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Posts Tagged ‘Federal Arbitration Act’

International Institute for Conflict Prevention and Resolution (CPR) Interviews Professor Angela Downes, Richard D. Faulkner, and Philip J. Loree Jr. about the Heckman v. Live Nation Entertainment Ninth Circuit Mass Arbitration Decision

November 13th, 2024 Appellate Practice, Applicability of Federal Arbitration Act, Application to Compel Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration Agreement Invalid, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Challenging Arbitration Agreements, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clear and Unmistakable Rule, CPR Alternatives, CPR Video Interviews, Delegation Agreements, FAA Chapter 1, FAA Section 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, International Institute for Conflict Prevention and Resolution (CPR), Mass Arbitration, New Era ADR, Petition to Compel Arbitration, Philip J. Loree Jr., Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Professor Angela Downes, Professor Downes, Repeat Players, Richard D. Faulkner, Russ Bleemer, Section 2, Section 4, The Loree Law Firm, Unconscionability, United States Court of Appeals for the Ninth Circuit No Comments »

CPR Interview

Heckman

Do you want to learn more about the Heckman mass arbitration case?

As readers may know, over the last four years or so, our friend and colleague Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), has hosted presentations about significant arbitration-law developments (principally in the United States Supreme Court) that feature interviews of our friends and colleagues: Professor Angela Downes, University of North Texas-Dallas College of Law Professor of Practice and Assistant Director of Experiential Education; arbitrator, mediator, arbitration-law attorney, and former judge, Richard D. Faulkner; and yours truly, Loree Law Firm principal, Philip J. Loree Jr. (See, e.g., here, herehereand here.) These interviews are posted on CPR’s YouTube channel, @CPRInstituteOnline.

On Monday, November 11, 2024, Russ interviewed Professor Downes, Rick and me about the Ninth Circuit’s recent mass-arbitration decision in Heckman v. Live Nation Entertainment, No. 23-55770, slip op. (9th Cir. Oct. 28, 2024). The video is here.

Heckman

The Heckman case centered around unusual mass-arbitration rules promulgated and administered by New Era ADR, which among many other things, included a broad delegation provision, which delegated to the arbitrator the authority to decide the validity of the parties’ arbitration agreement. The parties’ online ticket purchase agreement terms (the “Terms”) provided for arbitration pursuant to the New ERA Rules, which in the Heckman case meant New Era’s Rules for Expedited/Mass Arbitration proceedings.

Plaintiffs commenced in 2022 a putative class action against Live Nation Entertainment and Ticketmaster LLC, alleging that the companies violated the Sherman Act by engaging in anticompetitive practices. Those defendants  moved to compel arbitration, but the district court denied the motion, holding that the delegation clause and the arbitration agreement were procedurally and substantively unconscionable under California law.

Circuit Judge Lawrence VanDyke wrote a very interesting concurring opinion in Heckman in which he said he would have decided the case solely on the ground that the arbitration scheme violated the Discover Bank Rule, which was not preempted by the FAA because the scheme was not arbitration as envisioned by the FAA in 1925. This concurring opinion also discussed in some detail the conflict of interest that arises when arbitrators deciding arbitrability under a delegation clause conclude, or have reason to conclude, that an arbitration provider’s scheme—it’s business model—is unenforceable, pitting the arbitrator’s financial interest in continued employment against his or her neutral-decision-making interests.

Russ, Rick, Angela, and I discuss various aspects pertinent to the Heckman decision in the interview and identify issues that are likely to arise in future cases following the decision.
As always, we express our gratitude to Russ and CPR for hosting these interviews, and, along with Angela and Rick, look forward to contributing to future programs hosted by CPR.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related and other commercial and business matters.

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

 Photo Acknowledgment

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

Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part II)

October 21st, 2024 Application to Vacate, Arbitration Practice and Procedure, Authority of Arbitrators, Award Fails to Draw Essence from the Agreement, Award Vacated, Awards, Exceeding Powers, FAA Chapter 1, FAA Section 10, Federal Arbitration Act Section 10, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, United States Court of Appeals for the Seventh Circuit, United States District Court for the Northern District of Illinois, Vacate, Vacate Award | 10(a)(4), Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur, Vacatur for Conceded Nonfact or Clear Mistake of Historical Fact No Comments »

clear mistakeIn our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we discussed UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), which granted partial vacatur of an arbitration award because it was based on a “nonfact.”  We promised to take a closer, analytical look at UpHealth and its “clear mistake of historical fact or conceded nonfact” vacatur standard, and, in our October 18, 2024 post, Overturning Arbitration Awards Based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part I), identified five questions relating to UpHealth that help shed further light on the case and the arbitration award vacatur standard on which it relied:

  1. What is the difference, if any, between a “clear mistake of historical fact” and a “conceded nonfact?”
  2. What is or should be required to establish a “clear mistake of historical fact” or a “conceded nonfact?”
  3. Assuming Section 10(a)(4) authorizes courts to vacate awards based on a “clear mistake of historical fact” or a “conceded nonfact,” did the UpHealth district court err by holding that the award against Damodaran was based on a nonfact?
  4. Assuming that the district correctly applied the “conceded nonfact” standard, does it comport with the FAA?
  5. If there is a Seventh Circuit appeal of the UpHealth decision, is it likely the decision will be overturned on appeal, and if so, on what grounds?

