothetical Alito treatments of state law.

Justice Sonia Sotomayor told Gilbride her analysis was confusing, with the FAA Sec. 3 default meshing with FAA Sec. 4 on federal court jurisdiction over parties who refuse to honor arbitration agreements for purposes of compelling the process. Sotomayor appeared uncomfortable with the need to find a federal law default standard under Sec. 3 after finding the state law waiver standard needed for Sec. 2 in Gilbride’s sequential analysis proposal.

Sotomayor summarized, noting, “Some of my colleagues are troubled by the fact that states differ in how they define waiver.  I am troubled by the fact that the circuits define prejudice in different ways.”

At that point, Gilbride offered a bright-line standard. She noted that the requirement is “atextual” and not applied uniformly. “A presumption that a party should raise their defense of arbitration . . . by the time they file their first responsive pleading, by the time of their answer . . . before their answer if they file a motion,” she said, “that would be presumptively enough to get someone not to be in default in proceeding.”

The analysis Gilbride proposed, countered Chief Justice Roberts, will “increase the complexity and delay in arbitration proceedings.  . . . [It is] creating a whole new battleground before you even get to arbitration about whether or not there’s been . . waiver under state law. It seems quite contrary to the policy behind the FAA.”

Gilbride quickly countered that the prejudice requirement “actually increases delay and increases the sort of skirmishing in court . . . before anyone resorts to the arbitral forum that the FAA was designed eliminate.

In response to a comment by Justice Stephen G. Breyer that delay cases are fact intensive, Public Justice’s Karla Gilbride insisted that the analysis isn’t “any more complicated than questions about . . . who is bound by the contract or whether a particular dispute fall within the terms of the contract.  . . . State courts and federal courts applying state law answer those questions . . . within the parameters of the FAA all the time . . . without anything seeming to have ground to a halt.”

* * *

Sundance’s Paul Clement said that his client wasn’t in default under FAA Sec. 3, because there was no violation of a contract or a law. “[U]under all relevant state law doctrines, one has to show prejudice before a contractual right is lost because you litigated or waited too long to assert it,” he said at the outset, adding, “The most straightforward way to affirm the decision below is to apply Section 3 and its stay absent default direction.”

Client Sundance, Clement explained, moved under FAA Sec. 3 to stay the litigation, and “it is not in violation of any contractual deadline, any court rule, or any other legal obligation.”

He said the problem wasn’t a waiver by the respondent of its right to arbitrate.  “[W]hat is at issue is simply not asserting a right soon enough,” he said.

Chief Justice Roberts was skeptical, asking, “Waiver plays no role in regard–evaluating that situation at all?”

Clement said that in the absence of filing deadlines, courts will assess a variety of factors–including prejudice to the other side.  

Justice Neil Gorsuch pressed him on assessing a waiver in the absence of an intentional act, and Clement said that the lower court really meant a forefeiture. 

At that point, Gorsuch suggested it would make sense to send the case back for that state law analysis stating that the Eighth Circuit made a mistake using a federal law analysis.  That’s when Clement said that the Court should dismiss the case instead.

“The Eighth Circuit wasn’t saying this is absolutely waiver and ‘that’s why we’re applying this three-factor test,’” explained Clement.

The circuit court, he continued, “applied the three-factor test presumably as–if you go back in their case law . . .– as a gloss on the [FAA Sec. 3] statutory phrase ‘in default.’ And [the appeals panel] said, as a general matter, ‘This is when it’s too late to invoke your right to arbitrate, and we have a three-factor test, and the plaintiff in this case fails under the third factor.’ Importantly, [the Eighth Circuit] didn’t even definitively resolve the second factor [acting inconsistently with the right to arbitration], which is the only thing that actually even goes to an inconsistency that possibly could get to an implied waiver. And there’s not a hint in the decision that they thought they were talking about the explicit waiver that your question alludes to.”

