Introduction: This Term’s SCOTUS Arbitration Cases
The 2021 Term was a busy and controversial one for the United States Supreme Court (“SCOTUS”) regarding abortion, First Amendment rights, Second Amendment rights, and administrative agency power. However, many may not know SCOTUS decided four Federal Arbitration Act cases during the 2021 Term (the “FAA Cases”), as well as a pair of cases consolidated into one concerning whether U.S. Courts may provide under 28 U.S.C. § 1782 judicial assistance to international arbitration panels sited abroad. See Viking River Cruises, Inc. v. Moriana, 596 U. S. ____, No. 20–1573, slip op. (June 15, 2022) (construing FAA); ZF Automotive US, Inc., et al. v. Luxshare, Ltd., 596 U.S. ___, No. 21–401, slip op. (June 13, 2022) (construing 28 U.S.C. § 1782); Southwest Airlines Co. v. Saxon, 596 U.S. ___, No. 21-309, slip op. (June 6, 2022) (construing FAA); Morgan v. Sundance, Inc., 596 U.S. ___, No. 21-328, slip op. (May 23, 2022) (construing FAA); Badgerow v. Walters, 596 U.S. ___, No. 20-1143, slip op. (March 31, 2022) (construing FAA).
Three of the SCOTUS FAA Cases, Badgerow, Morgan, and Southwest Airlines signal SCOTUS’s apparent intention to construe strictly the Federal Arbitration Act’s text without indulging in any pro-arbitration presumptions or applying arbitration-specific rules intentionally encouraging arbitration-friendly outcomes. ZF Automotive, the 28 U.S.C. § 1782 judicial-assistance case also employed a strict, textualist approach to interpreting 28 U.S.C. § 1782, used the FAA to help support its conclusion, and held that 28 U.S.C. § 1782 did not authorize U.S. district courts to provide judicial assistance to private arbitration panels sited abroad—an outcome not particularly solicitous of international arbitration. It is therefore at least indirectly supportive of the more textually oriented and arbitration-neutral approach SCOTUS appears to have endorsed with special force during the 2021 Term.
The SCOTUS 2021 Term FAA Cases are not the first ones in which the Court applied textualist interpretations to the FAA. There are others. See, e.g., New Prime Inc. v. Oliveira, ___ U.S. ___, 139 S. Ct. 532 (2019) (discussed here and here). But common themes in three of those FAA Cases—echoed in ZF Automotive —suggest a marked trend by the Court to interpret the FAA in a less expansive manner that is not presumptively arbitration friendly. The expression of these common themes in four cases decided in a single term is particularly significant because Morgan, Southwest Airlines, and ZF Automotive were decided unanimously by all participating Justices and Badgerow was decided 8-1, with now retired Associate Justice Stephen G. Breyer dissenting.
Many previous FAA SCOTUS decisions of the last three or four decades have been very indulgent of arbitration. The Court encouraged arbitration proliferation far beyond B-2-B commercial and industry arbitration between sophisticated and resource-laden entities of roughly equal bargaining power. Arbitration was introduced into consumer and employment disputes and other disputes involving persons (including businesses) of vastly disparate resources and sophistication. SCOTUS made arbitration agreements readily enforceable, interpreted them expansively in favor of arbitration, limited defenses to arbitration agreements and awards, and promoted arbitration to make it, at least in the eyes of some, an attractive alternative to litigation. Critics challenged that view and assailed arbitration as “do it yourself court reform.” The SCOTUS arbitration decisions developed and implemented an expansive federal policy in favor of arbitration and a presumption of arbitrability and championed a very pro-arbitration approach to arbitration law in general.
That SCOTUS, the lower federal courts, and eventually even the skeptical state courts that are bound by its FAA decisions, have been solicitous and supportive of arbitration is unsurprising. The assumed (but not necessarily realized) benefits of arbitration have long been touted by academics and promoted by business and industry representatives. Of course, courts have for many years recognized that arbitration helps reduce docket congestion, which was exacerbated by COVID and remains a problem today, even with the help of proliferated arbitration proceedings. Arbitral dispute resolution is also a very impressive business sector in and of itself, generating billions in revenues for law firms, arbitrators, and arbitration providers. It therefore has many proponents.