That October 18, 2024 post went on to address questions 1 and 2. This Part II address the third question: “Assuming Section 10(a)(4) authorizes courts to vacate awards based on a “clear mistake of historical fact” or a “conceded nonfact,” did the UpHealth district court err by holding that the award against Damodaran was based on a nonfact?” The author thinks the answer is “yes.” One or more subsequent posts will answer questions 4 and 5.

Discussion

 

Assuming Section 10(a)(4) Authorizes Courts to Vacate Awards Based on a “Clear Mistake of Historical Fact” or a “Conceded Nonfact,” did the UpHealth District Court Err by Holding that the Award against Damodaran was Based on a Nonfact?

The UpHealth Court’s application of the “mistake of historical fact” or “conceded nonfact” standard raises serious questions about whether the Court substituted its judgment for that of the arbitrators. On balance, the author thinks it did for the reasons set forth below (which presume familiarity with our October 7, 2024, and our October 18, 2024, posts).

There are at least three flaws in the Court’s analysis: Continue Reading »

Overturning Arbitration Awards Based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part I)

October 18th, 2024 Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Award Fails to Draw Essence from the Agreement, Awards, Challenging Arbitration Awards, FAA Chapter 1, FAA Section 10, Federal Arbitration Act Section 10, Grounds for Vacatur, Imperfectly Executed Award or Powers, Judicial Review of Arbitration Awards, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, United States Court of Appeals for the Seventh Circuit, United States District Court for the Northern District of Illinois, Vacate Award | 10(a)(4), Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur, Vacatur for Conceded Nonfact or Clear Mistake of Historical Fact 1 Comment »

Historical factIn our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we promised  some further analysis of UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), the principal case discussed in that post, which held warranted  partial vacatur of an award because the award was based in part on a “nonfact.”  In this and at least one other post, let’s take a closer, analytical look at UpHealth’s  “clear mistake of historical fact or conceded nonfact” vacatur standard, consider whether UpHealth comports with the Federal Arbitration Act (“FAA”), and take an informed guess about how the U.S. Court of Appeals for the Seventh Circuit might decide the case if there is an appeal.

We’ll focus on the following questions and our answers will presume familiarity with the October 7, 2024, UpHealth post, here:

  1. What is the difference, if any, between a “clear mistake of historical fact” and a “conceded nonfact?”
  2. What is or should be required to establish a “clear mistake of historical fact” or a “conceded nonfact?”
  3. Assuming Section 10(a)(4) authorizes courts to vacate awards based on a “clear mistake of historical fact” or a “conceded nonfact,” did the UpHealth district court err by holding that the award against Damodaran was based on a nonfact?
  4. Assuming that the district correctly applied the “conceded nonfact” standard, does it comport with the FAA?
  5. If there is a Seventh Circuit appeal of the UpHealth decision, is it likely the decision will be overturned on appeal, and if so, on what grounds?

This Part I addresses questions 1 and 2. One or more subsequent posts will address questions 3 through 5.

Discussion

 

What is the Difference, if any, between a “Clear Mistake of Historical Fact” and a “Conceded Nonfact?”

 The standard adopted in UpHealth—which was derived from Electronics Corp. of Am. v. International Union of Elec., Radio and Mach. Workers, 492 F.2d 1255 (1st Cir. 1974); National Post Office, Mailhandlers, Watchmen, Messengers & Grp. Leaders Div, Laborers Int’l Union of N. Am., AFL-CIO v. United States Postal Serv., 751 F.2d 834, 843 (6th Cir. 1985) (Stewart, Associate Justice (ret.), sitting by designation), and Mollison-Turner v. Lynch Auto Grp., No. 01 6340, 2002 WL 1046704, at *3 (N.D. Ill. May 23, 2002)—authorizes vacatur of awards based on: (a) a “clear mistake of historical fact” or (b) a “conceded nonfact.” Both of these bases for vacating an award may, at least to some, suggest a fairly broad authorization to vacate awards that is not already encompassed within the manifest disregard of the agreement (a/k/a “essence of the agreement”) standard. That is especially so of vacatur based on a “clear mistake of historical fact.” Continue Reading »

Clause Conflicts: Supreme Court, New York County Finds Arbitration and Jurisdiction/Venue Clauses do not Conflict

September 30th, 2024 American Arbitration Association, Applicability of Federal Arbitration Act, Application to Stay Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Authority of Arbitrators, Clear and Unmistakable Rule, Conflict between Arbitration Clause and Another Clause, Drafting Arbitration Agreements, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Formation of Arbitration Agreement, Gateway Disputes, Gateway Questions, Jurisdiction Clause, New York County, New York State Courts, State Courts, Stay of Arbitration, Venue No Comments »

clauseWhat happens if a contract containing a broad arbitration clause also contains a clause that provides for federal or state court personal jurisdiction and venue over claims that would also fall within the scope of the arbitration clause? If you’ve ever worked on an insurance or reinsurance case in which the policy or contract contained both an arbitration agreement and a service of suit clause, then you’re probably familiar with how courts typically deal with apparent conflicts of that sort.

