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Archive for the ‘Arbitration Agreements’ Category

Second Circuit Says Collective Bargaining Agreement’s Arbitration Clause was Mandatory and did not Deprive Union Employee of Due Process

July 17th, 2019 Arbitrability, Arbitration Agreements, Arbitrator Selection and Qualification Provisions, Labor Arbitration, Motion to Compel Arbitration, United States Court of Appeals for the Second Circuit, United States District Court for the Eastern District of New York No Comments »

collective bargaining

Back in 2009 the Author wrote an article on the United States Supreme Court’s decision in 14 Penn Plaza LLC v. Pyett, 556 U.S. 247 (2009), which held “that a collective-bargaining agreement that clearly and unmistakably requires union members to arbitrate ADEA claims is enforceable as a matter of federal law.” 559 U.S. at 274. (See Loree Reins. & Arb. L. Forum Post here.)

On July 2, 2019, the U.S. Court of Appeals for the Second Circuit reversed a district court decision that erroneously applied the Pyett clear and unmistakable standard to the question whether an arbitration clause in a collective bargaining agreement (the “CBA”) was mandatory or permissive. Finding that the CBA imposed mandatory arbitration, the Second Circuit ruled that the clear and unmistakable standard applied only to the question whether the Employee’s statutory claims were within the scope of the CBA’s arbitration agreement (the “Arbitration Agreement”), and not to the mandatory versus permissive question. Abdullayeva v. Attending Homecare Servs. LLC, ___ F.3d ____, No. 18-0651, slip op. at *8-10 (2d Cir. July 2, 2019).

Applying ordinary contract principles to the question whether the Arbitration Agreement was mandatory or permissive, the Court held that it was mandatory. Slip op. at *10-13. Applying Pyett‘s clear and unmistakable standard to the scope question, it held that the Employee’s statutory claims under the Fair Labor Standards Act (“FLSA”) and New York’s Labor Law (“NYLL”) were within the scope of the arbitration clause. Slip op. at *13-14.

Finally, the Court held that the arbitration clause did not deny the Employee of due process of law, rejecting the Employee’s argument that it was deprived of due process because it did not personally participate in the selection of the arbitrator named in the arbitration clause. Slip op. at *14-16.

Background

collective bargaining home health care

The Employer is a provider of home health care services which employs health and personal care workers that serve elderly clients. The Employee was a member of that staff.

The Employee was required to join a Union of home health care workers (the “Union”).

At or about the time when the Employee began work for Employer, the Union and Employer entered into a collective bargaining agreement (the “CBA”).

The CBA contained an “Adjustment of Disputes” provision (the “Arbitration Agreement”) that provided, in pertinent part:

B. The parties [the Union and Attending] further agree a goal of this Agreement is to ensure compliance with all federal, state, and local wage hour law and wage parity statutes. Accordingly, to ensure the uniform administration and interpretation of this Agreement in connection with federal, state, and local wage-hour and wage parity statutes, all claims brought by either the Union or Employees, asserting violations of or arising under the Fair Labor Standards Act . . . , New York Home Care Worker Wage Parity Law, or New York Labor Law (collectively, the “Covered Statutes”), in any manner, shall be subject exclusively, to the grievance and arbitration procedures described below.

1) The statute of limitations to file a grievance concerning the Covered Statutes shall be consistent with the applicable statutory statute of limitations. All such claims if not resolved in the grievance procedure, including class grievances filed by the Union, or mediation as described below shall be submitted to final and binding arbitration before Elliott Shriftman. . . .

. . . .

4) In the event an Employee has requested, in writing, that the Union process a grievance alleging a violation of the Covered Statutes and the Union declines to process a grievance regarding alleged violations of the Covered Statutes, through the grievance/mediation process or to arbitration following the conclusion of mediation, an Employee solely on behalf of himself/herself, may submit their individual claim to mediation, or following the conclusion of mediation, to arbitration. . . .

Slip op. at *3-4 (quoting Arbitration Agreement; emphasis supplied by Court).

On her own behalf, and on behalf of all similarly situated employees, Employee sued Employer in the U.S. District Court for the Eastern District of New York, alleging that Employer had violated the Fair Labor Standards Act (“FLSA”) and provisions of New York’s Labor Law by, among other things, “willfully fail[ing] to pay its workers overtime and spread-of-hours pay. . . .” Slip op. at *4-5.

The Employer moved to compel arbitration, but the district court denied the motion. The district court ruled that the CBA did not require that the Employee’s claims be resolved in arbitration.

The district court reached that conclusion on two alternative grounds. First, the district court ruled that the arbitration agreement “violated the Employer’s due process rights due process rights because the arbitrator had been preselected by the Union and [the Employer] without any input from [the Employee].” Slip op. at *5.

Second, and in any event, the district court held that the arbitration agreement was not mandatory, and that accordingly, the Employer was entitled to bring its claims in federal district court. To that end the district court determined that the Arbitration Agreement was “‘at best ambiguous,’ and does not satisfy the clear and unmistakable test applicable to the assessment of purported waivers of union members’ right to bring statutory claims in court when such waivers are part of a collective bargaining agreement’s arbitration provisions.” Slip op. at *5 (quoting district court decision; other quotation omitted).

The Employer appealed.

The Second Circuit’s Decision

Arbitrability Question 1
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The Second Circuit began by explaining that motions to compel arbitration “ordinarily” present courts with four questions:

(1) whether the parties agreed to arbitrate; (2) the “scope” of the arbitration agreement; (3) whether the plaintiff’s federal statutory claims are “nonarbitrable”; and (4) if some, but not all of the claims in the case are arbitrable, whether to stay the balance of the proceedings pending arbitration.

