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Posts Tagged ‘Second Circuit’

Class Arbitration, Absent Class Members, and Class Certification Awards: Consent or Coercion?

January 6th, 2020 Arbitration Agreements, Arbitration as a Matter of Consent, Authority of Arbitrators, Class Action Arbitration, Class Arbitration - Class Certification Awards, Clause Construction Award, Confirm Award | Exceeding Powers, Consent to Class Arbitration, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, First Principle - Consent not Coercion, Practice and Procedure, Rights and Obligations of Nonsignatories, United States Court of Appeals for the Second Circuit No Comments »
absent class members | class arbitration

On November 29, 2019 we posted Absent Class Members, Class Arbitration, Class Certification Awards, Consent, Coercion, and the Second Circuit, which discussed the U.S. Court of Appeals for the Second Circuit’s recent decision in Jock v. Sterling Jewelers Inc., No. 18-153-cv, slip op. (2d Cir. November 18, 2019) (“Jock IV”).

In Jock IV the Second Circuit reversed a district court order vacating an arbitrator’s class certification award, which the district court vacated because it made tens of thousands of absent class members part of a certified class even though none: (a) was a party to the class arbitration; (b) opted in to the proposed class; or (c) participated in or otherwise consented to the class arbitration. The Second Circuit held it was enough that the absent class members, like all other employees, had executed an identical, form pre-dispute arbitration agreement (the “Agreement”), which required the absent class members to submit, among other things, arbitrability and arbitration procedure disputes to arbitration.

Absent Class Members: The Federal Arbitration Act’s First Principle and Consent to Class Arbitration

The Federal Arbitration Act (“FAA”)’s “first principle” is that “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80, 684 (2010) (citation and quotations omitted); see, e.g., Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1417 (2019); Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 295 & n.7, 294 n.6 (2010); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 648 (1986).

Beginning in Stolt-Nielsen,and most recently in Lamps Plus, the U.S. Supreme Court has repeatedly emphasized the importance of consent to class arbitration. In Stolt-Nielsen, the Court required a “contractual basis” for imposing class arbitration, and explained that “[a]n implicit agreement to authorize class arbitration, however, is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.” 599 U.S. at 685.  

Most recently, in Lamps Plus the Court imposed a federal presumption against consent to class arbitration under which silent or ambiguous contract language cannot establish consent to class arbitration, and under which the FAA is deemed to preempt state-law contract interpretation rules that are not intent-based—such as contra proferentem, the rule that ambiguities are, at least in the absence of any other extrinsic evidence of intent, construed against the contract’s drafter. See Lamps Plus,139 S. Ct. at 1416-19.

The Lamps Plus presumption requires more than simply “a contractual basis” for finding consent to class arbitration. As a practical matter it means that the parties must clearly and unmistakably consent to class arbitration. (See, e.g., our Lamps Plus post, here.)

What does the Agreement Have to Say About Class Arbitration?

The Agreement is a form dispute resolution agreement that was signed by each of an employer (the “Employer”)’s many employees. By signing the Agreement the signatory Employer and employee agreed to arbitrate their disputes, “waiv[ed] [their] right to obtain any legal or equitable relief . . . through any government agency or court, and . . . also waiv[e] [their] right to commence any court action.”

The Agreement provides that the employee “may. . . seek and be awarded equal remedy” under the Agreement, that “‘[t]he Arbitrator shall have the power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction[,]’ and that any claim arising thereunder will be arbitrated ‘in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association.’” Jock IV, slip op. at 4 (citations omitted).

The Agreement does not purport to be, or evidence consent to, a multi-lateral agreement – i.e., a collective Agreement between the employer and all the tens of thousands of other employees. Employees signing the Agreement do not purport to assign rights or delegate duties to other nonsignatory employees, nor do they purport to confer any authority upon any nonsignatory employees to arbitrate, or otherwise act on behalf of, the signatory employee.

The Agreement did not mention class arbitration, although the Arbitrator found in a June 1, 2009 Clause Construction Award, that the Agreement implicitly permitted class arbitration. In 2011 the Second Circuit in Jock I ruled that the arbitrator’s award should have been confirmed because, by finding that the language of the agreement implicitly permitted class arbitration, the arbitrator had at least arguably interpreted the contract.

The Jock IV Court said that the absent class members were bound by the Clause Construction Award even though they were never parties to the class arbitration, the Clause Construction Award, the certification award, or any of the Federal Arbitration Act enforcement proceedings (including Jock I, II, III, or IV, or any of the district court proceedings), and even though they never opted in to the class or otherwise consented to any of the arbitration or arbitration-related proceedings.

