InLandau v. Eisenberg, ___ F.3d ___, No. 17-3963, slip op. (May 1, 2019) (per curiam), the U.S. Court of Appeals for the Second Circuit recently held that district courts must “look through” a Section 9 petition to confirm an arbitration award to determine whether the court has subject matter jurisdiction to adjudicate the petition. District courts must therefore ascertain whether the district court would, absent an arbitration agreement, have had subject matter jurisdiction over the underlying controversy that resulted in the arbitration, and ultimately the award.
While the Second Circuit ruled in a per curiam decision, the issue it decided was of first impression. But it followed on the heels of, and heavily relied on, Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372, 379-89 (2d Cir. 2016), which held that district courts should look through a Section 10 or 11 petition to ascertain the existence of federal subject matter jurisdiction. Doscher instructed federal courts to focus not on whether the Section 10 and 11 FAA award review and enforcement process presented substantial federal questions, but on the same thing they would have focused on had they been asked to compel arbitration of the controversy: whether the underlying controversy, in keeping with the well-pleaded complaint rule, would have been within the Court’s subject matter jurisdiction had it not been submitted to arbitration. See Doscher, 882 F.3d at 379-89.
While Eisenberg and Doscher concerned the question whether federal-question subject matter jurisdiction exists over FAA Sections 9, 10, and 11 petitions, the reasoning of those cases also applies to the question whether there is federal subject matter jurisdiction over such petitions based on the diversity jurisdiction.
The Problem Addressed by Eisenberg and Doscher
Problem | Issue
The Federal Arbitration Act is “something of an anomaly in the realm of federal legislation: It bestows no federal jurisdiction but rather requires for access to a federal forum an independent jurisdictional basis over the parties’ dispute.” Vaden v. Discover Bank, 556 U.S. 49, 59 (2009).
Section 4 of the FAA, which governs motions to compel arbitration, provides that to determine the “independent jurisdictional basis” the court must ascertain whether “save for such agreement, [the district court] would have jurisdiction. . . of the subject matter of a suit arising out of the controversy [claimed to be arbitrable][:]”
[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.
9 U.S.C. § 4 (emphasis added).
The Supreme Court held in Vaden that “§ 4 of the FAA does not enlarge federal court jurisdiction,”
556 U.S. at 66, and district courts must “look through” the petition to the
controversy between the parties to ascertain whether the court had subject
matter jurisdiction over the controversy. 556 U.S. at 62. District courts must
therefore “assume the absence of the arbitration agreement and determine
whether it would have jurisdiction under title 28 without it.” Id. at 63.
But section 4 of the FAA expressly specifies the
circumstances under which a federal district court will have jurisdiction over
an application to compel arbitration, whereas Sections 9, 10, and 11 of the
FAA—which address applications to confirm, vacate, and modify awards—say
nothing about subject matter jurisdiction. The availability of relief under
those portions of the FAA is not conditioned on either the existence of a
lawsuit over which the Court already has subject matter jurisdiction (and which
may have been stayed pending arbitration under Section 3 of the FAA) or on a
party having previously invoked the court’s jurisdiction by filing a proceeding
to compel arbitration under Section 4.
Sections 9, 10, and 11 of the FAA do not in and of
themselves vest jurisdiction in a district court simply because they are part
of a federal statute—the FAA requires an independent basis for federal subject
matter jurisdiction. But what determines subject matter jurisdiction, the
nature of the petition to confirm, vacate, or modify the award, or the nature
of the underlying dispute that ultimately resulted in the arbitration
award?
Section 1 of the Federal Arbitration Act exempts from the FAA’s scope disputes involving “contracts of employment of . . . workers engaged in . . . interstate commerce.” 9 U. S. C. § 1. If parties to an arbitration agreement clearly and unmistakably delegate arbitrability questions to an arbitrator, who decides whether a contract containing the arbitration agreement is such a “contract of employment?”