Slip op. at *6.

But this case presented only the first two questions—whether the parties agreed to arbitrate, and if so, what they agreed to arbitrate. Slip op. at *6.

The “clear and unmistakable” standard for determining whether parties to a collective-bargaining agreement agreed to arbitrate statutory claims was a standard that applied only to the second question, that is, the scope of the arbitration agreement. Slip op. at *8-10. According to the Second Circuit, “[t]he district court framed the sole relevant inquiry as whether ‘[a] clause purporting to require arbitration of a [FLSA] claim that is contained in a collective bargaining agreement’ clearly and unmistakably requires arbitration.” Slip op. at *8 (quoting district court decision).

The district court therefore conflated the first two questions and applied the “clear and unmistakable” standard to both. The district court erred in doing so, said the Second Circuit, because “the clear and unmistakable standard does not reflect disfavor of union-negotiated arbitration agreements[,]” but instead “ensures that employees’ right to bring statutory claims in court is not waived by operation of confusing, “very general” arbitration clauses[,]” which, for example, might be reasonably construed to be limited to claims concerning the construction or application of a collective bargaining agreement, even though they might also be reasonably construed to encompass both contract and statutory claims. Slip op. at *9 (citations and quotations omitted).

The Second Circuit said “we ask not whether the parties clearly and unmistakably agreed to arbitrate, but whether, once we have established that an agreement exists, that agreement clearly and unmistakably encompasses the plaintiff’s statutory claims.” Slip op. at *9-10. “The clear and unmistakable standard,” the Court explained, is “therefore. . . specific to the scope question and has no bearing on whether there is an agreement to arbitrate in the first instance.” Slip op. at *10.

Having clarified how the clear and unmistakable standard is supposed to be applied, the Court addressed whether the arbitration agreement was permissive or mandatory, and if mandatory, whether statutory claims were  clearly and unmistakably within its scope. The Court held that the arbitration agreement was mandatory and clearly and unmistakably encompassed the statutory claims. Slip op. at *9.

Collective Bargaining Agreement’s Arbitration Clause is Mandatory

 The Court concluded that “[t]he Union was legally authorized to negotiate collective bargaining agreements on [the Employee’s] behalf[,]” citing 29 U.S.C. § 159(a), which provides that unions “selected for purposes of collective bargaining by the majority of the employees shall be the exclusive representatives of all the employees. . . for the purposes of collective bargaining. . . .” 29 U.S.C. § 159(a). The Employee was, accordingly, bound by the CBA, including the Arbitration Agreement.  

The Court next determined that the Arbitration Agreement, when construed as a whole, unambiguously imposed mandatory arbitration on the Employee, not simply an option to arbitrate or litigate. That provision, said the Court, “states that its goal is to ‘ensure the uniform administration and interpretation of [the CBA],’ and that the means by which it will achieve that goal is to require that all claims under the Covered Statutes, brought by the Union or employees, ‘be subject exclusively . . . to the grievance and arbitration procedures described below.” Slip op. at *11 (quoting Arbitration Agreement; emphasis added by Court). The Provision further “states that ‘all [claims under the Covered Statutes,] if not resolved in the grievance procedure, . . . shall be submitted to final and binding arbitration.’” Slip op. at *11-12. “On its face,” said the Court, “this language simply does not allow an employee to choose to proceed in a judicial forum.” Slip op. at *12.

The Court explained why it concluded the district court’s interpretation of the arbitration agreement was incorrect. The district court had “focused on subsection (4) of [the Arbitration Agreement][,]” which “states that where an employee has requested that ‘the Union process a grievance alleging a violation of the Covered Statutes,’ but the Union has declined to process that grievance, the employee ‘may submit [this] individual claim to mediation, or following the conclusion of mediation, to arbitration.’” Slip op. at *12 (quoting Arbitration Agreement; emphasis supplied by Court). The district court interpreted “‘may’. . . to mean that employees can ‘choose whether to arbitrate’ or pursue their claims in court.” Slip op. at *12 (quoting district court decision).

But the Second Circuit disagreed. Subsection (4) of the Dispute Resolution Provision, said the Court, “is best read as clarifying that when the Union declines to process particular grievances on employees’ behalf, aggrieved employees have two options[:]” “They ‘may’ either (1) submit their claims to meditation and arbitration or (2) abandon the claims entirely.” Slip op. at *12.

The Court said that its interpretation of “may” “makes sense of the provision in isolation but also in the context of the entire agreement.” Slip op. at *12-13 (quotation and citations omitted).

Interpreting “may” differently “is to bring subsection (4) into conflict with the rest of Article 8(B), which. . . manifestly reflects an intent to require arbitration.” Slip op. at *13. The district court’s interpretation, said the Court, “makes little sense in light of [subsection 1 of the Arbitration Agreement]’s requirement that ‘all [claims under the Covered Statutes,] if not resolved in the grievance procedure . . . shall be submitted to final and binding arbitration” Slip op. at *13 (quoting Arbitration Agreement; emphasis supplied by Court).

Collective Bargaining Agreement’s Arbitration Clause Clearly and Unmistakably Encompasses Statutory Claims

Having concluded the arbitration agreement was mandatory, the Court turned to whether the Employee’s statutory claims were within the scope of that agreement. The Court held that the Arbitration Agreement clearly and unmistakably encompassed those claims, and consequently, the Employee was required to arbitrate those claims.  

The Second Circuit explained “that both this Circuit and other sister circuits have interpreted the clear and unmistakable standard to require specific references in the [collective bargaining agreement] either to the statutes in question or to statutory causes of action generally.” Slip op. at *13 (quotation and citation omitted).

