Carolyn G. Nussbaum
Nixon Peabody LLP
Christopher M. Mason
Nixon Peabody LLP
§ 1.1. Introduction
In past years, we have tried to be comprehensive in our survey of developments in alternative dispute resolution, covering all cases pending or decided in the United States Supreme Court, all the materially substantive opinions issued by the federal Circuit Courts of Appeals, and all the materially substantive opinions issued by the highest courts in all 50 states (and the District of Columbia and the Commonwealth of Puerto Rico), together with comments on legislative and administrative developments. Every year, the volume of these opinions and developments increased as alternative dispute resolution became more and more widely accepted and used.
- But, perhaps in part because of the courts beginning to catch up with backlogs from the continuing COVID-19 pandemic, and perhaps because alternative dispute resolution was in some situations over the past two years the only practical alternative for many disputes to reach a conclusion, trying to cover virtually all the individual opinions and activity we had covered in the past seems to have reached a level where including all of the increased volume of case law may detract from the value of a summary. So this year, while we have reviewed all the same source material (all the Supreme Court, federal Circuit Court, and highest state court opinions, together with legislative and administrative activity) we are not trying to report on virtually every decision. Instead, we have tried to include matters we consider particularly important, interesting, or unique.
To begin with, despite our projection last year that the United States Supreme Court might issue a useful decision in Henry Schein Inc. v. Archer & White Sales, Inc., No. 19‐963 (U.S. argued Dec. 8, 2020) in 2021, the Court ultimately dismissed the writ of certiorari in that case as having been improvidently granted. As a result, the Court did not issue any substantive arbitration decisions in 2021.
But the Court did grant certiorari in five cases that remain pending before the Court as of December 2021. Three of those involve splits among the federal Courts of Appeals regarding the propriety of “looking through” pleadings to establish federal jurisdiction and the limits of federal court’s authority to compel discovery in international arbitration under 28 U.S.C. § 1782(a).
In addition to the cases involving Circuit splits now under review by the Supreme, the federal Courts of Appeals continue throughout 2021 to grapple with what it means to be “engaged in commerce” for section 1 exemption under the FAA.
Furthermore, in our 2020 ADR Annual Review, we explained that the Antitrust Division of the Department of Justice (the “Division”) issued “Updated Guidance Regarding the Use of Arbitration and Case Selection Criteria,” which signaled an interest in increasing the use of arbitration. Although the arbitration guidance was ultimately published in the Federal Register, its impact remains unclear at this time.
We also discussed the Forced Arbitration Injustice Repeal Act (“FAIR Act”), which has been introduced in one form or another for many years and generally would invalidate pre-dispute arbitration agreements in the employment, civil rights, consumer, and antitrust contexts, and would require employers to litigate workplace disputes in court. The bill was reintroduced as H.R. 963 in February 2021, and the House Judiciary Committee signed off on the bill in early November 2021. Of course, it must still pass both the House and the Senate before being signed by the President, but this is something that litigators should continue to monitor.
§ 1.2. Legislative and Regulatory Developments
§ 1.2.1. Revised Uniform Arbitration Act
The Uniform Law Commissioners drafted and proposed the original Uniform Arbitration Act (the “UAA”) in 1955. It provided, among other things, basic procedures for the conduct of an arbitration by agreement. Forty-nine jurisdictions adopted the original UAA, including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Four states, Alabama, Georgia, Mississippi, and West Virginia, did not enact any version of the original UAA.
In 2000, the Commission revisited and substantially revised the UAA to produce the 2000 Uniform Arbitration Act (the “Revised UAA”). The Revised UAA allows for consolidation of separate arbitration proceedings, expressly provides for immunity for arbitrators from civil liability, authorizes the award of punitive damages and attorneys’ fees when such an award would be authorized in a civil action, and provides arbitrators with discretion to order discovery, issue protective orders, and decide motions for summary judgment, similar to a judicial proceeding.
Twenty-two states have adopted the Revised UAA, including Alaska, Arizona, Arkansas, Colorado, Connecticut, the District of Columbia, Florida, Hawaii, Kansas, Michigan, Minnesota, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Utah, Washington, and West Virginia. No new states adopted the Revised UAA in 2021, although legislation introduced in Vermont in 2019 was reintroduced in 2021. The progress of states enacting the Revised UAA can be tracked at www.uniformlaws.org.
§ 1.2.2. Uniform Mediation Act
The Uniform Mediation Act (the “UMA”), as promulgated by the Uniform Law Commission in 2001 after a joint drafting effort with the American Bar Association’s Dispute Resolution Section, and as amended in 2003 to incorporate the Model Law on International Commercial Conciliation, was adopted by Georgia in 2021. It also continued in effect in the District of Columbia, Hawaii, Idaho, Illinois, Iowa, Nebraska, New Jersey, Ohio, South Dakota, Utah, Vermont, and Washington. The progress of states enacting the UMA may be tracked at www.uniformlaws.org.
§ 1.2.3. The United Nations Convention on International Settlement Agreements Resulting from Mediation
On August 7, 2019, 46 countries signed on to the United Nations Convention on International Settlement Agreements Resulting from Mediation (the “Singapore Convention”). The initial signatories included (in addition to Singapore, of course) major States such as the United States, China, and India, but did not include, for example, Australia, the European Union, or the United Kingdom. Since then, Ghana and Rwanda have signed on as well.
As discussed in our 2019 compilation, the Singapore Convention provides, for the first time, an international process for the direct enforcement of cross-border settlement agreements arising out of mediation. To fall within the scope of the Singapore Convention, a settlement agreement must be in writing, must result from a mediation, must be between two or more parties who have their place of business in different States, and must involve, as the place of business of each party, a State that has acceded to or ratified the Singapore Convention. There are some substantial exceptions to its coverage, however: the Singapore Convention will not apply to settlement agreements that relate to consumer transactions, or to family law, inheritance issues, or employment law; to settlement agreements that have been approved by a court or concluded in the course of proceedings before a court and that are enforceable as a judgment in the State of that court; or to settlement agreements that have been recorded and are enforceable as an arbitral award.
