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Archive for the ‘Section 4’ Category

Seventh Circuit Blocks Mass Arbitration: Wallrich v. Samsung Electronics America, Inc.  

July 16th, 2024 American Arbitration Association, Appellate Jurisdiction, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Fees, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clear and Unmistakable Rule, Delegation Agreements, Equal Footing Principle, FAA Chapter 1, FAA Chapter 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 4, Federal Subject Matter Jurisdiction, Mass Arbitration, Petition to Compel Arbitration, Practice and Procedure, Procedural Arbitrability, Questions of Arbitrability, Richard D. Faulkner, Section 4, United States Court of Appeals for the Seventh Circuit No Comments »

Mass ArbitrationIntroduction: Mass Arbitration

For many years consumers, employees, and others fought hard—with varying degrees of success—to compel class arbitration, and sellers, employers, and other more economically powerful entities fought equally hard to compel separate arbitrations in multi-claimant situations. Over time, companies included in their agreements—and courts enforced—clear class-arbitration waivers.

That might have been the end of the story but for a stroke of genius on the part of certain plaintiffs’ attorneys. These clever attorneys devised what is now known as “mass arbitration.”

In mass arbitration, as in class arbitration, multiple claimants—each represented by the same lawyer or group of lawyers—assert at the same time numerous  claims against a corporate defendant.

The result is that business entity defendants may be are forced to pay upfront hundreds of thousands or millions of dollars in arbitration provider and arbitrator fees as a precondition to defending thousands of individual arbitration proceedings that raise one or more common issues.

Saddling the business entity defendants at the outset with those enormous arbitration fees obviously puts them in an untenable settlement position. The business entities also incur very substantial legal costs for arbitration-related litigation.

Given the vigor with which business entities have opposed class arbitration—which, despite its cumbersome nature, purports to be (but really isn’t) a workable mechanism for resolving multiple, similar, arbitral claims—one can hardly fault a judge for concluding that business entity defendants have reaped what they’ve sown. But it would be strange to think that Federal Arbitration Act (“FAA”) arbitration should, in multiple claimant situations, boil down to the business entity choosing one form of economic extortion (endless, inefficient, and prohibitively expensive class arbitration) over another (being forced to pay millions of dollars of arbitration fees upfront before being able to defend any of the individual arbitrations).

There have been some recent efforts on the part of arbitration providers to amend their rules to address mass arbitration in a more equitable manner. But those rules, and the ins, outs, and idiosyncrasies of mass arbitration are beyond this post’s ambit.

Our focus instead is on a very important mass-arbitration development: the first U.S. Circuit Court of Appeals decision to address mass arbitration, Wallrich v. Samsung Electronics America, Inc., No. 23-2842, slip op. (7th Cir. July 1, 2024). The case is especially significant because it may portend the end of mass arbitration, at least in the form it typically takes.

The U.S. Court of Appeals for the Seventh Circuit derailed petitioners’ efforts to compel judicially the respondent to pay millions of dollars of arbitration fees demanded by mass arbitration claimants. It did so in two blows, the second more decisive than the first. Continue Reading »

S.K.A.V. v. Independent Specialty Ins. Co.: Fifth Circuit Decides Louisiana Statute Invalidating Arbitration Agreements in Insurance Contracts Applies to Surplus Lines Policies

June 27th, 2024 Anti-Arbitration Statutes, Applicability of Federal Arbitration Act, Application to Compel Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreement Invalid, Arbitration Law, Arbitration Practice and Procedure, Clear and Unmistakable Rule, Delegation Agreements, Existence of Arbitration Agreement, FAA Chapter 1, FAA Preemption of State Law, FAA Section 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, Formation of Arbitration Agreement, Gateway Disputes, Gateway Questions, Insurance Contracts, Louisiana Supreme Court, McCarran-Ferguson Act, Motion to Compel Arbitration, Petition to Compel Arbitration, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Questions of Arbitrability, Section 2, Section 4, State Arbitration Law, State Arbitration Statutes, State Courts, Statutory Interpretation and Construction, United States Court of Appeals for the Fifth Circuit No Comments »

Introduction: LA Stat. Ann. § 22.868 and its Application to Surplus Lines Policies

surplus lines policy regulation

Louisiana has a statute, LA Stat. Ann. § 22.868, that courts have construed to make unenforceable arbitration provisions in insurance contracts, including surplus lines policies. The statute has an exception or savings provision that removes from the statute’s scope “a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance[,]” LA Stat. Ann. § 22.868(D), for example, a venue- or forum-selection provision in a surplus lines policy.

