Part I of this post discussed how the Second and Fifth Circuits, in Metropolitan Life Ins. Co. v. Bucsek, ___ F.3d ___, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), and 20/20 Comms. Inc. v. Lennox Crawford, ___ F.3d ___, No. 18-10260 (5th Cir. July 22, 2019), suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability (a/k/a the “Clear and Unmistakable Rule”).
Under this Clear and Unmistakable Outcome Exception to the Clear and Unmistakable Rule, courts consider the merits of an underlying arbitrability issue as part of their analysis of whether the parties clearly and unmistakably agreed to arbitrate arbitrability issues.
But the Clear and Unmistakable Outcome Exception runs directly counter to the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ___, 139 S. Ct. 524 (January 8, 2019), and thus contravenes the Federal Arbitration Act as interpreted by Schein. 139 S. Ct. at 527-28, 529-31.
This Part II analyzes and discusses how Met Life and 20/20 Comm. effectively made an end run around Schein and considers what might have motivated those Courts to rule as they did.
Making an End Run
Around Schein?
When, prior to 20/20 Comm. we wrote about Met Life, we said it “an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.” (See here. )
But after the Fifth Circuit decided 20/20 Comm. this July, in comments we made to Russ Bleemer, Editor of Alternatives, the Newsletter of the International Institute for Conflict Prevention & Resolution (“CPR”)—which were reproduced with our consent in Mr. Zhan Tze’s CPR Speaks blog article about 20/20 Comm. (here)—we expressed the belief that the Fifth Circuit was (whether intentionally or unintentionally) making an end run around Schein, effectively creating an exception to the Clear and Unmistakable Rule.
After analyzing 20/20 Comm. and comparing it to
the Second Circuit’s Met Life decision, we concluded that the
Second Circuit’s decision also ran counter to Schein.
Schein’s
Abrogation of the “Wholly Groundless Exception” to the Clear and Unmistakable Rule
In Schein the U.S. Supreme Court abrogated the so-called “wholly groundless exception” to the Clear and Unmistakable Rule. Prior to Schein certain courts, including the Fifth Circuit, held that even when parties clearly and unmistakably agreed to arbitrate arbitrability questions, courts could effectively circumvent the parties’ agreement and decide for itself arbitrability challenges that it determined were “wholly groundless.”
The rationale Schein used to jettison the “wholly groundless exception” to the Clear and Unmistakable Rule is incompatible with the rationales the Second and Fifth Circuit used to support their decisions in Met Life and 20/20 Comm.
Under FAA Section 2, the Schein Court explained, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein, 139 S. Ct. at 529 (citation omitted). When those contracts delegate arbitrability questions to an arbitrator, “a court may not override the contract[,]” and has “no power to decide the arbitrability issue.” 139 S. Ct. at 529. That is so even where a Court “thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 139 S. Ct. at 529.
Schein explained that its conclusion was supported not only by the FAA’s text, but also by U.S. Supreme Court precedent. Citing and quoting cases decided under Section 301 of the Labor Management and Relations Act, the Court explained that courts may not “‘rule on the potential merits of the underlying’ claim that is assigned by contract to an arbitrator, ‘even if it appears to the court to be frivolous[,]’” and that “[a] court has “‘no business weighing the merits of the grievance’” because the “‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’” 139 S. Ct. at 529 (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649–650 (1986) and Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960)).
This “principle,” said the Schein Court, “applies with equal force to the threshold issue of arbitrability[]”—for “[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator.” 139 S. Ct. at 530.
Exception to Clear and Unmistakable Rule? Why the Second and Fifth Circuit Decisions Conflict with Schein
Arbitration law is replete with presumptions and other rules that favor one outcome or another depending on whether one thing or another is or is not clear and unmistakable. Put differently, outcomes often turn on the presence or absence of contractual ambiguity.
There are three presumptions that relate specifically to
questions arbitrability, that is, whether or not an arbitrator or a court gets
to decide a particular issue or dispute:
The Moses Cone Presumption of Arbitrability: Ambiguities in the scope of the arbitration agreement itself must be resolved in favor of arbitration. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Rebutting this presumption requires clear and unmistakable evidence of an intent to exclude from arbitration disputes that are otherwise arguably within the scope of the agreement.