Clement emphasized under tough questioning from Justices Breyer and Kagan that there was no dispute about the arbitration agreement’s existence, and attempts to resolve state law issues preliminarily under such circumstances belong with arbitrators, at one point invoking to Breyer the opinion the justice wrote on arbitrator versus court determinations in Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79 (2002) (available at https://bit.ly/2yiejeh).

“The arbitration agreement is valid,” said Clement. “Nobody questions that.”

Justice Brett Kavanaugh asked whether the failure to raise the arbitration defense to a court action in the first responsive pleading could be a review standard for waiver, but Clement rejected it. He said it wasn’t fair to his client. “[If you want to write an opinion in my client’s favor and suggest to the rules committee that they amend the rules to give clear notice to parties, then I could live with that.”

Clement followed up when Kavanaugh pressed further to note that the line drawn by courts generally isn’t the first responsive pleading, but when there already has been extensive discovery.

Kagan returned to Clement’s point that missing a deadline would satisfy FAA Sec. 3’s requirement that a stay wouldn’t be issued if the party asking for the stay was in default. “Where does this federal common law rule come from as to what counts as default?” she asked.

“It’s a gloss on the statutory phrase ‘in default,’” responded the former solicitor general, “and I think everybody agrees ‘default’ means you violated a legal obligation.”

Justice Sotomayor recounted Sundance’s moves in the matter, and maintained that the company intentionally waived arbitration to see how it would do in litigation, and then reversed course.  Clement resisted, but noted also countered that the strategy was sound and adhered to its arbitration contract.  

He responded:

I think what the parties bargained for here was not just arbitration but bilateral arbitration. And when the other side decides not just to violate the arbitration agreement but to seek a nationwide collective action, I think my client is perfectly within its rights, and it’s what I would advise my client to do under the circumstances[–]don’t make a motion to compel arbitration because you might get a motion to compel nationwide collective arbitration, and pretty much every defendant on the planet agrees that’s the worst of both worlds. So you wait.

Sotomayor said that Sundance should have raised that objection in its motion to compel.

“I suppose we could have,” responded Kirkland’s Paul Clement, “and with the benefit of that additional advice, maybe that’s what I’d tell my clients to do. But I’d still say, OK, at worst, we failed to make a motion. At worst, we’re in the realm of forfeiture, and we still have the ability to make this motion under [FAA] Sec. 3.”

The case is expected to be decided before the Court’s current term ends in June.  The audio of Supreme Court oral arguments, as well as transcripts, can be found here. For more background on Morgan, see Russ Bleemer, “The Supreme Court’s Six-Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022) (available here), and Mark Kantor, “U.S. Supreme Court Adds an Arbitration Issue: Is Proof of Prejudice Needed to Defeat a Motion to Compel?” CPR Speaks (Nov. 15, 2021) (available here).

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The author edits Alternatives to the High Cost of Litigation for CPR at altnewsletter.com.

[END]

#CPRAM22 Highlights: Hot Topics/Initiatives in ADR

By Andrew Ling

Lucila Hemmingsen, a partner in the New York office of King & Spalding practicing international commercial and investment arbitration and public international law, moderated a third-day CPR Annual Meeting panel on cutting-edge topics in ADR. The panel focused on arbitration cases pending before the U.S. Supreme Court, new arbitration legislation, an initiative to reduce arbitration’s carbon footprint, and diversity in ADR.

Hemmingsen was joined at the March 4 online #CPRAM22 session by three panelists:

  • Angela Downes, who is assistant director of experiential education and professor of practice law at University of North Texas Dallas College of Law;
  • Benjamin Graham, an associate at Williams & Connolly, in Washington, D.C., who focuses on complex commercial litigation and international arbitration. He has represented sovereign states and multinational corporations in investment-treaty disputes before ICSID and commercial disputes before leading arbitral institutions, and
  • Rachel Gupta, a mediator and arbitrator with her own New York City-based ADR practice, Gupta Dispute Resolutions. She is a mediator for state and federal court ADR panels and is an arbitrator and panelist for CPR, the American Arbitration Association, and FINRA.