The Court explained that a “vague directive” such as “‘any disputes . . . shall be subject to’ a grievance and arbitration procedure. . .” does not suffice, but that, here, the Arbitration Agreement “specifically cites. . . statutes. . . .” including “the FLSA, the New York Home Care Worker Wage Parity Law, and [New York’s Labor Law], and requires claims under those statutes to proceed pursuant to [the Arbitration Agreement]’s grievance and arbitration procedures.” Slip op. at *14 (citations and quotations omitted). The Arbitration Agreement thus clearly and unmistakably required arbitration of those statutory claims.  

The Employee’s brought claims under the FLSA and the NYLL, those claims are clearly and unambiguously within the scope of the Arbitration Agreement, and consequently, the Employee was required to arbitrate those claims. Slip op. at *14.  

The Arbitration Agreement does not Deny the Employee Due Process of Law   

The district court concluded that the Arbitration Agreement denied the Employee “due process because ‘the worker apparently has no part in the selection of the arbitrator.’” Slip op. at *14-15. The Second Circuit disagreed.

The Employee was a member of the Union, and under applicable law, including 29 U.S.C. § 159(a), the “Union had authority to negotiate on behalf of Abdullayeva, and so the fact that she did not personally participate in the selection of the arbitrator does not violate due process.” See slip op. at *15. As the U.S. Supreme Court explained in Pyett, “unions ‘may agree to the inclusion of an arbitration provision in a collective-bargaining agreement in return for other concessions from the employer.’” Slip op. at *15 (quoting Pyett, 556 U.S. at 257). And “‘courts must rigorously enforce arbitration agreements according to their terms, including terms that specify with whom [the parties] choose to arbitrate their disputes.’” Slip op. at *15 (quoting American Exp. Co. v. Italian Colors Restaurant, 570 U.S. 228, 233 (2013) (emphasis in original; citation omitted).

The Union was the Employer’s representative “authorized to negotiate ‘conditions of employment,’ including arbitration clauses, with the Employer on behalf of [the Employer’s employees].” The Arbitration Agreement, “including its proviso that ‘claims. . . shall be submitted to final and binding arbitration before Elliot Shriftman,’ was the product of the Union’s negotiation with [the Employer].” Slip op. at *15-16.

New York law requires that “arbitration procedures must generally conform to the ‘due process right of notice and opportunity to defend.’” Slip op. at *16 (quoting Beckman v. Greentree Sec., Inc., 87 N.Y.2d 566, 570 (1996)). But the Employee did “not argue that [the Arbitration Agreement’s] procedures are lacking in notice, or that the selected arbitrator is biased or would conduct arbitration proceedings in bad faith.” Slip op. at *16.

Thus, “the challenged portion of the [Arbitration Agreement], which simply ‘specifies with whom’ arbitration will be conducted in accordance with established Supreme Court precedent, does not violate due process.” Slip op. at *16 (quoting American Exp. Co., 570 U.S. at 233).

Photo Acknowledgements

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Does a Clear and Unmistakable Delegation Provision Require the Parties to Arbitrate Disputes About the Existence of an Arbitration Agreement?

April 27th, 2019 Arbitrability, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Existence of Arbitration Agreement, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Rights and Obligations of Nonsignatories, Separability, Severability, United States Court of Appeals for the Fifth Circuit, United States Supreme Court Comments Off on Does a Clear and Unmistakable Delegation Provision Require the Parties to Arbitrate Disputes About the Existence of an Arbitration Agreement?
Arbitrability Question 5 | Delegation Clause | Delegation Provision

Parties can, and frequently do, agree to include in their contract a so-called
“Delegation Provision” that clearly and unmistakably delegates to the arbitrators questions of arbitrability. (See, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, here, and here.) Questions of arbitrability include questions concerning: (a) the scope of an arbitration agreement, that is, whether the parties agreed to arbitrate particular disputes or categories of disputes; (b) the validity or enforceability of an arbitration agreement “upon upon such grounds as exist at law or in equity for the revocation of any contract[,]” 9 U.S.C. § 2; or (c) whether an arbitration agreement has been formed or concluded, that is, whether an arbitration agreement exists in the first place. (See Loree Reinsurance and Arbitration Law Forum post here.)

Typically, a “delegation provision” states in clear and unmistakable terms that arbitrability questions are to be decided by the arbitrators. For example, by making part of their contract Rule 8.1 of the 2018 version of the International Institute for Conflict Prevention and Resolution (CPR)’s Non-administered Arbitration Rules, parties agree to the following broad Delegation Provision:

Rule 8: Challenges to the Jurisdiction of the Tribunal

8.1 The Tribunal shall have the power to hear and determine challenges to its jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. This authority extends to jurisdictional challenges with respect to both the subject matter of the dispute and the parties to the arbitration.

CPR Non-Administered Arbitration Rule 8.1 (2018) (emphasis added).

Who Gets to Decide whether the Parties Entered into a Delegation Provision?

Federal Arbitration Act  | Who Gets to Decide? | Delegation Provision

Suppose that Agent A, without the knowledge and consent of Party A, purports to bind Party A to a written contract with Party B, which includes a broad arbitration agreement that expressly incorporates by reference, and makes part of the purported contract, the 2018 version of CPR’s Non-administered Arbitration Rules. Party B and Agent A deal with each other concerning the subject matter of the contract, and a dispute arises.

Party B demands arbitration of the dispute, and serves an arbitration demand on Party A, who is understandably surprised at being named a party in an arbitration proceeding concerning a purported agreement of which it had no knowledge, objects to the arbitration demand, and Party B commences an action to compel arbitration.