A service of suit clause—commonly found in, among others, London Market insurance and reinsurance policies and contracts—is a consent to personal jurisdiction provision that provides for personal jurisdiction in a court of competent subject-matter jurisdiction selected by the plaintiff or petitioner. See, e.g., Brooke Group Ltd. v. JCH Syndicate 488, 87 N.Y.2d 530, 534 (1996). It might provide, for example: “‘in the event of the failure of the Underwriters hereon to pay any amount claimed to be due’ the underwriters will, ‘at the request of the Insured. . . submit to the jurisdiction of a Court of competent jurisdiction within the United States.’” JCH Syndicate 488, 87 N.Y.2d at 534 (quoting service-of-suit clause).

At least at first glance, service of suit clauses appear to conflict with the kind of broad arbitration agreements typically found in reinsurance treaties and many London Market policies written for the U.S. excess and surplus lines market. Submitting to the jurisdiction of a court of competent jurisdiction in the event of a party’s failure to pay any amount claimed to be due under a contract seems antithetical to submitting the same failure to pay claim to arbitration.

Contentions of this sort have—not surprisingly—been made, but the Courts usually resolve them by harmonizing the service-of-suit clause with the arbitration clause, finding that the service-of-suit clause complements the arbitration clause by facilitating arbitration enforcement litigation. See, e.g., Pine Top Receivables of Illinois, LLC v. Transfercom, Ltd., 836 F.3d 784, 787 (7th Cir. 2016) (“Read as a whole, the reinsurance agreement[’s service of suit clause] requires Transfercom to submit to the jurisdiction of any court of competent jurisdiction chosen by PTRIL, whether it be to determine the arbitrable nature of the dispute, to confirm an arbitration award, to compel arbitration, or to resolve on the merits, a claim not subject to arbitration—including PTRIL’s breach of contract claim”); The Pointe on Westshore LLC v. Certain Underwriters at Lloyd’s of London, 670 F. Supp. 3d 1342, 1349-53 (M.D. Fla. 2023) (citing numerous cases).

As today’s case—Kennelly v. Myron & Selina Siegel Family Ltd. P’ship LP, No. 654950/2023, 2024 N.Y. Slip Op. 33278 (Sup. Ct. N.Y. Co. Sept. 17, 2024)—aptly demonstrates, apparent conflicts between arbitration agreements and venue or jurisdiction provisions in other types of contracts are addressed in a similar manner. They are resolved according to state law contract interpretation principles, and if the contract provisions can be harmonized, then the interpretation that gives effect to both provisions must prevail.

Clause Conflicts: Background

The interpretation issue in Kennelly arose out of an operating agreement (the “Operating Agreement”) for a limited liability company (the “LLC”). Two members and a manager (the “Arbitration Petitioners”) demanded arbitration against another member and another manager (the “Arbitration Respondents”), alleging that the LLC “and. . . [the Arbitration Respondent manager] failed to pay [those Arbitration Petitioners] all of the monies owed to [them] under the Operating Agreement, including the proper distributive share of [the LLC’s] net profits, and failed to properly manage and operate the venture’s property.” 2024 N.Y. Slip Op. at * 3. The Arbitration Petitioners sought between $1 million and 10 million dollars in damages, as well as interest, legal fees and expenses. Id.

The Operating Agreement (at Section 12.13) contained an arbitration agreement, which provided, in pertinent part:

Each Member agrees that the arbitration procedures set forth below shall be the sole and exclusive method for resolving and remedying claims for money damages arising out of a breach of this agreement (the ‘Disputes’); provided that nothing in this Section 12.13 shall prohibit a party hereto from instituting litigation to enforce any Final Determination (as defined below). The Members hereby acknowledge and agree that except as otherwise provided in this Section 12.13 or in the Commercial Arbitration Rules (the ‘Rules’) promulgated by the American Arbitration Association as in effect from time to time, the arbitration procedures and any Final Determination hereunder shall be governed by, and shall be enforced pursuant to the United States Arbitration Act, 9 U.S.C. § 1, et seq. . . .

(b) . . . . The arbitration shall be conducted in New York, NY, under the Rules as in effect from time to time. The arbitrator shall conduct the arbitration so that a final result, determination, finding, judgment and/or award (the “Final Determination”) is made or rendered as soon as practicable.

(c) Any applicable Member may enforce any Final Determination in any state or federal court of competent jurisdiction. For the purposes of any action or proceeding instituted with respect to any Final Determination, each party hereto hereby irrevocably submits to the jurisdiction of such courts, irrevocably consents to the service of process by registered mail or personal service and hereby irrevocably waives, to the fullest extent permitted by law, any objection which it my have or hereafter have as to personal jurisdiction, the laying of the venue of any such action or proceeding bought in any such court and any claim that any such action or proceeding brought in any court has been brought in an inconvenient forum.

2024 N.Y. Slip Op. 33278 at *4 (quoting Operating Agreement, § 12.13).

Section 12.14 of the Operating Agreement, “Venue,” stated:

Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with this Agreement or the transactions contemplated hereby or thereby may be brought in any state or federal court in The City of New York, Borough of Manhattan, and each Member hereby consents to the exclusive jurisdiction of any court in the State of New York (and of the appropriate appellate courts therefrom) in any suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objections which he, she or it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Each Member hereby waives the right to commence an action, suit or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with this Agreement or the transactions contemplated hereby or thereby in any court outside of The City of New York, Borough of Manhattan.