Mediation is defined under the new Singapore Convention as “a process, irrespective of the expression used or the basis upon which the process was carried out, whereby the parties attempt to reach an amicable settlement of their dispute with the assistance of a third person or persons (the ‘mediator’) lacking the authority to impose a solution upon the parties to the dispute.” Presuming that the Singapore Convention does go into effect, a settlement agreement that qualifies will allow a party to use a simplified procedure for enforcement. That party will provide to the relevant authority in the State where the party seeks to enforce the settlement agreement two basic pieces of evidence: first, a copy of the signed settlement agreement; and, second, proof that the settlement agreement resulted from a mediation. This latter requirement can be satisfied by a mediator’s signature on the settlement agreement or by a document signed by the mediator confirming that there was a mediation.
Once it receives this evidence, the relevant authority (most likely a court) is required to “act expeditiously.” Under limited circumstances it may refuse enforcement. These include proof of the incapacity of a party to the settlement agreement; proof that the settlement agreement is null and void, inoperative, or incapable of being performed; proof that the settlement agreement is not binding, or is not final, according to its terms; proof that the settlement agreement has been subsequently modified; proof that necessary obligations for enforcement of the settlement agreement have not been performed or are not clear and comprehensible; proof that granting relief would be contrary to the terms of the settlement agreement; proof that the mediator committed a serious breach of standards applicable to him, her, or the mediation, without which breach the party seeking to avoid enforcement would not have settled; proof that the mediator failed to disclose circumstances raising justifiable doubts as to his or her impartiality or independence, which failure had a material impact or undue influence on a party, and without which failure the party would not have settled; proof that granting relief would be contrary to the public policy of the State in which enforcement is sought; or proof that the subject matter of the dispute was not capable of settlement by mediation under the law of that State.
While this is not a short list, it is likely that, as with arbitration awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), enforcement of mediation settlements under the Singapore Convention is likely to be granted in most instances. Importantly, however, the Convention does not itself define the remedies for breach of a settlement agreement. Because permissible remedies are different in different countries, parties to international commercial mediation settlements will likely want to specify at least some remedies in their settlement agreements, and in doing so consider whether those remedies will be enforceable in the most likely jurisdictions of enforcement. Similarly, such parties will want to think carefully about choice of law decisions in their settlement agreements.
§ 1.2.4. State Codes
§ 188.8.131.52. California
While no significant statutes were passed this year by the California state government regarding arbitration, we reported last year on Assembly Bill No. 51 (“AB 51”). In February, the United States District Court for the Eastern District of California issued a preliminary injunction blocking implementation of AB 51. AB 51 was passed in 2019 to prohibit employers from requiring employees to waive any right, forum, or procedure established by the California Fair Employment and Housing Act or the California Labor Code. This includes a bar of any agreement that requires employees to opt out of a waiver or take any affirmative action to preserve their rights to a judicial forum, as would occur in an agreement mandating arbitration of an employment dispute.
AB 51 was set to take effect on January 1, 2020, but was challenged in court by the Chamber of Commerce of the United States of America, among other interested parties, alleging that the FAA preempted AB 51 and all legislation enacted under its mantle of authority. The District Court agreed with the plaintiffs and enjoined implementation of the laws enacted under AB 51 to preserve the mandate of the FAA. The court found that the challengers of the bill were likely to succeed on the merits because the FAA preempted AB 51 in two ways. First, AB 51 imposed restrictions on the formation of arbitration agreements that do not apply to contracts generally, violating the express direction under Section 2 of the FAA requiring courts and state legislatures to “place arbitration agreements ‘on equal footing with all other contracts.’” Second, AB 51 punished the exercise of a federally protected right to include arbitration agreements in employment contracts, directly impeding the FAA.
The District Court found that the challengers of AB 51 were likely to succeed on their strong arguments for preemption of the FAA, and granted a preliminary injunction blocking the bill from taking effect. The litigation is continuing.
§ 1.2.5. Rules of the International Chamber of Commerce
On January 1, 2021, the International Chamber of Commerce’s (“ICC”) 2021 Rules of Arbitration (the “2021 Rules”) became effective. These rules replace the ICC’s 2017 Rules of Arbitration (the “2017 Rules”). While the 2021 Rules do not significantly amend the predecessor 2017 Rules, there are several material changes to rules relating to the framework of ICC arbitration. We repeat them from our 2020 update for convenience below.
First, the 2021 Rules address virtual proceedings and communications by amending Article 26, which provides the rules for hearings. Article 26(1) has been updated to explicitly provide the arbitral tribunal with authority to conduct virtual hearings at its discretion either in person or virtually through “videoconference, telephone or other appropriate means of communication.” Although tribunals were not previously prohibited from conducting virtual hearings, clarifying the rules to explicitly provide this power addresses any doubts that may exist in a time where COVID-19 has led to a shift to the use of virtual proceedings. By including the “other appropriate means of communication” language, the ICC appears to have drafted this rule to anticipate evolving technology.
The framework of how arbitration is conducted under the ICC Rules has been further changed by amending the rules involving multi-party arbitration. One of the more significant changes in the 2021 Rules can be found in Article 7, which deals with the joinder of additional parties. Article 7(5) is a newly added provision that allows parties to make requests for joinder after the confirmation or appointment of any arbitrator in the proceeding. The 2017 Rules required that all parties, including the party sought to be joined, agree to such joinder, but the 2021 Rules contain no such requirement and instead leave it to the arbitral tribunal to decide the request. Article 10’s provisions on consolidation of arbitration have also been changed under the 2021 Rules. Under the 2017 Rules, Article 10 provided that the ICC’s International Court of Arbitration (the “ICC Court”) could consolidate two or more arbitrations where “all of the claims in the arbitrations are made under the same arbitration agreement.” This language created ambiguity as to whether consolidation was possible only for claims made under the same contract, or if it also applied when claims arise from multiple agreements with mirror arbitration clauses. The 2021 Rules address this ambiguity by amending Article 10(b) to apply to claims made under the same “agreement or agreements,” so arbitrations may be consolidated where they involve multiple agreements with mirror arbitration clauses.