Graham and Downes began the discussion by reviewing arbitration cases pending before the U.S. Supreme Court. Downes highlighted Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963, in which the question concerned whether a delegation provision in an arbitration agreement constitutes clear and unmistakable evidence that the parties intend the arbitral tribunal to decide questions of arbitrability.

Traditionally, courts are presumed to decide whether a dispute is subject to arbitration, phrased as the “question of arbitrability.” But in recent Supreme Court decisions, the Court has looked at the parties’ agreement and allowed the arbitral tribunal to decide questions of arbitrability if there is clear and unmistakable evidence indicating parties’ intent to delegate the authority to arbitrators.

Panelist Angela Downes said she views the fundamental Henry Schein issue as the drafting of the arbitration agreement, noting that disputes often arise when the agreement or provision lacks clarity. She pointed out that the case, which was dismissed a month after the oral arguments in January 2021 in a one-line opinion in which the Court said that it had “improvidently granted” review in the case, leave the status of delegation agreement still unsettled enough for potential future litigation.

Rachel Gupta then led the discussion on recent legislation on arbitration, focusing on H.R. 4445, titled Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021.

The panel discussed the Congressional backdrop to the bill, which was signed into by President Biden on March 3, the day before the panel discussion. In many employment contracts, employees have been bound by arbitration agreements and prohibited from bringing sexual harassment claims to a court. Arbitration proceedings are generally confidential, and the amount of an arbitral award tends to be lower than the damages rendered by a court. And when parties settle the dispute, employees are usually required to sign non-disclosure agreements. As a result, victims of sexual harassment are often silenced.

There are four amendments to the Federal Arbitration Act. First, it does not categorically ban arbitration agreements between employers and employees, but it allows plaintiffs to bring sexual harassment claims to courts. Second, plaintiffs have the option to bring the case individually or on behalf of a class, even if the employer’s arbitration agreement prohibits class arbitration. Third, FAA applicability will be decided by a federal court, not the arbitral tribunal. Finally, the amendments are retroactive.

Gupta pointed out that the bill does not address non-disclosure agreements. Angela Downes said she believed the omission was intended as a compromise to gain bipartisan support for the bill. In addition, many lawmakers and sexual harassment victims view binding arbitration agreements as the cause of the “broken system,” not the non-disclosure agreements.

The new law, the panel suggested, could drastically change employment arbitration practices. As Rachel Gupta commented, it will be interesting to observe if lawmakers intend to make similar amendments to other areas of arbitration, such as consumer class arbitration.

On reducing arbitration’s carbon footprint, Gupta first discussed the Campaign for Greener Arbitrations, founded by U.K. arbitrator Lucy Greenwood in 2019. The Campaign developed a set of Green Protocols to reduce the environmental impact of international arbitrations, such as using electronic correspondence and organizing virtual conferences.

Moderator Hemmingsen shared several changes in international arbitration practice: sending iPads to arbitrators instead of papers; reducing in-person meetings, and using advanced technology to take construction-site photos instead of traveling. She also predicted that more conferences and hearings would be held virtually.

The panel concluded by discussing diversity and inclusion among arbitrators and mediators. There have been several initiatives on appointing diverse neutrals and offering training and networking opportunities, such as the Ray Corollary Initiative, the JAMS Diversity Fellowship Program, New York Diversity and Inclusion Neutral Directory, the ADR Inclusion Network, and the Equal Representation in Arbitration pledge. Many arbitral institutions have taken action to place more women in arbitration panels. And CPR incorporated a “Young Lawyer” Rule in its Administered, Non-Administered and International Arbitration Rules to increase opportunities for junior lawyers to take a more active role in arbitration hearings (see Rule 12.5 in the rules available at https://www.cpradr.org/resource-center/rules/arbitration).