In the proceeding to compel arbitration, Party A argues that Agent A had no actual or apparent authority to bind it to the agreement that contained the arbitration agreement. Party B responds that because the Delegation Clause made part of the agreement requires arbitration of issues concerning the “existence” of the arbitration agreement, Party A must arbitrate the issue of whether Agent A had authority to bind it to the agreement.

Must Party A arbitrate the issue whether Agent A had authority to bind it to the agreement because the agreement contains a Delegation Provision? If the only consideration were the text of Rule 8.1, then the answer would be “yes.”

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Can Arbitrators Exceed their Powers by Making an Award in Manifest Disregard of the Parties’ Agreement?

April 17th, 2019 Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Challenging Arbitration Awards, Confirmation of Awards, Contract Interpretation, Contract Interpretation Rules, Exceeding Powers, Grounds for Vacatur, Manifest Disregard of the Agreement, Nuts & Bolts, Nuts & Bolts: Arbitration, Outcome Risk, Practice and Procedure, United States Court of Appeals for the Eighth Circuit, United States Supreme Court, Vacatur Comments Off on Can Arbitrators Exceed their Powers by Making an Award in Manifest Disregard of the Parties’ Agreement?
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Suppose arbitrators decide an issue within the scope of their authority but do so in manifest disregard the parties’ contract. Do they exceed their authority by making an award that has not even a barely colorable basis in the parties’ contract or in applicable law?

The answer to that question, is, of course, “yes,” and over the years we’ve discussed in a number of posts how arbitrators can exceed their powers under Federal Arbitration Act Section 10(a)(4) or Section 301 of the Labor Management Relations Act by making awards in manifest disregard of the parties’ agreement. (See Loree Reinsurance and Arbitration Law Forum Posts here, here, here, here, here, here, here, here, and here.) As discussed in those posts, the U.S. Supreme Court has on multiple occasions ruled that commercial and labor arbitrators can exceed their powers by making an award that manifestly disregards—or does not “draw its essence” from—the parties’ agreement. See Stolt-Nielsen S.A. v. AnimalFeeds Int’l Inc., 130 S.Ct. 1758, 1768-70 (2010); Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064, 2067, 2068 (2013); Eastern Associated Coal Corp. v. Mine Workers, 531 U.S. 57, 62 (2000); Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 599 (1960); Paperworkers v. Misco, Inc., 484 U.S. 29, 38 (1987).

In our April 12, 2019 post (here) we reviewed how it is that the limited review powers courts have to vacate commercial and labor arbitration awards are designed to provide a limited, but very important, safety net to protect parties against egregious, material violations of arbitration agreements. Without that limited protection, the risks associated with agreeing to arbitrate would be intolerably high and parties would be much less apt to opt for arbitration over court litigation.

Courts vacate arbitration awards where arbitrators act outside the scope of their authority by ruling on issues that the parties did not agree to submit to them. That’s what happened in Brock Indus. Servs., LLC v. Laborers’ Int’l Union., __ F.3d ___, No. 17-2597, slip op. (7th Cir. April 8, 2019), which we discussed in our April 12, 2019 post here.

But to obtain vacatur of an award based on manifest disregard of the agreement, however, an award challenger must satisfy an exceedingly demanding standard. We’ve addressed the parameters of that standard in a number of other posts. (See, e.g., here, here, here, here, here, here, here, here, and here. Our blog has also tried to give a feel for how Courts apply (or are supposed to apply) the standard by comparing the U.S. Supreme Court decision in Stolt-Nielsen, which held that an award should be vacated for manifest disregard of the agreement, to the Supreme Court decision in Oxford, which held that an award should not be vacated under that manifest disregard standard. (See Loree Reinsurance and Arbitration Law Forum posts here, here, and here.) And from time-to-time we’ve reported on other cases that have applied the standard.

While challenges to awards based on manifest disregard of the agreement are not uncommon, a very large majority of those challenges are either virtually certain to fail or at least highly unlikely to succeed. It is a relatively small universe of remaining, close cases that pose the biggest challenges for parties and courts.

Today we’ll look at one of those close cases, which was decided by the Eighth Circuit Court of Appeals and explain why the case failed to satisfy the demanding standard, even though, at least at first glance, it may be difficult to square the arbitration award with the parties’ agreement.

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If an Arbitration Panel Rules on an Issue the Parties did not Agree to Submit to that Panel, Should a Court Vacate the Award?

April 12th, 2019 Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Award Vacated, Awards, Enforcing Arbitration Agreements, Exceeding Powers, FAA Chapter 3, Federal Policy in Favor of Arbitration, Grounds for Vacatur, Practice and Procedure, United States Court of Appeals for the Seventh Circuit, Vacatur 2 Comments »

Introduction: Arbitration as a Way to Resolve those Disputes—and Only those Disputes—Parties Submit to Arbitrators

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The “first principle” of labor and commercial arbitration law is that “arbitration is a matter of consent, not coercion” —put differently, arbitration “is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995) (citations omitted); Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 295 & n.7, 294 n.6 (2010); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 648 (1986). That first principle is integrally intertwined with “the central or primary purpose of the [Federal Arbitration Act (“FAA”)][,]” which is “to ensure that  private agreements to arbitrate are enforced according to their terms.”Stolt-Nielsen, 559 U.S. at 679 (citations and quotations omitted).

What happens if the parties agree to submit one category of disputes to a two-person arbitration panel and to submit another category of disputes to a three-person panel?