The First Options Reverse Presumption of Arbitrability: Parties are presumed not to have agreed to arbitrate questions of arbitrability unless the parties clearly and unmistakably agree to submit arbitrability questions to arbitration. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995)
The Howsam/John Wiley Presumption of Arbitrability of Procedural Matters: “‘[P]rocedural’ questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)) (internal quotation marks omitted). To rebut this presumption, the parties must clearly and unmistakably exclude the procedural issue in question from arbitration.
These presumptions usually turn solely on what the contract has to say about the arbitrability of a dispute, not on what the outcome an arbitrator or court would—or at least should—reach on the merits of the dispute.
Some U.S. Circuit Courts of Appeal, including the Fifth Circuit, recognized an exception to the First Options Reverse Presumption of Arbitrability called the “wholly groundless exception.” Under that “wholly groundless exception,” courts could decide “wholly groundless” challenges to arbitrability even though the parties have clearly and unmistakably delegated arbitrability issues to the arbitrators. The apparent point of that exception was to avoid the additional time and expense associated with parties being required to arbitrate even wholly groundless arbitrability disputes, but the cost of the exception was a judicial override of the clear and unmistakable terms of the parties’ agreement to arbitrate.
Earlier this year the U.S. Supreme Court in Schein v. Archer & White Sales, Inc., 586 U.S. ___, slip op. at *1 (January 8, 2019) abrogated the “wholly groundless” exception. Schein, slip op. at *2, 5, & 8. “When,” explained the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Schein, slip op. at 2, 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Schein,slip op. at 8.
But since Schein both the Second and Fifth Circuits have decided First Options Reverse Presumption of Arbitrability cases by effectively conflating the question of who gets to decide an arbitrability issue with the separate question of who should prevail on the merits of that arbitrability issue. The Courts in both cases determined whether the parties clearly and unmistakably agreed to arbitrate arbitrability questions by considering, as part of the clear and unmistakable calculus, the merits of the arbitrability question.
These two cases suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability. But the problem with that trend is that it runs directly counter to the Supreme Court’s decision in Schein, and thus contravenes the Federal Arbitration Act as interpreted by Schein.
In Part I of this post we discuss the Second Circuit and Fifth Circuit decisions. In Part II we analyze and discuss how— and perhaps why — those courts effectively made an end run around Schein.
InLandau v. Eisenberg, ___ F.3d ___, No. 17-3963, slip op. (May 1, 2019) (per curiam), the U.S. Court of Appeals for the Second Circuit recently held that district courts must “look through” a Section 9 petition to confirm an arbitration award to determine whether the court has subject matter jurisdiction to adjudicate the petition. District courts must therefore ascertain whether the district court would, absent an arbitration agreement, have had subject matter jurisdiction over the underlying controversy that resulted in the arbitration, and ultimately the award.
While the Second Circuit ruled in a per curiam decision, the issue it decided was of first impression. But it followed on the heels of, and heavily relied on, Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372, 379-89 (2d Cir. 2016), which held that district courts should look through a Section 10 or 11 petition to ascertain the existence of federal subject matter jurisdiction. Doscher instructed federal courts to focus not on whether the Section 10 and 11 FAA award review and enforcement process presented substantial federal questions, but on the same thing they would have focused on had they been asked to compel arbitration of the controversy: whether the underlying controversy, in keeping with the well-pleaded complaint rule, would have been within the Court’s subject matter jurisdiction had it not been submitted to arbitration. See Doscher, 882 F.3d at 379-89.
While Eisenberg and Doscher concerned the question whether federal-question subject matter jurisdiction exists over FAA Sections 9, 10, and 11 petitions, the reasoning of those cases also applies to the question whether there is federal subject matter jurisdiction over such petitions based on the diversity jurisdiction.
The Problem Addressed by Eisenberg and Doscher
Problem | Issue
The Federal Arbitration Act is “something of an anomaly in the realm of federal legislation: It bestows no federal jurisdiction but rather requires for access to a federal forum an independent jurisdictional basis over the parties’ dispute.” Vaden v. Discover Bank, 556 U.S. 49, 59 (2009).