The panelists agreed that promoting diversity among arbitrators and mediators must be a concerted effort from ADR providers, arbitrators, law firms, and clients. Progress in diversity and inclusion is needed to grow the profession and benefit the next generation of ADR practitioners.

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The author, a third-year law student at the University of Texas School of Law, in Austin, Texas, is a CPR 2022 Spring Intern.

[END]

Justice Breyer’s ADR Legacy

By Andrew Ling

U.S. Supreme Court Justice Stephen G. Breyer’s retirement announcement last month puts the focus on his replacement, but it also requires looking back at the justice’s record. Serving more than two decades on the Court, he has made important contributions to U.S. jurisprudence on arbitration, in both domestic and international contexts.

Breyer officially retired on Jan. 27, just ahead of the Court’s winter recess.  It returns this week, with an opinion expected soon on the one arbitration case argued so far this year, Badgerow v. Walters, No. 20-1143 (see Russ Bleemer, “Supreme Court Hears Badgerow, and Leans to Allowing Federal Courts to Broadly Decide on Arbitration Awards and Challenges,” CPR Speaks (Nov. 2)), and four more arbitration arguments slated for next month.  See Russ Bleemer, “The Supreme Court’s Six‐Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022) (available on open access at https://bit.ly/3GDEJEK).

In 1995, in his second year on the bench, Breyer drafted two frequently cited Federal Arbitration Act opinions. In the first, Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265 (1995) (available at https://bit.ly/3uUcJu5), Breyer wrote that the FAA applies to all transactions involving interstate commerce, even if the parties did not contemplate an interstate commerce connection.

The holding endorsed a broad FAA reading—specifically on 9 U. S. C. § 2,  which “makes enforceable a written arbitration provision in “a contract evidencing a transaction involving commerce.”

In First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995) (available at http://bit.ly/2WEXGnF), Breyer set up the general principle that courts, not arbitrators, should decide whether a dispute is subject to arbitration, phrased as the “question of arbitrability.”

To submit questions of arbitrability to arbitration, there must be clear and unmistakable evidence indicating such intent from the parties. As Columbia Law Prof. George Bermann commented, First Options recognizes “the fundamental importance of consent to arbitrate,” and guarantees parties’ rights to an independent judicial determination. See George A. Bermann, “After First Options: Delegation Run Amok,” American Review of International Arbitration (Sep. 2021) (available at https://bit.ly/3oV54bb).

By contrast, when an issue does not raise a question of arbitrability, it should be presumptively decided by an arbitrator. In Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) (available at https://bit.ly/2yiejeh), Justice Breyer wrote that a FINRA time-limit rule for submission to arbitration is a procedural issue that an arbitral tribunal should decide. This approach achieves a balance between respecting arbitrators’ authority and parties’ consent to arbitrate.

Justice Breyer is recognized as an international arbitration authority. As he argued in his 2015 book, “The Court and The World: American Law and the New Global Realities” (Penguin Random House), the Court must look at foreign and international laws in today’s increasingly interdependent world.

Breyer put his philosophy to use in the investment treaty case of BG Group PLC v. Argentina, 572 U.S. 25 (2014) (available at https://bit.ly/3LIfLb8). The matter dealt with an enforcement action of a foreign investment arbitral award. Breyer, writing for the 6-2 Court, held that a treaty precondition to arbitration is a procedural issue that usually leaves the arbitral tribunal to decide, and the court should defer to the tribunal’s decision on that matter.

But the view was expansive. Breyer cited multiple international authorities and wrote that a bilateral investment treaty should not be treated differently from a contract.

Washington, D.C.-based Paul Hastings partner Igor Timofeyev praised the opinion for bringing predictability to the enforcement of investment arbitral awards in the U.S. See Caroline Simson, “Justice Breyer Set Many Standards for Arbitration Community,” Law 360 (Jan. 27) (available at https://bit.ly/3oSQoJO).