The 2021 Rules also include multiple changes designed to address potential conflicts of interest in arbitration proceedings. First, Article 11, which contains general provisions, has been revised with the inclusion of Article 11(7) requiring parties to promptly inform the ICC Secretariat of any agreements where a non-party has an economic interest in the outcome of the arbitration through an agreement to fund a party’s claims or defenses. This change places the affirmative obligation on parties at the outset to inform of the involvement of litigation funders to address potential conflicts at the outset. Second, the 2021 Rules provide a new paragraph under Article 12(9) addressing the constitution of the arbitral tribunal. The ICC Court now has the power to appoint each member of the arbitral tribunal, even if this method differs from what the parties had envisioned in their arbitration agreement. However, this power is limited to “exceptional circumstances” that would avoid “a significant risk of unequal treatment and unfairness that may affect the validity of the award.” Third, Article 17 has been renamed to “Party Representation” and now requires parties to immediately notify the Secretariat, arbitral tribunal, and other parties of any change in their representation. Notably, the tribunal has been given the authority under this rule to exclude new representatives from participating in arbitration if necessary to avoid a conflict of interest with an arbitrator.
Other noteworthy updates in the 2021 Rules include a new provision in Article 36(3) allowing a party to apply to the Secretariat for an additional award for claims made in the arbitral proceeding that the tribunal has omitted to decide. Additionally, the pecuniary threshold to avoid application of the expedited rules has been increased from $2 million under the 2017 Rules to $3 million under the 2021 Rules for arbitration agreements concluded on or after January 1, 2021.
Lastly, the 2021 Rules reflect an effort to increase transparency, as a party may now, among other things, request that the ICC Court communicate its reasons for reaching its decisions, although the ICC Court is not required to communicate such reasons when exceptional circumstances dictate that it should not.
§ 1.3. The United States Supreme Court Docket
In early November 2021, the Court heard oral argument in Badgerow v. Walters, 975 F.3d 469 (5th Cir. (La.) 2020), cert granted, 141 S. Ct. 2620 (U.S. May 17, 2021) (No. 20-1143). In that case, the Court is considering a split among the federal Circuits regarding whether district courts possess subject matter jurisdiction over petitions to confirm or vacate arbitration awards to the extent “the underlying controversy between the parties arises under federal law.”
Denise Badgerow, a financial advisor formerly employed with REJ Properties, Inc. (“REJ”), began a FINRA arbitration action against three principals of REJ following her termination from the company. The three principals were also affiliates of Ameriprise Financial, so Badgerow later added a Title VII sex discrimination claim against Ameriprise in the FINRA arbitration. In her claims, Badgerow sought damages against the principals for tortious interference of contract and for violating a Louisiana “whistleblower” law. She also sought to hold Ameriprise jointly liable for the principals’ and REJ’s conduct. The FINRA panel dismissed all of Badgerow’s claims with prejudice.
Badgerow then sued in Louisiana state court to vacate the FINRA panel’s award, contending that the principals of REJ had committed fraud on the FINRA panel. She named only the REJ principals in the state court action. She did not name REJ itself or Ameriprise. When the principals removed to federal district court, Badgerow sought remand, arguing the district court lack subject matter jurisdiction because the claims asserted against the principals were based solely on state law.
The district court denied Badgerow’s motion to remand, holding that it had subject matter jurisdiction over Badgerow’s petition to vacate because she had asserted a Title VII declaratory judgment claim against Ameriprise in the arbitration. The court ultimately found that no fraud had been committed in the arbitration and confirmed the FINRA panel’s dismissal of all of Badgerow’s claims.
Badgerow then appealed to the Fifth Circuit. She argued there that the district court had lacked subject matter jurisdiction over the petition to vacate and, therefore, had improperly denied her motion to remand. The Fifth Circuit affirmed, in reasoning important to the review now granted by the Supreme Court.
The Fifth Circuit began by reviewing the Supreme Court’s decision in Vaden v. Discover Bank, 556 U.S. 49 (2009). In that case the Court adopted a “look-through” analysis for “determining federal jurisdiction in actions to compel arbitration under section 4 of the FAA.” Although the plaintiff’s petition to vacate in Badgerow was brought pursuant to section 10 of the FAA, the Fifth Circuit explained that motions brought under sections 9, 10, and 11 of the FAA are all subject to the same look-through approach. In particular, “a federal court should determine its jurisdiction by looking through an FAA petition to the parties’ underlying substantive controversy.” If the claims involved in the underlying dispute evidence that the dispute could have been brought in federal court, “then federal jurisdiction lies over the FAA petition.”
Badgerow had contended that because she only sought to vacate the dismissal of her claims against the principals and not her claims asserted Ameriprise, the federal declaratory judgment action against Ameriprise asserted in the FINRA arbitration could not be properly considered in the look-through analysis. But, according to the Fifth Circuit, Vaden says otherwise. Under Vaden, the court believed that its task was to determine whether “a federal court would have had jurisdiction over an action raising the same claims against the [p]rincipals that Badgerow brought in the FINRA arbitration proceeding—namely tortious interference and Louisiana ‘whistleblower.’” In making this determination, the court noted that Badgerow’s claims against the principals and Ameriprise “arose from the same common nucleus of operative fact,” and that the Title VII declaratory judgment claim against Ameriprise would have created sufficient federal jurisdiction to allow for supplemental jurisdiction over Badgerow’s state law claims against the principals. Accordingly, the Fifth Circuit upheld the district court’s jurisdiction and affirmed its denial of remand. Badgerow then petitioned for certiorari, which the Supreme Court granted.
As Badgerow explains in her opening brief on the merits, the question presented to the Supreme Court is “[w]hether federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Section 9 and 10 of the FAA where the only basis for jurisdiction is that the underlying dispute involved a federal question.” Badgerow contends that federal courts do not possess such jurisdiction because the text of the FAA simply does not countenance a “look-through” approach to motions filed pursuant to sections 9 and 10 of the FAA. Section 4 of the FAA, allowing a party to compel arbitration, “has unique language that instructs courts, explicitly, to look through the petition to the underlying dispute.” This unique language, according to Badgerow, is the phrase “save for such agreement”. Because sections 9 and 10 of the FAA do not include similar language, Badgerow contends that courts cannot perform the same look-through for confirmation of arbitral awards under section 9 and vacatur of arbitral awards under section 10.