Section 4 of the FAA, which governs motions to compel arbitration, provides that to determine the “independent jurisdictional basis” the court must ascertain whether “save for such agreement, [the district court] would have jurisdiction. . . of the subject matter of a suit arising out of the controversy [claimed to be arbitrable][:]”
[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.
9 U.S.C. § 4 (emphasis added).
The Supreme Court held in Vaden that “§ 4 of the FAA does not enlarge federal court jurisdiction,”
556 U.S. at 66, and district courts must “look through” the petition to the
controversy between the parties to ascertain whether the court had subject
matter jurisdiction over the controversy. 556 U.S. at 62. District courts must
therefore “assume the absence of the arbitration agreement and determine
whether it would have jurisdiction under title 28 without it.” Id. at 63.
But section 4 of the FAA expressly specifies the
circumstances under which a federal district court will have jurisdiction over
an application to compel arbitration, whereas Sections 9, 10, and 11 of the
FAA—which address applications to confirm, vacate, and modify awards—say
nothing about subject matter jurisdiction. The availability of relief under
those portions of the FAA is not conditioned on either the existence of a
lawsuit over which the Court already has subject matter jurisdiction (and which
may have been stayed pending arbitration under Section 3 of the FAA) or on a
party having previously invoked the court’s jurisdiction by filing a proceeding
to compel arbitration under Section 4.
Sections 9, 10, and 11 of the FAA do not in and of
themselves vest jurisdiction in a district court simply because they are part
of a federal statute—the FAA requires an independent basis for federal subject
matter jurisdiction. But what determines subject matter jurisdiction, the
nature of the petition to confirm, vacate, or modify the award, or the nature
of the underlying dispute that ultimately resulted in the arbitration
award?
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?”
United States Supreme Court
InNew 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.
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
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
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
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)).
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.
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, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, and here.)
But suppose parties to a delegation provision disagree about whether they are required to arbitrate a dispute, yet their contract clearly excludes the dispute from arbitration. Can a Court preemptively decide the merits of an arbitrability question delegated to the arbitrators, and refuse to compel arbitration of the arbitrability question, if the Court decides that the argument for arbitration of the underlying dispute is wholly groundless?
On January 8, 2019 the U.S. Supreme Court, in a 9-0 decision, held that where parties have clearly and unmistakably agreed to arbitrate arbitrability disputes, courts must compel arbitration even if the argument in favor of arbitration is “wholly groundless.” Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. at *2, 5, & 8 (January 8, 2019).
The Court said that “[t]he [FAA] does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute….” Slip op. at 2; see also slip op. at 8. “When,” said the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Slip op. at 2; see also slip op. at 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Slip op. at 8.
Facts and Procedural History
Schein was a dispute between a dental equipment manufacturer and a distributor. The parties’ contract contained an arbitration agreement, which required arbitration of “[a]ny dispute arising under or related to [the Parties’] Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [the manufacturer]….” Slip op. at 2. Arbitration was to be “in accordance with the arbitration rules of the American Arbitration Association [(the “AAA”)].” Slip op. at 2.
Favorable arbitration awards are wonderful things, but they are not self-enforcing. Sometimes the other side voluntarily complies, but if not, there is really not much of anything the arbitrator can do to help.
Arbitrators are not judges and do not have the authority to garnish wages, seize property, foreclose on encumbered property, freeze bank accounts, impose contempt sanctions, and so forth. Parties can delegate to arbitrators broad adjudicatory and remedial authority, but that is relevant only to the nature and scope of their awards, and does not confer power on the arbitrators to enforce their awards coercively.
Apart from its potential preclusive effect in subsequent litigation or arbitration, an arbitration award stands on the same footing as any other privately prepared legal document, and for all intents and purposes it is a contract made for the parties by their joint agent of sorts—the arbitrator or arbitration panel. It may be intended by the arbitrator or panel, and at least one of the parties, to have legal effect, but it is up to a court to say what legal effect it has, and, if necessary, to implement that legal effect through coercive enforcement.