Justice Breyer’s arbitration opinions also reflect his often-noted pragmatic streak. He drafted majority opinions on class arbitration, such as Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) (available at https://bit.ly/33putSQ) (designating that the decision on the contract in the case about the applicability of class arbitration was for the arbitrators, not the court), and Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019) (available at https://bit.ly/3696Cb2) (finding that “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice[ ] the principal advantage of arbitration,’” and reaffirming that “courts may not infer consent to participate in class arbitration absent an affirmative ‘contractual basis for concluding that the party agreed to do so.’”)

But Justice Breyer also sometimes found himself in the minority. In the seminal consumer arbitration case, AT&T Mobility LLC v. Concepcion, 563 U.S. 133 (2011) (available at https://bit.ly/3LEpkHV), the Court ruled that the Federal Arbitration Act preempted California arbitration law, which barred class arbitration. While Breyer drafted a dissenting opinion in the case, he upheld and applied Concepcion in his majority decision in DIRECTV Inc. v. Imburgia, 577 U.S. 47 (2015) (available at https://bit.ly/3gS8DKQ). He wrote,

No one denies that lower courts must follow this Court’s holding in Concepcion. The fact that Concepcion was a closely divided case, resulting in a decision from which four Justices dissented, has no bearing on that undisputed obligation. Lower court judges are certainly free to note their disagreement with a decision of this Court. But the “Supremacy Clause forbids state courts to dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source.” . . . The Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.

For Justice Breyer, “it’s the court’s job to help make government work for real people,” according to a former law clerk. See Richard Wolf, “After 20 Years, Breyer Is High Court’s Raging Pragmatist,” USA Today (Aug. 7, 2014) (available at https://bit.ly/3GTfu1m).

In Breyer’s view, by following judicial precedents, the Court contributes to social stability and allows people to plan their lives. He said, “The law might not be perfect but if you’re changing it all the time people won’t know what to do, and the more you change it the more people will ask to have it changed, and the more the court hears that, the more they’ll change it.” Andrew Chung, “U.S. Justice Breyer Touts Compromise, Democracy, Adherence to Precedent,” Reuters (May 28, 2021) (available at https://reut.rs/3Ju4Wr4).

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The author, a third-year law student at the University of Texas School of Law, in Austin, Texas, is a CPR 2022 Spring Intern.

[END]

US Supreme Court to Review Whether Private Attorney General Action Can Be Waived by an Arbitration Agreement

By Mark Kantor

Continuing its focus on arbitration, the U.S. Supreme Court yesterday granted certiorari in Viking River Cruises v. Moriana, No. 20-1573, where the question presented is whether the Federal Arbitration Act requires enforcement of an arbitration agreement that waives a signatory’s ability to bring a labor law claim on behalf of California labor law agencies in court pursuant to California’s Private Attorneys General Act (PAGA).

The official issue presented:

Whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under the California Private Attorneys General Act.

PAGA enables an individual employee to seek a court judgment for breach of California labor laws as a “private attorney general” on behalf of the state of California. 

An employee bringing a PAGA action does so as the “proxy” or “agent” of California’s labor law enforcement agencies, who are the real parties in interest.  A successful employee-plaintiff may obtain civil penalties under PAGA for violations committed against similarly placed employees, Cal. Lab. Code § 2699(g)(1), just as the state could if it brought the enforcement action directly.   Civil penalties recovered in a PAGA representative action must be allocated 75% to the state enforcement agency and 25% to the aggrieved employee. Cal. Lab. Code § 2699(i).

California state courts, and federal courts applying the California law, have held that a PAGA representative claim in court cannot be overcome by an arbitration agreement.  Employers consider that jurisprudence to be contrary to U.S. Supreme Court precedent.

The Supreme Court will now take up that issue for review.

The Court’s docket page for Viking River Cruises with filings is linked above. The Scotusblog page containing the lower court opinion and amicus briefs can be found here.

