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Archive for the ‘Stay of Litigation’ Category

SmartSky: Fourth Circuit Says No Jurisdictional Anchor Post Badgerow

March 23rd, 2024 Application to Compel Arbitration, Application to Confirm, Application to Stay Litigation, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Award Confirmed, Confirmation of Awards, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Diversity Jurisdiction, Enforcing Arbitration Agreements, FAA Chapter 1, FAA Chapter 2, FAA Section 10, FAA Section 11, FAA Section 3, FAA Section 4, FAA Section 9, 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 207, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Motion to Compel Arbitration, New York Convention, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Modify Award, Petition to Vacate Award, Section 10, Section 11, Section 6, Section 9, Stay of Litigation, Stay of Litigation Pending Arbitration, Subject Matter Jurisdiction, United States Court of Appeals for the Fourth Circuit No Comments »

SmartSky

 

Introduction

This post discusses the U.S. Court of Appeals for the Fourth Circuit’s recent decision in SmartSky Networks, LLC v. DAG Wireless, Ltd., ___ F.4th ___, No. 22-1253, slip op. (4th Cir. Feb. 13, 2024). SmartSky held that, under Badgerow v. Walters, 596 U.S. 1, 142 S. Ct. 1310 (2022), if a party makes a motion to confirm, vacate, or modify an award in an action over which the Court has federal-question subject matter jurisdiction, then it must nevertheless demonstrate that the Court would have had subject matter jurisdiction had the motion been brought as a standalone petition to confirm, vacate, or modify. That is so even if the Court has under Federal Arbitration Act (“FAA”) Section 3 stayed the action pending arbitration.

Suppose:

  1. A and B, both New York citizens, entered a contract containing an arbitration agreement;
  2. A and B become embroiled in a dispute that is governed by a federal statute;
  3. A sues B in federal court, properly invoking the federal court’s federal- question jurisdiction, 28 U.S.C. § 1331;
  4. B demands arbitration, and moves to compel arbitration under Section 4 and for a stay of litigation pending arbitration under Section 3;
  5. A unsuccessfully opposes the motion, the Court compels arbitration and grants a Section 3 stay of litigation pending arbitration.
  6. B ultimately obtains a $100,000 (exclusive of costs and interest) award in its favor and moves in the stayed action to confirm the award.
  7. A opposes the motion on the ground the court has no subject matter jurisdiction to confirm the award.

SmartSky would require the Court to dismiss A’s motion for lack of subject matter jurisdiction, even though A made the motion in an action over which the Court had subject matter jurisdiction, the Court had compelled the arbitration that resulted in the award, and the Court had stayed the action pending arbitration under Section 3.  There is no federal-question jurisdiction, and because both A and B are citizens of New York, no diversity jurisdiction.

According to SmartSky, the dismissal of the motion to confirm would be required by Badgerow.

Badgerow 

In Badgerow the Supreme Court of the United States (“SCOTUS”) held that a basis for subject-matter jurisdiction—independent from the FAA itself—must appear on the face of a standalone, petition to confirm or vacate an arbitration award and that independent basis cannot be established by “looking through” to the underlying arbitration proceeding that resulted in the award. See Badgerow, 142 S. Ct. at 1314, 1320.

Simply petitioning a court for relief under Sections 9, 10, 0r 11 of the Federal Arbitration Act (“FAA”) raises no federal question and does not confer on a court federal-question subject-matter jurisdiction, as strange as that might sound to the uninitiated. In the absence of a federal question appearing on the face of the freestanding petition—such as a claim for relief falling under Chapter Two of the FAA, which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), see 9 U.S.C. §§ 202, 203; 28 U.S.C. § 1331, or one falling under Chapter Three, which implements or Inter-American Convention on International Commercial Arbitration (the “Inter-American Convention”), see 9 U.S.C. §§ 301, et seq.; 28 U.S.C. § 1331—the only possible basis for federal subject-matter jurisdiction over such a standalone petition is diversity of citizenship. See 28 U.S.C. § 1332(a).

If there is no diversity jurisdiction, and if the action does not concern an award falling under the New York or Inter-American Conventions, then the substantive provisions of Chapter One still apply but enforcement must be sought in state court. See Vaden v. Discover Bank, 556 U.S. 49, 59 (2009) (“Given the substantive supremacy of the FAA, but the Act’s nonjurisdictional cast, state courts have a prominent role to play as enforcers of agreements to arbitrate”).

A “Jurisdictional Anchor” Post-Badgerow?

The author explained in a recent Arbitration Law Forum post—Philip J. Loree Jr., Weighing the “Jurisdictional Anchor”: Post-Badgerow Second Circuit Subject Matter Jurisdiction Requirements for Applications to Confirm, Modify, or Vacate Arbitration Awards, Arbitration Law Forum (Nov. 13, 2023) (the “Jurisdictional Anchor Post”)— that Badgerow leaves unanswered an important question. It arises when—in a preexisting action over which the Court already has federal-question subject matter jurisdiction—a Court grants a motion made under Sections 4 and 3 of the FAA to compel arbitration and stay litigation, and a party subsequently moves in the same, stayed action to confirm, vacate, or modify an award resulting from the compelled arbitration. Does the Court in the stayed action have continuing subject matter jurisdiction to hear the parties’ motions to confirm or vacate the award, even though there is no independent basis for federal question or diversity jurisdiction? Can the existing but stayed federal-question lawsuit provide a “jurisdictional anchor” for the motions to confirm or vacate even though the Court would not, under Badgerow, have subject matter jurisdiction over those motions if either were brought as an independent, freestanding petition to confirm or vacate an award?