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Second Circuit Denies Motion to Compel Appraisal because Insurer Sought to Submit Question of Law to Appraisers

April 7th, 2019 Applicability of Federal Arbitration Act, Appraisal, Arbitrability, Arbitration Agreements, Authority of Arbitrators, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Practice and Procedure, Rights and Obligations of Nonsignatories, United States Court of Appeals for the Second Circuit Comments Off on Second Circuit Denies Motion to Compel Appraisal because Insurer Sought to Submit Question of Law to Appraisers
Appraisal

In the Second Circuit, appraisal provisions in insurance policies and other contracts are, as a matter of federal common law, considered arbitration agreements for purposes of the Federal Arbitration Act. Bakoss v. Certain Underwriters at Lloyds of London Issuing Certificate No. 0510135, 707 F.3d 140, 143 (2d Cir. 2013). That is because they “clearly manifest[] an intention by the parties to submit certain disputes to a specified third party for binding resolution.” McDonnell Douglas Finance Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825, 830 (2d Cir. 1988); Bakoss, 707 F.3d at 143. That appraisal clauses typically do not use the term “arbitration” is of no moment—all that counts “is that the parties clearly intended to submit some disputes to their chosen instrument [appraisal] for the definitive settlement of certain grievances under the Agreement.” Id. (quotations omitted); see Bakoss, 707 F.3d at 143.

In Milligan v. CCC Info. Servs. Inc., ___ F.3d ___, No. 18-cv-1405, slip op. (2d Cir. April 3, 2019) the Second Circuit affirmed a district court decision that denied an insurer (the “Insurer”)’s motion to compel, under the Federal Arbitration Act, appraisal of a dispute concerning the Insurer’s obligation to indemnify the insured (the “Insured”) for total loss of a leased vehicle. The Second Circuit held that the dispute the Insurer sought to submit to appraisal concerned interpretation of the policy, and thus presented a question of law that was outside the scope of the appraisal clause.

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Arbitrability of Arbitrability Questions: the Second Circuit Pushes Back (a little)

April 3rd, 2019 Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Contract Interpretation, Contract Interpretation Rules, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Stay of Arbitration, United States Court of Appeals for the Second Circuit, United States Supreme Court 1 Comment »
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Abitrability Questions
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In a January 16, 2019 post (here) on the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. (January 8, 2019), we explained that arbitrability questions are ordinarily for courts to decide, but parties may, by way of a “delegation provision,” clearly and unmistakably agree to submit them to arbitration. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995); Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010). (See also Loree Reinsurance and Arbitration Law Forum posts herehere, and here.)

Typically, a “delegation provision” states in clear and unmistakable terms that arbitrability questions are to be decided by the arbitrators. It might, for example, state that the parties agree to submit to arbitrators questions concerning their “jurisdiction,” or the “existence, scope, or validity” of the arbitration agreement.

The U.S. Court of Appeals for the Second Circuit, however, does not require the parties to expressly state in their agreement that they agree to submit arbitrability questions to the arbitrators. The Second Circuit has found that the parties may “clearly and unmistakably” submit arbitrability questions to arbitration when they agree to a very broad arbitration clause. See Wells Fargo Advisors, LLC v. Sappington, 884 F.3d 392, 394, 396 (2d Cir. 2018) (An agreement “to arbitrate any dispute, claim or controversy that may arise between you and Wells Fargo Advisors, or a client, or any other person[, and] . . . giving up the right to sue Wells Fargo Advisors . . . in court concerning matters related to or arising from your employment” “demonstrate[d] the parties’ clear and unmistakable intent to arbitrate all questions of arbitrability.”); PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1199 (2d Cir. 1996) (A contractual provision that “any and all controversies . . . concerning any account, transaction, dispute or the construction, performance, or breach of this or any other agreement . . . shall be determined by arbitration” and that “the parties are waiving their right to seek remedies in court” clearly and unmistakably demonstrated “parties’ intent to arbitrate all issues, including arbitrability.”) (emphasis omitted); Alliance Bernstein Investment Research and Management, Inc. v. Schaffran, 445 F.3d 121 (2d Cir. 2006) (NASD Code Rule 10324, which authorized arbitrators “to interpret and determine the applicability of all provisions under [the] Code[]” was a clear and unmistakable delegation to arbitrators of arbitrability questions concerning interpretation of the NASD Code.).

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

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

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

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

To give effect to the parties’ likely intent that they did not agree to arbitrate arbitrability questions that arose after B left the NASD, the Second Circuit had no choice but distinguish and qualify its prior precedent without falling afoul of the Supreme Court’s recent pronouncement in Schein. That required the Second Circuit to modify, to at least some extent, the contractual interpretation analysis that courts within the Second Circuit are supposed to engage to ascertain whether parties “clearly and unmistakably” agreed to arbitrate arbitrability in circumstance where they have not specifically agreed to arbitrate such issues.

Metropolitan Life is an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.

It is easy to see how applying Metropolitan Life in future cases could raise some interesting and challenging questions for parties, their attorneys, and the courts. We may look at those challenges in more detail in a future post, but for now, let’s take a careful look at the Second Circuit’s decision.

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Up Narrow Arbitration Clause Creek without a Papalote?—Narrow Arbitration Clauses and the Difference between Interpretation and Performance

March 26th, 2019 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Federal Arbitration Act Section 4, Federal Policy in Favor of Arbitration, Practice and Procedure, Presumption of Arbitrability, United States Court of Appeals for the Fifth Circuit 1 Comment »
Narrow Arbitration Clauses: Papalote
Hang Glider or Papalote

I am told “papalote” is a Spanish word meaning “kite” or “hang glider.” It also appears in the name of a party to a recent decision of the U.S. Court of Appeals for the Fifth Circuit concerning narrow arbitration clauses, Papalote Creek II, L.L.C. v. Lower Colo. River Auth., No. 17-50852, slip op. (5th Cir. Mar. 15, 2019) (“Papalote II”). The party was Papalote Creek II, L.L.C. (“Papalote”). It won the appeal.