The respondents in Badgerow argue in opposition that motions to confirm or vacate arbitration awards are mere “adjuncts” to an underlying controversy between arbitrating parties. According to them, the FAA “authorizes various procedural devices that allow parties to enlist courts in facilitating arbitration.” These procedural devices include applications for stays under section 3, petitions to compel under section 4, applications for the appointment of arbitrations under section 5, and petitions to subpoena witnesses under section 7. Sections 9, 10, and 11, which allow for confirmation, vacation, or modification of arbitration awards, respectively, are no different, in their view. All of these applications and motions are simply vehicles for the courts to ensure that an underlying controversy is “successfully resolved through arbitration.” Similarly, the FAA’s repeated reference to such motions being filed in the “United States district court[s]” further shows that the FAA presupposes federal courts have jurisdiction over those motions. Therefore, if a federal court determines that it would have had jurisdiction over an underlying controversy, it necessarily has jurisdiction to hear FAA motions related to a disputed arbitration.
The Supreme Court held oral argument on these issues on November 2, 2021. Justice Thomas began the questioning by inquiring into Badgerow’s view that section 4 of the FAA creates federal jurisdiction, noting “[c]ounsel, we have said or suggested from time to time that the FAA doesn’t provide federal question jurisdiction. So how do you square that with the notion that Section 4 . . . provides such jurisdiction? Badgerow’s counsel responded by contending that section 4 is an exception to the traditional rule that a court is to only look to the well-pleaded complaint for determining jurisdiction. Justice Kagan followed up by suggesting “well, if we look to the well-pleaded complaint, the well-pleaded complaint says something about Section 9 and that arises under federal law.” Counsel responded by explaining that, with exception of section 4, the FAA does not create jurisdiction and that jurisdiction under sections 9 and 10 would predominantly arise only in diversity cases.
Justice Kagan, however, cast doubt on this argument by noting “isn’t that a little bit backwards, that it ends up that you put the diversity cases in the federal court system and you take all the cases that involve federal questions and say, oh, the federal courts don’t have anything to do with those cases?” And Justice Kavanaugh summarized what seemed to be the sense of many members of the Court by asking:
[D]oesn’t it make sense to have a – a uniform rule if you’re not going to have, oh, the Act itself confers jurisdiction, a uniform way to think about jurisdiction? And the uniform way that I understood it’s always been thought about was you look through to the underlying controversy, it’s pretty simple, and you do that kind of all the way through.
Despite the somewhat uphill fight Badgerow seems to face, Chief Justice Roberts did challenge the respondents on the issue of whether federal courts would have to handle many more FAA proceedings if the Court agreed with the “look through” argument, noting that “the consequence of your position is to federalize a lot more of FAA actions, procedures, than it seems would make sense if you buy the idea that this is a statute that doesn’t give generally federal jurisdiction. The Court will likely issue its decision this year.
The Court also granted certiorari in December 2021 in two cases that have since been consolidated: ZF Automotive US, Inc. v. Luxshare, Ltd., (U.S. Dec. 10, 2021) (No. 21-401), and AlixPartners, LLP v. The Fund for Protection of Investors’ Rights in Foreign States, 2021 WL 5858633 (U.S. Dec. 10, 2021) (Consolidated No. 21-401). In these cases, the Court is considering a split among the Circuits regarding whether a federal court’s authority “to render assistance in gathering evidence for use in ‘a foreign or international tribunal,’ encompasses private commercial arbitral tribunals[.]” As argued by ZF Automotive in its Petitioner’s Brief, the Fourth and Sixth Circuits have held that the federal courts possess such authority whereas the Second, Fifth, and Seventh Circuits have found that they do not.
In Luxshare, Luxshare applied under 28 U.S.C. § 1782 in a federal court in the Eastern District of Michigan to be allowed discovery against ZF Automotive and two ZF executives for use in a prospective arbitration proceeding between Luxshare and ZF that was to occur in Munich, Germany and pursuant to German Arbitration Institute (DIS) rules. Section 1782 allows a district court to require a person who resides in a respective district to “give his testimony or to produce a document or other thing for use in a proceeding in a foreign or international tribunal[.]” The district court granted Luxshare’s motion and allowed Luxshare to “obtain limited email production and to take one deposition.” As explained by the district court, courts generally consider four factors in deciding whether to grant a Section 1782 application:
- whether the person from whom discovery is sought is a participant in the foreign proceeding;
- the nature of the foreign tribunal, the character of the proceedings, and the receptivity of the agency abroad to federal-court judicial assistance;
- whether the application conceals an attempt to circumvent foreign proof-gathering restrictions or other policies; and
- whether the discovery sought is unduly intrusive or burdensome.
ZF largely contended that since it was going to be a participant in the German arbitration proceeding, the DIS arbitration tribunal more properly could compel discovery instead of the district court. However, the district disagreed, and relying largely on affidavits from Luxshare’s German counsel testifying that the DIS rules had no mechanism to compel the requested discovery, the district court found that the four factors weighed in favor of granting the application and, therefore, granted the same.
After ZF failed to provide the ordered discovery, Luxshare moved to compel, and, in response, ZF appealed and filed a motion to stay with the Sixth Circuit. While the matter was pending before the Sixth Circuit, the district court granted Luxshare’s motion to compel and ordered production within 14 days from a Sixth Circuit ruling “denying the motion to stay or dismissing the appeal.” ZF petitioned for a writ of certiorari before the Sixth Circuit issued a final decision on the appeal, which the Supreme Court granted in December 2021.
In Alix Partners, the Second Circuit considered issues similar to those presented in Luxshare but also considered whether a foreign investor may properly invoke Section 1782 to obtain an order compelling discovery from a U.S. company for use in an arbitration proceeding between the foreign investor and a foreign government. In affirming the Southern District of New York’s order compelling the disputed discovery, the Second Circuit found that Section 1782 provides such authority. Luxshare and Alix Partners undoubtedly present confounding jurisdictional issues with profound implications, and parties (and related nonparticipants) involved in international disputes should pay close attention.
In addition to Circuit splits presented in the above cases, the Court granted a petition for writ of certiorari regarding the Eight Circuit’s decision in Morgan v. Sundance, Inc., 992 F.3d 711 (8th Cir. (Iowa) 2021), wherein the Eight Circuit reversed a district court’s order that denied a motion to compel arbitration filed by Sundance, finding that the plaintiff had failed to show prejudice from Sundance’s delay in seeking arbitration.