The Jock IV Court said that was so because each of the absent class members had signed an Agreement identical to the ones signed by the class representatives and employees who had opted into the class, and had agreed to submit arbitrability disputes to an arbitrator.

Further, said the Court, the absent class members could not collaterally attack the Clause Construction Award because the Agreement clearly and unmistakably authorized an arbitrator to decide both arbitrability questions and questions concerning procedure. Consequently, the absent class members were not entitled to a de novo determination of whether they consented to class arbitration, which, under Lamps Plus, would require the class arbitration proponents to demonstrate that the parties clearly and unmistakably consented to class arbitration.

What Result if the Court Determined the Class Arbitration Consent Issue on a De Novo Basis?

To test the soundness of the Jock IV Court’s conclusion, let’s assume that the Court should have determined on a de novo basis whether the absent class members consented to class arbitration, or, alternatively, whether the absent class members consented to be bound by Clause Construction and certification awards, which were made by arbitrators the absent class members had no part in selecting, and to which those absent class members did not consent after being given an opportunity to opt in to the class.

Lamps Plus requires clear and unmistakable consent to class arbitration. There is no possibility the arbitration agreements signed by the parties could satisfy that demanding requirement. As Jock I demonstrates, at most the Agreement was susceptible to an interpretation under which one might infer implied consent to class arbitration. But it was also susceptible to one or more other interpretations under which it contemplated only bilateral arbitration.

It was therefore ambiguous, and were the Court to have analyzed class arbitration consent on a de novo basis under Lamps Plus standard, then the Court would presumably have determined that the absent class members did not consent to class arbitration and therefore could not be made part of a class.

Did the Jock IV Court Err by Deeming the Absent Class Members to be Bound by the Clause Construction Award?   

The soundness of Jock IV thus depends on whether the absent class members’ signing of arbitration agreements identical to those signed by the Jock class representatives and opt-in class members can legitimately be construed to evidence their consent to be bound by a nearly-decade-old Clause Construction Award decided (a) by an arbitrator they played no part in selecting under (b) a legal standard that has been superceded by a 2019 United States Supreme Court decision (Lamps Plus). 

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Manifest Disregard of the Law | Manifest Disregard of the Agreement | Second Circuit Remands Award to Arbitrator for Do-Over

October 25th, 2019 Authority of Arbitrators, Award Vacated, Awards, Challenging Arbitration Awards, Contract Interpretation, Enforcing Arbitration Agreements, Exceeding Powers, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Grounds for Vacatur, Manifest Disregard of the Agreement, Manifest Disregard of the Law, Uncategorized, United States Court of Appeals for the Second Circuit, Vacate Award | 10(a)(4), Vacate Award | Manifest Disregard of the Law, Vacatur No Comments »
Second Chance to Make Award not in Manifest Disregard of Law or Agreement

Arbitrators are human and occasionally they make awards that cannot be squared with logic and law, and courts may, in appropriate circumstances, vacate those awards as being in manifest the agreement, or in some circuits, in manifest disregard of the law. The U.S. Court of Appeals for the Second Circuit considered such an award in Weiss v. Sallie Mae, Inc., ___ F.3d ___, No. 18-2362, slip op. (Sept. 12, 2019), and solved the problem in a way that imposed minimal costs and delay on the parties and, at the same time, gave effect to the parties’ reasonable contractual expectations, including that the arbitrator would make an award with a colorable basis in the law or the parties’ agreement, not one in manifest disregard of the law or the agreement. It is therefore a good example of a case that promotes arbitration as an alternative to litigation.

Background

W is a student-loan borrower who in 2011 defaulted on a loan issued by S (N is the successor of S, but we shall refer to both as “S”). W gave S her phone number (“Phone Number 1”) when she obtained the loan and consented to S contacting her via an automatic telephone dialing system (“ATDS”). S made ATDS calls to her using Phone Number 1 prior to her default on the loan in 2011.

Also prior to her 2011 default W obtained a second telephone number (“Phone Number 2”) but did not give S consent to contact her on that number via an ATDS.

After W’s 2011 default, S contacted W seven or eight times a day at Phone Number 2 via an ATDS, attempting to collect the debt. S made 774 ATDS calls to Phone Number 2 during the period September 16, 2011 through July 1, 2013.

The Arbitration

A dispute arose between W and S about whether S’s ATDS calls had violated the Telephone Consumer Protection Act (“TCPA”) and W commenced an action in the U.S. District Court for the Western District of New York. The action was stayed after the parties stipulated to arbitration pursuant to an arbitration agreement in a student-loan promissory note.