But Badgerow, Morgan, Southwest Airlines, and ZF Automotive suggest that SCOTUS is rethinking its prior expansive, and highly-arbitration-friendly approach to the FAA and might be more willing to entertain seriously arguments for interpreting: (a) arbitration agreements less expansively, and more like ordinary contracts; and (b) Sections 10 and 11 of the FAA strictly according to their text and not in an exceedingly narrow manner designed to encourage, arbitration-award-favoring outcomes. These cases may also embolden lower courts, especially the state courts, to do the same.
Through creative, out-of-the-box thinking, skilled arbitration-law counsel, armed with a comprehensive understanding of these decisions, and of recent SCOTUS constitutional law decisions, may be able to convince courts to adopt a more arbitration-neutral approach toward the FAA. That may result in arbitration-outcomes perceived to be fairer and more balanced than those that have resulted from past interpretations of the FAA.
Our good friend, colleague and sometimes co-counsel Richard D. Faulkner, a former judge, former law professor, and current arbitrator and arbitration-law practitioner, had this to say about these recent U.S. Supreme Court developments:
The Court’s literal FAA language interpretations combined with its newly articulated textualist and historically focused Constitutional analysis, suggest the high-water mark of the Court’s pro-arbitration tide has been reached. The actual language of the FAA and limited intent of its 1925 proponents have been revealed as important tools for interpreting the FAA. Add the Court’s repeated references to state contract law, and almost all of the previous state and federal courts’ assumptions about the FAA are questionable. It appears the Court’s pro-arbitration tide is finally beginning to ebb.
Subject Matter Jurisdiction: Badgerow v. Walters
Badgerow, an 8-1 decision authored by Associate Justice Elena Kagan, emphasized a textualist approach to FAA interpretation, and significantly limited the number of FAA cases over which the federal courts will have subject matter jurisdiction. It may have also given Award challengers a slight edge in certain circumstances, because some state courts may be more inclined than their federal-court counterparts to vacate, modify, or correct an award.
Badgerow addressed whether federal subject matter over motions to confirm or vacate awards can be based on whether a Court would, in the absence of the arbitration agreement, have subject matter jurisdiction over the case and controversy before the arbitrators. Engaging in a textual analysis of the FAA, the Court said the answer was “no.”
The Court in Vaden v. Discover Bank, 556 U.S. 49, 53-54 (2009) held that subject matter jurisdiction based on such a “look through” approach was proper when a party is moving to compel arbitration under FAA Section 4, id.. Certain lower courts had, based on Vaden, held that “look through” jurisdiction was proper in cases that sought post-award enforcement relief under Sections 9 (motions to confirm) and 10 (motions to vacate). Petitions to enforce subpoenas under FAA Section 7, appoint arbitrators under Section 5, and to modify or correct awards under Section 11 were also viewed as candidates for look-through jurisdiction.
But Badgerow held that Courts cannot assess jurisdiction using a “look through” approach in cases seeking confirmation or vacatur of awards under Sections 9 or 10 of the FAA. Rather, a court’s subject matter jurisdiction to grant relief under sections 9 or 10 of the FAA must be based on whether a legitimate basis for subject matter jurisdiction appears on the face of the petition. See Badgerow, slip op. at 2, 6. While the Court did not decide the issue, presumably, the same analysis would apply to petitions to modify or correct awards under Section 11, to appoint arbitrators under Section 5, and to enforce subpoenas under Section 7.
Because an application to confirm or vacate an award under Chapter One of the Arbitration Act does not confer on the court the required independent basis for subject matter jurisdiction, because the substance of motions to confirm or vacate do not otherwise present federal questions, see Badgerow, slip op. at 6, and because Courts cannot “look through” to the underlying arbitrable controversy to determine jurisdiction to hear a Section 9 or 10 petition, federal courts will have jurisdiction over such applications only when diversity jurisdiction exists based on the face of the petition, see 28 U.S.C. § 1332(a), or perhaps if there a valid basis for supplemental jurisdiction under 28 U.S.C. § 1367.
What was the reason Badgerow did not extend “look through” subject matter jurisdiction to applications not falling under Section 4 of the FAA? Section 4 expressly provides that “[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. Because the text of Sections 9 and 10 of the FAA do not expressly provide for the “look through” jurisdiction expressly contemplated by Section 4, Badgerow held that jurisdiction over requests to confirm or vacate awards are are subject to the usual rule for assessing subject matter jurisdiction: jurisdiction must appear on the face of the petition. See Badgerow, slip op. at 2, 6.
The SCOTUS Waiver Case: Morgan v. Sundance, Inc.