A judgment, by contrast, is an official decree by a governmental body (the court) that not only can be coercively enforced through subsequent summary proceedings in the same or other courts (including courts in other states and federal judicial districts), but is, to some extent, self-enforcing. A judgment, for example, can ordinarily be filed as a statutory lien on real property, and applicable state or federal law may, for example, authorize attorneys to avail their clients of certain judgment-enforcement-related remedies without prior judicial authorization.
Confirming Arbitration Awards 2
The Federal Arbitration Act, and most or all state arbitration statutes, provide for enforcement of arbitration awards through a procedure by which a party may request a court to enter judgment on the award, that is to “confirm” it. Once an award has been reduced to judgment, it can be enforced to the same extent as any other judgment. See, e.g., 9 U.S.C. § 13 (Under Federal Arbitration Act, judgment on award “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action; and it may be enforced as if it had been rendered in an action in the court in which it is entered”); Fla. Stat. § 682.15(1)( “The judgment may be recorded, docketed, and enforced as any other judgment in a civil action.”); N.Y. Civ. Prac. L. & R. § 7514(a) (“A judgment shall be entered upon the confirmation of an award.”).
Chapter One of The Federal Arbitration Act (the “FAA”), and most or all state arbitration statutes, authorize courts to confirm domestic awards in summary proceedings. State arbitration-law rules, procedures, limitation periods, and the like vary from state to state and frequently from the FAA, and state courts may apply them to FAA-governed awards (provided doing so does not frustrate the purposes and objectives of the FAA). And Chapter 2 of the FAA provides some different rules that apply to the confirmation of domestic arbitration awards that fall under the Convention on the Recognition of Foreign Arbitral Awards (the “Convention”), and the enforcement of non-domestic arbitration awards falling under the Convention (i.e., awards made in territory of a country that is a signatory to the Convention.
But let’s keep things simple, and take a brief look at the FAA’s requirements for confirming arbitration awards, as applicable in federal court for domestic awards not falling under Chapter Two of the Federal Arbitration Act in situations where there is no prior pending action related to the arbitration, and there are no issues concerning federal subject-matter jurisdiction, personal jurisdiction, sufficiency or service of process, venue (i.e., whether the suit should have been brought in a different federal judicial district), or the applicability of Chapter One of the FAA (9 U.S.C. §§ 1-16). We’ll also discuss how applications to confirm are supposed to be summary proceedings, why timing of an application is important, and how courts decide them.
What are the Requirements for Confirming Arbitration Awards under the Federal Arbitration Act?
Confirming Arbitration Awards 3
Like most other issues arising under the FAA, whether a court should confirm an award depends on what the parties agreed. Section 9 of the FAA, which governs confirmation of awards, says—with bracketed lettering added, and in pertinent part: “[A] If the parties in their agreement have [B] agreed that a judgment of the court shall be entered upon [C] the award made pursuant to the arbitration, and [D] shall specify the court, then [E] at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and [F] thereupon the court must grant such an order unless [G] the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.” 9 U.S.C. § 9. Items [A] through [D] above each concern party consent as evidenced by the parties’ arbitration agreement.
The key substantive requirements for confirming arbitration awards are thus: Continue Reading »
This is Part II of this two-part Arbitration Law FAQ Guide, which is designed to provide individuals and businesses with a brief and broad overview of challenging awards under the Federal Arbitration Act. Part I (here) addressed eight FAQs concerning this topic. This Part II addresses six more.
These FAQs, like the first eight, assume that a party is seeking to challenge a Federal-Arbitration-Act-governed arbitration award in a federal court having subject matter jurisdiction, personal jurisdiction, and proper venue.
This guide is not legal advice or a substitute for legal advice. An individual or business contemplating a challenge of an award under the Federal Arbitration Act should consult with an attorney or firm that has experience and expertise in arbitration law matters.
What does a person have to prove to convince a Court to grant it vacatur, modification, or correction of an award?
