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 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.
This Arbitration Law FAQ guide briefly explains what
the Federal Arbitration Act is, and then answers some frequently asked
questions about Chapter 1 of the Act. It is not legal advice, nor a substitute
for legal advice, and should not be relied upon as such.
If you desire or require legal advice or representation in a matter concerning commercial, labor, or any other arbitration-law matter, then do not hesitate to contact a skilled and experienced arbitration-law attorney. This guide provides some general information that may be able to assist you in your search for legal representation, or in simply obtaining a better understanding of some arbitration-law basics.
Arbitration Law FAQS: What is the Federal Arbitration Act?
The Federal Arbitration Act is a federal statute
enacted in 1925 that makes certain (but not all) arbitration agreements “valid,
irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2. It was originally, and for many years,
known as the “United States Arbitration Act,” but for simplicity’s sake we’ll
refer to it as the “Federal Arbitration Act,” the “FAA,” or the “Act.”
It was passed at a time when courts were, for the most part, unwilling to enforce agreements to arbitrate because they thought that such agreements “divested” their “jurisdiction” over disputes that would ordinarily be decided by courts. In other words, many courts thought it wrong for courts to lend their assistance to the enforcement of contracts under which parties would agree to submit their disputes to private decision makers.
Even by the time the FAA was passed, arbitration was
not new. For example, it can be traced back at least as far as medieval times,
when various guilds used it as a way of resolving disputes according to what
became known as the “law merchant,” an informal body of rules and principles
that merchants believed should be applied to their disputes, but which common
law courts did not, at the time, apply. The first arbitration agreement was
reportedly included in a reinsurance contract in the late 18th
century, and George Washington apparently included an arbitration clause in his
will.
As originally enacted, the FAA consisted of 15 provisions, section 14 of which Congress repealed in 1947, renumbering as Section 14 former Section 15. In 1970 Congress designated those remaining 14 provisions as “Chapter 1” of the FAA, and added a “Chapter 2,” which consists of various provisions implementing and enabling the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a the “New York Convention”). In 1988 Congress added two additional provisions to Chapter 1 of the FAA, Sections 15 and 16. In 1990 Congress added to the FAA a Chapter 3, which consists of provisions implementing and enabling the Inter-American Convention on International Commercial Arbitration (a/k/a the “Panama Convention”).
The remainder of this FAQ guide focuses on Chapter 1 of
the FAA.
Arbitration Law FAQs: What does Chapter 1 of the FAA do apart from declaring certain arbitration agreements to be valid, irrevocable, and enforceable?
Section 2 of the Federal Arbitration Act is sometimes
referred to as the Act’s “enforcement command.” It is the provision that
declares certain (but not all) arbitration agreements to be “valid,
irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2.
Under Section 2, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. at *4 (Jan. 8, 2019) (citation and quotation omitted). Section 2 also “requires courts to place arbitration agreements on an equal footing with all other contracts.” Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1424 (2017) (quotations and citations omitted).
Section 1 of the FAA provides some definitions and
exempts from the FAA a fairly limited universe of agreements that would
otherwise fall within the scope of the Act. See 9 U.S.C. § 1. The other provisions of
Chapter 1 implement the enforcement command by lending judicial support to the
enforcement of arbitration agreements and awards. These are briefly summarized
below:
Section 3 – Requires courts to stay litigation in favor
of arbitration. 9 U.S.C. §
3.
Section 4 – Provides for courts to compel arbitration.
Section 5 – Provides for courts to appoint arbitrators
when there has been a default in the arbitrator selection process.
Section 6 – Provides that motion practice rules apply
to applications made under the FAA, thereby expediting the judicial disposition
of such applications.
Section 7 – Provides for the judicial enforcement of
certain arbitration subpoenas.
Section 8 – Provides
that where the basis for federal subject matter jurisdiction is admiralty, then
“the party claiming to be aggrieved may begin his proceeding [under the FAA]…by
libel and seizure of the vessel or other property….” 9 U.S.C. § 8.
Section 9 – Provides for
courts to confirm arbitration awards, that is, enter judgment upon them.
Section 10 – Authorizes
courts to vacate arbitration awards in certain limited circumstances.
Section 11 – Authorizes courts to modify or correct arbitration awards in certain limited circumstances.
Section 12 – Provides rules concerning the service of a motion to vacate, modify, or correct an award, including a three-month time limit.
Section 13 – Specifies
papers that must be filed with the clerk on motions to confirm, vacate, modify,
or correct awards and provides that judgment entered on orders on such motions
has the same force and effect of any other judgment entered by the court.
Section 14 – Specifies that agreements made as of the
FAA’s 1925 effective date are subject to the FAA.