In Morgan v. Sundance, Inc., 596 U.S. ___, No. 21-328, slip op. (May 23, 2022), a 9-0 opinion that, like Badergow, was authored by Associate Justice Elena Kagan, the Supreme Court held that “the FAA’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules,” slip op. at 6. A waiver of arbitration rule requiring a showing of prejudice is such a rule. Slip op. at 4-5, 7. Richard Faulkner and the author wrote a May 27, 2022, article on Morgan for Employment Law360, entitled “After High Court Ruling, Arbitration May Lose Its Luster,” which can be accessed by paid subscribers to that publication, here. (Prior to SCOTUS granting certiorari, the Arbitration Law Forum discussed the Morgan petition in detail here.)
After Morgan a party can establish under the FAA waiver of arbitration based on litigation conduct simply by demonstrating conduct inconsistent with that party’s right to demand arbitration. No showing of prejudice is required. See Morgan, slip op. at 7.
Holding that the FAA policy in favor of arbitration does not authorize federal courts to create special procedural rules favoring arbitration, the Court explained that the federal policy is “merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.” Slip op. at 6 (quoting Granite Rock Co. v. Teamsters, 561 U.S. 287, 302 (2010) (cleaned up)) and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967) (“[T]he policy is to make ‘arbitration agreements as enforceable as other contracts, but not more so.”)).
As interpreted by Morgan, the federal policy requires courts to hold parties to their arbitration contracts to the same extent—but no more than—the law holds them to their other contracts. That conclusion may be construed by lower courts as limiting the scope of the federal presumption of arbitrability, which requires ambiguities in arbitration agreements to be resolved in favor of arbitration. This could be a game changer in disputes about the scope of arbitration agreements. It could make it more difficult to compel arbitration in cases where there is an ambiguity about scope, especially in state courts.
Morgan also further reinforces SCOTUS’s policy of interpreting the FAA according to textualist principles. The Court used the text of FAA Section 6 to support its conclusion. Section 6 says FAA applications “shall be made and heard in the manner provided by law for the making and hearings of motions” unless the FAA provides otherwise. 9 U.S.C. § 6.
The Court explained that Section 6 commands federal courts to apply ordinary federal procedural rules and accordingly bars courts from creating special rules designed to favor arbitration-friendly outcomes. Morgan, slip op. at 7. Because the general federal procedural rule governing waiver does not require prejudice, and because Section 6 requires courts to apply general federal procedural rules, the general federal procedural rule applies to waiver of arbitration, not a special rule applicable to arbitration only that conditions waiver on prejudice.
Morgan is not what one might characterize as an “arbitration friendly” decision. For many years, defendants sued in federal court on claims that fall within the scope of an arbitration agreement have been able to gain a significant tactical or strategic advantage by continuing to litigate for a period in federal court prior to moving to stay the litigation under FAA Section 3 and compel arbitration under Section 4. That kind of reversal of position can strain the resources of an opponent, and cause significant delay in resolution of the matter.
The arbitration-specific rule that required a showing of prejudice to establish waiver allowed parties to engage in such behavior with relative impunity, save for in those cases where the arbitration-challenger could establish prejudice, which is not easy to prove. But under Morgan, the arbitration-proponent’s actions inconsistent with the right to arbitrate alone will establish waiver, and that means that more cases that might otherwise end up in arbitration may remain in litigation.
SCOTUS and the Scope of FAA’s Coverage: Southwest Airlines Co. v. Saxon
In Southwest Airlines Co. v. Saxon, 596 U.S. ___, No. 21-309, slip op. (June 6, 2022), an 8-0 opinion authored by Associate Justice Clarence Thomas, the Court undertook an extensive, textual analysis of Section 1 of the FAA to determine whether an airline employee whose work “require[ed] her to load and unload baggage, airmail, and commercial cargo on and off airplanes that travel across the country[]” was exempted from the coverage of the FAA under FAA Section 1. Southwest Airlines, slip op. at 1. Section 1 of the FAA, as pertinent here, exempts from the FAA “contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1.
After engaging in a thorough, strict textual analysis of Section 1, the Court concluded that the employee was one of a “class of workers engaged in foreign or interstate commerce” within the meaning of Section 1, and thus exempt from the FAA. Southwest Airlines, slip op. at 11. Of all the cases discussed, Southwest Airlines featured the most extensive textual analysis.