2024 N.Y. Slip Op. 33278 at *4 (quoting Operating Agreement, § 12.14).

The Arbitration Respondent brought a special proceeding in Supreme Court, New York County (the “special proceeding”), which sought, among other things,  to stay the arbitration on the ground that the Arbitration Petitioner’s  claims were not arbitrable. According to the Arbitration-Respondent (petitioner in the special proceeding), “the Operating Agreement’s separate venue provision, Section 12.14, conflicts with the arbitration provision and, as such, there was no meeting of the minds. . . .” N.Y. Slip Op. 33278 at *7. The Court rejected this argument. N.Y. Slip Op. 33278 at *7 & 8.

Clause Conflicts: Discussion

At the outset the Court noted that the parties agreed that the Federal Arbitration Act (“FAA”) applied, and that where, as here, the existence of an arbitration agreement is at issue, the court decides the question. N.Y. Slip Op. 33278 at *6-7 (citations omitted). It pointed out that there is no dispute that the parties entered into the Operating Agreement and that the Agreement is binding. In the arbitration provision,  Section 12.13, the parties unambiguously agreed that arbitration pursuant to the American Arbitration Association (“AAA”)’s Commercial Arbitration Rules was the “‘sole and exclusive method for resolving and remedying claims for money damages arising out of a breach’ of the Operating Agreement.” N.Y. Slip Op. 33278 at *7.

The Court explained that the alleged conflict between Section 12.13 and Section 12.14 was false. Under New York contract interpretation rules, courts must avoid interpretations that would render contractual provisions without meaning, and if reasonably possible, allegedly conflicting provisions should be harmonized, giving both force and effect. N.Y. Slip Op. 33278 at *7 (citations omitted).

The Court cited five cases where New York courts had harmonized similar apparent conflicts between arbitration clauses and jurisdiction-related clauses, including one involving a clause providing for “exclusive jurisdiction” in New York State courts. N.Y. Slip Op. 33278 at *7.  Three of these were decided by the Appellate Division, First Department, and two by the Supreme Court, New York County. See N.Y. Slip Op. 33278 at *7 (citing cases).

The Court had little difficulty harmonizing the arbitration (Section 12.13) and jurisdiction and venue clause (Section 12.14). The arbitration clause applied only to claims for money damages. That arbitration clause further provided that “the arbitration mandate [did] not ‘prohibit a party hereto from instituting litigation to enforce  any’ final arbitration determination.” N.Y. Slip Op. 33278 at *8 (quoting Section 12.13). The jurisdiction and venue clause said that “any ‘suit, action, or proceeding’ seeking to enforce any provision of the Operating Agreement, or any matter arising out of the agreement, ‘may be brought in any state or federal court’ located in new York County and that the parties consent to exclusive jurisdiction in any such court.” N.Y. Slip Op. 33278 at *8 (quoting Section 12.14).

From that, in turn, the Court drew three conclusions, which collectively demonstrated that the clauses were in harmony:

  1. Because Section 12.13 required arbitration only of monetary relief claims, claims for “equitable or other relief —e.g., specific performance or to stay or compel arbitration—must be brought in a court, and Section 12.14 would apply to any such suit.” N.Y. Slip Op. 33278 at *8 (citation omitted; emphasis in original).
  2. The arbitration clause (Section 12.13) refers to suits brought to enforce arbitration awards and Section 12.14 governed jurisdiction and venue for those suits. N.Y. Slip Op. 33278 at *8.
  3. The ejusdem generis canon of contract construction indicates that the specific should prevail over the general, and here the arbitration clause is “a specific, mandatory clause” while the jurisdiction and venue provision is “a general clause. . . .” Id.  

The Court thus held that “the plain language of Sections 12.13 and 12.14 permits an interpretation that does not result in an irreconcilable conflict between the two provisions or in one provision being rendered meaningless.” N.Y. Slip Op. 33278 at *8.

Delegation of Arbitrability to the Arbitrator

There were two other issues before the Court, one of which we’ll briefly address. The Arbitration Respondent argued that the Arbitration Petitioner’s claims were all “derivative in nature and should be precluded on that ground as well.” N.Y. Slip Op. 33278 at *8. In response, the Arbitration Petitioner argued that whether the claims were derivative [i.e., would have to be brought on behalf of the LLC], and if so, whether they were subject to arbitration, presented questions of arbitrability—questions the parties had delegated to the arbitrator by incorporating the AAA Commercial Rules into their contract. The Arbitration Respondent also apparently made arguments about “lack of proper service or notice,” but the Court’s opinion does not provide details on those claims.

The Arbitration Petitioner argued that these questions concerning the allegedly derivative nature of the claims, and proper service and notice, all had to be submitted to arbitration. The Court agreed with the Arbitration Petitioner.

The parties did not dispute that they had agreed to arbitrate according to the AAA Commercial Rules, which provided “that the ‘arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.’” N.Y. Slip Op. 33278 at *9 (quotation and citation omitted).