The Award: Was it in Manifest Disregard of the Law or the Agreement?

Final Award 2 - yay-15399450

Following a hearing an arbitrator made an award granting W $108,000 in statutory damages under the TCPA. But the award held that W was a class member in a class action that S had settled. The class-action settlement (the “Arthur Settlement”) “included as a class member, ‘any person who received ATDS calls from [S] between October 27, 2005 and September 14, 2010.’” Slip op. at 5 (citation omitted).

W did not contend that the calls S made to Phone Number 1 violated the TCPA (W had consented to those calls), and W contended that, accordingly, she was not bound by the settlement, even though she had received ATDS on Phone Number 1 during the specified period. The arbitrator, however, found that argument “‘unpersuasive,’” and “ruled that Weiss was a class member and that ‘the proof was conclusive that [S] provided [W] with the required notice of the settlement and of her rights and obligations under the terms of the settlement.’” Slip op. at 5-6 (citation omitted).

The Arthur Settlement “notice offered class members the opportunity to file a ‘consent Revocation’ document by September 15, 2012; absent such a filing, ‘the ATDS calls would not stop and the borrower’s prior consent to give them [sic] would be deemed to have been given.’” Slip op. at 6 (citation omitted; bracketed text in original).  

While W contended that she was not aware of the Arthur Settlement, S testified that notice was successfully emailed to W.

The agreement implementing the Arthur Settlement featured a general release, “under which class members were ‘deemed to have fully released and forever discharged [S]’. . . from any and all claims and causes of action, inter alia, ‘that arise out of or are related in any way to the use of an [ATDS]. . . used by any of the Released Parties in connection with efforts to contact or attempt to contact Settlement Class Members including, but not limited to, claims under or for violations of the [TCPA].’” Slip op. at 6 (citations omitted; some bracketed text in original).

Even though the general release, to which the arbitrator determined W was bound, deemed W to have “waived ‘any and all’ TCPA claims effective the date of final judgment in the Arthur Settlement action[,]” the arbitrator’s award did not acknowledge the existence of that release. Slip op. at 6-7. “Instead,” said the Court, “the arbitrator interpreted [W]’s failure to submit a consent revocation pursuant to the Arthur class notice as precluding recovery for any calls placed to [Phone Number 2] after the September 15, 2012 deadline but also as permitting recovery for ATDS calls placed to [Phone Number 2] between September 6, 2011, and September 16, 2012.” Slip op. at 7.

The arbitrator awarded TCPA statutory damages in the amount of $108,500 ($500 per call for 217 calls during the applicable period). W moved to confirm the award and S cross-moved to vacate it.

The district court vacated the award, finding that “by neglecting to ‘apply—or even address—an explicit, unambiguous term of the settlement agreement,’ which “clearly and unambiguously bars recovery for claims until and including the date of the agreement,’ the arbitrator manifestly disregarded the law.” Slip op. at 7. W appealed.

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New Clear and Unmistakable Outcome Exception to the Old Clear and Unmistakable Rule? (Part II)

August 15th, 2019 Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clause Construction Award, Clear and Unmistakable Rule, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, FINRA Arbitration, First Options Reverse Presumption of Arbitrability, Manifest Disregard of the Agreement, Manifest Disregard of the Law, United States Court of Appeals for the Fifth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court 1 Comment »
Clear and Unmistakable Rule | Analysis

Part I of this post discussed how the Second and Fifth Circuits, in  Metropolitan Life Ins. Co. v. Bucsek, ___ F.3d ___, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), and 20/20 Comms. Inc. v. Lennox Crawford, ___ F.3d ___, No. 18-10260 (5th Cir. July 22, 2019), suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability (a/k/a the “Clear and Unmistakable Rule”).

Under this Clear and Unmistakable Outcome Exception to the Clear and Unmistakable Rule, courts consider the merits of an underlying arbitrability issue as part of their analysis of whether the parties clearly and unmistakably agreed to arbitrate arbitrability issues.

But the Clear and Unmistakable Outcome Exception runs directly counter to the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ___, 139 S. Ct. 524 (January 8, 2019), and thus contravenes the Federal Arbitration Act as interpreted by Schein. 139 S. Ct. at 527-28, 529-31.

This Part II analyzes and discusses how Met Life and 20/20 Comm. effectively made an end run around Schein and considers what might have motivated those Courts to rule as they did.

Making an End Run Around Schein?