United States Supreme Court
InNew Prime Inc. v. Oliveira, 586 U.S. ___, slip op. (Jan. 15, 2019), the nation’s highest court held that courts decide whether a contract is within the scope of the FAA’s coverage, even where the parties clearly and unmistakably delegate arbitrability questions to an arbitrator. Slip op. at 4. Addressing the merits of the FAA’s applicability to the contract, the United States Supreme Court held that under Section 1 it was exempt from the FAA because in 1925, the year Congress enacted the FAA, the term “contracts of employment” was ordinarily understood to include not only contracts establishing an employer-employee (or master and servant) relationship, but also independent contractor relationships. Slip op. at 15.
Who gets to decide whether the Federal Arbitration Act applies to the parties’ agreement?
Today we’ll focus on the first issue addressed by the Court: who gets to decide whether a contract falls within the Section 1 “contracts of employment” exemption when the parties have delegated arbitrability disputes to the arbitrators. In a later post we’ll look at how the Court decided the contract before it was under Section 1 a “contract of employment of a “worker[] engaged in interstate commerce[,]” and thus outside the scope of the FAA.
Background
Dispute between a trucker and a trucking company
New Prime was a dispute between a truck driver and a trucking company. The relationship between the two was established by a written contract which, at least in form, established an independent contractor, rather than an employer-employee relationship. The contract contained an arbitration clause which provided that “any disputes arising out of the parties’ relationship should be resolved by an arbitrator—even disputes over the scope of the arbitrator ’s authority.” Slip op. at 1-2.
The trucker commenced a federal-court class action, which alleged that, irrespective of what the trucking company called its drivers, the trucking company “treat[ed] them as employees and fail[ed] to pay the statutorily due minimum wage.” Slip op. at 2.
The trucking company asked the district court to compel arbitration of the dispute. In response the trucker contended that his contract was outside the scope of the FAA because it was a “contract[] of employment of . . . [a] worker[] engaged in foreign or interstate commerce.” 9 U.S.C. § 1. Thus, said the trucker, the FAA “supplied the district court with no authority to compel arbitration….” Slip op. at 2.
The trucking company replied that the parties had agreed to submit to arbitration the question whether the Section 1 “contracts of employment” exemption applied to the contract. The trucking company alternatively contended that, if the question was for the Court, then the term “‘contracts of employment’ refers only to contracts that establish an employer-employee relationship[,]” and the trucker was an independent contractor, not an employee, of the trucking company. Accordingly, said the trucking company, the Section 1 exclusion did not apply, the FAA applied, and the Court should stay the litigation and compel arbitration under FAA Sections 3 and 4. See 9 U.S.C. §§ 3 & 4; slip op. at 2-3.
The district court and the United States Court of Appeals for the First Circuit found in favor of the trucker. The First Circuit “held, first, that in disputes like this a court should resolve whether the parties’ contract falls within the Act’s ambit or [Section 1’s] exclusion before invoking the [FAA’s] authority to order arbitration.” Slip op. at 3. The First Circuit further “held that [Section 1’s] exclusion of certain ‘contracts of employment’ removes from the Act’s coverage not only employer-employee contracts but also contracts involving independent contractors.” Slip op. at 3. Accordingly, irrespective of whether the parties’ agreement established an employer-employee or independent contractor relationship, the district court lacked FAA authority to compel arbitration. Slip op. at 3.
In an 8-0 Opinion written by Associate Justice Neil M. Gorsuch, the U.S. Supreme Court affirmed the First Circuit’s decision (Associate Justice Brett Michael Kavanaugh took no part). Associate Justice Ruth Bader Ginsburg penned a brief concurring opinion.
The Court Must Decide Whether Section 1 Exempts the Contract from the FAA’s Scope
The Broad Authority the FAA Confers on Courts does not Extend to All
Private Contracts
SCOTUS: Judicial authority to compel arbitration under the FAA “may be considerable[,]” but it is not “unconditional”
The answer to the “who” question was “immediately” “clear” to the Court. Slip op. at 3. Though “a court’s authority under the [FAA] to compel arbitration may be considerable, it isn’t unconditional.” Slip op. at 3. FAA Sections 3 and 4 “often require a court to stay litigation and compel arbitration ‘according to the terms’ of the parties’ agreement[,]” “[b]ut this authority doesn’t extend to all private contracts, no matter how emphatically they may express a preference for arbitration.” Slip op. at 3.