* * *

It has been a busy week for arbitration at the Supreme Court, and with recent moves, the Court has provided itself a full arbitration docket, with six separate cases pending in five matters, only one of which has been argued, as the others await argument dates.

Last Friday, the Court accepted two cases and consolidated them into one argument, date to be announced, on a long-running issue about the reach of a federal law that provides discovery in foreign matters. Details on the Dec. 10 cert grant on the consolidated cases, which will determine whether the law applies to discovery in international arbitration matters, can be found at John Pinney, “International Arbitration Is Back at the Supreme Court with Today’s Cert Grant on Two Section 1782 Cases,” CPR Speaks (Dec. 10) (available here).

The Court on Friday also accepted a case on  Federal Arbitration Act Sec. 1 that will examine the extent of the exception from the FAA involving workers in interstate commerce. For details on that new case, as well as a roundup of the six arbitration cases now at the U.S. Supreme Court, see Russ Bleemer, “Court Adds a Third Arbitration Case in Friday’s Cert Granted Order List,” CPR Speaks (Dec. 10) (available here).

* * *

Mark Kantor is a member of CPR-DR’s Panel 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]

Court Adds a Third Arbitration Case in Friday’s Cert Granted Order List

By Russ Bleemer

In addition to the two cert grants this afternoon on the international arbitration discovery issue in 28 U.S.C. § 1782, the U.S. Supreme Court accepted a third arbitration case for oral arguments.

Southwest Airlines Co. v. Saxon, No. 21-309, presents a Federal Arbitration Act Sec. 1 question:

“Whether workers who load or unload goods from vehicles that travel in interstate commerce, but do not physically transport such goods themselves, are interstate ‘transportation workers’ exempt from the Federal Arbitration Act.”

FAA Sec. 1 defines the statute’s application to maritime transactions and commerce. The section ends noting that “nothing [in the statute] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

The Court has interpreted the law to mean that the exception from FAA application is only for transportation workers “engaged in” interstate commerce. Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) (available at https://bit.ly/2HhwYLu).

The original plaintiff in the case, now the respondent, is a “Ramp Agent Supervisor for Southwest who occasionally loads and unloads passenger baggage from airplanes,” according to Southwest’s cert petition, which is available at the docket link above. The original plaintiff works at Chicago’s Midway Airport.

The Seventh U.S. Circuit Court of Appeals in the case (available at https://bit.ly/3rRA8Ln) held that the plaintiff was a transportation worker, and therefore exempt from the FAA.  

Noting a circuit split, Southwest appealed, and this afternoon, the nation’s top Court agreed to decide whether the local worker was FAA-exempt, which is likely to include an examination of the plaintiff’s work in relation to interstate commerce.

The case has not yet been scheduled; schedules for winter and spring 2022 argument dates in the current 2021-2022 term have yet to be released, and the case could be added before the Court’s year ends in June.

* * *

Southwest Airlines Co. v. Saxon, and the two new international arbitration cases on 28 U.S.C. § 1782, ZF Automotive US Inc. v. Luxshare Ltd.No. 21-401, and AlixPartners LLP v. The Fund for Protection of Investor Rights in Foreign States, No. 21-518, contribute to an already busy 2021-2022 Supreme Court arbitration docket.

The Court had scheduled an arbitration case to be argued the first week of the term, but it dismissed the matter shortly before the arguments at the parties’ request after an award was issues and the case concluded.  For details, see Bryanna Rainwater, “Case Dismissed: Supreme Court Lightens Its Arbitration Load as Servotronics Is Removed from 2021-22 Docket,” CPR Speaks (Sept. 8) (available here).

But two more arbitration cases quickly followed last month. The Court heard Nov. 2 arguments in Badgerow v. WaltersNo. 20-1143, an employment discrimination case that dives into the jurisdiction of federal courts under Federal Arbitration Act sections on enforcing and overturning arbitration awards.  See Russ Bleemer, “Supreme Court Hears Badgerow, and Leans to Allowing Federal Courts to Broadly Decide on Arbitration Awards and Challenges,” CPR Speaks (Nov 2) (available here).