SmartSky, as we’ve seen, says the answer to those questions is no: the parties moving to confirm or vacate must establish an independent basis for subject matter jurisdiction even when the motion is brought in a pre-existing but stayed lawsuit over which the Court undisputedly had federal question  jurisdiction.

SmartSky has flatly rejected the “jurisdictional anchor” theory (a/k/a “anchor jurisdiction”), under which the answer would be yes: the parties do not have to establish an independent basis for subject matter jurisdiction because they are filing their motions in a preexisting  stayed action over which the Court has subject matter jurisdiction.

SmartSky Caused a Circuit Split Concerning the Viability of Anchor Jurisdiction 

SmartSky‘s conclusion directly conflicts with the only other post-Badgerow U.S. Circuit Court of Appeals decision to address anchor jurisdiction, Kinsella v. Baker Hughes Oilfield Operations, LLC, 66 F.4th 1099 (7th Cir. 2023). If we count pre-Badgerow cases, SmartSky also conflict with the pro-anchor-jurisdiction holdings of the Second, Fifth, Eighth, Ninth, Tenth, and Eleventh Circuits. Dodson Int’l Parts v. Williams Int’l Co., 12 F.4th 1212, 1227-28 (10th Cir. 2021) (citing cases).

SmartSky’s Petition for Rehearing and Rehearing En Banc

Arbitration proponent SmartSky has added to its legal team SCOTUS ace Daniel L. Geyser, Esq., Chair of Haynes and Boone, LLP‘s U.S. Supreme Court Practice,  and, with Mr. Geyser’s assistance, prepared and submitted a very well-written and persuasive Petition for Rehearing and Rehearing En Banc, which among other things, pointed out the Circuit conflicts which SmartSky has created with both pre- and post-Badgerow decisions and explained why SmartSky believes the Fourth Circuit misconstrued Badgerow and failed to adhere to settled subject-matter-jurisdiction principles. SmartSky, No. 22-1253, Dk. 77.

The Petition also pointed out that, even if SmartSky correctly construed Badgerow, there is an independent basis for jurisdiction under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) because two of the parties are foreign citizens, DAG Wireless LTD (“Wireless”) and David D. Gross.

Both of these persons are, according to SmartSky, identified on the face of the petition as Israeli citizens (Wireless was identified as an Israeli company and D. Gross as an Israeli resident).  Smartksy points out that the award therefore falls under the Convention and its enforcement raises a federal question. See 9 U.S.C. §§ 202, 203, & 207; 28 U.S.C. § 1331; 22-1253, Dk. 77 at 13-16.

On March 13, 2024, the Fourth Circuit denied the petition. 22-1253, Dk. 80. That raises the possibility that SmartSky might petition SCOTUS for certiorari, something that wouldn’t surprise the author given that Mr. Geyser has joined its team.  If SmartSky petitions for certiorari, SCOTUS will presumably have to consider whether the current split in the circuits warrants certiorari or whether it should wait until more circuits have ruled on the issue post-Badgerow.  

The author plans to submit to an ADR trade publication an article analyzing and critiquing  SmartSky in some detail. For now, we briefly summarize what transpired in SmartSky and the reasons the Court gave for its ruling. 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 »

CPR Interviews Downes, Faulkner & Loree About Recent SCOTUS Developments

December 8th, 2021 Amount in Controversy, Appellate Practice, Application to Compel Arbitration, Application to Stay Litigation, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Contract Defenses, CPR Speaks Blog of the CPR Institute, Diversity Jurisdiction, Equal Footing Principle, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Courts, Federal Question, International Arbitration, International Institute for Conflict Prevention and Resolution (CPR), International Judicial Assistance, Laches, Loree and Faulkner Interviews, Moses Cone Principle, Nuts & Bolts, Nuts & Bolts: Arbitration, Petition to Compel Arbitration, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Section 3 Stay of Litigation, Small Business B-2-B Arbitration, Stay of Litigation, Stay of Litigation Pending Arbitration, Subject Matter Jurisdiction, United States Supreme Court, Waiver of Arbitration Comments Off on CPR Interviews Downes, Faulkner & Loree About Recent SCOTUS Developments
CPR | SCOTUS | Sundance | Morgan | Interview | Downes | Faulkner | Loree

Steps and columns on the portico of the United States Supreme Court in Washington, DC.

Arbitration is an important topic this year at the U.S. Supreme Court (“SCOTUS”). On Monday, November 23, 2021 the International Institute of Conflict Protection and Resolution (“CPR”) conducted a video interview of Professor Angela Downes,  Assistant Director of Experiential Education and Professor of Practice Law at the University of North Texas-Dallas College of Law; Dallas-based arbitrator, attorney, and former judge Richard D. Faulkner, Esq.;  and Loree Law Firm principal Philip J. Loree Jr. about three recent SCOTUS arbitration-law developments. To watch and listen to the video-conference interview, CLICK HERE or HERE.