Section 1 and Section 2 are Antecedent Provisions that Limit Judicial Power to Stay Litigation and Compel Arbitration under Sections 3 and 4
Court must apply FAA Sections 1 and 2 to determine whether it has the authority to stay litigation or compel arbitration under Sections 3 and 4
Sections 1 and 2, the Court explained, are “antecedent statutory provisions” that “limit the scope of the scope of the court’s powers under [Sections] 3 and 4.” Slip op. at 3. Section 2 “applies only when the parties’ agreement to arbitrate is set forth as a ‘written provision in any maritime transaction or a contract evidencing a transaction involving commerce.’” Slip op. at 3. Section 1, which “helps define [Section] 2’s terms[,]” provides that “‘nothing’ in the [FAA] ‘shall apply’ to ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’” Slip op. at 3-4 (quoting 9 U.S.C. § 1).
According to the Court, Section 1’s exemption was included in the FAA, which was enacted in 1925, because “Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers[,]” [a]nd it seems Congress ‘did not wish to unsettle’ those arrangements in favor of whatever arbitration procedures the parties’ private contracts might happen to contemplate.” Slip op. at (quoting Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 121 (2001)).
The FAA’s “Terms and Sequencing” Demonstrates that under Section 1 Courts Decide whether a Contract Falls Under the FAA
The FAA’s “terms and sequencing” supported the Court’s conclusion that “a court should decide for itself whether [Section] 1’s ‘contracts of employment’ exclusion applies before ordering arbitration.” Slip op. at 4. Before a Court can “invoke its statutory powers under [Sections] 3 and 3 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or beyond the boundaries of [Sections] 1 and 2.” Slip op. at 4. That is so even if the “parties’ private agreement [is] crystal clear and require[s] arbitration of every question under the sun….” See slip op. at 4.
The Court’s Prior Decisions have Stressed the Significance of the FAA’s “Sequencing”
SCOTUS says its “holding” should come as no “surprise[,]” because its prior decisions require that a contract fall within the scope of Sections 1 and 2 before litigation may be stayed or arbitration compelled under Sections 3 or 4.
The Court said “[n]othing in our holding on this score should come as a surprise[,]” because the Court has “long stressed the significance of the statute’s sequencing.” By way of example the Court cited and quoted Bernhardt v. Polygraphic Co. of America, 350 U. S. 198, 201–202 (1956), Circuit City, and Southland Corp. v. Keating, 465 U. S. 1, 10–11, and n. 5 (1984). In Bernhardt the Court explained that “‘Sections 1, 2, and 3 [and 4] are integral parts of a whole. . . . [Sections] 1 and 2 define the field in which Congress was legislating,’ and §§3 and 4 apply only to contracts covered by those provisions.” Slip op. at 4 (quoting Benhardt, 350 U.S. at 201-202). In Circuit City, the Court “acknowledged that ‘Section 1 exempts from the [Act] . . . contracts of employment of transportation workers.’” Slip op. at 4 (quoting Circuit City, 532 U. S., at 119). In Keating the Court “noted that ‘the enforceability of arbitration provisions’ under §§3 and 4 depends on whether those provisions are ‘ part of a written maritime contract or a contract “evidencing a transaction involving commerce”’ under §2—which, in turn, depends on the application of §1’s exception for certain ‘contracts of employment.’” Slip op. at 4-5. (quoting Keating, 465 U. S. at 10–11, and n. 5).
The Trucking Company’s Delegation and Severability Arguments Put the Section 3 and Section 4 Cart before the Section 1 and Section 2 Horse
The trucking company’s arguments put the Section 3 and 4 cart before the Section 1 and 2 horse. Admittedly, the above photo doesn’t accurately depict that idiomatic scenario, but why make hay of it?