What was the appeal about? Narrow arbitration clauses, and in particular whether a dispute about maximum, aggregate liability under a wind-energy purchase and sale contract was a dispute “with respect to performance” within the meaning of the parties’ narrow arbitration clause.

The appeal was not the first, but the second, and the procedural history was tangled, both in terms of what transpired in the disputed arbitration and in the district court. The first appeal, Papalote I, resulted in a remand because at the time the district court compelled arbitration, the district court lacked subject matter jurisdiction. The issue on which the arbitration proponent sought arbitration was not ripe, even though it became ripe during the time Papalote I was pending. See Lower Colo. River Auth. v. Papalote Creek II, L.L.C., 858 F.3d 916 (5th Cir. 2017) (“Papalote I”).

By the time Papalote I was decided, the arbitration panel had ruled against Papalote, the arbitration opponent. But Papalote I obligated the district court to vacate the arbitration award and to reconsider the issue of whether arbitration should be compelled under the narrow arbitration clause.

On remand the district court adhered to its previous decision that the dispute fell within the scope of the narrow arbitration clause, which resulted in another order to compel arbitration and the second appeal, Papalote II.

On the second appeal the Fifth Circuit reversed the district court’s decision on arbitrability, ruling that the dispute was not about “performance,” but about “interpretation.” Going forward that means that the parties will either have to settle their dispute or litigate it in court, even though they’ve both no doubt already spent not only a good deal of time, but money, litigating about arbitration, and arbitrating a dispute they did not mutually consent to arbitrate. (Perhaps for Papalote that’s not necessarily a bad outcome, but it’s just speculation on our part.)

Bottom line: Irrespective of whether the parties considered the potential consequences associated with their narrow arbitration clause, at least one of them (and perhaps even both) may, at least to some extent, now feel like they’re up that proverbial creek without a paddle—or even a papalote….

This post takes a closer look at Papalote II, focusing exclusively on the issue whether the dispute fell within or without the scope of the parties’ narrow arbitration clause.

Narrow Arbitration Clauses: Papalote II Background

Narrow Arbitration Clauses

In Papalote II the Fifth Circuit held that a narrow arbitration clause that covered disputes about the “performance” of a contract did not cover a dispute concerning the meaning of an aggregate liability provision in a wind-energy contract. That dispute, said the Court, concerned the interpretation of the contract, not its performance, and therefore the arbitration opponent was not required to submit it to arbitration.

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Arbitration Nuts and Bolts: Federal Appellate Jurisdiction over Orders Compelling Arbitration and Staying Litigation

March 21st, 2019 Appellate Jurisdiction, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration Practice and Procedure, Authority of Arbitrators, FAA Section 16, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure, Stay of Arbitration, Stay of Litigation, United States Court of Appeals for the Second Circuit 1 Comment »

Introduction

Appellate Jurisdiction 1

Today we look at federal appellate jurisdiction over orders compelling arbitration and staying litigation.

Sections 3 and 4 of the Federal Arbitration Act (the “FAA”) provide remedies for a party who is aggrieved by another party’s failure or refusal to arbitrate under the terms of an FAA-governed agreement. FAA Section 3, which governs stays of litigation pending arbitration, requires courts, “upon application of one of the parties,” to stay litigation of issues that are “referable to arbitration” “until arbitration has been had in accordance with the terms of the parties’ arbitration agreement, providing [the party applying for a stay] is not in default in proceeding with such arbitration.” 9 U.S.C. § 3. Faced with a properly supported application for a stay of litigation of an arbitrable controversy, a federal district court must grant the stay. 9 U.S.C. § 3.

Section 4 of the FAA authorizes courts to make orders “directing arbitration [to] proceed in the manner provided for in [the [parties’ written arbitration] agreement[,]” and sets forth certain procedures for adjudicating petitions or motions to compel arbitration. 9 U.S.C. § 4. It provides that when a court determines “an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.” 9 U.S.C. § 4 (emphasis added). Just as courts must grant properly supported applications for relief under Section 3, so too must they grant properly supported applications for relief under Section 4. See 9 U.S.C. §§ 3 & 4.

There is much to be said about the many issues that may arise out of applications to stay litigation, compel arbitration, or both, but our focus here is on the appellate jurisdiction of the U.S. Circuit Courts of Appeals over appeals from the grant or denial of such applications. Before a U.S. Circuit Court of Appeals can hear an appeal on the merits of a federal district court’s order and judgment, it must be satisfied that: (a) the federal district court had original subject matter jurisdiction (e.g., diversity jurisdiction or federal question jurisdiction); (b) there is still a “case or controversy” within the meaning of Article III of the U.S. Constitution (e.g., the controversy has not become moot by settlement or otherwise); and (c) the order or judgment appealed from is one over which it has appellate jurisdiction.

Appellate Jurisdiction and the FAA

Appellate Jurisdiction 2

Appellate jurisdiction refers to a Circuit Court of Appeals’ power to review, amend, vacate, affirm, or reverse the orders and judgments of the district courts within the judicial circuit over which the Court of Appeals presides. Generally, and outside the context of injunctions and the certification procedure of 28 U.S.C. § 1292(b), U.S. Courts of Appeal have jurisdiction to review only “final decisions” of district courts. See 28 U.S.C. §§ 1291, 1292. A “final decision” “is a decision that ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment.” Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 86 (2000) (citations and quotations omitted).