Citing Second Circuit and New York state court authority, the Court explained that incorporation of the AAA Commercial Rules into an arbitration agreement delegates arbitrability questions to the arbitrator. See N.Y. Slip Op. 33278 at *9 (citing and quoting Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir. 2005); other citations omitted); see, e.g., post here. The Court therefore held that the derivative-claim, notice, and service claims raised questions of arbitrability, which the Arbitration Respondent was required to submit to arbitration. N.Y. Slip Op. 33278 at *10.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related and other matters.

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

 Photo Acknowledgment

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

 

Ineffective Objections and Untimely Filings Lead to FAA Forfeiture: Sivanesan v. YBF, LLC, ___ A.D. 3d ___, 2024 N.Y. Slip Op. 4327 (2d Dep’t 2024)

September 4th, 2024 Applicability of Federal Arbitration Act, Application to Confirm, Application to Vacate, Arbitrability, Arbitrability - Nonsignatories, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Award Confirmed, Challenging Arbitration Awards, Clear and Unmistakable Rule, Confirm Award | Exceeding Powers, Confirmation of Awards, Delegation Agreements, Enforcing Arbitration Agreements, Existence of Arbitration Agreement, FAA Chapter 1, FAA Section 10, FAA Section 11, FAA Section 9, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 9, First Department, First Options Reverse Presumption of Arbitrability, First Principle - Consent not Coercion, Formation of Arbitration Agreement, Grounds for Vacatur, Modify or Correct Award, New York Arbitration Law (CPLR Article 75), Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Procedural Arbitrability, Questions of Arbitrability, Rights and Obligations of Nonsignatories, Second Department, Section 10, Section 11, Section 9, Service of Process, State Arbitration Law, Time Limit for Vacating, Modifying, or Correcting Award, Vacate Award | 10(a)(4), Vacate Award | Arbitrability, Vacate Award | Excess of Powers, Vacate Award | Existence of Arbitration Agreement Comments Off on Ineffective Objections and Untimely Filings Lead to FAA Forfeiture: Sivanesan v. YBF, LLC, ___ A.D. 3d ___, 2024 N.Y. Slip Op. 4327 (2d Dep’t 2024)

Objections Must be Timely and Effective in Federal Arbitration Act Litigation, Including Litigation Relating to Consulting AgreementsA good chunk of FAA practice and procedure —including FAA practice and procedure in state court—involves knowing when, how, and why to make timely and effective objections and filings in arbitration enforcement litigation.  Sivanesan v. YBF, LLC, ___ A.D. 3d ___, 2024 N.Y. Slip Op. 4327 (2d Dep’t 2024), which New York’s Appellate Division, Second Department, decided on August 28, 2024, illustrates this point well.

Appellants were not signatories to the arbitration agreement, did not agree to arbitrate any matters, and did not clearly and unmistakably agree to arbitrate questions of arbitrability. But the Court found that they participated in the arbitration without lodging adequate objections to the arbitrator’s jurisdiction and did not timely file in the confirmation litigation their petition to vacate the awards at issue. Accordingly, the Appellants were—by their participation in the arbitration without effective objections to the arbitrator’s jurisdiction—deemed to have impliedly consented to arbitrate all issues before the arbitrator, including whether they were bound by the contract and arbitration agreement as successors-in-interest. Not a happy place to be.

Background

The transactions pertinent to Sivanesan began in 2008 when YBF, LLC (“YBF”) sold to Cosmetics Specialties, East LLC (“CSE”) an exclusive license to Continue Reading »

Sanctions: Seventh Circuit Awards $40,000 in FRAP 38 Fees and Costs in Zurich v. Sun Holdings Case

August 28th, 2024 American Arbitration Association, Appellate Practice, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Award Confirmed, Challenging Arbitration Awards, Confirm Award | Exceeding Powers, Exceeding Powers, FAA Chapter 1, FAA Section 10, FAA Section 9, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 9, Judicial Review of Arbitration Awards, Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, Section 9, United States Court of Appeals for the Seventh Circuit, Vacate Award | 10(a)(4), Vacate Award | Attorney Fees, Vacate Award | Attorney's Fees, Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur Comments Off on Sanctions: Seventh Circuit Awards $40,000 in FRAP 38 Fees and Costs in Zurich v. Sun Holdings Case

sanctionsWe previously discussed the Seventh Circuit’s decision in American Zurich Ins. Co. v. Sun Holdings, Inc., 103 F.4th 475 (7th Cir. 2024) (Easterbrook, J.), in which the award challenger Sun Holdings, Inc. (“Sun Holdings”) claimed that the arbitrators exceeded their powers by imposing as sanctions a $175,000.00 attorney fee award, which they claimed, among other things, was barred by the language of the contract. (See our prior post, here.) The problem was that the arbitrators at least arguably interpreted the language in question and concluded that it did not bar the award of attorney fees in question. And the attorney fee  award comported with New York law and the American Arbitration Association Commercial Rules, both of which the parties made part of their agreement.

The challenger further undermined its position by not acknowledging the existence of controlling Seventh Circuit and U.S. Supreme Court authority and engaging in the arbitration proceedings what the Seventh Circuit believed was recalcitrant behavior. The challenger compounded that by attempting to second guess various determinations made by the arbitrators.