As reported in CPR’s blog, CPR Speaks, the three SCOTUS arbitration-law developments are:

  1. SCOTUS’s recent decision to Grant Certiorari in Morgan v. Sundance Inc.No. 21-328, which will address the question: “Does the arbitration specific requirement that the proponent of a contractual waiver defense prove prejudice violate this Court’s instruction that lower courts must ‘place arbitration agreements on an equal footing with other contracts?’” Morgan v. Sundance, Inc., No. 21-328, Petition for a Writ of Certiorari (the “Petition”), Question Presented (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)). (See SCOTUS Docket here for more information and copies of papers.) Prior to SCOTUS granting certiorari, we discussed the Morgan petition in detail here.
  2. Two SCOTUS petitions for certiorari that address the issue whether, for purposes of 28 U.S.C. 1782’s judicial-assistance provisions, an arbitration panel sited abroad is a “foreign or international tribunal” for purposes of the statute, which permits “any interested person” to seek U.S. judicial assistance to obtain evidence in the U.S. for use abroad. These petitions are AlixPartners LLP v. The Fund for Protection of Investors’ Rights in Foreign StatesNo. 21-518, and ZF Automotive US Inc. v. Luxshare Ltd.No. 21-401. Information about these cases is available at Bryanna Rainwater, “The Law on Evidence for Foreign Arbitrations Returns to the Supreme Court,” CPR Speaks(Oct. 22, 2021) (available here) and “CPR Asks Supreme Court to Consider Another Foreign Tribunal Evidence Case,” CPR Speaks (Nov. 12, 2021) (available here).
  3. Badgerow v. WaltersNo. 20-1143, a recently-argued SCOTUS case that presents the question “[w]hether federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the FAA where the only basis for jurisdiction is that the underlying dispute involved a federal question.” See id., Question Presented Report, here. The case was argued before SCOTUS on November 2, 2021, and you can listen to the oral argument here. The oral argument is discussed in Russ Bleemer, “Supreme Court Hears Badgerow, and Leans to Allowing Federal Courts to Broadly Decide on Arbitration Awards and Challenges,” CPR Speaks (November 2, 2021) (available here).

Our good friend Russ Bleemer, Editor of CPR’s newsletter, Alternatives to the High Cost of Litigation, did a fantastic job conducting the interview.

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The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

Waiver of Arbitration: Will the U.S. Supreme Court Resolve the Circuit Split Concerning Prejudice?

September 28th, 2021 Application to Compel Arbitration, Application to Stay Litigation, Arbitration Law, Arbitration Practice and Procedure, Equal Footing Principle, Estoppel, FAA Chapter 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, Laches, Nuts & Bolts: Arbitration, Practice and Procedure, Prejudice, Section 3 Stay of Litigation, Small Business B-2-B Arbitration, Stay of Litigation, Stay of Litigation Pending Arbitration, United States Supreme Court, Waiver of Arbitration 1 Comment »

Waiver of Arbitration based on Litigation-Related Conduct

Waiver | Prejudice | Supreme Court | Cert Granted

United States Supreme Court

Whether an arbitration challenger must show prejudice to establish waiver of arbitration based on litigation-related conduct is an issue that might be the subject of a United States Supreme Court opinion in the not too distant future.

Federal Arbitration Act (“FAA”) Section 3 authorizes a stay of litigation in favor of arbitration “providing the applicant for the stay is not in default in proceeding with . . . arbitration.” 9 U.S.C. § 3 (emphasis added). The most common application of the “not in default” language occurs when a defendant in a lawsuit delays seeking a Section 3 stay and litigates on the merits. See, generally, Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 217-19 (3d Cir. 2007); Doctor’s Associates, Inc. v. Distajo, 66 F.3d 438, 454-56 (2d Cir. 1995).

Defending the suit on the merits—rather than seeking a stay of litigation and moving to compel arbitration—is inconsistent with arbitration and at some point constitutes at least an implied rejection or abandonment of the right to arbitrate. Section 3’s “not in default” condition authorizes a plaintiff resisting a stay to assert that the defendant has waived its right to arbitrate. 9 U.S.C. § 3; see 482 F.3d at 218; 66 F.3d at 454-56.

We discussed waiver of arbitration based on litigation-related conduct in a prior post, here. Under general principles of contract law, waiver is the “intentional relinquishment of a known right.” See, e.g., Professional Staff Congress-City University v. New York State Public Employment Relations Board, 7 N.Y.3d 458, 465 (2006) (“A waiver is the intentional relinquishment of a known right with both knowledge of its existence and an intention to relinquish it. . . . Such a waiver must be clear, unmistakable and without ambiguity”) (citations and quotations omitted).

Waiver may be established by demonstrating that a party renounced or abandoned contract rights, whether by its representations or other conduct inconsistent with an intent to assert those rights. See, e.g., Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt, L.P., 7 N.Y.3d 96, 104 (2006).