But Federal Arbitration Act litigation is quite different from ordinary litigation from both a substantive and procedural prospective, and so it comes as no surprise that the FAA features its own set of appellate jurisdiction rules.

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Arbitration Law FAQ: Chapter 1 of the Federal Arbitration Act

February 27th, 2019 Applicability of Federal Arbitration Act, Arbitration Agreements, Arbitration and Mediation FAQs, Federal Arbitration Act Section 1, Federal Arbitration Act Section 2, Nuts & Bolts: Arbitration Comments Off on Arbitration Law FAQ: Chapter 1 of the Federal Arbitration Act
Chapter 1 Federal Arbitration Act 1

This Arbitration Law FAQ guide briefly explains what the Federal Arbitration Act is, and then answers some frequently asked questions about Chapter 1 of the Act. It is not legal advice, nor a substitute for legal advice, and should not be relied upon as such.

If you desire or require legal advice or representation in a matter concerning commercial, labor, or any other arbitration-law matter, then do not hesitate to contact a skilled and experienced arbitration-law attorney. This guide provides some general information that may be able to assist you in your search for legal representation, or in simply obtaining a better understanding of some arbitration-law basics.

Arbitration Law FAQS: What is the Federal Arbitration Act?

Wholly Groundless Exception 3 - Chapter 1 Federal Arbitration Act 2

The Federal Arbitration Act is a federal statute enacted in 1925 that makes certain (but not all) arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. It was originally, and for many years, known as the “United States Arbitration Act,” but for simplicity’s sake we’ll refer to it as the “Federal Arbitration Act,” the “FAA,” or the “Act.”

It was passed at a time when courts were, for the most part, unwilling to enforce agreements to arbitrate because they thought that such agreements “divested” their “jurisdiction” over disputes that would ordinarily be decided by courts. In other words, many courts thought it wrong for courts to lend their assistance to the enforcement of contracts under which parties would agree to submit their disputes to private decision makers.

Even by the time the FAA was passed, arbitration was not new. For example, it can be traced back at least as far as medieval times, when various guilds used it as a way of resolving disputes according to what became known as the “law merchant,” an informal body of rules and principles that merchants believed should be applied to their disputes, but which common law courts did not, at the time, apply. The first arbitration agreement was reportedly included in a reinsurance contract in the late 18th century, and George Washington apparently included an arbitration clause in his will.  

The FAA, as originally enacted, consisted of 14 provisions. In 1970 Congress designated those first 14 provisions as “Chapter 1” of the FAA, and added a “Chapter 2,” which consists of various provisions implementing and enabling the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a the “New York Convention”). In 1988 Congress added two additional provisions to Chapter 1 of the FAA, Sections 15 and 16. In 1990 Congress added to the FAA a Chapter 3, which consists of provisions implementing and enabling the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”).

The remainder of this FAQ guide focuses on Chapter 1 of the FAA.

Arbitration Law FAQs: What does Chapter 1 of the FAA do apart from declaring certain arbitration agreements to be valid, irrevocable, and enforceable?

Section 2 of the Federal Arbitration Act is sometimes referred to as the Act’s “enforcement command.” It is the provision that declares certain (but not all) arbitration agreements to be “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.

Under Section 2, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. at *4 (Jan. 8, 2019) (citation and quotation omitted). Section 2 also “requires courts to place arbitration agreements on an equal footing with all other contracts.” Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1424 (2017) (quotations and  citations omitted).    

implement

Section 1 of the FAA provides some definitions and exempts from the FAA a fairly limited universe of agreements that would otherwise fall within the scope of the Act. See 9 U.S.C. § 1. The other provisions of Chapter 1 implement the enforcement command by lending judicial support to the enforcement of arbitration agreements and awards. These are briefly summarized below:

Section 3 – Requires courts to stay litigation in favor of arbitration. 9 U.S.C. § 3.

Section 4 – Provides for courts to compel arbitration.

Section 5 – Provides for courts to appoint arbitrators when there has been a default in the arbitrator selection process.

Section 6 – Provides that motion practice rules apply to applications made under the FAA, thereby expediting the judicial disposition of such applications. 

Section 7 – Provides for the judicial enforcement of certain arbitration subpoenas.

Section 8 – Provides that where the basis for federal subject matter jurisdiction is admiralty, then “the party claiming to be aggrieved may begin his proceeding [under the FAA]…by libel and seizure of the vessel or other property….” 9 U.S.C. § 8.

Section 9 – Provides for courts to confirm arbitration awards, that is, enter judgment upon them.

Section 10 – Authorizes courts to vacate arbitration awards in certain limited circumstances.

Section 11 – Authorizes courts to modify or correct arbitration awards in certain limited circumstances.

Section 12 – Provides rules concerning the service of a motion to vacate, modify, or correct an award, including a three-month time limit.

Section 13 – Specifies papers that must be filed with the clerk on motions to confirm, vacate, modify, or correct awards and provides that judgment entered on orders on such motions has the same force and effect of any other judgment entered by the court.

Section 14 – Specifies that agreements made as of the FAA’s 1925 effective date are subject to the FAA.

Section 15 – Provides that “Enforcement of arbitral agreements, confirmation of arbitral awards, and execution upon judgments based on orders confirming such awards shall not be refused on the basis of the Act of State doctrine.”

Section 16 – Specifies when appeals may be taken from orders made under the FAA, and authorizing appeals from final decisions with respect to arbitration.

How can I tell if an arbitration agreement or award is governed by Chapter 1 of the Federal Arbitration Act?