And on Nov. 15, the Court accepted an employment arbitration case, Morgan v. Sundance Inc.No. 21-328, on the extent to which a federal court may defer to an arbitration agreement. The case will return to the scope of a decade-old case,  AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), which permits mandatory arbitration backed with class waivers in consumer contracts. For details, see Mark Kantor, “U.S. Supreme Court Adds an Arbitration Issue: Is Proof of Prejudice Needed to Defeat a Motion to Compel?” CPR Speaks (Nov. 15) (available here).

Like today’s three-case addition to the Court docket, Morgan awaits an argument date.

* * *

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

[END]

The Latest #SCOTUS #Arbitration: Process ‘Preference’; Int’l #Discovery; Federal Courts’ Arb #Jurisdiction

CPR presents on YouTube linked and embedded above a new discussion on the current U.S. Supreme Court hot arbitration topics.  

The discussion is moderated by Russ Bleemer, editor of Alternatives to the High Cost of Litigation (http://altnewsletter.com, and for CPR members at www.cpradr.org/news-publications/alternatives) (@altnewsletter)), who is joined by Angela Downes, Assistant Director of Experiential Education and Professor of Practice Law at the University of North Texas-Dallas College of Law; independent Dallas attorney-arbitrator Richard Faulkner, and arbitration advocate Philip J. Loree Jr., who heads the Loree Law Firm in New York (@PhilLoreeJr). 

Here are the matters discussed, and links on this CPR Speaks blog to details on the cases and potential cases along with resources including links to lower court opinions and briefs.

  1. Morgan v. Sundance Inc., No. 21-328, an employment case on the extent to which a federal court may defer to an arbitration agreement, which the nation’s top Court agreed to hear last week. For details, see Mark Kantor, “U.S. Supreme Court Adds an Arbitration Issue: Is Proof of Prejudice Needed to Defeat a Motion to Compel?” CPR Speaks (Nov. 15) (available here).
  2. The Court has scheduled two cases involving the reach of 28 U.S.C § 1782 for a Dec. 3 conference that will determine whether it should hear the matters or let lower court opinions stand.  The cases examine whether the statute, which authorizes “any interested person” in a proceeding before a “foreign or international tribunal” to ask for and receive discovery from a person in the United States, covers international arbitration tribunals. The cases, AlixPartners LLP v. The Fund for Protection of Investors’ Rights in Foreign States, No. 21-518, and ZF Automotive US Inc. v. Luxshare Ltd., No. 21-401, are discussed at Bryanna Rainwater, “The Law on Evidence for Foreign Arbitrations Returns to the Supreme Court,” CPR Speaks (Oct. 22, 202) (available here).  CPR has filed an amicus brief asking the Supreme Court to accept and decide the AlixPartners case; the NYC-based nonprofit which publishes this blog did not take a position in the case.  The details on the filing can be found at “CPR Asks Supreme Court to Consider Another Foreign Tribunal Evidence Case,” CPR Speaks (Nov. 12) (available here) (containing information and links to CPR’s previous amicus brief in Servotronics v. Rolls Royce PLC, No. 20-794, another Section 1782 case that the Supreme Court dismissed in September and removed from the Court’s October argument calendar).
  3. Badgerow v. Walters, No. 20-1143, an employment discrimination case that dives into the jurisdiction of federal courts under Federal Arbitration Act sections on enforcing and overturning arbitration awards.  The case was most recently discussed on CPR Speaks at Russ Bleemer, “Supreme Court Hears Badgerow, and Leans to Allowing Federal Courts to Broadly Decide on Arbitration Awards and Challenges,” CPR Speaks (Nov 2) (available here).

The video embedded above can be found on YouTube at https://www.youtube.com/watch?v=Sw8ps4vtTfs.

[END]

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.

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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.

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