The question before the U.S. Court of Appeals for the Fifth Circuit in S.K.A.V. v. Independent Specialty Ins. Co., ___ F.4th ___, No. 23-30293, slip op. (5th Cir. June 5, 2024), was whether the statute invalidates arbitration provisions contained in surplus lines insurance policies, that is, whether arbitration provisions in such contracts fall within the subsection (D) exception. Predicting how it thinks the Louisiana Supreme Court would rule if faced with the question, the Court held that the subsection (D) exemption did not apply, and accordingly, the statute rendered unenforceable arbitration agreements in surplus lines contracts. The Court accordingly affirmed the judgment of the district court, which denied the arbitration proponent’s motion to compel arbitration.

Pushing the Elephant Out of the Room. . .

Before taking a closer look at how the Court arrived at its conclusion, let’s deal with the “elephant in the room.” Why is the Court in a case governed by the Federal Arbitration Act (“FAA”) even considering enforcing a state statute that would (or could) render unenforceable an FAA-governed arbitration agreement? Doesn’t the FAA preempt state law that puts arbitration agreements on a different footing than other contracts?

The answer is “undoubtedly”, but, as insurance and reinsurance practitioners know, under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011, et seq., “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. . . .” 15 U.S.C. § 1012(b).

LA Stat. Ann. § 22.868 has been construed to be one that “regulat[es] the business insurance[,]” and the FAA is not an “Act [that] specifically relates to the business of insurance. . . .” Section 22.868 thus “reverse preempts” the FAA under McCarran-Ferguson. See slip op. at 2. (See, e.g., here.)

The Court’s Interpretation of Section 22.868, Including its Surplus Lines Policy Exemption

  LA Stat. Ann. § 22.868, provides, in pertinent part: Continue Reading »

SCOTUS Decides Spizzirri, Saying that FAA Section 3 Stays of Litigation Pending Arbitration are Mandatory if Requested

May 21st, 2024 Appellate Jurisdiction, Appellate Practice, Arbitration Law, Arbitration Practice and Procedure, FAA Chapter 1, FAA Section 16, FAA Section 3, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Look Through, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 16, Section 3 Stay of Litigation, Section 4, Stay of Litigation, Stay of Litigation Pending Arbitration, Stay Pending Appeal, Subject Matter Jurisdiction, Textualism, Uncategorized, United States Court of Appeals for the Fourth Circuit, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Seventh Circuit, United States Supreme Court No Comments »

Section 3 Stay of LitigationOn May 16, 2024, the U.S. Supreme Court (“SCOTUS”) in Smith v. Spizzirri, 601 U.S. ___, No 22-1218, slip op. (U.S. May 16, 2024), decided 9-0 that Section 3 of the Federal Arbitration Act (the “FAA”) does not “permit[] a court to dismiss the case instead of issuing a stay when the dispute is subject to arbitration and a party requests a stay pending arbitration.” 601 U.S. at ___; slip op. at 1.

In an opinion written by Associate Justice Sonia Sotomayor, the Court concluded that the “text, structure, and purpose” of Section 3 and the FAA all “point to the same conclusion: When a federal court finds that a dispute is subject to arbitration, and a party has requested a stay of the court proceeding pending arbitration , the court does not have discretion to dismiss the suit on the basis that all the claims are subject to arbitration.” 601 U.S. at ___, slip op. at 3. The Court therefore held that if a lawsuit “involves an arbitrable dispute, and a party requests a Section 3 stay, the Court must stay the litigation. 601 U.S. at ___; slip op. at 6.

The Court’s opinion resolves a long-standing and deepening split in the circuits, which the Court left open in Green Tree Financial Corp.-Ala. v. Randolph, 531 U.S. 79, 87 n.2 (2000), and Lamps Plus v. Varela, 587 U.S. 176, 181 n.1 (2019). That split in the circuits is discussed in note 1 of the Court’s opinion. 601 U.S. at ___ n.1, slip op. at 2-3 n.1 (citing cases).