That this strategy backfired, exposing Sun Holdings to sanctions, is not surprising. It resulted in the Court issuing an order to show cause providing the challenger 14 days “to show cause why sanctions, including but not limited to an award of attorneys’ fees, should not be imposed for this frivolous appeal.” Zurich, slip op. at 5 (citing Fed. R. App. P. 38).

The Court,  on July 1, 2024,  after considering Sun Holdings challenger’s response to the order to show cause, determined that Fed. R. App. P. (“FRAP”) 38 sanctions were warranted.  The Court “conclude[d] that Sun Holdings must compensate American Zurich for the legal fees and other costs that it was unnecessarily forced to incur by Sun’s unnecessary appeal.” July 3, 2024, Order, No 23-3134, Dkt. 42 at 1 of 2 (7th Cir. July 3, 2024) (available on PACER).

In response to the Order to Show Cause, Sun Holdings argued “that it did not litigate in bad faith because it was entitled to contest the Second Circuit’s understanding of New York law, as represented in ReliaStar Life Insurance Co. v. EMC National Life Co., 564 F.3d 81, 86-89 (2d Cir. 2009).” Dk. 42 at 1 of 2. (Our posts on ReliaStar are here and here.)

“But[,]” said the Court, “the dominant theme of [Sun Holdings’] brief in this court was that we should review and reject the arbitrators’ interpretation of its contract with American Zurich. That line of argument is incompatible with an agreement to arbitrate, as our opinion explains.” Dk. 42 at 1 of 2. The Court proceeded to quote in further support the following passage from its opinion:

[A]s if to highlight the fact that it disdains the limits on judicial review of arbitral awards, Sun wants us to reexamine the arbitrators’ conclusion that it engaged in frivolous conduct (it was “just putting on a defense,” Sun insists) and wants us to say that the arbitrators overestimated the amount of excess fees that American Zurich was compelled to incur. These arguments are unrelated to contractual meaning. They are unabashed requests to contradict the arbitrators’ findings, something the Federal Arbitration Act forbids.

Dk.42 at 2 of 2 (quoting  American Zurich Ins. Co. v. Sun Holdings, Inc. 103 F.4th 475, 478 (7th Cir. 2024) (Easterbrook, J.)).

The Court said “Sun Holdings’ response to our order to show cause does not address that baseless aspect of its appellate argument.” Dk. 42 at 2 of 2. Sanctions, concluded the Court, would be imposed.

Having determined that FRAP 38 sanctions were warranted, the Court ordered American Zurich “to file a statement of the fees and costs incurred in defending its judgment,” giving Sun Holdings an opportunity to respond.

American Zurich originally sought $46,300.30 in fees and costs, but amended its statement to seek $75,250.80. August 21, 2024, Fees and Costs Order, No 23-3134, Dkt. 47 at 1 -2 of 2 (7th Cir. August 21, 2024) (available on PACER).

But the Court ordered Sun Holdings to “pay $40,000 to American Zurich as compensation for this frivolous appeal.” Dkt. 47 at 2 of 2. The Court said that it “declined to award the full amount sought by American Zurich[]” because “[a]n award exceeding [$40,000.00] is difficult to justify, given that much of the legal work should have preceded the appeal and we are not awarding fees for legal work in the district court.” Dkt. 47 at 2 of 2.

Contacting the Author

If you have any questions about this article, arbitration, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related, and other, matters.

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

 Photo Acknowledgment

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

Attorney Fees: Seventh Circuit to Consider Whether Exceeding Powers Challenge to Arbitrators’ Attorney’s Fees Award Warrants FRAP 38 Sanctions

June 19th, 2024 Appellate Practice, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Bad Faith, Challenging Arbitration Awards, Confirmation of Awards, Exceeding Powers, FAA Chapter 1, FAA Section 10, FAA Section 11, FAA Section 9, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 9, Insurance Contracts, Judicial Review of Arbitration Awards, Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Retrospectively-Rated Premium Contracts, Section 10, Section 11, Section 9, Uncategorized, United States Court of Appeals for the Seventh Circuit, Vacate, Vacate Award | 10(a)(4), Vacate Award | Attorney Fees, Vacate Award | Attorney's Fees, Vacatur 1 Comment »

Introduction

Attorney's Fees | Contract InterpretationMost challenges to arbitration awards—including attorney fees awards— fail because the standards of review are so demanding. The bar is exceedingly high by design. Otherwise—the reasoning goes—courts would “open[] the door to the full-bore legal and evidentiary appeals that can rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process and bring arbitration theory to grief in post-arbitration process.” Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 588 (2008) (citations and quotations omitted; some parenthetical material in original).

But the narrow margin for success is not a free pass for challengers to advance arguments that do not, in a court’s view, have a legitimate, good faith basis in the facts and the law, or in a reasonable argument for reversal or modification of the law.

A recent case in point is Circuit Judge Easterbrook’s decision in American Zurich Ins. Co. v. Sun Holdings, Inc., No. 23-3134, slip op. at 1 (7th Cir. June 3, 2024) (Easterbrook, J.). The award challenger claimed the arbitrators exceeded their power by imposing as a sanction an award of $175,000.00 in attorney fees because the contract allegedly barred such an attorney fees award. The problem was that the arbitrators at least arguably interpreted the language in question and concluded that it did not bar the award of attorney fees in question. Moreover,  the attorney fees  award comported with New York law and the American Arbitration Association Commercial Rules, both of which the parties made part of their agreement.