Robyn Morgan, who worked at one of Sundance’s Taco Bell franchises, brought a collective action on behalf of herself others similarly against Sundance alleging Sundance violated the Fair Labor Standards Act by failing to properly pay overtime to its workers. Sundance moved to dismiss the complaint alleging that another similar suit had already been filed in Michigan. The district court denied the motion approximately four months later, and Sundance thereafter answered the complaint without asserting any right to arbitration. Sundance ultimately settled the Michigan action, and despite Morgan’s participate in the global mediation that led to the Michigan action settlement, Morgan’s action did not settle and, instead, continued to proceed. The parties, however, did not conduct any discovery. Following the failed mediation, and after the case had been pending for about eight months, Sundance moved to compel Morgan’s claims to arbitration. The district court denied Sundance’s motion finding that Sundance had “substantially invoked the litigation machinery primarily by waiting eight months to assert its right to arbitrate this dispute[,]” and, therefore, that Morgan would be prejudiced by being compelled to arbitrate.” The Eighth Circuit disagreed.
As explained by the Eighth Circuit, four months of the disputed eight-month period was due to the district court’s consideration of Sundance’s first-to-file motion to dismiss. The court also noted that Sundance’s first-to-file motion did not address the merits of the dispute and, instead, only focused on quasi-jurisdictional issues. Additionally, the court explained that Sundance’s participation in mediation should be considered an effort to avoid “invoking the litigation machinery,” not a substantial invocation of the machinery Further, according to the court, the parties spent little time actively litigating and spent no time regarding the merits of Morgan’s case. Accordingly, the court found that Morgan had not been prejudiced by Sundance’s eight-month delay and reversed the district court’s denial of Sundance’s motion to compel arbitration.
Morgan petitioned the Supreme Court to grant a writ of certiorari, which the Court granted in November 2021. Morgan principally challenged the Eighth Circuit’s ruling that Morgan failed to show prejudice by Sundance’s eight-month delay in seeking arbitration. The question presented, according to Morgan (citing AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)) is whether “the arbitration-specific requirement that the proponent of a contractual waiver defense prove prejudice violate this Court’s instruction that lower courts must ‘place arbitration agreements on an equal footing with other contracts?’”
Noting a great variety of views among the federal Courts of Appeals and states’ highest courts regarding whether prejudice is required, and to what extent, Morgan asserts that “the Eighth Circuit placed itself firmly into the strong-prejudice camp.” As explained by Morgan, although the Eighth Circuit acknowledged that Sundance acted inconsistently with its right to compel arbitration, the court “refused to find this conduct constituted waiver . . . because ‘Morgan was not prejudiced by Sundance’s litigation strategy.’”
Although the case is in its early stages before the Court, the Court’s grant of Morgan’s petition perhaps does not bode well for parties who wait an extended time to seek arbitration. There, of course, is some strategy with first moving to dismiss claims early in the litigation and then seeking to compel arbitration later, if necessary. However, that strategy might need to be reconsidered in light of the Court’s acceptance of this case. Litigators should pay close attention to the Court’s disposition of this case.
Finally, the Court granted a petition for writ of certiorari regarding the 7th Circuit’s decision in Saxon v. Southwest Airlines Co., 993 F.3d 492 (7th Cir. (Ill.) 2021). In that case, the Seventh Circuit held that airport ramp supervisors are “transportation workers” exempt from the FAA.
A ramp supervisor in Saxon brought a putative class action against Southwest Airlines arguing that the company had failed to pay proper overtime to its ramp supervisors in violation of the Fair Labor Standards Act. Southwest moved to compel based on an arbitration provision that was contained in an employment agreement between it and the supervisor. In response, the supervisor argued that she exempt from the FAA because she was part of a “class of workers engaged in foreign or interstate commerce.” The district court disagreed and ruled that the supervisor was too far removed from interstate commerce to fall within the FAA exemption. The Seventh Circuit disagreed and reversed.
The Seventh Circuit first discussed the phrase “class of workers” contained in the section 1 FAA exemption and explained that the question was not whether the supervisor, on an individual basis, was engaged in commerce but, rather, whether Southwest ramp supervisors as a whole were engaged in commerce and whether the supervisor was a member of that class. The court then explained under United States Supreme Court precedent, “[t]o be engaged in commerce for purposes of § 1 . . . is to perform work analogous to that of seamen and railroad employees, whose occupations are centered on the transport of goods in interstate and foreign commerce.” Thus, according to the Seventh Circuit, the essential question was “whether the interstate movement of goods” was a central part of a ramp supervisor’s job.
Focusing on undisputed evidence that supervisors often acted as ramp agents when Southwest was short of workers and, therefore, required to “spend a significant amount of their time engaged in physically loading baggage and cargo onto planes” that traversed other states or countries, the court found that the supervisors were engaged in interstate or foreign commerce. The court similarly found that the supervisor was a member of the cargo loader class. In an putative attempt to placate Southwest’s concerns with its ruling, the court ruled that ramp supervisors could still be subject to arbitration “under state law or through an agreement outside of [their] contract[s] of employment.” Regardless, in the end, the court ruled that the supervisor was a transportation worker exempt from the FAA and, as such, reversed the district court’s ruling compelling arbitration.
Southwest, thereafter, filed its petition for writ of certiorari with the Supreme Court. As explained by Southwest, the essential question is:
Whether workers who load or unload goods from vehicles that travel in interstate commerce, but do not physically transport such goods themselves, are interstate ‘transportation workers’ exempt from the Federal Arbitration Act.
The Court granted certiorari in December 2021, and it will be interesting to see how the Court further defines what it means to be engaged in commerce for purposes of FAA exemption.
§ 1.4. Who Decides—The Court or the Arbitrator?
Swiger v. Rosette, 989 F.3d 501 (6th Cir. (Mich.) 2021). Where a party opposing arbitration challenges an arbitration agreement as a whole but fails to specifically challenge a delegation clause contained in the agreement, it is for the arbitrator to decide whether the claims are subject to arbitration.