Awards Under the Federal Arbitration Act 2
An arbitration award is presumed valid and an award challenger has a heavy burden of proof to show otherwise. Some courts require clear and convincing evidence of certain grounds, such as evident partiality or corruption in the arbitrators. And even if a challenger can meet its burden, challenging an award under the Federal Arbitration Act must ordinarily be done in a summary proceeding, which is heard and determined in the same manner as a motion.
Generally, the challenger must establish that the only legitimate inference that can be drawn from the law and undisputed facts is that vacatur, modification, or correction of the award is warranted. Even where there are factual disputes, courts ordinarily will not order discovery or evidentiary hearings absent “clear evidence of impropriety.” See, generally, Andros Compania Maritima, S.A. v. Marc Rich & Co., 579 F.2d 691, 701, 702 (2d Cir. 1978).
What proceedings does a Court usually hold to determine applications to vacate, modify, or correct awards under the Federal Arbitration Act?
These applications are summary proceedings that are made and decided like motions. See 9 U.S.C. § 6. If there is not already pending an action between the parties in which a motion may be made, then a challenger can start a proceeding by filing and serving, among other things, a petition or application, a notice of petition or application, supporting affidavits, and a memorandum of law in support. The responding party serves and files a memorandum in opposition, along with any affidavits in support.
Since the matter is a summary proceeding, and since the ordinary pleading rules do not apply, courts generally require the challenger to make all of its arguments at the time its response is due, including arguments that might be made by pre-answer motion in an ordinary law suit, such as lack of subject-matter or personal jurisdiction. The responding party will also typically file a cross-motion to confirm the award, that is, a request that the Court enter judgment upon the award. See 9 U.S.C. § 9. Continue Reading »
What constitutes a “final arbitration award” for purposes of the Federal Arbitration Act is important because it bears on whether an award can be confirmed, vacated, or modified under Sections 9, 10, or 11 of the Federal Arbitration Act (the “FAA”). We addressed the basics concerning final awards in a 2009 post, here.
In Northfolk Southern Railway Co. v. Sprint Communications Co., L.P., 883 F.3d 417 (4th Cir. 2018), the U.S. Court of Appeals for the Fourth Circuit was faced with the question whether an award (the “Appraisal Award”), convened under an agreement’s appraisal clause, and issued by three appraisers, was a final arbitration award under the FAA. The unusual procedural posture of the case raised an additional, related question: whether under the FAA an arbitration panel, convened under the arbitration provision of the parties’ agreement, had the authority to declare the Appraisal Award to be a final award. That question matters, for if an arbitration panel has that power, then its decision concerning finality is subject only to the very highly deferential review permitted by Section 10 of the FAA. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-43 (1995); Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068-69 (2013).
Concededly with the benefit of 20/20 hindsight, we wonder whether a different litigation and appellate strategy might have yielded a different outcome. The Court held that the Appraisal Award was not final, and remanded the matter back to the appraisers. But the Court did not, for the reasons set forth below, definitively answer the “who” question. The Court’s decision that the Appraisal Award was not final was unquestionably correct if one considers from a purely objective standpoint, without deference to the Arbitration Award, which declared that the Award was final. But the correct outcome would be considerably less certain had the Railroad sought confirmation of the Arbitration Award and urged the Court to accord deference to the arbitrators who made it.
The dispute between Northfolk Southern Railway Co. (the “Railroad” or the “Appraisal Award Defending Party”) and Sprint Communications Co., L.P. (the “Carrier” or the “Appraisal Award Challenging Party”) arose out of a 25-year-term 1987 licensing agreement (the “Agreement”) under which the Carrier’s predecessor licensed from the Railroad’s predecessor the right to use for fiber-optics-cable purposes certain parts of the Railroad’s rights of way. The Carrier renewed that Agreement for an additional 25-year term (the “renewed Agreement term”), and a dispute arose about the renewal price. Continue Reading »
Section 10(a)(2) of the Federal Arbitration Act (the “FAA”) authorizes courts to vacate awards “where there was evident partiality. . . in the arbitrators. . . .” 9 U.S.C. § 10(a)(2). As respects neutral arbitrators, the U.S. Court of Appeals for the Second Circuit has long held that “[e]vident partiality may be found only where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” Scandinavian Reinsurance Co. Ltd. v. Saint Paul Fire and Marine Ins. Co., 668 F.3d 60, 64 (2d Cir. 2012) (quotations and citations omitted).