Section 15 – Provides that “Enforcement of arbitral
agreements, confirmation of arbitral awards, and execution upon judgments based
on orders confirming such awards shall not be refused on the basis of the Act
of State doctrine.”
Section 16 – Specifies when appeals may be taken from
orders made under the FAA, and authorizing appeals from final decisions with
respect to arbitration.
How can I tell if an arbitration agreement or award is governed by Chapter 1 of the Federal Arbitration Act?
Whether an arbitration agreement falls under the FAA depends on whether: (a) the arbitration agreement is in writing; and (b) is part of a “maritime transaction” or of a contract that affects interstate commerce.
The starting point is, as before, Federal Arbitration
Act Section 2’s enforcement command, which provides, with bracketed text added:
[A] A written provision [B] in any maritime transaction or [C] a contract evidencing a transaction involving commerce [D] to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or [E] an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, [F] shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
9 U.S.C. § 2.
Section 2’s requirement that an arbitration agreement be “written” (Part [A]) seems simple enough, and, for the most part, it is. But remember, just because a contract is required to be “written” doesn’t mean the arbitration agreement must be signed.
As respects whether a “contract” “evidenc[es] a transaction involving commerce” (Part [C]), the U.S. Supreme Court has interpreted Section 2 broadly to mean the Federal Arbitration Act applies to arbitration agreements in contracts or transactions that affect commerce, that is, to any contract or transaction that Congress could regulate in the full exercise of its Commerce Clause powers. See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 268, 281-82 (1995); U.S. Const. Art. I, § 8, Cl. 3 (giving Congress power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes”).
Whether a contract “affects” commerce depends on the facts concerning, among other things, the parties, the contract’s subject matter, and the actual or contemplated transactions constituting the contract’s performance or contemplated performance. See Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56-57 (2003). A party does not have to demonstrate that the contract has a “specific” or “substantial” “effect upon interstate commerce if in the aggregate the economic activity in question would represent a general practice subject to federal control.” Id. (citations and quotations omitted). The question is whether the “aggregate economic activity in question” “bear[s] on interstate commerce in a substantial way.” Id. at 57.
Parts [A] through [D]] of Section 2 make the Federal
Arbitration Act applicable to written, pre-dispute arbitration “provision[s]”
in “maritime transactions” or in “contract[s] evidencing transactions involving
commerce….” These arbitration provisions are “pre-dispute” arbitration
agreements because they are defined by Part [D] as “provision[s]” “to settle a
controversy thereafter arising out of
such contract or transaction, or [out of] the refusal to perform the whole or
any part” of such contract or transaction….”
9 U.S.C. § 2
(emphasis added). In other words, agreements to submit future disputes to arbitration.
Parts [A] through [E] of Section 2 make the FAA applicable also to written, post-dispute arbitration agreements, that is, agreements to arbitrate existing disputes arising out of “maritime transactions” or “contract[s] evidencing transactions involving commerce….” To that end Part [E] makes Section 2 applicable to “agreement[s] in writing to submit to arbitration an existing controversy arising out of” “maritime transaction,” (Part [B]) “contract evidencing a transaction involving commerce” (Part [C]), or “refusal to perform the whole or any part” of such a contract or transaction. (Part[D]). 9 U.S.C. § 2 (emphasis added).
Arbitration Law FAQs: Are there any Arbitration Agreements Falling Under FAA Section 2 that are Exempt from Chapter 1 of the FAA?
Federal Arbitration Act Section 1
Yes. Section 1 of the FAA provides that “nothing [in the FAA] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” According to the United States Supreme Court, this exemption applies “only” to “contracts of employment of transportation workers.” Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 119 (2001). But those “contracts of employment” include not only contracts establishing an employer-employee relationship, but also contracts establishing independent contractor relationships. New Prime Inc. v. Oliveira, 586 U.S. ___, slip op.at 6, 7, & 15 (Jan. 15, 2019).
Arbitration Law FAQs: If the Chapter 1 of the Federal Arbitration Act applies, does that mean all FAA litigation falling under Chapter 1 can be brought in federal court?
No. Chapter 1 of the Federal Arbitration Act does not
confer an independent basis for federal court subject matter jurisdiction over
applications for the relief authorized by Chapter 1. Put differently making an
application under the FAA does not raise a “federal question” over which a
federal court could, under 28 U.S.C. §
1331, base subject matter jurisdiction.
But that doesn’t mean that federal courts cannot have subject
matter jurisdiction over Chapter 1 Federal Arbitration Act proceedings. If the
requirements for diversity jurisdiction are met, including complete diversity
of citizenship between the parties, and an amount in controversy that exceeds
$75,000.00, excluding interest and costs, then a federal court will have
subject matter jurisdiction under the diversity jurisdiction. See 28 U.S.C. § 1332.
