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Posts Tagged ‘Separability’

Federal Arbitration Act Section 1: SCOTUS Says Courts Decide Whether FAA Applies to Contract and this Time Answer is “No”

January 25th, 2019 Appellate Practice, Applicability of Federal Arbitration Act, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 1, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Separability, Severability, United States Court of Appeals for the First Circuit, United States Supreme Court 1 Comment »

Section 1 of the Federal Arbitration Act exempts from the FAA’s scope disputes involving “contracts of employment of . . . workers engaged in . . . interstate commerce.”  9 U. S. C. § 1. If parties to an arbitration agreement clearly and unmistakably delegate arbitrability questions to an arbitrator, who decides whether a contract containing the arbitration agreement is such a “contract of employment?”   

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United States Supreme Court

In New Prime Inc. v. Oliveira, 586 ___ U.S. ___, slip op. (Jan. 15, 2019), the nation’s highest court held that courts decide whether a contract is within the scope of the FAA’s coverage, even where the parties clearly and unmistakably delegate arbitrability questions to an arbitrator. Slip op. at 4. Addressing the merits of the FAA’s applicability to the contract, the United States Supreme Court held that under Section 1 it was exempt from the FAA because in 1925, the year Congress enacted the FAA, the term “contracts of employment” was ordinarily understood to include not only contracts establishing an employer-employee (or master and servant) relationship, but also independent contractor relationships. Slip op. at 15.

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Who gets to decide whether the Federal Arbitration Act applies to the parties’ agreement?

Today we’ll focus on the first issue addressed by the Court: who gets to decide whether a contract falls within the Section 1 “contracts of employment” exemption when the parties have delegated arbitrability disputes to the arbitrators. In a later post we’ll look at how the Court decided the contract before it was under Section 1 a “contract of employment of a “worker[] engaged in interstate commerce[,]” and thus outside the scope of the FAA.  

Background

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Dispute between a trucker and a trucking company

New Prime was a dispute between a truck driver and a trucking company. The relationship between the two was established by a written contract which, at least in form, established an independent contractor, rather than an employer-employee relationship. The contract contained an arbitration clause which provided that “any disputes arising out of the parties’ relationship should be resolved by an arbitrator—even disputes over the scope of the arbitrator ’s authority.” Slip op. at 1-2.

The trucker commenced a federal-court class action, which alleged that, irrespective of what the trucking company called its drivers, the trucking company “treat[ed] them as employees and fail[ed] to pay the statutorily due minimum wage.” Slip op. at 2.

The trucking company asked the district court to compel arbitration of the dispute. In response the trucker contended that his contract was outside the scope of the FAA because it was a “contract[] of em­ployment of . . . [a] worker[] engaged in foreign or interstate commerce.” 9 U.S.C. § 1. Thus, said the trucker, the FAA “supplied the district court with no authority to compel arbitration….” Slip op. at 2.

The trucking company replied that the parties had agreed to submit to arbitration the question whether the Section 1 “contracts of employment” exemption applied to the contract. The trucking company alternatively contended that, if the question was for the Court, then the term “‘contracts of employment’ refers only to contracts that establish an employer-employee relationship[,]” and the trucker was an independent contractor, not an employee, of the trucking company. Accordingly, said the trucking company, the Section 1 exclusion did not apply, the FAA applied, and the Court should stay the litigation and compel arbitration under FAA Sections 3 and 4. See 9 U.S.C. §§ 3 & 4; slip op. at 2-3.

The district court and the United States Court of Appeals for the First Circuit found in favor of the trucker. The First Circuit “held, first, that in disputes like this a court should resolve whether the parties’ contract falls within the Act’s ambit or [Section 1’s] exclusion before invoking the [FAA’s] au­thority to order arbitration.” Slip op. at 3. The First Circuit further “held that [Section 1’s] exclusion of certain ‘contracts of employ­ment’ removes from the Act’s coverage not only employer-employee contracts but also contracts involving independ­ent contractors.” Slip op. at 3. Accordingly, irrespective of whether the parties’ agreement established an employer-employee or independent contractor relationship, the district court lacked FAA authority to compel arbitration. Slip op. at 3.

In an 8-0 Opinion written by Associate Justice Neil M. Gorsuch, the U.S. Supreme Court affirmed the First Circuit’s decision (Associate Justice Brett Michael Kavanaugh took no part). Associate Justice Ruth Bader Ginsburg penned a brief concurring opinion.