But, particularly in industry and labor arbitration, the parties do not necessarily intend that party-appointed arbitrators on tripartite panels are neutral, that is, disinterested in the outcome, impartial and independent. Can a party vacate an award based on the “evident partiality” of a non-neutral, party-appointed arbitrator, and if so, what standard applies to such a challenge? Continue Reading »
Ronald v. Sprint Spectrum L.P., No. 14-3478, slip op. (7th Cir. May 11, 2015) (Posner, J.)
Ronald v. Sprint Spectrum L.P., No. 14-3478, slip op. (7th Cir. May 11, 2015) arose out of a class action lawsuit brought in the U.S. District Court for the Northern District of Illinois by a putative class of mobile phone customers—represented by Mr. and Ms. Andermann (the “Andermanns”)—against Sprint, which sought damages for alleged violations of the Telephone Consumer Protection Act, 47 U.S.C. § 227.
Sprint moved to compel arbitration, but the district court denied its motion. Sprint appealed to the U.S. Court of Appeals for the Seventh Circuit as authorized by 9 U.S.C. § 16(a)(1)(B). The Seventh Circuit, in an opinion written by Circuit Judge Richard A. Posner, and joined in by Circuit Judge Diane S. Sykes and Chief District Court Judge Philip P. Simon of the Northern District of Indiana (sitting by designation), reversed and remanded with instructions to compel arbitration.
The Sprint Spectrum facts; the legal rules and principles that determined the outcome; and the outcome itself were not controversial. Had the court limited its task to applying the material facts to the applicable law, then the case likely would not have warranted a reported opinion.
But occasionally appellate judges, particularly ones as prominent, skilled and engaged as Judge Posner, will use a case like Sprint to make a point in passing that might influence other judges in the future and perhaps provide valuable information to attorneys and their clients. Judge Posner, with the apparent blessing of the other two judges, used the case to make a couple of points, one purely legal, the other bearing on both the law and, and at least to some extent, on matters pertinent to court administration.
The purely legal issue concerned the proper scope and practical significance of the federal policy in favor of arbitration, which a majority of the U.S. Supreme Court, Judge Posner and some other judges apparently believe lawyers and judges may misunderstand or misinterpret. In Sprint Spectrum Judge Posner, in dictum, raises the topic and shares some important insights about it.
The hybrid legal and judicial administration point concerned his view of the merits of the underlying Telephone Consumer Protection Act dispute. While the Court acknowledged that it was for the arbitrators to decide the merits, it nevertheless explained why it believed the claim would likely fail, whether in arbitration or in court.
Sprint Spectrum: Background
In 2000 the Andermanns entered into a two-year renewable mobile-phone service contract with U.S. Cellular, which was renewed continuously, and for the last time in 2012. The contract contained an arbitration agreement requiring arbitration of “any controversy or claim arising out of or relating to this agreement.” The parties agreed that the obligation to arbitrate would “survive[] the termination of [the] [mobile phone] service agreement[,]” and that “U.S. Cellular may assign this Agreement without notice to” the customer.
In 2013 U.S. Cellular sold the contract to Sprint, and notified the Andermanns of the sale in a letter sent months later. The letter informed the Andermanns that their service would be terminated effective January 2014 because of a compatibility problem between the Andermann’s mobile phone and the Sprint network. The letter explained that the Andermanns would have to obtain a new cell phone or find a new carrier, but “that Sprint was offering attractive substitutes for the terminated service,” and, if interested, the customer should contact Sprint by telephone. See slip op. at 2.
In December Sprint phoned the Andermanns to remind them that their service was about to expire, and added that Sprint had “a great set of offers and devices available to fit [their] needs.'” Slip op. at 3. Sprint called each of three members of the Andermann family twice (a total of six calls), but by the time the calls were made, the Andermanns had obtained cell phone service from another carrier.