Commerce

Whether an arbitration agreement falls under the FAA depends on whether: (a) the arbitration agreement is in writing; and (b) is part of a “maritime transaction” or of a contract that affects interstate commerce.

The starting point is, as before, Federal Arbitration Act Section 2’s enforcement command, which provides, with bracketed text added:

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

9 U.S.C. § 2.

Section 2’s requirement that an arbitration agreement be “written” (Part [A]) seems simple enough, and, for the most part, it is. But remember, just because a contract is required to be “written” doesn’t mean the arbitration agreement must be signed.

As respects whether a “contract” “evidenc[es] a transaction involving commerce” (Part [C]), the U.S. Supreme Court has interpreted Section 2 broadly to mean the Federal Arbitration Act applies to arbitration agreements in contracts or transactions that affect commerce, that is, to any contract or transaction that Congress could regulate in the full exercise of its Commerce Clause powers. See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 268, 281-82 (1995); U.S. Const. Art. I, § 8, Cl. 3 (giving Congress power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes”).

Whether a contract “affects” commerce depends on the facts concerning, among other things, the parties, the contract’s subject matter, and the actual or contemplated transactions constituting the contract’s performance or contemplated performance. See Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56-57 (2003). A party does not have to demonstrate that the contract has a “specific” or “substantial” “effect upon interstate commerce if in the aggregate the economic activity in question would represent a general practice subject to federal control.” Id. (citations and quotations omitted). The question is whether the “aggregate economic activity in question” “bear[s] on interstate commerce in a substantial way.” Id. at 57.

Parts [A] through [D]] of Section 2 make the Federal Arbitration Act applicable to written, pre-dispute arbitration “provision[s]” in “maritime transactions” or in “contract[s] evidencing transactions involving commerce….” These arbitration provisions are “pre-dispute” arbitration agreements because they are defined by Part [D] as “provision[s]” “to settle a controversy thereafter arising out of such contract or transaction, or [out of] the refusal to perform the whole or any part” of such contract or transaction….”  9 U.S.C. § 2 (emphasis added). In other words, agreements to submit future disputes to arbitration.

Parts [A] through [E] of Section 2 make the FAA applicable also to written, post-dispute arbitration agreements, that is, agreements to arbitrate existing disputes arising out of “maritime transactions” or “contract[s] evidencing transactions involving commerce….”  To that end Part [E] makes Section  2 applicable to “agreement[s] in writing to submit to arbitration an existing controversy arising out of”  “maritime transaction,” (Part [B]) “contract evidencing a transaction involving commerce” (Part [C]), or “refusal to perform the whole or any part” of such a contract or transaction. (Part[D]). 9 U.S.C. § 2 (emphasis added).

Arbitration Law FAQs: Are there any Arbitration Agreements Falling Under FAA Section 2 that are Exempt from Chapter 1 of the FAA?

Contracts of Employment 1 Federal Arbitration Act Section 1
Federal Arbitration Act Section 1

Yes. Section 1 of the FAA 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.” According to the United States Supreme Court, this exemption applies “only” to “contracts of employment of transportation workers.” Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 119 (2001). But those “contracts of employment” include not only contracts establishing an employer-employee relationship, but also contracts establishing independent contractor relationships. New Prime Inc. v. Oliveira, 586 U.S. ___, slip op.at 6, 7, & 15 (Jan. 15, 2019).

Arbitration Law FAQs: If the Chapter 1 of the Federal Arbitration Act applies, does that mean all FAA litigation falling under Chapter 1 can be brought in federal court?

No. Chapter 1 of the Federal Arbitration Act does not confer an independent basis for federal court subject matter jurisdiction over applications for the relief authorized by Chapter 1. Put differently making an application under the FAA does not raise a “federal question” over which a federal court could, under 28 U.S.C. § 1331, base subject matter jurisdiction.

But that doesn’t mean that federal courts cannot have subject matter jurisdiction over Chapter 1 Federal Arbitration Act proceedings. If the requirements for diversity jurisdiction are met, including complete diversity of citizenship between the parties, and an amount in controversy that exceeds $75,000.00, excluding interest and costs, then a federal court will have subject matter jurisdiction under the diversity jurisdiction. See 28 U.S.C. § 1332. 

Does Chapter 1 of the Federal Arbitration Act apply in state court?

Federalism

Yes. State courts are required to enforce arbitration agreements under Section 2 of the FAA. Basically, they must enforce arbitration agreements falling under the FAA, putting them on the same footing as other contracts. See Kindred Nursing Centers, 137 S. Ct. at 1424.     

Most or all states have their own arbitration statutes. New York’s arbitration statute, for example, is codified in Article 75 of the New York Civil Practice Law and Rules (“CPLR”). Depending on applicable state law, state courts may carry out Section 2’s enforcement command using their own arbitration statute’s provisions, even if they are different than those provided by Chapter 1 of the FAA. But if enforcement of the FAA through the provisions of the state’s arbitration code would undermine the purposes and objectives of the FAA, then the offending state arbitration code provisions would be preempted (i.e., superseded) by the FAA to the extent that they conflict with the FAA.

If you are interested in learning more about the Federal Arbitration Act, see 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. L&L added text to the first three photos from the top.

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?”   

Federal Arbitration Act Section 1 1
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.

Federal Arbitration Act Secction 1 2
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

Federal Arbitration Act Secction 1 3
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 

Federal Arbitration Act Secction 1 4
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.

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

Federal Arbitration Act Secction 1 5
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 under Section 1 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”

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 Section 3 and Section 4 Cart before the Section 1 and Section 2 Horse

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)).

Federal Arbitration Act Section 1 8

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.