It focuses solely on the conduct of the party charged with waiver—it does not require any showing that the other party detrimentally relied on the conduct or otherwise suffered any prejudice. See, e.g., United Commodities-Greece v. Fidelity Int’l Bank, 64 N.Y.2d 449, 456-57 (1985); Fundamental Portfolio Advisors, 7 N.Y.3d at 104, 106-07; Albert J. Schiff Assoc. v. Flack, 51 N.Y.2d 692, 698-99 (1980).

The concept that another’s untimely assertion of a right has prejudiced a person is central to the equitable doctrine of laches, not waiver. See Capruso v. Village of Kings Point, 23 N.Y. 3d 631, 641 (2014) (“Laches is defined as such neglect or omission to assert a right as, taken in conjunction with the lapse of time, more or less great, and other circumstances causing prejudice to an adverse party, operates as a bar in a court of equity. The essential element of this equitable defense is delay prejudicial to the opposing party.”) (citations and quotations omitted).

Prejudice is also an element required to establish estoppel, which is an equitable bar to enforcement of a contract right. See, e.g., Schiff Assoc., 51 N.Y.2d at 699 (“Distinguished from waiver, of course, is the intervention of principles of equitable estoppel, in an appropriate case, such as where an insurer, though in fact not obligated to provide coverage, without asserting policy defenses or reserving the privilege to do so, undertakes the defense of the case, in reliance on which the insured suffers the detriment of losing the right to control its own defense.”)

Waiver: The Circuit Split on Prejudice

There is a split in the circuits concerning whether a party opposing a stay must not only demonstrate litigation-related conduct inconsistent with arbitration to establish waiver but must also establish prejudice.

Most circuit courts of appeals have determined that prejudice is required to establish waiver of arbitration based on litigation-related conduct. See Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir. 1968); Gavlik Constr. Co. v. H. F. Campbell Co., 526 F.2d 777, 783-84 (3d Cir. 1975), overruled on other grounds by Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271 (1988); Carolina Throwing Co. v. S & E Novelty Corp., 442 F.2d 329, 331 (4th Cir. 1971); Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986); O.J. Distrib., Inc. v. Hornell Brewing Co., 340 F.3d 345, 356 (6th Cir. 2003); Stifel, Nicolaus & Co. v. Freeman, 924 F.2d 157, 158 (8th Cir. 1991); ATSA of Cal., Inc. v. Cont’l Ins. Co., 702 F.2d 172, 175 (9th Cir. 1983); S & H Contractors, Inc. v. A.J. Taft Coal Co., 906 F.2d 1507, 1514 (11th Cir. 1990); see also Joca-Roca Real Estate, LLC v. Brennan, 772 F.3d 945, 949 (1st Cir. 2014) (prejudice requirement is “tame at best”).

Courts frequently cite the FAA’s federal policy favoring arbitration as justifying a prejudice requirement for waiver. See, e.g., Stifel, Nicolaus & Co., 924 F.2d at 158 (citing Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). Other circuit courts do not require prejudice. See St. Mary’s Med. Ctr. of Evansville, Inc. v. Disco Aluminum Prods. Co., 969 F.2d 585, 590 (7th Cir. 1992); Nat’l Found. for Cancer Rsch. v. A.G. Edwards & Sons, Inc., 821 F.2d 772, 774 (D.C. Cir. 1987).

State supreme courts are also split.  Compare, e.g., St. Agnes Med. Ctr. v. PacifiCare of Cal., 82 P.3d 727, 738 (Cal. 2003) (prejudice required under state arbitration law); Advest, Inc. v. Wachtel, 668 A.2d 367, 372 (Conn. 1995) (prejudice required; following Second Circuit authority) with Hudson v. Citibank (S.D.) NA, 387 P.3d 42, 47-49 (Alaska 2016) (prejudice not required under federal law); Raymond James Fin. Servs., Inc. v. Saldukas, 896 So.2d 707, 711 (Fla. 2005) (prejudice not required under federal law);  Cain v. Midland Funding, LLC, 156 A.3d 807, 819 (Md. 2017) (prejudice not required under state law).

The Morgan SCOTUS Petition: Waiver, Prejudice, and the “Equal Footing” Principle

This raises an important question concerning FAA Section 2’s “equal footing principle,” which has been presented to the Supreme Court in a recent petition for certiorari: “Does the arbitration specific requirement that the proponent of a contractual waiver defense prove prejudice violate this Court’s instruction that lower courts must ‘place arbitration agreements on an equal footing with other contracts?’” Morgan v. Sundance, Inc., No. 21-328, Petition for a Writ of Certiorari (the “Petition”), Question Presented (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)). (See SCOTUS Docket here for more information and copies of papers.) Opposition papers are due on October 1, 2021, which means that the Court may grant or deny the petition before the end of 2021.

The question is a substantial one since the purpose of “savings clause” of FAA Section 2 “was to make arbitration agreements as enforceable as other contracts, but not more so.” See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967). FAA Section 2’s “savings clause” provides that arbitration agreements falling under the FAA “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.

Courts that require prejudice to establish waiver are arguably making arbitration agreements more enforceable than ordinary contracts. And that may violate the “equal footing” principle.

Back in 2011 the Supreme Court granted a petition for certiorari seeking review of essentially the same question, but the parties settled the case before it was fully submitted and SCOTUS dismissed it as moot without reaching the merits. Citibank, N.A. v. Stok & Assocs., P.A., 387 F. App’x 921 (11th Cir. 2010), cert. granted, 562 U.S. 1215 (2011), cert. dismissed, 563 U.S. 1029 (2011) (See SCOTUS Docket here.)