The Court Must Decide Whether Section 1 Exempts the Contract from the FAA’s Scope

The Broad Authority the FAA Confers on Courts does not Extend to All Private Contracts 

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SCOTUS: Judicial authority to compel arbitration under the FAA “may be considerable[,]” but it is not “unconditional”

The answer to the “who” question was “immediately” “clear” to the Court. Slip op. at 3. Though “a court’s authority under the [FAA] to compel arbitration may be considerable, it isn’t unconditional.” Slip op. at 3. FAA Sections 3 and 4 “often require a court to stay litigation and compel arbitration ‘according to the terms’ of the parties’ agreement[,]” “[b]ut this authority doesn’t extend to all private contracts, no matter how emphatically they may express a preference for arbitration.” Slip op. at 3.

Sections 1 and 2 are Antecedent Provisions that Limit Judicial Power to Stay Litigation and Compel Arbitration under Sections 3 and 4

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Court must apply FAA Sections 1 and 2 to determine whether it has the authority to stay litigation or compel arbitration under Sections 3 and 4

Sections 1 and 2, the Court explained, are “antecedent statutory provisions” that “limit the scope of the scope of the court’s powers under [Sections] 3 and 4.” Slip op. at 3. Section 2 “applies only when the parties’ agreement to arbitrate is set forth as a ‘written provision in any maritime transaction or a contract evidencing a transaction involving commerce.’” Slip op. at 3. Section 1, which “helps define [Section] 2’s terms[,]” provides that “‘nothing’ in the [FAA] ‘shall apply’ to ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’” Slip op. at 3-4 (quoting 9 U.S.C. § 1).

According to the Court, Section 1’s exemption was included in the FAA, which was enacted in 1925, because “Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers[,]” [a]nd it seems Congress ‘did not wish to unsettle’ those arrangements in favor of whatever arbitration procedures the parties’ private contracts might happen to contemplate.” Slip op. at (quoting Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 121 (2001)).

The FAA’s “Terms and Sequencing” Demonstrates that Courts Decide whether a Contract Falls Under the FAA

The FAA’s “terms and sequencing” supported the Court’s conclusion that “a court should decide for itself whether [Section] 1’s ‘contracts of employment’ exclusion applies before ordering arbitration.” Slip op. at 4. Before a Court can “invoke its statutory powers under [Sections] 3 and 3 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or be­yond the boundaries of [Sections] 1 and 2.” Slip op. at 4. That is so even if the “parties’ private agreement [is] crystal clear and require[s] arbitration of every question under the sun….” See slip op. at 4.  

The Court’s Prior Decisions have Stressed the Significance of the FAA’s “Sequencing”

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SCOTUS says its “holding” should come as no “surprise[,]” because its prior decisions require that a contract fall within the scope of Sections 1 and 2 before litigation may be stayed or arbitration compelled under Sections 3 or 4.

The Court said “[n]othing in our holding on this score should come as a surprise[,]” because the Court has “long stressed the significance of the statute’s sequencing.” By way of example the Court cited and quoted Bernhardt v. Polygraphic Co. of America, 350 U. S. 198, 201–202 (1956), Circuit City, and Southland Corp. v. Keating, 465  U. S. 1, 10–11, and n. 5 (1984). In Bernhardt the Court explained that “‘Sections 1, 2, and 3 [and 4] are integral parts of a whole. . . . [Sections] 1 and 2 define the field in which Congress was legislating,’ and §§3 and 4 apply only to contracts covered by those provisions.” Slip op. at 4 (quoting Benhardt, 350 U.S. at 201-202). In Circuit City, the Court “acknowledged that ‘Section 1 exempts from the [Act] . . . contracts of employment of transportation workers.’” Slip op. at 4 (quoting Circuit City, 532 U. S., at 119). In Keating the Court “noted that ‘the enforce­ability of arbitration provisions’ under §§3 and 4 depends on whether those provisions are ‘ part of a written mari­time contract or a contract “evidencing a transaction in­volving commerce”’ under §2—which, in turn, depends on the application of §1’s exception for certain ‘contracts of employment.’” Slip op. at 4-5. (quoting Keating, 465  U. S. at 10–11, and n. 5).

The Trucking Company’s Delegation and Severability Arguments Put the Proverbial Cart before the Horse

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The trucking company’s arguments put the Section 3 and 4 cart before the Section 1 and 2 horse. Admittedly, the above photo doesn’t accurately depict that idiomatic scenario, but why make hay of it?

The trucking company contended that an arbitrator should decide the parties’ Section 1 dispute, relying on the delegation provision in the contract and the severability doctrine. “A delegation clause,” said the Court, “gives an arbitrator authority to decide even the initial question whether the parties’ dispute is subject to arbitration.” Slip op. at 5 (citing Rent-A-Center, West, Inc. v. Jackson, 561 U. S. 63, 68–69 (2010)).

Under the severability doctrine, the Court “treat[s] a challenge to the validity of the arbitration agreement (or a delegation provision) separately from a challenge to the validity of the entire contract in which it appears.” Slip op. at 5. If a party does not “specifically challenge[] the validity of the agreement to arbitrate, both sides may be required to take all their disputes—including disputes about the validity of their broader contract—to arbitration. Slip op. at 5 (citing Rent-a-Center).  