The trucking company contended that an arbitrator should decide the parties’ Section 1 dispute, relying on the delegation provision in the contract and the severability doctrine. “A delegation clause,” said the Court, “gives an arbitrator authority to decide even the initial question whether the parties’ dispute is subject to arbitration.” Slip op. at 5 (citing Rent-A-Center, West, Inc. v. Jackson, 561 U. S. 63, 68–69 (2010)).
Under the severability doctrine, the Court “treat[s] a challenge to the validity of the arbitration agreement (or a delegation provision) separately from a challenge to the validity of the entire contract in which it appears.” Slip op. at 5. If a party does not “specifically challenge[] the validity of the agreement to arbitrate, both sides may be required to take all their disputes—including disputes about the validity of their broader contract—to arbitration. Slip op. at 5 (citing Rent-a-Center).
The trucking company argued that: (a) the
trucker did not “specifically challenge[] the parties’ delegation clause. . .”;
and, therefore, (b) the parties had to arbitrate their dispute over whether the
contract fell within Section 1’s exemption.
The Court explained that this argument “overlooks the necessarily antecedent statutory inquiry we’ve just discussed.” Slip op. at 5. “A delegation clause,” said the Court, “is merely a specialized type of arbitration agreement, and the [FAA] ‘operates on this additional arbitration agreement just as it does on any other.’” Slip op. at 5 (quoting Rent-a-Center, 561 U. S. at 70.) To “use [Sections] 3 and 4 to enforce a delegation clause[,]” “the clause” must “appear[] in a ‘written provision in . . . a contract evidencing a transaction involving commerce’ consistent with [Section] 2[,]” “[a]nd only if the contract in which the clause appears doesn’t trigger [Section] ’s ‘contracts of employment’ exception.” Slip op. at 5.
“In exactly the same way,” said the Court, the FAA’s “severability principle applies only if the parties’ arbitration agreement appears in a contract that falls within the field [Sections] 1 and 2 describe.” Slip op. at 5-6. Indeed, the Court “acknowledged as much some time ago, explaining that, before invoking the severability principle, a court should ‘determine[] that the contract in question is within the coverage of the Arbitration Act.’” Slip op. at 6 (citing and quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 402 (1967)).
More to follow on New Prime…
But if in the meantime you want to learn more now about arbitrability and delegation provisions, see prior posts here, here, here, here, and here.
Photo Acknowledgments:
The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law.
Each involved a dispute about the existence of an arbitration agreement. In UBS Securities United States District Judge Denise L. Coteof the United States District Court for the Southern District of New York entered a declaratory judgment that certain Swiss investors could not compel UBS to arbitrate their securities fraud claims, and permanently enjoined the Swiss investors from pursuing their claims in arbitration. Affirming the district court, the Second Circuit held that UBS satisfied the three requisites of permanent injunctive relief: 1) success on the merits; 2) lack of an adequate remedy at law; and 3) irreparable harm.
As respects success on the merits, the Court held that UBS was not obligated to arbitrate with the Swiss investors, and therefore had succeeded on the merits. Financial Industry Regulatory Authority(“FINRA”) Code Rule 12200 provides that members can be compelled to arbitrate only 1) pursuant to a written agreement; or 2) where a customer requests arbitration. FINRA R. 12200. There was no written agreement to arbitrate between UBS and any of the Swiss investors and the Swiss investors were not customers of UBS. See UBS Securities, slip op. at 3.
As respects the lack of an adequate remedy at law and irreparable harm, the Court explained that under Merrill Lynch Inv. v. Optibase, Ltd., 337 F.3d 125, 129 (2d Cir. 2003), “[b]eing forced to arbitrate a claim one did not agree to arbitrate constitutes an irreparable harm for which there is no remedy at law.” Slip op. at 3. Because UBS was not legally obligated to arbitrate, and because “the lack of an injunction would result in UBS effectively being required to do so, UBS satisfie[d] the ‘irreparable harm’ and ‘lack of an adequate remedy at law’ requirements for an injunction.” Slip op. at 3.