Clear and Unmistakable Rule | Circumvent | End Run

When, prior to 20/20 Comm. we wrote about Met Life, we said it “an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.” (See here. )

But after the Fifth Circuit decided 20/20 Comm. this July, in comments we made to Russ Bleemer, Editor of Alternatives, the Newsletter of the International Institute for Conflict Prevention & Resolution (“CPR”)—which were reproduced with our consent in Mr. Zhan Tze’s CPR Speaks blog article about 20/20 Comm. (here)—we expressed the belief that the Fifth Circuit was (whether intentionally or unintentionally) making an end run around Schein, effectively creating an exception to the Clear and Unmistakable Rule.

After analyzing 20/20 Comm. and comparing it to the Second Circuit’s Met Life decision, we concluded that the Second Circuit’s decision also ran counter to Schein.

Schein’s Abrogation of the “Wholly Groundless Exception” to the Clear and Unmistakable Rule

Clear and Unmistakable Rule | Jettison

In Schein the U.S. Supreme Court abrogated the so-called “wholly groundless exception” to the Clear and Unmistakable Rule. Prior to Schein certain courts, including the Fifth Circuit, held that even when parties clearly and unmistakably agreed to arbitrate arbitrability questions, courts could effectively circumvent the parties’ agreement and decide for itself arbitrability challenges that it determined were “wholly groundless.”  

The rationale Schein used to jettison the “wholly groundless exception” to the Clear and Unmistakable Rule is incompatible with the rationales the Second and Fifth Circuit used to support their decisions in Met Life and 20/20 Comm.

Under FAA Section 2, the Schein Court explained, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein, 139 S. Ct. at 529 (citation omitted). When those contracts delegate arbitrability questions to an arbitrator, “a court may not override the contract[,]” and has “no power to decide the arbitrability issue.” 139 S. Ct. at 529. That is so even where a Court “thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 139 S. Ct. at 529.

Schein explained that its conclusion was supported not only by the FAA’s text, but also by U.S. Supreme Court precedent. Citing and quoting cases decided under Section 301 of the Labor Management and Relations Act, the Court explained that courts may not “‘rule on the potential merits of the underlying’ claim that is assigned by contract to an arbitrator, ‘even if it appears to the court to be frivolous[,]’” and that “[a] court has “‘no business weighing the merits of the grievance’” because the “‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’” 139 S. Ct. at 529 (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649–650 (1986) and Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960)).

This “principle,” said the Schein Court, “applies with equal force to the threshold issue of arbitrability[]”—for “[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator.” 139 S. Ct. at 530.

Exception to Clear and Unmistakable Rule? Why the Second and Fifth Circuit Decisions Conflict with Schein

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New Clear and Unmistakable Outcome Exception to the Old Clear and Unmistakable Rule? (Part I)

August 13th, 2019 Arbitrability, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Clear and Unmistakable Rule, FAA Chapter 2, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, FINRA Arbitration, First Options Reverse Presumption of Arbitrability, United States Court of Appeals for the Fifth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court 1 Comment »
Federal Arbitration Act Secction 1 6

Arbitration law is replete with presumptions and other rules that favor one outcome or another depending on whether one thing or another is or is not clear and unmistakable. Put differently, outcomes often turn on the presence or absence of contractual ambiguity.

There are three presumptions that relate specifically to questions arbitrability, that is, whether or not an arbitrator or a court gets to decide a particular issue or dispute:   

  1. The Moses Cone Presumption of Arbitrability: Ambiguities in the scope of the arbitration agreement itself must be resolved in favor of arbitration. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Rebutting this presumption requires clear and unmistakable evidence of an intent to exclude from arbitration disputes that are otherwise arguably within the scope of the agreement.
  2. The First Options Reverse Presumption of Arbitrability:  Parties are presumed not to have agreed to arbitrate questions of arbitrability unless the parties clearly and unmistakably agree to submit arbitrability questions to arbitration. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995)
  3. The Howsam/John Wiley Presumption of Arbitrability of Procedural Matters: “‘[P]rocedural’ questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (quoting John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557 (1964)) (internal quotation marks omitted). To rebut this presumption, the parties must clearly and unmistakably exclude the procedural issue in question from arbitration.

These presumptions usually turn solely on what the contract has to say about the arbitrability of a dispute, not on what the outcome an arbitrator or court would—or at least should—reach on the merits of the dispute.

Some U.S. Circuit Courts of Appeal, including the Fifth Circuit, recognized an exception to the First Options Reverse Presumption of Arbitrability called the “wholly groundless exception.” Under that “wholly groundless exception,” courts could decide “wholly groundless” challenges to arbitrability even though the parties have clearly and unmistakably delegated arbitrability issues to the arbitrators. The apparent point of that exception was to avoid the additional time and expense associated with parties being required to arbitrate even wholly groundless arbitrability disputes, but the cost of the exception was a judicial override of the clear and unmistakable terms of the parties’ agreement to arbitrate.  