The trucking company argued that: (a) the trucker did not “specifically challenge[] the parties’ delegation clause. . .”; and, therefore, (b) the parties had to arbitrate their dispute over whether the contract fell within Section 1’s exemption.

The Court explained that this argument “overlooks the necessarily antecedent statutory inquiry we’ve just discussed.” Slip op. at 5. “A delegation clause,” said the Court, “is merely a specialized type of arbitration agreement, and the [FAA] ‘operates on this additional arbitration agreement just as it does on any other.’” Slip op. at 5 (quoting Rent-a-Center, 561 U. S. at 70.) To “use [Sections] 3 and 4 to enforce a delegation clause[,]” “the clause” must “appear[] in a ‘written provision in . . . a contract evidencing a transaction involving commerce’ consistent with [Section] 2[,]” “[a]nd only if the contract in which the clause appears doesn’t trigger [Section] ’s ‘contracts of employment’ exception.” Slip op. at 5.

“In exactly the same way,” said the Court, the FAA’s “severability principle applies only if the parties’ arbitration agreement appears in a contract that falls within the field [Sections] 1 and 2 describe.” Slip op. at 5-6. Indeed, the Court “acknowledged as much some time ago, ex­plaining that, before invoking the severability principle, a court should ‘determine[] that the contract in question is within the coverage of the Arbitration Act.’” Slip op. at 6 (citing and quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 402 (1967)).

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More to follow on New Prime

But if in the meantime you want to learn more now about arbitrability and delegation provisions, see prior posts here, here, here, here, and here.

Photo Acknowledgments:

The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law. 

International Institute for Conflict Prevention and Resolution Newsletter Features Philip J. Loree Jr. Cover Story on Rent-A-Center and Granite Rock

March 16th, 2010 Arbitrability, Authority of Arbitrators, Labor Arbitration, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on International Institute for Conflict Prevention and Resolution Newsletter Features Philip J. Loree Jr. Cover Story on Rent-A-Center and Granite Rock

The March 2010 issue of Alternatives to the High Cost of Litigation, the excellent newsletter of the International Institute for Conflict Prevention and Resolution (“CPR”), featured as its cover story an article I wrote on Rent-A-Center West v. Jackson, No. 09-497, and Granite Rock Co. v. Int’l Brotherhood of Teamsters, No. 08-1214, two of the three cases pending before the United States Supreme Court this term.  The article is entitled “It’s Time for Doctrines: The Supreme Court Wrestles with ‘Severability’ and the ‘Clear and Unmistakable’ Standard.” 

These two cases involve, to some degree, the Buckeye Check Cashing/Prima Paint doctrine of severability—a/k/a “separability.”  Rent-A-Center also examines the “clear and unmistakable doctrine,” under which arbitrators can decide arbitrability questions if the parties clearly and unmistakably so agree. 

Rent-a-Center, which arises under the Federal Arbitration Act,  raises the question whether courts or arbitrators get to decide whether an arbitration agreement is unconscionable if the parties clearly and unmistakably agree to submit arbitrability questions to arbitration.  (See our prior posts here, here and here.)   Granite Rock, which arises under Section 301 of the Labor Management Relations Act, concerns whether, on the facts presented, arbitration must go forward and what it should encompass.  (See our prior post here.)

In the article I argue that both cases were wrongly decided by the Court of Appeals for the Ninth Circuit, and that, in Granite Rock, the Ninth Circuit reached the right result (an order compelling arbitration) for the wrong reasons.  I predict that the United States Supreme Court will reverse the Rent-A-Center decision and vacate the Granite Rock decision.

Alternatives to the High Cost of Litigation is a subscription-only publication.   Anyone interested in obtaining a copy of the article can request one at this page.  Subscription information is available at that page, too, as well as publisher John Wiley & Sons, here.

I would like to take this opportunity to thank CPR, and Russ Bleemer, Editor of Alternatives, for their kind assistance and support in featuring my article.  Russ is not only a keen, professional editor, but a pleasure to work with as well.

Professor Aaron Bruhl’s Analysis of Rent-A-Center, West v. Jackson (No. 09-497)

February 24th, 2010 Arbitrability, Authority of Arbitrators, United States Court of Appeals for the Ninth Circuit, United States Supreme Court Comments Off on Professor Aaron Bruhl’s Analysis of Rent-A-Center, West v. Jackson (No. 09-497)

Professor Aaron Bruhl, an Assistant Professor of Law at the University of Houston Law Center, recently published in PrawfsBlawg a thought-provoking and insightful article on Rent-A-Center West v. Jackson (No. 09-497).  (Post here)  Regular readers no doubt remember that the United States Supreme Court recently granted certiorari in Rent-A-Center, and will be hearing argument on April 26, 2010.  (See our prior posts here and here).