The Seventh Circuit has signaled that it believes there was no good faith basis for the challenge and that the challenger has offered none, apart from its insistence that its interpretation was the only one even barely plausible. The challenger appears to have further undermined its litigation position by engaging in what the Seventh Circuit believes was recalcitrant behavior in the arbitration proceedings, and, according to the Court, not acknowledging the existence of controlling Seventh Circuit and U.S. Supreme Court authority controverting its position. The challenger compounded that by asserting—contrary to FAA Sections 10 and 11— additional award challenges that the Court concluded were simply attempts to second guess various determinations made by the arbitrators.

That this strategy backfired should come as no surprise. It resulted in the Court issuing an order to show cause providing the challenger 14 days “to show cause why sanctions, including but not limited to an award of attorneys’ fees, should not be imposed for this frivolous appeal.” Zurich, slip op. at 5 (citing Fed. R. App. P. 38). At the time of this writing no decision has been made by the Court concerning whether it will, in fact, impose sanctions.

Background: The Award of Attorney Fees

Petitioner Sun Holdings, Inc. (“Sun” or the “Award Challenger”) is a Texas- Continue Reading »

SmartSky: Fourth Circuit Says No Jurisdictional Anchor Post Badgerow

March 23rd, 2024 Application to Compel Arbitration, Application to Confirm, Application to Stay Litigation, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Award Confirmed, Confirmation of Awards, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Diversity Jurisdiction, Enforcing Arbitration Agreements, FAA Chapter 1, FAA Chapter 2, FAA Section 10, FAA Section 11, FAA Section 3, FAA Section 4, FAA Section 9, Federal Arbitration Act 202, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 207, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Motion to Compel Arbitration, New York Convention, Petition or Application to Confirm Award, Petition to Compel Arbitration, Petition to Modify Award, Petition to Vacate Award, Section 10, Section 11, Section 6, Section 9, Stay of Litigation, Stay of Litigation Pending Arbitration, Subject Matter Jurisdiction, United States Court of Appeals for the Fourth Circuit 4 Comments »

SmartSky

 

Introduction

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

Suppose:

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

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

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

Badgerow 

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

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

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

A “Jurisdictional Anchor” Post-Badgerow?

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

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

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

SmartSky Caused a Circuit Split Concerning the Viability of Anchor Jurisdiction 

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

SmartSky’s Petition for Rehearing and Rehearing En Banc

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

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

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

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

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

Status of Arbitration-Law Cases Pending Before SCOTUS this Term

February 12th, 2024 Appellate Practice, Applicability of Federal Arbitration Act, Application to Appoint Arbitrator, Application to Compel Arbitration, Application to Enforce Arbitral Summons, Application to Stay Litigation, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, CPR Alternatives, CPR Speaks Blog of the CPR Institute, CPR Video Interviews, Delegation Agreements, Exemption from FAA, FAA Chapter 1, FAA Section 16, FAA Section 3, FAA Transportation Worker Exemption, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Question, Federal Subject Matter Jurisdiction, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Professor Downes, Richard D. Faulkner, Russ Bleemer, Section 3 Stay of Litigation, Subject Matter Jurisdiction, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit Comments Off on Status of Arbitration-Law Cases Pending Before SCOTUS this Term

Status of Arbitration Cases Pending Before SCOTUS this TermThere are three arbitration-law cases pending before the United States Supreme Court (“SCOTUS”) this October 2023 Term. SCOTUS will presumably decide all three cases by this June, 2024.

 

The Cases: Bissonnette

The first is  Bissonnette v. LePage Bakeries Park St., LLC, No. 23-51 (U.S.), a case that concerns the scope of Section 1 of the Federal Arbitration Act (“FAA”), which 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 (the “Section 1 Exemption”). SCOTUS granted cert. in Bissonnette on September 29, 2023. As set forth in the question presented:

The First and Seventh Circuits have held that [the Section 1 Exemption] applies to any member of a class of workers that is engaged in foreign or interstate commerce in the same way as seamen and railroad employees-that is, any worker ‘actively engaged’ in the interstate transportation of goods. The Second and Eleventh Circuits have added an additional requirement: The worker’s employer must also be in the ‘transportation industry.’

The question presented is: To be exempt from the Federal Arbitration Act, must a class of workers that is actively engaged in interstate transportation also be employed by a company in the transportation industry?

(Bissonnette Question Presented Report)

We summarized the case briefly here and provided a link to an October 24, 2023 video conference in which our friend and colleague Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), interviewed Professor Angela Downes, University of North Texas-Dallas College of Law Professor of Practice and Assistant Director of Experiential Education; Richard D. Faulkner, arbitrator, mediator, arbitration-law attorney, and former judge; and yours truly, Loree Law Firm principal, Philip J. Loree Jr., about the case, its implications, and how SCOTUS might decide it. You can watch the video-conference interview here.

SCOTUS has set Bissonnette down for oral argument for Tuesday, February 20, 2024 (here). You can listen to SCOTUS arguments on C-Span or on the Court’s website.