Earlier this year the U.S. Supreme Court in Schein v. Archer & White Sales, Inc., 586 U.S. ___, slip op. at *1 (January 8, 2019) abrogated the “wholly groundless” exception. Schein, slip op. at *2, 5, & 8. “When,” explained the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Schein, slip op. at 2, 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Schein,slip op. at 8.    

But since Schein both the Second and Fifth Circuits have decided First Options Reverse Presumption of Arbitrability cases by effectively conflating the question of who gets to decide an arbitrability issue with the separate question of who should prevail on the merits of that arbitrability issue. The Courts in both cases determined whether the parties clearly and unmistakably agreed to arbitrate arbitrability questions by considering, as part of the clear and unmistakable calculus, the merits of the arbitrability question.

These two cases suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability. But the problem with that trend is that it runs directly counter to the Supreme Court’s decision in Schein, and thus contravenes the Federal Arbitration Act as interpreted by Schein.

In Part I of this post we discuss the Second Circuit and Fifth Circuit decisions. In Part II we analyze and discuss how— and perhaps why — those courts effectively made an end run around Schein.

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Look Through: Second Circuit Holds that District Courts Must “Look Through” a Section 9 Petition to Confirm to Ascertain Subject Matter Jurisdiction

May 13th, 2019 Amount in Controversy, Arbitration Practice and Procedure, Awards, Confirmation of Awards, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Diversity Jurisdiction, FAA Chapter 1, FAA Chapter 2, FAA Chapter 3, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Look Through, Petition to Modify Award, Petition to Vacate Award, Subject Matter Jurisdiction, United States Court of Appeals for the Second Circuit Comments Off on Look Through: Second Circuit Holds that District Courts Must “Look Through” a Section 9 Petition to Confirm to Ascertain Subject Matter Jurisdiction
Look Through

In Landau 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?   

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Second Circuit Holds that “Collapse” Provision in All Risks Policy does not Cover Severely Cracked, but Still Standing, Basement Walls

April 9th, 2019 Insurance Contracts, Insurance Coverage, Property Insurance Comments Off on Second Circuit Holds that “Collapse” Provision in All Risks Policy does not Cover Severely Cracked, but Still Standing, Basement Walls
collapse

Homeowners and All Risk policies often provide coverage for “collapse” of all or part of a structure. Is coverage for “collapse” limited to an abrupt collapse of a wall or building, or does it include situations where cracking or crumbling has substantially impaired the structural integrity of the wall or building, but has not resulted in the structure’s literal collapse?

The answer to that question may depend on how the insurer defined “collapse.” For example, in Beach v. Middlesex Mutual Assurance Co., 205 Conn. 246 (1987) the Connecticut Supreme Court held that a policy that provided coverage for “collapse,” but did not define what that term meant, was ambiguous, and thus included coverage for the “substantial impairment of the structural integrity of a building.” 205 Conn. at 251, 253.

In Valls v. Allstate Ins. Company, ___ F.3d ___, No. 17-3495-cv, slip op. (2d Cir. April 2, 2019), the U.S. Court of Appeals for the Second Circuit, applying Connecticut law, and construing a collapse provision that defined “collapse” in some detail, held that provision did not provide coverage for extensive cracking of basement walls, which may have substantially impaired the structural integrity of the walls, but did not result in their literal “collapse.” See slip op. at 14.

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Arbitrability of Arbitrability Questions: the Second Circuit Pushes Back (a little)

April 3rd, 2019 Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Contract Interpretation, Contract Interpretation Rules, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Stay of Arbitration, United States Court of Appeals for the Second Circuit, United States Supreme Court 1 Comment »
Thurgood Marshall U.S. Courthouse

Abitrability Questions
Thurgood Marshall U.S. Courthouse, 40 Centre Street, New York, NY 10007

In a January 16, 2019 post (here) on the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. (January 8, 2019), we explained that arbitrability questions are ordinarily for courts to decide, but parties may, by way of a “delegation provision,” clearly and unmistakably agree to submit them to arbitration. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995); Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010). (See also Loree Reinsurance and Arbitration Law Forum posts herehere, and here.)

Typically, a “delegation provision” states in clear and unmistakable terms that arbitrability questions are to be decided by the arbitrators. It might, for example, state that the parties agree to submit to arbitrators questions concerning their “jurisdiction,” or the “existence, scope, or validity” of the arbitration agreement.