Does Chapter 1 of the Federal Arbitration Act apply in state court?
Yes. State courts are required to enforce arbitration agreements under Section 2 of the FAA. Basically, they must enforce arbitration agreements falling under the FAA, putting them on the same footing as other contracts. SeeKindred Nursing Centers, 137 S. Ct. at 1424.
Most or all states have their own arbitration statutes. New York’s arbitration statute, for example, is codified in Article 75 of the New York Civil Practice Law and Rules (“CPLR”). Depending on applicable state law, state courts may carry out Section 2’s enforcement command using their own arbitration statute’s provisions, even if they are different than those provided by Chapter 1 of the FAA. But if enforcement of the FAA through the provisions of the state’s arbitration code would undermine the purposes and objectives of the FAA, then the offending state arbitration code provisions would be preempted (i.e., superseded) by the FAA to the extent that they conflict with the FAA.
If you are interested in learning more about the Federal Arbitration Act, see here, here, and here.
Photo Acknowledgments:
The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law. L&L added text to the first three photos from the top.
Section 1 of the Federal Arbitration Act (the “FAA”) exempts from the FAA’s scope disputes involving “contracts of employment of . . . workers engaged in . . . interstate commerce.” 9 U. S. C. § 1. Does the FAA apply to an agreement to arbitrate disputes between an individual trucker and an interstate trucking company if the contract between them establishes an independent contractor relationship, not an employer-employee one?
InNew Prime Inc. v. Oliveira, 586 ___ U.S. ___, slip op. (Jan. 15, 2019), the United States Supreme Court said that the FAA does not apply to such contracts. That was so, the Court explained, 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 7. Consequently, a court does not have authority under the FAA to stay litigation under FAA Section 3—or to compel arbitration under FAA Section 4—if the parties’ agreement evidences such a “contract of employment,” including a contract of employment that establishes an independent contractor relationship rather than an employer-employee one. Slip op. at 6, 7 & 15.
In our first New Prime post, here, we focused our discussion on a threshold issue addressed by the Court: who gets to decide whether a contract falls within Section 1’s “contracts of employment” exemption when the parties have delegated arbitrability disputes to the arbitrators? The answer to that question, we explained, is “the courts.” For the inapplicability of the Section 1 exemption is an “antecedent” question that must be resolved before the Court can conclude that it has any power whatsoever to stay litigation under Section 1 or compel arbitration under Section 4. Slip op. at 3-4. (See, also, here.)
Today we shift our focus to the merits of the Section 1 exemption question that the U.S. Supreme Court proceeded to resolve.
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.
We’ve discussed various issues concerning the allocation of asbestos or hazardous waste claims by insurers or cedents in situations where losses occur in multiple policy periods over time. (See here, here, & here.) Issues relating to allocation of such claims have, for many years, arisen in both insurance coverage cases and reinsurance litigation and arbitration, and they still do.
Earlier this year in Keyspan Gas East Corp. v. Munich Reins. Am., Inc., ___ N.Y.3d ___, N.Y. Slip Op. 2116 (March 27, 2018), New York State’s highest court held that, where applicable policy language contemplates a pro-rata time-on-the-risk allocation of loss, the damages or liability should be allocated over the entire period during which it occurred, including periods during which insurance was not available in the market because of exclusions or other reasons. While the outcomes it will generate are more favorable to insurers than policyholders, the Keyspan decision is sound and consistent with prior New York Court of Appeals cases on allocation and insurance generally. Given New York’s highest court’s historically excellent reputation for resolving insurance and reinsurance issues in an objectively fair and commercially reasonable manner, we suspect that Keyspan may prove to be an influential decision that other states will consider carefully when they are faced with questions concerning what should or should not be counted as part of the time-on-the-risk.
Hazardous waste and asbestos claims are unique because the “injury producing harm is gradual and continuous and typically spans multiple insurance policy periods….” Keyspan, 2018 N.Y. Slip Op. 2116, at *4. Typically the “environmental contamination” or asbestos injury “that occurred in any given year is unidentifiable and indivisible from the total resulting damages.” See 2018 N.Y. Slip Op. at 2.
Allocating a multi-policy-period loss in different ways can have very significant financial consequences to reinsurers and cedents, and insurers and their insureds. The amount of loss allocated to a given policy determines the applicability of deductibles, the exhaustion (or non-exhaustion) of limits, and the amount the insured is entitled to collect from the insurer under each policy. It factors into whether reinsurance retentions have been met or whether reinsurance contract limits have been exceeded. It can even determine whether certain insurers (e.g. excess or umbrella carriers) or reinsurers are responsible for any of the loss. Continue Reading »
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.
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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?
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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?