Morgan v. Sundance, Inc., presents another opportunity for the Court to resolve the circuit and state supreme court conflicts on litigation-conduct-related waiver. As set forth in the comprehensive and well-written petition, Morgan presents a good vehicle for SCOTUS to resolve a long-standing (and deep) circuit/state-supreme-court conflict, which continues to be worthy of review.

If the Supreme Court grants certiorari; reverses the U.S. Court of Appeals for the Eighth Circuit’s decision, which required the plaintiff to show prejudice; and holds that prejudice is not required to establish waiver, then parties who wish to demand arbitration after being named a defendant in a litigation will need to move promptly to stay litigation and compel arbitration or risk losing the right to do so. While that might create some enforcement risks for parties who wish to arbitrate, it may also reduce, or at least streamline, FAA enforcement proceedings concerning litigation-related-conduct-based waiver.

Contacting the Author

If you have any questions about arbitration, arbitration-law, arbitration-related litigation, or this article, or if you wish to discuss possibly retaining the Loree Law Firm to provide legal advice or other legal representation, please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

CPR Speaks Publishes Philip J. Loree Jr.’s Post on Schein’s Return to the U.S. Supreme Court

February 20th, 2020 Arbitrability, Arbitrability | Clear and Unmistakable Rule, CPR Speaks Blog of the CPR Institute, Delegation Agreements, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Gateway Disputes, Gateway Questions, International Institute for Conflict Prevention and Resolution (CPR), Loree & Loree, Questions of Arbitrability, Section 3 Stay of Litigation, Separability, Stay of Litigation, Stay of Litigation Pending Arbitration, United States Court of Appeals for the Fifth Circuit, United States Supreme Court 2 Comments »
Schein II
Steps and columns on the portico of the United States Supreme Court in Washington, DC.

If you’ve been following our posts on Henry Schein Inc. v. Archer & White Sales Inc., 139 S. Ct. 524 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw) (“Schein I”), and the U.S. Court of Appeals for the Fifth Circuit decision on remand, Archer and White Sales Inc. v. Henry Schein Inc., 935 F.3d 274 (5th Cir. 2019) (available at http://bit.ly/2P9FGMU) (“Schein II”), then you know that the arbitration proponent, Henry Schein, Inc. (“Schein”), petitioned for rehearing en banc. (See here, here, here, and here.)

Well, unfortunately, the Fifth Circuit denied that petition on December 6, 2019. But apparently Schein was at least as disappointed with that ruling as we were, and so Schein filed on January 30, 2020 a petition for certiorari, asking the U.S. Supreme Court to review the Fifth Circuit’s Schein II ruling. A copy of the Petition is here.

We were delighted—not because we get to write still more articles and posts about Schein I and Schein II, but because, with all due respect to the Fifth Circuit, we think that Schein II was wrongly decided, and that consequently, Schein has been denied the benefit of the arbitration agreement and Delegation Agreement for which it freely bargained. And we hope that the U.S. Supreme Court grants Schein’s petition, reverses the Fifth Circuit decision, and directs the Fifth Circuit to compel arbitration of the parties’ arbitrability dispute as required by the parties’ Delegation Agreement.

On February 19, 2020, our friends at CPR Speaks, the blog of the International Institute for Conflict Prevention and Resolution (“CPR”), published a post we authored about this development, entitled Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court, which you can review here.

The post discusses the background of Schein I and Schein II, the events leading up to the petition for certiorari, some of the reasons why we believe Schein II was wrongly decided, and how we believe that it should be decided if SCOTUS grants the petition.

Many thanks to our good friend, Russ Bleemer—a New York attorney who is the editor of CPR’s Alternatives, an international ADR newsletter published by John Wiley & Sons, Inc., for his very helpful edits. And a shout-out also to CPR’s Tania Zamorsky, who, among other things, is the blog master of CPR Speaks.

About the Author

Philip J. Loree Jr. is a partner and founding member of Loree & Loree. He has nearly 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is a former partner of the litigation departments of the New York City firms of Cadwalader, Wickersham & Taft LLP and Rosenman & Colin LLP (now known as Katten Munchin Rosenman LLP).

Loree & Loree represents private and government-owned-or-controlled business organizations, and persons acting in their individual or representative capacities, and often serves as co-counsel, local counsel or legal adviser to other domestic and international law firms requiring assistance or support.

You can contact Phil Loree Jr. at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

Stay of Litigation | Waiver of Arbitration | The Businessperson’s Federal Arbitration Act FAQ Guide III | Pre-Award Litigation under Chapter 1 of the Federal Arbitration Act | Litigating Gateway Disputes | The Nuts and Bolts of Pre-Award Federal Arbitration Act Practice under Sections 2, 3, and 4 (Part I)

February 16th, 2020 Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration and Mediation FAQs, Arbitration Law, Arbitration Practice and Procedure, Businessperson's FAQ Guide to the Federal Arbitration Act, Challenging Arbitration Agreements, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Gateway Disputes, Gateway Questions, Moses Cone Principle, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure, Questions of Arbitrability, Section 3 Stay of Litigation, Small Business B-2-B Arbitration, Stay of Litigation, Stay of Litigation Pending Arbitration, United States Court of Appeals for the Second Circuit, United States Court of Appeals for the Seventh Circuit 2 Comments »
Section 3 Stay of Litigation

Today we’re going to focus on Section 3 of the Federal Arbitration Act, which authorizes a Court to stay litigation.