The U.S. Court of Appeals for the Second Circuit, however, does not require the parties to expressly state in their agreement that they agree to submit arbitrability questions to the arbitrators. The Second Circuit has found that the parties may “clearly and unmistakably” submit arbitrability questions to arbitration when they agree to a very broad arbitration clause. See Wells Fargo Advisors, LLC v. Sappington, 884 F.3d 392, 394, 396 (2d Cir. 2018) (An agreement “to arbitrate any dispute, claim or controversy that may arise between you and Wells Fargo Advisors, or a client, or any other person[, and] . . . giving up the right to sue Wells Fargo Advisors . . . in court concerning matters related to or arising from your employment” “demonstrate[d] the parties’ clear and unmistakable intent to arbitrate all questions of arbitrability.”); PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1199 (2d Cir. 1996) (A contractual provision that “any and all controversies . . . concerning any account, transaction, dispute or the construction, performance, or breach of this or any other agreement . . . shall be determined by arbitration” and that “the parties are waiving their right to seek remedies in court” clearly and unmistakably demonstrated “parties’ intent to arbitrate all issues, including arbitrability.”) (emphasis omitted); Alliance Bernstein Investment Research and Management, Inc. v. Schaffran, 445 F.3d 121 (2d Cir. 2006) (NASD Code Rule 10324, which authorized arbitrators “to interpret and determine the applicability of all provisions under [the] Code[]” was a clear and unmistakable delegation to arbitrators of arbitrability questions concerning interpretation of the NASD Code.).

In Metropolitan Life Ins. Co. v. Bucsek, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), the Second Circuit was faced with an unusual situation where party A sought to arbitrate against party B, a former member of the Financial Industry Regulatory Authority (“FINRA”)’s predecessor, the National Association of Securities Dealers (“NASD”), a dispute arising out of events that occurred years after party B severed its ties with the NASD.

The district court rejected A’s arguments, ruling that: (a) this particular arbitrability question was for the Court to decide; and (b) the dispute was not arbitrable because it arose years after B left the NASD, and was based on events that occurred subsequent to B’s departure. The Second Circuit affirmed the district court’s judgment.

After the district court decision, but prior to the Second Circuit’s decision, the U.S. Supreme Court decided Schein, which—as we explained here—held that even so-called “wholly-groundless” arbitrability questions must be submitted to arbitration if the parties clearly and unmistakably delegate arbitrability questions to arbitration. Schein, slip op. at *2, 5, & 8.

The Second Circuit faced a situation where a party sought to arbitrate a dispute which clearly was not arbitrable, but in circumstances under which prior precedent, including Alliance Berstein (cited above), suggested that the parties clearly and unmistakably agreed to arbitrate arbitrability.

To give effect to the parties’ likely intent that they did not agree to arbitrate arbitrability questions that arose after B left the NASD, the Second Circuit had no choice but distinguish and qualify its prior precedent without falling afoul of the Supreme Court’s recent pronouncement in Schein. That required the Second Circuit to modify, to at least some extent, the contractual interpretation analysis that courts within the Second Circuit are supposed to engage to ascertain whether parties “clearly and unmistakably” agreed to arbitrate arbitrability in circumstance where they have not specifically agreed to arbitrate such issues.

Metropolitan Life is an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.

It is easy to see how applying Metropolitan Life in future cases could raise some interesting and challenging questions for parties, their attorneys, and the courts. We may look at those challenges in more detail in a future post, but for now, let’s take a careful look at the Second Circuit’s decision.

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Arbitration Nuts and Bolts: Federal Appellate Jurisdiction over Orders Compelling Arbitration and Staying Litigation

March 21st, 2019 Appellate Jurisdiction, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration Practice and Procedure, Authority of Arbitrators, FAA Section 16, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure, Stay of Arbitration, Stay of Litigation, United States Court of Appeals for the Second Circuit 1 Comment »

Introduction

Appellate Jurisdiction 1

Today we look at federal appellate jurisdiction over orders compelling arbitration and staying litigation.

Sections 3 and 4 of the Federal Arbitration Act (the “FAA”) provide remedies for a party who is aggrieved by another party’s failure or refusal to arbitrate under the terms of an FAA-governed agreement. FAA Section 3, which governs stays of litigation pending arbitration, requires courts, “upon application of one of the parties,” to stay litigation of issues that are “referable to arbitration” “until arbitration has been had in accordance with the terms of the parties’ arbitration agreement, providing [the party applying for a stay] is not in default in proceeding with such arbitration.” 9 U.S.C. § 3. Faced with a properly supported application for a stay of litigation of an arbitrable controversy, a federal district court must grant the stay. 9 U.S.C. § 3.