A consumer brought suit against finance company executives arguing the executives and the finance company issued a loan to the consumer that violated Michigan state law and federal law. One of the executives moved to stay the case and compel arbitration based on an arbitration provision and delegation clause that was contained in the loan contract. Based on the delegation clause, the executive argued that the district court should compel arbitration of both the case itself and the case’s threshold arbitrability questions. Citing an opinion from the Second Circuit, the district court ruled that enforceability of the arbitration agreement had already been decided against the executive in a similar case and, therefore, denied the executive’s motion to compel arbitration. Finding that the district court should have enforced the delegation clause, the Sixth Circuit reversed.
Preliminarily, the Sixth Circuit explained that FAA allows parties to agree that an arbitrator will decide arbitrability questions, including whether parties have agreed to arbitrate at all or whether an agreement encompasses a particular controversy. As explained by the court, these delegation clauses “preclude courts from resolving any threshold arbitrability disputes, even those that appear wholly groundless.” Only when a party specifically challenges a delegation clause may a court consider the enforceability of such clause. Accordingly, a party must specifically attack a delegation clause and challenging the entire agreement itself will not be sufficient. The court then explained that when the consumer challenged arbitration, she challenged the enforceability of the entire arbitration agreement and failed to challenge the delegation clause specifically. Even on appeal, according to the court, the consumer failed to challenge the delegation clause. Accordingly, and due to the consumer’s failure to challenge the delegation clause, the Sixth Circuit ruled that the district court should have enforced it and referred the case to arbitration. The court, therefore, reversed the district court and remanded the case.
Bossé v. New York Life Ins. Co., 992 F.3d 20 (1st Cir. (N.H.) 2021). Where an arbitration provision includes an unmistakable arbitrability delegation clause, the arbitrator is to decide arbitrability, not the court.
An insurance agent brought suit against New York Life arguing that his business relationship with New York Life was improperly terminated due to his race. In response, New York Life moved to compel arguing that certain arbitration clauses contained in various agreements executed with the agent during his tenure with the company required the agent to arbitrate his claims. At least one of the clauses specifically stated that any disputes between the parties were to be decided by an arbitrator. Nonetheless, the district court ruled that the arbitrability determination was for it to decide, not an arbitrator. Specifically, the district court ruled that Section 2 of the FAA required an arbitration clause to bear some relationship to the respective agreement or contract. According to the district court, the subject arbitration clauses improperly required arbitration of “any” dispute between the parties and was not sufficiently limited to disputes bearing a relationship to the contract itself. Accordingly, the district court declined to enforce the arbitration clauses. The First Circuit reversed.
Relying on the U.S. Supreme Court’s decision in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019), the First Circuit explained that where parties have clearly and unmistakably delegated issues of arbitrability to the arbitrator, courts must enforce the parties’ expectations as reflected in the agreement and, therefore, defer to the arbitrator to decide the issue. Reviewing the language contained in one of the arbitration clauses, the court explained that the parties had not only agreed to arbitrate any disputes arising between them but also “‘any dispute as to whether such Claim is arbitrable.’” Additionally, another arbitration clause provided that the arbitration was to be administered by the AAA in accordance with its rules. As explained by the court, rule 6(a) of the AAA Employment Arbitration Rules and Mediation Procedures requires the arbitrator to decide whether claims are arbitrable.
Additionally, the court rejected the agent’s argument that a court must assess whether a dispute is encompassed by an arbitration agreement to properly determine whether arbitrability was delegated to an arbitrator. According to the court, that type of “short-circuiting” was explicitly rejected by Henry Schein. Furthermore, the court summarily found there was no support for the agent’s argument that an arbitration clause must bear some relationship to the underlying contract to be enforceable.
Accordingly, finding that the arbitration clauses unmistakably delegated the arbitrability determination to the arbitrator, the court reversed the district court and ordered the district court to compel arbitration.
Glacier Park Iron Ore Properties, LLC v. U.S. Steel Corp., 961 N.W.2d 766 (Minn. 2021). Absent clear and unmistakable evidence that parties have agreed to arbitrate arbitrability, the arbitrability determination is a function for the court.
Glacier Park initiated an action against U.S. Steel arguing that a lease agreement entered into between U.S. Steel and trust from which Glacier Park acquired assets and rights, was wrongly procured through a breach of the trust’s fiduciary duty. After filing the action, Glacier Park moved to compel arbitration. Although the lease did not clearly express that the parties agreed that the question of arbitrability was subject to arbitration, Glacier Park argued that under an older Minnesota “reasonably debatable” standard, the arbitrator should decide arbitrability. The trial court disagreed, finding that the FAA dictated the court, not the arbitrator, to decide arbitrability. The Court of Appeals affirmed.
On appeal to the Supreme Court, the Supreme Court agreed that the FAA applied because the case involved interstate commerce. Accordingly, the Supreme Court inquired into whether the lease evidenced that Glacier Park and U.S. Steel clearly and unmistakably intended to arbitrate arbitrability. In examining the arbitration provision, the Court noted that although the parties specified certain disputes were subject to arbitration, the provision did not provide that the arbitrability of the claim itself was subject to arbitration. As explained by the Court, parties to an arbitration must expressly state that arbitrability is subject to arbitration, and Glacier Park and U.S. Steel failed to do that. Accordingly, the Supreme Court affirmed the Court of Appeals and held that the question of whether the breach of fiduciary claim was arbitrable was a question for the court.
Melaas v. Diamond Resorts U.S. Collection Dev., LLC, 953 N.W.2d 623 (N.D. 2021). The court, not an arbitrator, decides whether a party provided the necessary consent to enter into an arbitration agreement.
A customer to a timeshare agreement sued Diamond Resorts seeking to void the agreement due to improper actions of Diamond Resorts during the execution of the agreement. Diamond Resorts moved to compel arbitration based upon an arbitration provision contained in the timeshare agreement. The customer contested arbitration arguing that she was a vulnerable adult and, therefore, could not have properly consented to entering into the agreement. The trial court compelled arbitration without considering whether the customer possessed the requisite capacity to consent to the agreement in the first instance. The Supreme Court found this was in error.