In the last segment of this series we answered the following FAQs about how gateway disputes are decided by courts and arbitrators:

  1. What is the Presumption of Arbitrability?
  2. Does the Presumption of Arbitrability Apply to all Questions of Arbitrability?
  3. What Law Applies to Determine Gateway Disputes about Arbitrability to which the Presumption of Arbitrability does not Apply?
  4. How is the Presumption of Arbitrability Applied to Resolve Gateway Questions about the Scope of an Arbitration Agreement?
  5. What Defenses, if any, Can Parties Assert against Enforcement of an Arbitration Agreement, and what Law Governs these Defenses?

The answers to these questions, along with those provided in prior segments, were designed to provide you with a solid foundation for understanding how pre-award Federal Arbitration Act litigation works and what to expect if your business is or becomes embroiled in it.

The segment of which this post is Part I answers FAQs about the nuts and bolts of pre-award Federal Arbitration Act practice and procedure under Sections 2, 3, and 4 of the Act, the Sections that address gateway disputes about whether arbitration should proceed.

In this Part I we address the following FAQs, which focus on Section 3 stays of litigation:

  1. What Gateway Disputes do Sections 2, 3, and 4, Address, and How do they Address them?  
  2. How does Section 3 Work in Practice?

Future parts of this segment will address questions concerning Section 4 of the Federal Arbitration Act, which authorizes courts to compel arbitration. And we’ll move forward from there.

What Gateway Disputes do Sections 2, 3, and 4, Address, and How do they Address them?   

Section 2, as we’ve said, is the enforcement command of the Federal Arbitration Act, which deems all arbitration agreements falling within its scope 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. (See here and here.) Section 2 requires, as a matter of federal law, that arbitration agreements falling within its scope are to be enforced to the same extent as contracts generally. (See here.)  

But the Federal Arbitration Act does more than require the enforcement of arbitration agreements by putting them 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). It provides for specific performance of arbitration agreements, both in the form of an order staying litigation of an arbitrable controversy under Section 3 of the FAA, and an order directing a party to proceed with arbitration in accordance with their agreement. 9 U.S.C. §§ 3 & 4.

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The Businessperson’s Federal Arbitration Act FAQ Guide III: Pre-Award Litigation under Chapter 1 of the Federal Arbitration Act—Gateway Disputes about Whether Arbitration Should Proceed (Part II)

February 4th, 2020 Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Businessperson's FAQ Guide to the Federal Arbitration Act, Enforcing Arbitration Agreements, FAA Chapter 1, FAA Preemption of State Law, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Policy in Favor of Arbitration, First Principle - Consent not Coercion, Gateway Disputes, Gateway Questions, McCarran-Ferguson Act, Moses Cone Principle, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Presumption of Arbitrability, Procedural Arbitrability, Questions of Arbitrability, Small Business B-2-B Arbitration, Stay of Litigation, Substantive Arbitrability 2 Comments »
gateway disputes

Gateway disputes, which concern whether parties are required to arbitrate a dispute on the merits, are the principal subject of pre-award Federal Arbitration Act litigation. In the last segment of this series, Gateway Disputes about Whether Arbitration Should Proceed (Part I), we answered a number of FAQs concerning gateway disputes, including who gets to decide those disputes:  

  1. What is the Difference between Pre-Award and Post-Award Litigation under the Federal Arbitration Act?
  2. What are Gateway Questions?
  3. Who Decides Gateway Questions?
  4. How do Parties Clearly and Unmistakably Agree to Submit Questions of Arbitrability to Arbitrators?
  5. Are there any Arbitrability Disputes that Courts Decide when the Contract at Issue Clearly and Unmistakably Provides for the Arbitrator to Decide Questions of Arbitrability?

Today we’ll answer some more FAQs about how gateway disputes are decided (or at least are supposed to be decided) by courts and arbitrators:

  1. What is the Presumption of Arbitrability?
  2. Does the Presumption of Arbitrability Apply to all Questions of Arbitrability?
  3. What Law Applies to Determine Gateway Disputes about Arbitrability to which the Presumption of Arbitrability does not Apply?
  4. How is Presumption of Arbitrability Applied to Resolve Gateway Questions about the Scope of an Arbitration Agreement?
  5. What Defenses, if any, Can Parties Assert against Enforcement of an Arbitration Agreement, and what Law Governs these Defenses?

The answers to these questions, along with the answers provided in Part I, will provide you with a solid foundation for understanding how pre-award Federal Arbitration Act litigation works and what to expect if your business is or becomes embroiled in it. The next segment will answer FAQs about the nuts and bolts of pre-award Federal Arbitration Act practice and procedure under Sections 2, 3, and 4 of the Act.

What is the Presumption of Arbitrability?