The Cases: Coinbase, Inc. v. Suski (a/k/a “Coinbase II”)

The second case  is Coinbase, Inc. v. Suski, No. 23-3 (U.S.) (“Coinbase II”), a case that is related to Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023) (“Coinbase I”), which was decided on June 23, 2023, and discussed hereCoinbase II concerns the application of a delegation provision—an agreement to arbitrate arbitrability disputes—contained in  a contract (“Contract 1”) clearly and unmistakably requires the parties to submit to the arbitrator the question whether the Contract 1 arbitration agreement requires the parties to arbitrate disputes concerning a subsequent contract, Contract 2, even though Contract 2 does not provide for arbitration and requires the parties to submit all disputes concerning Contract 2 exclusively to litigation before the California courts. Is Contract 1’s delegation provision, as applied to the dispute over Contract 2, and in light of the parties’ agreement to litigate, not arbitrate,  disputes concerning Contract 2, clear and unmistakable, as required by SCOTUS precedent? Or, as put differently by the question presented: “Where parties enter into an arbitration agreement with a delegation clause, should an arbitrator or a court decide whether that arbitration agreement is narrowed by a later contract that is silent as to arbitration and delegation?”

SCOTUS granted certiorari in Coinbase II on November 3, 2023, and on November 10, 2023, CPR’s Bleemer interviewed Professor Downes, Faulkner, and Loree about the certiorari grant, what it means, and how the Court might rule on it. You can watch the video-conference interview here. Our blog post about the interview and cert. grant is here.

Oral argument in Coinbase II has been scheduled for February 28, 2024.

Smith v. Spizzirri

The third case is Smith v. Spizzirri, No. 22-1218, which concerns FAA Section 3’s stay-of-litigation-pending-arbitration provision. The Court granted certiorari on January 12, 2024.

FAA Section 3 provides that, once a court determines that a dispute must be arbitrated, the court “shall on application of one of the parties stay the trial of the action until” conclusion of the arbitration.  9 U.S.C. § 3 (emphasis added). Most circuits addressing the question have determined that a stay is mandatory if requested. The Ninth Circuit, and a few others, have held that, despite the statute’s mandatory text, courts retain discretion to dismiss an action where all disputes in the action are subject to arbitration.

The Ninth Circuit below held that it was bound to follow prior precedent concerning discretion to dismiss (rather than stay), even though it acknowledged that the statute’s “plain text” suggests otherwise. The Ninth Circuit acknowledged the circuit split and two judges, in an occurring opinion, encouraged “the Supreme Court to take up this question.” (See Question Presented Report.)

The question presented to SCOTUS is “[w]hether Section 3 of the FAA requires district courts to stay a lawsuit pending arbitration, or whether district courts have discretion to dismiss when all claims are subject to arbitration.” (See Question Presented Report.)

Oral argument has not yet been scheduled and merits briefs have not yet been filed.

The case is more noteworthy than may initially meet the eye. It has important implications concerning appealability. If an action is stayed, rather than dismissed, a granted motion to compel arbitration cannot be immediately appealed, see 9 U.S.C. § 16(b)(1),(2), (3) & (4); but if a motion to compel is granted, and the action is dismissed, then the right to appeal the denial begins to run immediately. 9 U.S.C. § 16(a)(3); Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 85-89 (2000). If a Section 3 stay is mandatory when requested, then there will presumably be fewer cases where courts compel arbitration and dismiss  (rather than stay) the underlying lawsuit, and therefore fewer cases where a grant of a motion to compel or denial of a motion to stay or enjoin arbitration is immediately appealable.

The subject matter jurisdiction implications of the case are equally significant. As we explained in a recent post, under Badgerow, a court’s federal-question subject matter jurisdiction can, for purposes of a motion to compel arbitration, be based on whether the underlying dispute would fall under the Court’s federal question jurisdiction.

But subject matter jurisdiction over a petition to confirm or vacate an award resulting from that arbitration cannot, after Badgerow, be based on such “look through” jurisdiction. An independent basis for subject matter jurisdiction must appear from the face of the petition and cannot be based on whether a court would have federal question jurisdiction over the underlying dispute.

As we explained in our Badgerow post, in cases where a Section 3 stay has been requested and granted, there may nevertheless be a so-called “jurisdictional anchor” on which subject matter jurisdiction over subsequent motions to confirm, vacate, or modify awards, to enforce arbitral subpoenas, or appoint arbitrators may be based. Under that jurisdictional anchor theory as long as the court stays the litigation, the court would retain its subject matter jurisdiction, and could exercise it to grant subsequent motions for FAA relief. While there remains a question whether the jurisdictional anchor theory survived Badgerow,  the theory makes sense, even under Badgerow, and is supported by pre-Badgerow case law. (See Badgerow Post.)

If the Court in Spizzirri rules that a motion to stay litigation pending arbitration must be granted if supported and requested, then it will presumably be easier for parties to assert subject matter jurisdiction based on a jurisdictional anchor theory.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip J. Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. (bio, here) 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 various federal district courts and circuit courts of appeals.

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

Photo Acknowledgment

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

 

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

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

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

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

Section 4 of the Federal Arbitration Act expressly authorizes a Court to exercise subject-matter jurisdiction on that basis: “A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C. § 4; see Badgerow, 142 S. Ct. at 1317.

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

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

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

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

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