The Court first noted that because arbitration is a matter of consent, a court can only order arbitration if it satisfied that the parties actually agreed to arbitrate their disputes. Similarly, because there is a possibility that a party to an arbitration agreement lacked the mental capacity to consent to entering into the agreement, the court – not an arbitrator – must decide whether the agreement was properly formed. If the court determines that a valid arbitration agreement exists, it must order arbitration of the dispute. Accordingly, because the trial court failed to determine whether the timeshare agreement was properly formed, the Supreme Court remanded the case to the trial court to hold an evidentiary hearing to determine whether a contract containing an arbitration agreement properly existed.
§ 1.5. What Constitutes an Agreement to Arbitrate?
Foster v. Walmart, Inc., 15 F.4th 860 (8th Cir. (Ark.) 2021). Where there exist material disputes of fact as to whether parties have agreed to arbitrate, a court should proceed summarily to trial to determine the issue.
Gift card purchasers brought suit against Walmart after the gift cards turned out to be worthless due to third parties tampering with, and stealing, the funds that originally were included on the gift cards. Walmart moved to compel based on a notation that was contained on the back of the gift cards directing purchasers to “see Walmart.com for complete terms.” According to Walmart, if the purchasers had visited that website, they would have come across an arbitration provision which explained that the purchasers accepted arbitration by using or accessing the Walmart sites. The district court denied Walmart’s motion to compel finding that the purchasers never had notice of the arbitration clause and could not have consented to arbitration unless they saw the clause first. On appeal, the Eighth Circuit found that the issue more-properly should have been determined in a trial instead of being decided by the district court itself.
The Eighth Circuit first explained that its task was to determine whether the record revealed any material issue of fact as to whether the parties had an agreement to arbitrate and to the extent that it did, the FAA required the court remand the case for trial. The court then discussed the possible theories behind whether the parties agreed to arbitrate. The first possibility was the instant the plaintiffs purchased their gift cards. According to Walmart, the plaintiff purchasers had notice of the arbitration agreement because it directed them to Walmart’s website for the cards’ complete terms. Nonetheless, the court found that the arbitration clause that was contained on the website explained that the plaintiffs accepted arbitration only by using or accessing Walmart’s websites. Accordingly, as explained by the court, if Walmart wanted the arbitration agreement to be formed at the point-of-purchase, it should have expressly said so in the arbitration clause.
The next possibility for agreeing to the arbitration clause was at the moment the plaintiffs actually accessed Walmart’s sites pursuant to the language contained in the clause. Crucial to this determination, according to the court, was whether the plaintiffs had adequate notice of the “browsewrap agreement.” As explained by the court, to be bound, the plaintiffs were required to either obtain actual notice of the arbitration clause or inquiry notice. The court then noted that the record before it and the district court was “meager,” and, therefore, it was difficult to determine whether the plaintiffs possessed sufficient notice. Characterizing these issues as material disputes of fact, the court explained that the FAA required the district court to proceed summarily to a trial on the issue of notice. Accordingly, the Eighth Circuit reversed the district court and remanded the case for trial for determining whether the parties agreed to arbitrate.
Kauders v. Uber Technologies, Inc., 159 N.E.3d 1033 (Mass. 2021). No arbitration agreement is formed where a signatory does not have reasonable notice of the arbitration terms and does not provide a reasonable manifestation of assent to the terms.
Users of Uber’s phone application brought suit against Uber after drivers for Uber refused to transport the riders because they were blind and accompanied by guide dogs. Uber moved to compel arbitration based on an arbitration provision contained in the terms and conditions contained in the application, which was granted by the trial court. Following arbitration, the riders moved for reconsideration of the trial court’s order requiring arbitration due to an interim opinion issued by the First Circuit Court of Appeals holding that Uber’s registration process did not create a contract with the application’s users because it failed to provide reasonable notice of its terms and conditions. The trial court agreed with the riders that the application failed to provide reasonable notice of its terms and conditions, including the arbitration provision, and, therefore, there was no contract between the riders and Uber. Uber appealed contending the terms and conditions constituted an enforceable contract. The Massachusetts Supreme Judicial Court disagreed.
The Supreme Judicial Court first acknowledged that it had not yet had an occasion to address “what standard a court should use when considering issues of contract formation for online contracts.” Nonetheless, the Court noted that the standard for creating online contracts should not differ from ordinary contract formation. Accordingly, the Court delineated a two prong test for determining whether a party has agreed to the terms of an online contract: there must be both (1) reasonable notice of the terms of the contract; and (2) reasonable manifestation of assent to the terms.
As it relates to the first element, the Court explained that a rider’s mere agreement to use the application did not necessarily mean that the rider also agreed to the “Terms & Conditions” because the application did not require the user to actually click on the link or otherwise review the terms and conditions when creating an account.” Moreover, according to the Court, the page upon which the terms and conditions were hyperlinked focused on payment information and the link was minimally prominent on the page. Accordingly, the Court found that Uber failed to show that it provided the riders with reasonable notice of the terms and conditions, including the disputed arbitration provision. For the same reasons, the Court held that the drivers did not reasonably manifest assent to the terms and conditions. Because there was no reasonable notice of the terms and conditions and because the drivers did not reasonably manifest assent to the terms and conditions, the Supreme Judicial Court ruled that there was no enforceable arbitration agreement between Uber and the riders and, accordingly, remanded the case.
Hillhouse v. Chris Cook Construction, LLC, 325 So.3d 646 (Miss. 2021). An arbitration provision is unenforceable where it requires arbitration to take place in a non-existing forum.
Purchasers of a home brought negligence and contractual claims against a contractor following a flooding of their home. The construction company moved to compel based on an arbitration provision that was contained in the purchase contract. The trial court granted the construction company’s motion to compel despite the fact that the provision required mediation to occur before the Southern Arbitration and Mediation Association (“SAMA”) which had ceased to exist seventeen years prior to the parties entering into the contract. The purchasers appealed arguing that because SAMA did not exist at the time of the contract execution, the arbitration provision was unenforceable. The Supreme Court agreed.
The Supreme Court explained that the contract provided that all claims “shall” be subject to SAMA. Accordingly, arbitration before SAMA was an express contractual requirement. Because SAMA as a forum was an express contractual requirement, the Court explained that it could not rewrite the contract merely because the forum was unavailable. To do so, according to the Court, would be to choose a forum not anticipated by either party. The Court, therefore, reversed the trial court finding that the arbitration provision was unenforceable due to SAMA’s nonexistence and unavailability.