Dedon concerned the familiar rule that disputes about the existence of a contract containing an arbitration agreement must be decided by the court (absent a clear and unmistakable post-dispute submission of that issue to arbitration). Janus sought to compel arbitration before the International Chamber of Commerce(“ICC”) of an exclusive-distribution-agreement dispute, contending 1) the parties had agreed to arbitrate “as evidenced by a draft exclusive distribution agreement or the standard terms and conditions that accompanied each purchase;” and 2) Dedon had “waived its right to arbitrate through its conduct before the ICC” in London. Slip op. at 2. United States District Judge Colleen McMahonof the United States District Court for the Southern District of New York denied the motion to compel and declined to stay the proceedings pending an ICC determination of the contract formation issue, holding that the dispute concerned the existence of an arbitration agreement and that Dedon had not unreservedly submitted the contract formation issue to ICC arbitration.
The Court held that Dedon had not waived its right to court determination of the contract formation issue. The Court said that “Dedon’s submissions to the ICC were replete with statements that Dedon disputed the ICC’s jurisdiction; such repeated objections to ICC jurisdiction prevent a finding of waiver. . . .” Slip op. at 5 (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 946 (1995); Opals on Ice, 320 F.3d at 368).
The Court also rejected Janus’ argument that an agreement to arbitrate “may be found in the terms and conditions that accompanied each purchase order between Dedon and Janus.” Slip op. at 5:
On their face, the terms and conditions in those purchase orders govern the particular exchange of goods occurring with that purchase order — “[a]ll contractual and extra-contractual disputes arising out of or in connection with contracts to which these International Terms and Conditions apply, shall be finally resolved by arbitration” (emphasis added) — and do not purport to create or refer to any exclusive distribution relationship between the parties, which is the sole focus of the present suit.
Janus also argues that the exclusive distribution agreement should be encompassed within the meaning of ‘pre-contractual and collateral obligations’ to the purchase orders. Janus would thus have this court find that “any dispute related to any obligation arising prior to or outside of the contract formed by each shipment of goods” is governed by the purchase orders’ terms and conditions. (emphasis in original) We decline to adopt Janus’s broad reading of that contractual language, as it ignores the plain language of the purchase order, and we agree with the district court that the terms and conditions do not provide an alternative basis for compelling arbitration.
Slip op. at 5-6 (emphasis in original).
Dedon — the party who prevailed in the district court — argued that the district court should have denied the motion to compel with prejudice. Dedon relied on Kahn Lucas Lancaster, Inc. v. Lark Int’l Ltd., 186 F.3d 210, 218 (2d Cir. 1999), partially abrogated on other grounds by Sarhank Group v. Oracle Corp., 404 F.3d 657, 660 n.2 (2d Cir. 2005), which held that under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, arbitration agreements, to be enforceable, “must be signed by the parties or contained within an exchange of letters or telegrams.” 186 F.3d at 218) (quoting Article II of the Convention). But Dedon did not raise that argument before the district court, and so the Court said “the parties will have the opportunity to argue this issue at the trial on the existence of a contact.” Slip op. at 6-7. The Court also noted that the district court may “consider what effect, if any, [the Court’s] holding in Kahn Lucas has on any renewed motion to compel.” Slip op. at 7.
[EDITOR’S NOTE: (Summary orders “filed on or after January 1, 2007 may be cited in a document filed” with the Second Circuit, subject to Rule 32.1 of the Federal Rules of Appellate Procedure and Local Rule 32.1.1. See Second Circuit Local Rule 32.1.1(b)(1) ; Fed. R. App. P. 32.1. “[A] party must cite either the Federal Appendix or an electronic database (with the notation ‘summary order)[,]” and “must serve a copy of it on every party not represented by counsel.” Second Circuit Local Rule 32.1.1(c) & (d).]
In this Part V.A of our consolidated-reinsurance-arbitration series, we delve into Stolt-Nielsen’s legal implications on consolidated reinsurance-arbitration practice, focusing on how courts are likely to decide the allocation-of-power question: Who gets to decide whether the parties consented to consolidated arbitration? In Part V.B we shall examine Stolt-Nielsen’s other specific legal and practical implications, focusing on what a party will likely need to show to obtain consolidated arbitration and how frequently consolidated arbitration is likely to be granted after Stolt-Nielsen.