Background

The underlying merits litigation that resulted in an order granting a motion to compel arbitration—but a dismissal despite the request for a Section 3 stay— was a state court action between current and former drivers for a delivery service and the operators of that service. Claims were made under state and federal employment laws based on alleged misclassification of the drivers as independent contractors rather than employees. Claimants sought damages for sick leave and overtime wages.

Defendants removed the case to federal district court in Arizona and moved to compel arbitration and dismiss the action. Claimants conceded arbitrability but argued that the action should be stayed under Section 3.

Ninth circuit precedent granted district courts considering an application to stay litigation under Section 3 the discretion to either stay or dismiss the action. Relying on that precedent, the district court dismissed the suit, reasoning that all claims in the litigation had been ordered to arbitration.

The Ninth Circuit affirmed, but two judges concurred, suggesting that this Ninth Circuit precedent was wrong and that SCOTUS should resolve the split in the circuits concerning whether a requested Section 3 stay was mandatory when claims in the litigation are subject to arbitration and a stay is requested.

SCOTUS granted certiorari, reversed the Ninth Circuit’s decision, and resolved the split. Continue Reading »

Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards

November 13th, 2023 Amount in Controversy, Appellate Jurisdiction, Appellate Practice, Application to Compel Arbitration, Application to Confirm, Application to Enforce Arbitral Summons, Application to Stay Litigation, Arbitral Subpoenas, Arbitration Law, Arbitration Practice and Procedure, Confirmation of Awards, FAA Chapter 1, FAA Chapter 2, FAA Section 16, Federal Arbitration Act 202, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 5, Federal Arbitration Act Section 7, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Modify or Correct Award, Motion to Compel Arbitration, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Enforce Arbitral Summons, Petition to Modify Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 10, Section 11, Section 3 Stay of Litigation, Section 4, Section 5, Section 7, Section 9, Stay of Litigation, Stay of Litigation Pending Arbitration, Subject Matter Jurisdiction, United States Court of Appeals for the Second Circuit Comments Off on Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards

Jurisdictional Anchor | Subject Matter JurisdictionThe U.S. Supreme Court decision, Badgerow v. Walters, 142 S. Ct. 1310 (2022) (discussed here), requires that an independent basis for subject matter jurisdiction (usually diversity) must appear on the face of petitions to confirm, vacate, or modify arbitration awards, and, by extension, petitions to enforce arbitral subpoenas or appoint arbitrators. See Badgerow, 142 S. Ct. at 1314, 1320. That independent basis for subject matter jurisdiction cannot be established by “looking through” to the underlying arbitration proceeding. In other words, the federal court cannot base subject matter jurisdiction on whether the court would have had subject matter jurisdiction over the merits of the controversy had they been submitted it to court rather than to arbitration.  See Badgerow, 142 S. Ct. at 1314, 1320.

Badgerow does not change the rule that federal question jurisdiction over a Section 4 petition to compel arbitration can be established by “looking through” to the underlying dispute that is or is claimed to be subject to arbitration. 142 S. Ct. at 1314; see  Vaden v. Discover Bank, 556 U.S. 49, 53 (2009); Hermès of Paris, Inc. v. Swain, 867 F.3d 321, 324-26 (2d Cir. 2017) (diversity of citizenship not determined by “look through”).

Section 4 of the Federal Arbitration Act expressly authorizes a Court to exercise subject-matter jurisdiction on that basis: “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; see Badgerow, 142 S. Ct. at 1317.

Unlike Section 4, Sections 5 (appointment of arbitrators), 7 (arbitral subpoena enforcement), 9 (confirmation of awards), 10 (vacatur of awards), and 11 (modification of awards), do not expressly authorize the exercise of subject matter jurisdiction on a “look through” basis.  See 142 S. Ct. at 1317-18; 9 U.S.C. §§ 4, 5, 7, 9, 10, & 11.

Badgerow, in the specific context of an action commenced by petition to vacate an award under FAA Section 10—which, in turn, prompted a cross-petition to confirm under FAA Section 9—held that the absence in Sections 9 and 10 of Section 4’s express language authorizing subject matter jurisdiction based on “look through” meant that Congress did not authorize “look through” subject matter jurisdiction for Section 9 and 10 claims (and presumably for claims seeking relief under Sections 5, 7, or 11). See 142 S. Ct. at 1319.