In addition to strictly construing the FAA from a textualist perspective, the Court rejected a plea by the employer to construe Section 1 according to what it characterized as the FAA’s statutory purpose as evidenced by FAA Section 2’s broad mandate requiring courts to enforce arbitration agreements. Southwest Airlines, slip op. at 11. In this respect, the Court echoed Morgan’s teachings that Courts should not in FAA cases craft or rely on rules or analyses of purpose that are designed to encourage arbitration-favoring outcomes.
Section 2, argued the employer, “broadly requires courts to enforce arbitration agreements in any ‘contract evidencing a transaction involving commerce,’ while § 1 provides only a narrower exemption.” Southwest Airlines, slip op. at 11. That structure, according to the employer, evidences the FAA’s “‘proarbitration purposes’ and counsels in favor of an interpretation that errs on the side of fewer § 1 exemptions.” Southwest Airlines, slip op. at 11 (quoting brief for Petitioner 16, 30-33). But the Court said that “[Section] 1’s plain text suffices to show that airplane cargo loaders are exempt from the FAA’s scope, and we have no warrant to elevate vague invocations of statutory purpose over the words Congress chose.” Southwest Airlines, slip op. at 11.
The SCOTUS Judicial Assistance Case: ZF Automotive US, Inc., et al. v. Luxshare
In ZF Automotive, a 9-0 opinion written by Associate Justice Amy Coney Barrett, the Court construed the United States’ judicial assistance statute, 28 U.S.C. § 1782, which authorizes district courts to order the production of evidence or testimony “for use in a proceeding in a foreign or international tribunal.” 28 U.S.C. § 1782. The question was whether private arbitration panels sited abroad are “foreign or international tribunals” for purposes of the statute. The Court held that Section 1782 “reaches only governmental or intergovernmental adjudicative bodies, and neither of the arbitral panels involved in these cases fits that bill.” ZF Automotive, slip op. at 1.
The Court supported its interpretation of 28 U.S.C. § 1782 with an exacting textual analysis of the statute, first considering the term “tribunal” in isolation from the adjectives, “foreign or international,” and then in conjunction with each of them individually. The Court concluded that “‘foreign tribunal’ and ‘international tribunal’ complement one another; the former is a tribunal imbued with governmental authority by one nation, and the latter is a tribunal imbued with governmental authority by multiple nations.” ZF Automotive, slip op. at 9.
The Court also concluded that a “comparison to the [FAA]” confirmed the validity of the Court’s textual analysis. “Extending § 1782 to include private bodies[,]” the Court said, “would also be in significant tension with the FAA, which governs domestic arbitration, because § 1782 permits much broader discovery than the FAA allows.” ZF Automotive, slip op. at 11. Under the FAA, “only the arbitration panel. . . [may] request discovery, 9 U.S.C. § 7, while district courts can entertain § 1782 requests from foreign or international tribunals or ‘any interested person.’” ZF Automotive, slip op. at 1 (quoting 28 U.S.C. § 1782(a)). In addition, observed the Court, “prearbitration discovery is off the table [under the FAA]. . . but broadly available under § 1782.” ZF Automotive, slip op. at 11 (citation omitted).
The Court accordingly concluded that “[i]nterpreting § 1782 to reach private arbitration would therefore create a notable mismatch between foreign and domestic arbitration.” ZF Automotive, slip op. at 11. To further underscore the point the Court quoted from the Seventh Circuit’s Servotronics decision: “‘[its hard to conjure a rationale for giving parties to private foreign arbitrations such broad access to federal-court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations.’” ZF Automotive, slip op. at 11 (quoting Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689, 695 (7th Cir. 2020)).
Why no Discussion of Viking River Cruises?
Attentive readers are probably wondering why we have not in this article discussed the Viking River Cruises decision. That omission is intentional as that case is not as neatly grouped with the other three FAA Cases because it involved the question whether the FAA preempted California’s Private Attorney General Law (“PAGA”) to the extent that the law purports to preclude the division of PAGA actions into individual and non-individual claims, and did not involve a strictly textual analysis of the FAA. The case is nonetheless very interesting in its own right and will undoubtedly influence FAA practice and procedure, albeit for reasons that are outside the scope of this article.
The other three FAA Cases, and at least to some extent, ZF Automotive, will likely have the most significant impact on arbitration-law matters in the future. And if courts follow the teachings of those cases, the author thinks that arbitration-law may become more arbitration-neutral as well as more just.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or services that the Loree Law Firm offers, then 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. He is licensed to practice law in New York and before certain federal district and federal appellate courts.
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