Professor Bruhl points out that, in addition to being of interest to those practicing employment, consumer or plain old arbitration law, Rent-A-Center “is just as interesting for those who study federal courts and judicial politics.”   He reminds us that one of the few remaining “safety valves” for challenging arbitration agreements is unconscionability:     

In the last few years, as other routes for challenging arbitration have been closed off, unconscionability has become a surprisingly common and surprisingly effective way of attacking arbitration agreements.  The challenges do not attack arbitration per se – federal law favors arbitration – but instead target various aspects of a particular arbitration process:  a given clause might forbid class arbitrations, bar punitive damages or otherwise restrict remedies, sharply curtail discovery, require a consumer to pay hefty arbitrator’s fees, etc.  There have been many cases on these topics in recent years, and a good number of them sustain the challenge to the arbitration clause.

He notes that the United States Supreme Court has consistently denied certiorari in cases where lower courts have invalidated arbitration agreements on state-law unconscionability grounds and the question is whether the invalidation offended the Federal Arbitration Act.  He suspects “the Court has avoided these cases because it feels ill-equipped to resolve whether a lower court is discriminating against arbitration:” 

First, unconscionability analysis often requires a fact-intensive inquiry.  Second, and more important, determining whether a lower court is using unconscionability differently when it comes to arbitration requires an engagement with the details of state law and a comparison of lots of prior unconscionability cases.  Third, and maybe most important of all, a holding that the lower court is applying unconscionability unfairly, especially when the lower court says it is applying the same analysis it applies elsewhere, carries with it some serious expressive baggage.  Essentially, it requires the Supreme Court to say that the lower court is being dishonest.  That happens, but when it does so, it is a big deal (think cases like Bush v. Gore or the cases from the 50s/60s rejecting supposed procedural defaults in the state courts).

 But the Court granted certiorari in Rent-A-Center, a case involving not the merits of a state law unconscionability challenge, but the question who gets to decide unconscionability when the parties clearly and unmistakably submit it to the arbitrators.  Professor Bruhl believes certiorari was granted because addressing the “who” question, and resolving it in favor of arbitration, will cleanly dispose of the unconscionability problem from the standpoint of the federal courts, at least in cases where the parties clearly and unmistakably agreed to arbitrate arbitrability: 

That doesn’t require diving into the weeds of state law and the record. If the Court assigns the issue to the arbitrator, that will be a very easy rule to monitor for compliance (unlike deciding whether the lower court applied unconscionability correctly).  All of those unconscionability cases out there will instantly become not wrong but irrelevant – because courts won’t be deciding the issue anymore.  And it won’t matter whether some lower courts can be trusted to apply unconscionability correctly, because they will be cut out of the picture. Continue Reading »

The Texas Supreme Court Says Court – Not Arbitrator — Gets to Decide Lack of Capacity Issue Notwithstanding the Severability Doctrine

July 21st, 2009 Arbitrability, Authority of Arbitrators, Texas Supreme Court Comments Off on The Texas Supreme Court Says Court – Not Arbitrator — Gets to Decide Lack of Capacity Issue Notwithstanding the Severability Doctrine

Karl Bayer’s and Victoria VanBuren’s Texas-based  Disputing blog recently reported on In re Morgan Stanley & Co., Inc., __ S.W.3d __ (Texas 2009) (No. 07-0665), in which the Texas Supreme Court held that whether a contracting party had the capacity to enter into a contract containing an arbitration agreement was for the court to decide, notwithstanding that, under the severability (a/k/a “separability”) doctrine, a challenge to the validity or enforceability of a contract as a whole, including the arbitration agreement, is generally for the arbitrators to decide under a broad arbitration clause.  Ms. VanBuren did an excellent job summarizing the case and explaining its significance in her post, “Texas Supreme Court Holds that the Court, not the Arbitrator Should Decide the Issue of Capacity to Contract,” and we recommend that anyone interested in learning more about the case read her thoughtful and nicely-written post. 

Morgan Stanley illustrates that the severability doctrine —  first espoused by the United States Supreme Court in Prima Paint v. Conklin Mfg. Corp., 388 U.S. 395, 403-04 (1967) and later clarified in Buckeye Check Cashing v. Cardengna, 546 U.S. 440, 449 (2006) — is not without its limits.  Severability is a legal fiction, which Courts apply for the purpose of determining whether arbitrators have the authority to determine certain disputes concerning the enforceability or validity of a contract containing an arbitration clause.  It deems the arbitration clause to be an agreement which stands on its own footing from the contract in which it is contained.  Continue Reading »