An independent basis for subject matter jurisdiction is required, and in the absence of a federal question appearing on the face of the petition (such as a claim for relief under Chapter Two of the FAA, see 9 U.S.C. § 203; 28 U.S.C. § 1331), the only possible basis for subject matter jurisdiction is diversity of citizenship. See 28 U.S.C. § 1332(a). And there could be no diversity jurisdiction in Badgerow because the parties to the petitions were citizens of the same state. See 142 S. Ct. at 1316.

Badgerow’s reasoning certainly applies to independent, summary proceedings in which the only relief sought is under the FAA. But does it apply with equal force where litigation on the merits of an arbitrable or allegedly arbitrable dispute has commenced, and the motion to compel arbitration is made by motion in the pending action, which is stayed pending arbitration? Can the stayed merits litigation act as what former Associate Justice Stephen G. Breyer, in his Badgerow dissent, referred to as a “jurisdictional anchor” for not only the motion to compel arbitration, but also other subsequent applications for pre- or post-award FAA relief relating to the arbitration?  See Badgerow, 142 S. Ct. at 1326 (Breyer, J., dissenting).

That is an open question in the Second Circuit after Badgerow, although pre-Badgerow the answer was yes. Let’s look at it more closely and try to get a sense of how the Second Circuit might rule on it considering Badgerow. Continue Reading »

Subject Matter Jurisdiction in FAA Proceedings: Eighth Circuit Demonstrates It’s a Trap for the Unwary

August 23rd, 2023 Amount in Controversy, Application to Compel Arbitration, Arbitration Law, Arbitration Practice and Procedure, Award Vacated, Awards, Challenging Arbitration Awards, Confirmation of Awards, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 4, Federal Arbitration Act Section 5, Federal Arbitration Act Section 7, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Look Through, or Modify Award, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Enforce Arbitral Summons, Petition to Modify Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 10, Section 11, Section 4, Section 5, Section 7, Section 9, United States Court of Appeals for the Eighth Circuit Comments Off on Subject Matter Jurisdiction in FAA Proceedings: Eighth Circuit Demonstrates It’s a Trap for the Unwary

Introduction

Subject Matter Jurisdiction | Petition to Confirm | Petition to Vacate The U.S. Court of Appeals for the Eighth Circuit recently decided a case that provides a good—and simple—example of how subject matter jurisdiction can be a trap for the unwary, especially for parties seeking to confirm or vacate arbitration awards under the Federal Arbitration Act (the “FAA”). In Prospect Funding Holdings (N.Y.) v. Ronald J. Palagi, P.C., No. 22-1871, slip op. (8th Cir. Aug. 7, 2023), the Eighth Circuit vacated a district court’s judgment vacating two arbitration awards because the petitioner failed to plead the citizenship of the parties and therefore could not establish the requisite independent basis for subject matter jurisdiction. But there was more to it than that. Continue Reading »

Assignment and Separability: Can an Assignor Compel Arbitration? The South Carolina Supreme Court Says the Arbitrators Get to Decide

August 2nd, 2023 Application to Compel Arbitration, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Clear and Unmistakable Rule, Contract Defenses, Existence of Arbitration Agreement, FAA Chapter 1, Federal Arbitration Act Section 1, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Policy in Favor of Arbitration, Gateway Disputes, Gateway Questions, Practice and Procedure, Questions of Arbitrability, Section 4, Separability, Severability, South Carolina Supreme Court, United States Supreme Court Comments Off on Assignment and Separability: Can an Assignor Compel Arbitration? The South Carolina Supreme Court Says the Arbitrators Get to Decide

Introduction: Assignment and the Separability Doctrine 

Separability and Assignment

Suppose A and B enter a contract imposing mutual obligations on them. The contract contains an arbitration agreement requiring arbitration of all disputes arising out of or related to the contract. The contract does not purport to prohibit assignment, and the parties’ rights under the contract are otherwise capable of assignment.

A assigns to assignee C its rights to receive performance under the contract. B commences an action against A under the contract and A demands arbitration. B resists arbitration, arguing that A has assigned to C its right to enforce the contract (we’ll call it a “container contract” because it contains an arbitration agreement) and thus there is no longer any arbitration agreement that A can enforce against B. Judgment for whom?