B. Who Gets to Decide Whether the Parties Consented to Consolidated Arbitration?
Readers will recall from Part III (here) that courts interpreted Bazzle as governing the allocation-of-power issue. Now that the Court has said Bazzle never commanded a majority on that issue, and that it remains open, courts must reconsider it not only in the class-, but in the consolidated-arbitration context.
Consolidated arbitrations, like class arbitrations, raise two types of questions: Common-dispute and party-consent questions. We think that courts will likely conclude that both are questions of arbitrability for the court to decide in the first instance, unless the parties clearly and unmistakably agree otherwise. Arbitrators may play a role in resolving contractual ambiguities identified by the court.
1. Who Gets to Decide Common-Dispute Questions?
All consolidated-arbitration questions concern whether at least one arbitration agreement encompasses not only disputes concerning one, but all other contracts at issue. We call this the “common-dispute” question.
In some consolidated-arbitration disputes the “common dispute” question is the only one presented. Suppose reinsurer R enters into two treaties with cedent C, Contracts A and B, each of which incept on the same date and are in force for one year. Contract A’s limits are $1 million per occurrence excess a $500,000 retention. Contract B has per occurrence limits of $2 million excess of $1.5 million. Both contain broad arbitration clauses under which the parties agreed to arbitrate “any dispute arising out of or relating to this contract.” Continue Reading »
The validity of class action waivers in arbitration agreements is a controversial subject at the moment. There is an obvious tension between the pro-enforcement policies of the Federal Arbitration Act and competing state and federal policies favoring class action arbitration or litigation as a vehicle for vindicating consumer rights. The United States Supreme Court may provide some hint of where it stands on this issue when it decides the Stolt-Nielsen case (blogged here and here), which raises the related issue whether imposing class action arbitration is consistent with the Federal Arbitration Act when the parties’ contract is silent on that score. And the Supreme Court may directly address the issue of whether class action waivers comport with federal policy if it decides to grant certiorari in the American Express Merchants’ Litigation (blogged here). Today we examine a case in which the question was whether a state policy in favor of consumer class actions could trump the enforcement of an arbitration agreement containing a class-action waiver.
On July 2, 2009, in Feeney v. Dell Inc., ___ Mass. ___, slip op. (July 2, 2009), the Massachusetts Supreme Judicial Court (the “SJC”) ruled that a class action waiver contained in a consumer arbitration agreement violated a fundamental Massachusetts public policy favoring class actions, even though the parties had agreed that Texas law, which allows class action waivers, would govern their agreement. This violation of Massachusetts public policy, said the Court, rendered the arbitration agreement unenforceable because the class action waiver was unenforceable and could not be severed from the remainder of the arbitration agreement. But, in an interesting turn of events, the Court dismissed the consumers’ claims with leave to replead, because they failed to state a claim under Mass. G.L., c. 93A, the applicable consumer protection law.
The case is somewhat different from other decisions voiding class action waivers because the agreement was voided on state public policy grounds, rather than on state unconscionability grounds, and because the court refused to enforce not only the class action waiver but also a choice-of-law clause indicating the parties’ desire that Texas, not Massachusetts, law would govern the class action waiver issue. The case gives rise to serious questions concerning federal preemption of Massachusetts state policy.
In this part I of a two-part post, we summarize the Feeny case. In part II, which will follow tomorrow or the next day, we shall provide our critical analysis. Because the publicly available copy of the case does not feature official pagination, we have eliminated jump cites, but provide after quotes pertinent information about internal citations, quotations and the like. Continue Reading »
Attorney Advertising Notice: Prior results do not guarantee a similar outcome.
Please see also the information and links set forth on each footer page of the The Loree Law Firm website of which this blog is a part (http://www.loreelawfirm.com), and in the disclaimer that appears in the bottom right corner of each post page of this blog.
Disclaimer: The content of this blog is not intended to be legal advice and should not be construed as such. The views expressed in this blog are solely those of the author and do not necessarily reflect those of The Loree Law Firm or any of its current or former clients.