Section 4 of the FAA authorizes courts to make orders “directing arbitration [to] proceed in the manner provided for in [the [parties’ written arbitration] agreement[,]” and sets forth certain procedures for adjudicating petitions or motions to compel arbitration. 9 U.S.C. § 4. It provides that when a court determines “an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.” 9 U.S.C. § 4 (emphasis added). Just as courts must grant properly supported applications for relief under Section 3, so too must they grant properly supported applications for relief under Section 4. See 9 U.S.C. §§ 3 & 4.

There is much to be said about the many issues that may arise out of applications to stay litigation, compel arbitration, or both, but our focus here is on the appellate jurisdiction of the U.S. Circuit Courts of Appeals over appeals from the grant or denial of such applications. Before a U.S. Circuit Court of Appeals can hear an appeal on the merits of a federal district court’s order and judgment, it must be satisfied that: (a) the federal district court had original subject matter jurisdiction (e.g., diversity jurisdiction or federal question jurisdiction); (b) there is still a “case or controversy” within the meaning of Article III of the U.S. Constitution (e.g., the controversy has not become moot by settlement or otherwise); and (c) the order or judgment appealed from is one over which it has appellate jurisdiction.

Appellate Jurisdiction and the FAA

Appellate Jurisdiction 2

Appellate jurisdiction refers to a Circuit Court of Appeals’ power to review, amend, vacate, affirm, or reverse the orders and judgments of the district courts within the judicial circuit over which the Court of Appeals presides. Generally, and outside the context of injunctions and the certification procedure of 28 U.S.C. § 1292(b), U.S. Courts of Appeal have jurisdiction to review only “final decisions” of district courts. See 28 U.S.C. §§ 1291, 1292. A “final decision” “is a decision that ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment.” Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 86 (2000) (citations and quotations omitted).

But Federal Arbitration Act litigation is quite different from ordinary litigation from both a substantive and procedural prospective, and so it comes as no surprise that the FAA features its own set of appellate jurisdiction rules.

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What is the Statute of Limitations for a Reinsurance Claim under New York Law and When does it Begin to Run?

October 6th, 2014 Choice-of-Law Provisions, Claims Handling, Contract Interpretation, New York Court of Appeals, New York State Courts, Nuts & Bolts: Reinsurance, Reinsurance Arbitration, Reinsurance Claims, Retrospectively-Rated Premium Contracts, State Courts, Statute of Limitations Comments Off on What is the Statute of Limitations for a Reinsurance Claim under New York Law and When does it Begin to Run?

 Part IV.B

 Why is Hahn Automotive v. American Zurich Ins. Co. Important?

Introduction

Now that we’ve taken a closer look at Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co., 18 N.Y.3d 765 (2012), let’s step back a bit and consider what it means both in general and in the reinsurance-claim-statute-of-limitations scheme of things.

As will be explained in this Part VI.B, Part VI.C, and Part VI.D, Hahn:

  1. Creates a new general rule, which effectively extends to a larger universe of contracts a statute of limitations accrual principle that it had applied only to certain specific types of contracts, including contracts of indemnity;
  2. Demonstrates that, outside the limited context of express conditions, breach-of-contract statute-of-limitations accrual is not exclusively a matter of party intent;
  3. Suggests that the New York Court of Appeals, if faced with an accrual question where the obligee’s demand is an express condition to the obligor’s liability, would probably not permit accrual to be delayed for more than a relatively brief period measured from the date on which the obligee was legally entitled to demand payment;
  4. All but forecloses an argument that a court may justify a delay in the statute of limitations by deeming a demand requirement to be an implied condition;
  5. Creates an analytic framework for determining breach-of-contract statute-of-limitations accrual questions that is at least as well-suited to excess-of-loss reinsurance contracts as it is to retrospective premium contracts;
  6.  Will likely be applied to reinsurance contract statute-of-limitations questions, that cedents or reinsurers may in the past have assumed would be governed by Continental Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16 (2d Cir. 1996); and
  7. If so applied to a situation where, as in Stronghold: (a) the reinsurance contract does not unambiguously condition the reinsurers’ liability on claims presentation; and (b) the cedent settled the underlying insurance claims more than six-years before commencing their action, will, all else equal, likely require a finding that the cedent’s claims are time-barred.

Hahn therefore has some important claims management implications for both cedents and reinsurers, which we’ll discuss in Part IV.E.