In Sanders v. Svannah Highway Auto Co., No. 28168, slip op. (July 26, 2023),  the Supreme Court of North Carolina said that, under the Federal Arbitration Act’s “separability” doctrine, the claim that the contract—including the arbitration agreement— could no longer be enforced was an issue that concerned the enforceability of the container contract as a whole, not the enforceability of the arbitration agreement specifically. And because the assignment concerned only the continued existence of the container contract, and not a claim that the container contract was never formed, the exception to the separability doctrine under which courts get to decide whether a contract has been concluded did not apply.

Accordingly, explained the South Carolina Supreme Court, it was for the arbitrator to decide what effect, if any, the assignment had on A’s right to enforce the container contract, including the arbitration agreement. Continue Reading »

Expert-Determination Clauses: Third Circuit Holds Dispute Resolution Clause Provided for Expert-Determination, not Arbitration

July 31st, 2023 Applicability of Federal Arbitration Act, Application to Compel Arbitration, Application to Stay Litigation, Appraisal, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Challenging Arbitration Agreements, Challenging Arbitration Awards, Contract Interpretation, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Practice and Procedure, Questions of Arbitrability, Section 3 Stay of Litigation, Section 4, United States Court of Appeals for the Third Circuit Comments Off on Expert-Determination Clauses: Third Circuit Holds Dispute Resolution Clause Provided for Expert-Determination, not Arbitration

Introduction: Third Circuit’s Ruling on Expert-Determination Clauses Versus Arbitration Clauses

expert-determination

Not every dispute resolution clause contained in a contract is an arbitration clause, let alone an arbitration clause governed by the Federal Arbitration Act (“FAA”). Absent a statute stating otherwise, dispute resolution clauses that are not arbitration agreements must be enforced via ordinary contract-law rules only, not through FAA- or state-arbitration-statute-authorized motions to compel arbitration, motions to stay litigation pending arbitration, or motions to confirm, vacate, or modify awards.

The U.S. Court of Appeals for the Third Circuit recently decided a case that turned on whether the dispute resolution clause in the contract was an arbitration clause, or simply a contractual provision calling for resolution of an issue by experts, sometimes referred to as an “expert-determination provision[,]” slip op. at 14, or “expert-determination clause.” In Sapp v. Indus. Action Servs., No. 22-2181, slip op. (3d Cir. July 20, 2023) the Court held that the clause before it was not an arbitration agreement, but an expert clause and consequently reversed the district court’s decision to compel arbitration and vacated the Court’s order granting the motion to confirm the expert’s decision and denying the motion to vacate it. Slip op. at 3, 19.

Whether or not you are—in a particular case—advocating for or opposing arbitration, Sapp demonstrates how important it is to make an early determination as to whether the alternative dispute resolution clause at issue is, in fact, an arbitration agreement whose enforcement is governed by the FAA or a state arbitration statute.

Another point about Sapp is that its interpretation of the Federal Arbitration Act is arguably more narrow than that of the Second Circuit. The Second Circuit has said that a dispute resolution provision otherwise falling under Section 2 of the FAA is an “arbitration agreement” for purposes of the FAA, including an “appraisal” provision in an insurance contract. The test is whether the dispute resolution provision  “clearly manifests an intention by the parties to submit certain disputes to a specified third party for binding resolution.” McDonnell Douglas Finance CorpvPennsylvania Power & Light Co., 858 F.2d 825, 830 (2d Cir. 1988); Bakoss v. Certain Underwriters at Lloyds of London Issuing Certificate No. 0510135, 707 F.3d 140, 143 (2d Cir. 2013). That dispute resolution clauses, such as 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 [e.g., appraisal] for the definitive settlement of certain grievances under the Agreement.” Id. (quotations omitted); see Bakoss, 707 F.3d at 143. (See also Arbitration Law Forum post here.)

The reason for this difference is most likely because, as we shall see, Sapp ruled that state law—specifically, that of Delaware—not federal common-law, governs what constitutes an arbitration agreement for purposes of the FAA. See Slip op. at 12-16. In the Second Circuit, however, federal common-law governs that question. See Bakoss, 707 F.3d at 143. Continue Reading »