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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 »
This two-part Arbitration Law FAQ guide is designed to provide individuals and businesses with a basic overview of what the Federal Arbitration Act has to say about challenging arbitration awards in court. This is Part I and Part II is here.
It assumes that the award is governed by the Federal Arbitration Act; the challenge is made in a federal district court having subject matter and personal jurisdiction; and venue is proper.
This guide is not legal advice or a substitute for legal advice. If you are an individual or business which wants or has to challenge or defend an arbitration award, or make an application to confirm the award, then you should consult with an attorney or firm that has experience and expertise in arbitration law matters.
I just received an arbitration award against me, which I believe is governed by the Federal Arbitration Act (the “FAA”). Does the FAA allow me to appeal the award to a court?
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You cannot—at least in any meaningful sense of the word—“appeal” an FAA-governed arbitration award to a court. An appeal involves judicial review by an appellate court under which a panel of judges reviews trial-court rulings on questions of law independently—that is, as if the appellate court were deciding the question for itself in the first instance. The appellate court generally reviews the trial court’s findings of fact on a “clearly erroneous” or “clear error” standard of review, that is, paying a certain degree of deference to the finder of fact (the jury or, in a bench trial, the judge). Appellate review of a court decision is thus fairly broad and searching, particularly where outcomes turn solely on questions of law.
When a person agrees to arbitrate it gives up the right to appellate review, which focuses on issues relating to the merits of the case the court decided or on important litigation-procedure rulings.
Does the FAA permit a party to challenge an arbitration award?
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The Federal Arbitration Act provides some limited remedies for challenging arbitration awards where a party can show certain kinds of unusual and material violations of an arbitration agreement by an arbitrator or an opposing party, or an obvious mathematical, typographical, or technical error that appears on the face of the award. The remedies are orders: (a) modifying or correcting the award; or (b) vacating the award in whole or in part.
To vacate an award means to annul it, that is, to declare it null and void. When an award is vacated, then the parties generally must (absent a settlement) go back and re-arbitrate the matters that were the subject of the award. When an award is modified or corrected, the correction or modification may be made by the court, or the court may remand the matter back to the arbitrators for that purpose. Continue Reading »
We have discussed (here) what constitutes a final award under the Federal Arbitration Act, an issue that is important for a host of reasons, but is particularly so to any business faced with an adverse clause construction award. A clause construction award is an interim or partial final arbitration ruling that determines the threshold issue of whether the parties consented to class arbitration.
But not all arbitrations – even class arbitrations – are governed by the Federal Arbitration Act (“FAA”), and even when they are, parties may agree to procedural rules that are different from those of the FAA. See Preston v. Ferrer, 128 S.Ct. 978, 987-89 (2008); Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 478-79 (1989). In Maplebear, Inc. v. Busick, ___ Cal. App.5th ___, slip op. (Cal. App., 1st Dist. August 21, 2018) (certified for publication), the parties agreed that “the arbitration would be conducted by JAMS under its rules and procedures; the arbitrator would apply California substantive law; the arbitrator had no ‘power or authority to commit errors of law or legal reasoning’; and ‘[a]ny action to review the arbitration award for legal error or to have it confirmed, corrected or vacated’ would be decided under California law by ‘a California state court of competent jurisdiction.’” Slip op. at 2.
At issue in Maplebear was whether the California courts had jurisdiction to vacate a partial final Clause Construction Award, which concluded that the parties had consented to class arbitration. The California Appeals Court said “no,” which means that—unless the California Supreme Court (or the U.S. Supreme Court) hears an appeal and says otherwise—the parties have to endure through an entire class arbitration procedure before there is any judicial review of the Clause Construction Award. (Whether or not review by the California Supreme Court or the U.S. Supreme Court is even possible given the procedural posture of this case is outside the scope of this post.)
An Unfair Burden on the Clause Construction Award Challenger?
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Consider the burden the decision imposes on the class-arbitration opponent. According to the majority opinion in Concepcion, then fairly current American Arbitration Association statistics showed that: (a) “[a]s of September 2009, the AAA had opened 283 class arbitrations[;]” (b) “[o]f those, 121 remained active, and 162 had been settled, withdrawn, or dismissed[;]” (c) “[n]ot a single one, however, had resulted in a final award on the merits[;]” and (d) “[f]or those cases that were no longer active, the median time from filing to settlement, withdrawal, or dismissal—not judgment on the merits—was 583 days, and the mean was 630 days.” AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1751 (2011).
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While we have not researched whether more recent statistics tell a different story, it seems quite likely that the Court’s decision on finality means that the class arbitration opponent will have to spend an awful lot of time and money before the issue of class arbitration consent is reviewed by a court, assuming it is ever reviewed.
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