But there is, as no doubt many readers have discerned, a proverbial “elephant in the room:” arbitration. Arbitration agreements are exceedingly common in reinsurance contracts, particularly in treaties. In Part V., we’ll discuss the profound effect that the choice between judicial and arbitral resolution of a controversy can have on statute of limitations questions, and how that choice bears on cedent and reinsurer time-bar strategy.

Finally, there is another very important—and all too frequently overlooked— consideration that we would arguably be remiss not to discuss: choice-of-law. Reinsurance disputes, like so many of their other commercial counterparts, frequently cross state and national borders, raising horizontal choice-of-law issues. But in many (indeed, probably most U.S.) jurisdictions, including New York, choice-of-law rules that determine what substantive rules of decision apply (i.e., what rules of decision apply to merits-related issues) do not determine what statute-of-limitations rules apply, and that may be true (as it ordinarily is in New York) even where parties agree that the law of State X governs their agreement.

In New York, that issue is ordinarily determined by New York’s borrowing statute, New York Civ. Prac. L. § 202, many other states have similar (although not necessarily identical) borrowing statutes and at least a few other states may either simply follow the traditional rule that forum law governs statute of limitations or apply substantive choice-of-law rules to determine the applicable statute of limitations. Part VI will thus address choice-of-law questions pertinent to the statute of limitations, focusing on New York’s borrowing statute, and discuss how choice-of-law issues affect time-bar strategy. Continue Reading »

Update on Federal Arbitration Act Cases Pending in the United States Supreme Court

September 29th, 2009 Awards, Class Action Arbitration, Class Action Waivers, Consolidation of Arbitration Proceedings, United States Court of Appeals for the Ninth Circuit 1 Comment »

Today the United States Supreme Court is considering whether to grant certiorari in three cases that concern whether manifest disregard of the law remains a viable ground for vacating or modifying an arbitration award after Hall Street Assoc., L.L.C. v. Mattel , Inc, 552 U.S. ___, slip op. (March 25, 2008).  The first is The Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx. 415 (6th Cir. 2008), petition for cert. filed May 11, 2009 (08-1396), in which the United States Court of Appeals for the Sixth Circuit held that manifest disregard survived Hall Street as an independent ground for vacatur, and that an award in favor of a franchisor must be vacated because the arbitrator manifestly disregarded Maryland franchise law requiring franchisors to disclose certain types of prior criminal convictions.  The Sixth Circuit also found that the franchisor’s failure to disclose the conviction vitiated the arbitration clause contained in the franchise contract, a holding that seems questionable in light of Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 449 (2006). 

The second case is Grain v. Trinity Health, 551 F.3d 374 (6th Cir. 2008), petition for cert. filed May 19, 2009 (08-1446), in which the Sixth Circuit held that the arbitrators’ failure to enforce the parties’ choice of Michigan law as respects the issue of costs and attorney fees — characterized as manifest disregard of the law — was not a valid ground for modifying an arbitration award under Federal Arbitration Act Section 11.  

The third is Improv West Associates v. Comedy Club, Inc.,  553 F.3d 1277 (9th Cir. ), petition for cert. filed June 8, 2009 (08-1529), in which the United States Court of Appeals for the Ninth Circuit held that manifest disregard of the law remained viable after Hall Street because it fell within the ambit of Federal Arbitration Act Section 10(a)(4), and vacated an award on the ground that the arbitrator’s interpretation of applicable state law was “fundamentally incorrect,” albeit made in good faith. 

The briefs in support of and in opposition to both petitions, as well as the lower court decisions, can be obtained by visiting one of our favorite blogs, the SCOTUSblog, here and  here.  It will be interesting to see whether the United States Supreme Court decides to grant certiorari in any or all of these cases.   

On a related matter, Petitioners’ and amici merits briefs in  Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 548 F.3d 85 (2d Cir. 2009), petition for cert. granted June 15, 2009 (No. 08-1198) can be accessed via the American Bar Association’s website, here.  Respondent’s briefs are due later in October and oral argument has been scheduled for December 9, 2009.  (See Russ Kunkel’s LawMemo Arbitration Blog here).  We have written extensively on Stolt-Nielsen, which concerns whether class arbitration may be imposed on parties whose contracts are silent on that point.  (Posts available here,  here, here, here, here, here, here, here and here.)  

 Finally, we are following the petition for certiorari filed in the American Express Merchants’ Litigation (blogged here), which has not yet come up for conference.   The Amex Merchants’ Litigation concerns whether class arbitration waivers comport with federal antitrust policy. 

We shall keep readers apprised of developments as and when they occur.  .  .  .