The Andermanns did not answer any of the six calls, except by commencing a class action lawsuit against Sprint, which contended that the unsolicited calls violated the Telephone Consumer Protection Act. Sprint moved to compel arbitration, contending that the dispute arose out of and related to the contract renewed in 2012. Even though that contract was between U.S. Cellular and the Andermanns, U.S. Cellular had, as permitted by the contract, assigned its rights to Sprint, who had now stepped into U.S. Cellular’s shoes under the contract.
The Seventh Circuit’s Decision
The district court denied Sprint’s motion because its contract with the Andermanns had terminated prior to the allegedly offending telephone calls at issue in the lawsuit. The district court reasoned that the dispute did not arise out of or relate to the terminated agreement.
But the Court said “[a]ctually, there’s an intimate relation” between the dispute and the contract. “The contract,” said the Court, authorized an assignment, and because of the incompatibility of the assignor’s (U.S. Cellular’s) cellphones and the assignee’s (Sprint’s) mobile phone network, Sprint had had to terminate the U.S. Cellular customers, such as the Andermanns, whom it had acquired by virtue of the assignment. . . .” Slip op. 4. Sprint made the calls, and “offer[red] substitute service[]” “to prevent the loss of. . . customers because of the incompatibility. . . .” Slip op. at 4.
The Andermanns attempted to support their argument by offering an “untenable interpretation” of Smithv.Steinkamp, 318 F.3d 775, 777 (7th Cir. 2003). See Slip op. at 4. Steinkamp explained “‘absurd results’ would ensue if the arising from and relating to provisions contained in a payday loan agreement defining what disputes would have to arbitrated rather than litigated, were cut free from the loan and applied to a subsequent payday loan agreement that did not contain those provisions.” Slip op. at 4-5 (quoting Steinkamp, 318 F.3d at 777).
The Andermanns argued that Steinkamp suggested that the same type of “absurd results” would ensue under the facts of this case. But Steinkamp, explained the Court, “is not this case[,]” which concerns a single contract containing an arbitration agreement, not two successive contracts, one with an arbitration agreement and one without an arbitration agreement. See slip op. at 5.
While the Andermanns received a mild (and perhaps well-deserved) rebuke, Sprint’s argument prompted the verbal version of a roll of the eyes coupled with a quiet sigh—not so much because there was anything really wrong with the argument, but presumably because it overstated the importance of the federal policy in favor of arbitration. But that gave Judge Posner an opportunity to make a somewhat subtle, but important point.
The Court said “Sprint gilds the lily, however, in telling us that arbitration is a darling of federal policy, that there is a presumption in favor of it, that ambiguities in an arbitration clause should be resolved in favor of arbitration, and on and on in this vein.” Slip op. at 5. “It’s true,” said the Court, “that such language (minus the “darling”) appears in numerous cases.” Slip op. at 5 (citations omitted): “But the purpose of that language is to make clear, as had seemed necessary because of judges’ historical hostility to arbitration, that arbitration was no longer to be disfavored — especially in labor cases, see, e.g., Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 298-99 (2010), where arbitration is now thought a superior method of dispute resolution to litigation.” Slip op. at 5.
Noting that “[t]he Federal Arbitration Act is inapplicable to labor disputes, . . . and merely makes clauses providing for the arbitration of disputes arising out of transactions involving interstate or foreign commerce. . . enforceable in federal and state courts[,]” the Court said it was “not clear that arbitration, which can be expensive because of the high fees charged by some arbitrators and which fails to create precedents to guide the resolution of future disputes, should [in commercial cases] be preferred to litigation.” Slip op. at 5-6. Continue Reading »
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Section 10(a)(2) of the Federal Arbitration Act (the “FAA”) authorizes courts to vacate awards “where there was evident partiality. . . in the arbitrators. . . .” 9 U.S.C. § 10(a)(2). As respects neutral arbitrators, the U.S. Court of Appeals for the Second Circuit has long held that “[e]vident partiality may be found only where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” Scandinavian Reinsurance Co. Ltd. v. Saint Paul Fire and Marine Ins. Co., 668 F.3d 60, 64 (2d Cir. 2012) (quotations and citations omitted).