Back in 1983 the U.S. Supreme Court, in the landmark decision Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983), famously declared that “[t]he [Federal] Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” 

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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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Delegation Provisions: SCOTUS Says Courts Must Compel Arbitration of Even “Wholly-Groundless” Arbitrability Disputes

January 16th, 2019 American Arbitration Association, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Exceeding Powers, Existence of Arbitration Agreement, Federal Arbitration Act Enforcement Litigation Procedure, Stay of Litigation, United States Supreme Court 3 Comments »
Wholly Groundless 1

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?

Some federal courts have held that a federal court can, despite a clear and unmistakable agreement to arbitrate arbitrability, refuse to compel arbitration of a “wholly groundless” arbitrability question, but others have held that the FAA requires Courts to refer to arbitration even “wholly groundless” arbitrability questions. Compare Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F. 3d 522 (4th Cir. 2017); Douglas v. Regions Bank, 757 F. 3d 460 (5th Cir. 2014); Turi v. Main Street Adoption Servs., LLP, 633 F. 3d 496 (6th Cir. 2011); Qualcomm, Inc. v. Nokia Corp., 466 F. 3d 1366 (Fed. Cir. 2006), with Belnap v. Iasis Healthcare, 844 F. 3d 1272 (10th Cir. 2017); Jones v. Waffle House, Inc., 866 F. 3d 1257 (11th 2017); Douglas, 757 F. 3d, at 464 (Dennis, J., dissenting).

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).

Wholly Groundless Exception 2

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

Wholly Groundless Exception 3

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.

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Does the Presumption of Arbitrability Apply if a Contract Contains two Broad, Overlapping Forum Selection Clauses, one for Arbitration and one for Litigation?

June 7th, 2015 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Contract Interpretation, Contract Interpretation Rules, FAA Preemption of State Law, Federal Policy in Favor of Arbitration, Moses Cone Principle, Presumption of Arbitrability, Stay of Litigation, United States Court of Appeals for the Ninth Circuit Comments Off on Does the Presumption of Arbitrability Apply if a Contract Contains two Broad, Overlapping Forum Selection Clauses, one for Arbitration and one for Litigation?

Introduction

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Back in 1983 the U.S. Supreme Court, in the landmark decision Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) (Brennan, J.), famously declared that “[t]he [Federal] Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” Moses Cone thus established that there was a presumption in favor of arbitrability in cases governed by the Federal Arbitration Act, a conclusion that a number of other lower courts had previously reached, and which the Court had adopted about 23 years previously as a matter of federal labor law derived from Section 301 of the Labor Management Relations Act (sometimes referred to as the “Taft-Hartley Act”). See United Steel Workers of Am. v. Warrier & Gulf Nav. Co., 363 U.S. 574, 582-83 (1960) (Douglas, J.) (“An order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage.”)

The presumption of arbitrability is not a talismanic solution to every arbitration-law related problem. In fact it is designed to address only questions about the scope of an arbitration agreement.

The presumption has two related components. First, when courts construe the scope provision of an arbitration agreement to determine what merits-related issues the parties agreed to arbitrate, the court resolves ambiguities in favor of arbitration.  See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995). Second, it presumes that procedural issues arising out of arbitrable disputes, and contract-related defenses to arbitrability—that is, “allegation[s] of waiver, delay and like defenses to arbitrability[,]” are presumptively for the arbitrator. See Moses Cone, 460 U.S. at 24-25; Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).

Roughly ten days ago, in a post about U.S. Circuit Judge Richard A. Posner’s Sprint Spectrum decision, we wrote about how some judges have interpreted the presumption too expansively:

The federal policy in favor of arbitration has, at least arguably, been interpreted to apply more expansively than the U.S. Supreme Court likely intended. As a result, even though the U.S. Supreme Court has said many times that arbitration is supposed to be a “matter of contract,” or one of “consent not coercion,” an overly expansive interpretation of the policy has, at least in some cases, arguably resulted in arbitration agreements being placed on a considerably more advantaged footing than ordinary contracts. As we read it, Judge Posner’s comment in Roughneck raises the question whether this might have more to do with “limit[ing] judicial workloads” than a desire to enforce contracts as written and according to their terms.

(Read our Sprint Spectrum post here.)

With all the hoopla about the presumption of arbitrability, one would think it very difficult to find a case that didn’t apply the presumption of arbitrability in a situation where it was supposed to apply it. In general that’s probably true, but on June 2, 2015 the U.S. District Court for the Western District of Washington proved that truth is not a universal one.

In Scolari v. Elliot Rust Co., No. C15-5163 (BHS), slip op. (W.D. Wash. June 2, 2015) the court considered whether ambiguity created by apparently conflicting forum selections clauses: one arbitral and two judicial. While the Court’s reasoning indicated that it considered the issue before it one of contract interpretation—the resolution of ambiguity—it nevertheless held that the ambiguity had to be resolved against the drafter of the contract, which the district court thought Washington law required, rather than in favor of arbitration, which was what federal law required. While it apparently recognized that application of the presumption, rather than a state-law contra proferentem rule, would have required the court to stay the litigation, it nevertheless denied the requested stay of litigation, concluding that the issue before it concerned the enforceability of the arbitration agreement, rather than an interpretation of its scope.

The net effect of the ruling was for the district court to implicitly have found that a judicial forum selection clause trumped an arbitral one, simply because they overlapped in scope, and that accordingly the arbitral forum selection clause was not enforceable. There was no legal basis for such a finding and the district court cited none.

The seriousness of the error was compounded by the district court’s acknowledgement that the arbitration proponent had advanced a reasonable interpretation of the arbitration agreement and judicial forum selection clauses, which harmonized them, and would have allowed arbitration to proceed, with the district court staying its hand in the interim. Instead of adopting that interpretation, it said that the arbitration challenger’s interpretation was likewise “reasonable,” but the court did not say what the challenger’s interpretation was, and given the disposition of the case, we assume that the “interpretation” was that the parties must not have intended to include a concededly existing and valid arbitration agreement in their agreement. But that interpretation not only ignored the presumption of arbitrability, but the general rule of contract interpretation that one contract provision not be construed to negate another.

We do not know whether the arbitration proponent preserved the argument for appeal, but there was another ground for a stay of litigation in this case that would have bypassed the issue of the presumption of arbitrability. The arbitration agreement contained a delegation clause, which clearly and unmistakably required the parties to submit to arbitration all disputes about arbitrability. Because there was no dispute about the existence or validity of the delegation clause, the Court should have held that the resolution of the apparent conflict between arbitral and judicial forum selection clauses was a question for the arbitrators.

If the arbitration proponent decides to appeal the decision, we hope that the U.S. Court of Appeals for the Ninth Circuit will correct these errors without delay, so that the parties can arbitrate their disputes, which is, after all, what they agreed to do.

Background

yay-12775922-digitalScolari v. Elliot Rust Co., No. C15-5163 (BHS), slip op. (W.D. Wash. June 2, 2015), arose out of the purchase, sale, termination and buyback of an interest in a limited liability company. Effective January 1, 2013 the plaintiff (the “Buyer”) purchased a ten-percent ownership interest in  Elliot Rust Companies, LLC (the “LLC”), the purchase and sale of which was governed by a “Grant Agreement” executed by the parties “according to the terms of [an] Amended and Restated LLC Agreement of Elliot Rust Companies, LLC dated January 1, 2013.” Both agreements were apparently part of the same transaction and were entered into at or about the same time.

The Buyer and LLC were the only parties to the Grant Agreement, which provided that the Buyer would acquire its 10% interest “according to the terms of the terms of the Amended and Restated LLC Agreement of Elliot Rust Companies, LLC dated January 1, 2013

The Grant Agreement provided, among other things, that:

[Scolari] understands, acknowledges and agrees that, upon execution of this Grant Agreement and the joinder to the LLC Agreement, [Scolari] shall, without further action or deed, thereupon be bound by the LLC Agreement, as it may thereafter be restated or amended, as though a direct signatory thereto.

It contained a “jurisdiction” clause that stipulated Washington law as governing and the U.S. District Court for the Western District of Washington as the exclusive judicial forum:

Governing Law: Jurisdiction. This Grant Agreement and the transaction contemplated hereby shall be governed by and construed according to the laws of the state of Washington. With respect to any dispute arising out of or related to this Grant Agreement or the LLC Agreement, the parties hereby consent to the exclusive jurisdiction of the United States District Court for the Western District of Washington. . . .

yay-1916763-digitalThe LLC Agreement, unlike the Grant Agreement, contained a broad arbitration agreement, which said:

Arbitration. All disputes, claims or controversies relating to this Agreement that are not resolved by mediation shall be submitted to final and binding arbitration. . . . Questions or arbitrability or the scope of the parties’ agreement to arbitrate shall be determined by the arbitrator.

But like the Grant Agreement, the LLC Agreement also contained a jurisdiction and venue clause:

Jurisdiction and Venue. Any suit involving any dispute or matter arising under this Agreement may only be brought in the United States District Court for the Western District of Washington or the Superior Court of Pierce County. All Members hereby consent to the exercise of personal jurisdiction by any such court with respect to any such proceeding.

The LLC terminated the plaintiff on November 6, 2014, and on December 15, 2014 offered to buy plaintiff’s 10% interest out for $158,882.60. The plaintiff refused the offer one week later, claiming that he did not believe it to be accurately valued.

yay-13760132Unable to agree a resolution the plaintiff filed suit in March 2015, requesting a judgment declaring he has a 20% interest in the profits of the LLC, and equitable relief.

The LLC moved on April 3, 2015 to dismiss for improper venue or to stay the action pending arbitration under Section 3 of the Federal Arbitration Act pending arbitration. The Court denied the motion.

The District Court’s Analysis and Conclusions

The Court began its analysis by acknowledging that its “role” was confined “‘to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.’” Slip op. at 4 (quoting Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000)). If the arbitration proponent establishes that the answers to both questions are “yes,” then, said the Court, the Court must “‘enforce the arbitration in accordance with its terms.’” Slip op. at 4 (quoting 207 F.3d at 1130). And in discussing the standard applicable to question (2), the Court, playing homage to the strong presumption in favor of arbitration, said “‘any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. . . .’” Slip op. at 4 (quoting 207 F.3d at 1131).

So far, so good. But having accurately stated the governing rules, the Court inexplicably failed to heed them. Continue Reading »