Fitness, Fun, & Freedom, Inc. v. Perdue, No. 20-0344, 2021 WL 653240 (W. Va. Feb. 19, 2021) (unpub.). Minor who enters into a contract containing an arbitration provision may disaffirm the contract, including its arbitration provision, upon reaching majority, even after suit is filed.
Parents of a minor who was injured at a trampoline park brought suit against the trampoline park after the minor broke his legs while using a trampoline at the park. Prior to going to the trampoline park, the minor completed a release of liability on the trampoline park’s website, forging his mother’s signature to the release. The release contained a broad arbitration provision requiring arbitration of any and all claims related to trampoline park and its equipment. Based on the arbitration provision, the trampoline park moved to compel. Thereafter, the parents amended their complaint to add the trampoline manufacturer as a defendant. In the amended complaint, the minor also disaffirmed the release because he had, by that point, reached the age of majority. Because of the minor’s disaffirmance of the release, including its arbitration provision, the trial court denied the trampoline park’s motion to compel. The Supreme Court of Appeals affirmed.
The Supreme Court first explained that a trial court’s review of a motion to compel is limited to two questions: (1) does a valid arbitration agreement exist, and (2) do the subject claims fall within its scope. The Court then noted that contracts entered into by minors are voidable and may be disaffirmed after reaching majority. The Court, therefore, found that because the minor disaffirmed the release, including the arbitration provision, upon reaching majority, the release was no longer valid. Accordingly, the Supreme Court of Appeals affirmed the trial court’s denial of the trampoline parks’ motion to compel.
§ 1.5.1. Issues of FAA Preemption
Harper v. Amazon.com Srvcs., Inc., 12 F.4th 287 (3d Cir. (N.J.) 2021). Where it is unclear whether claims are exempt from being arbitrated under the FAA, a court should first inquire into whether the respective claims are arbitrable under state law before ordering discovery regarding exemption under the FAA.
In Harper, a “flexible” “last mile” delivery driver for Amazon brought suit against Amazon alleging entitlement to additional wages and tips and related violations of New Jersey labor laws. Despite the existence of an arbitration provision in his agreement with Amazon, the plaintiff initiated suit against Amazon in the Superior Court of New Jersey. Amazon removed to federal court based on diversity jurisdiction and the plaintiff, thereafter, asserted a putative class action against Amazon. In response, Amazon moved to compel arbitration under the FAA but also argued that the plaintiff’s claim was also arbitrable under state law. The plaintiff argued that he was exempt under Section 1 of the FAA because he made deliveries across state lines. The district court denied Amazon’s motion to compel and ordered discovery to determine whether the plaintiff was included within the section 1 exemption. The district court expressly did not decide whether the plaintiff’s claims were arbitrable under state law. The Third Circuit found this was in error.
The Third Circuit first acknowledged that section 1 has been interpreted to cover employees in any transportation industry who are engaged in the interstate or foreign movement of commerce or are so closely-related to it so as to practically be a part of it. It is crucial to make a determination as to an employee’s status because a court must know whether a contract itself falls within our without the scope of sections 1 and 2 of the FAA. However, in some instances, as explained by the court, “the scope of the class of workers cannot be determined by examining the nature of the work performed by the class” and limited discovery may be ordered to obtain facts about the class of works. Nonetheless, if there are state law grounds for enforcing arbitration even if the FAA does not apply, courts must first consider and answer that question before ordering discovery. The court explained that this inquiry must take place because “[n]ot all state laws” are displaced by the FAA. Instead, only state laws which conflict with the FAA are preempted. Where a state law enforces arbitration, there is no conflict.
Accordingly, and in light of the above, the Third Circuit vacated the district court’s denial of Amazon’s motion to compel, and remanded the case to the district court to determine whether the case was arbitrable under applicable state law and ordered that such determination be made before “turning to questions of fact and discovery” regarding the applicability of the section 1 exemption under the FAA.
A Better Way Wholesale Autos, Inc. v. Saint Paul, 258 A.3d 1244 (Conn. 2021).
State statute requiring a party to move to vacate an arbitration award within thirty days was not preempted by the FAA.
A car purchaser initiated an arbitration proceeding contending that the car company failed to disclose certain charges in violation of the federal Truth in Lending Act and Connecticut’s Unfair Trade Practices Act, and the arbitrator ruled in favor of the car purchaser. The car company moved to vacate the arbitrator’s award thirty-six days later, arguing that the arbitration had exceed his powers. In response, the car purchaser argued that because Connecticut law required the car company to move to vacate within thirty days of the award, the car company’s application was untimely and the trial court, therefore, lacked jurisdiction to vacate the award. In support of its motion to vacate, the car company argued that the Connecticut statute was preempted by the FAA’s three month limitation period since the respective financing agreement provided that the FAA would apply. The trial court rejected the car company’s argument that the statute was unconstitutional and dismissed the car company’s application to vacate. Connecticut’s intermediate appellate court affirmed the trial court finding that the FAA did not preempt the thirty-day Connecticut statutory provision. The Supreme Court similarly affirmed the trial court finding the Connecticut statute was not preempted by the FAA.
As an initial matter, the Supreme Court acknowledged that the FAA does not expressly preempt state law on temporal requirements, not does it reflect any congressional intent to occupy the entire arbitration field. Accordingly, the Supreme Court considered whether there was a conflict between the FAA’s ninety-day provision to move to vacate and Connecticut’s thirty-day provision. In the end, the Supreme Court found that there was no such conflict because the thirty-day provision does not interfere with a party’s right to challenge an arbitration award and, in fact, furthers arbitration’s goal of resolving disputes timely. Accordingly, the Supreme Court affirmed the trial court’s dismissal of the car customer’s vacation application as being untimely.
§ 1.6. Jurisdiction Under the Federal Arbitration Act
Tantaros v. Fox News Network, LLC, 12 F.4th 135 (2d Cir. (N.Y.) 2021). State statute prohibiting mandatory arbitration clauses for employment discrimination claims “except where inconsistent with federal law” raised federal issue of whether claims brought pursuant to the statute were preempted by the FAA.
Fox News initiated an arbitration action against one of its political commentators arguing that the commentator failed to obtain prior approval before publishing a book, thereby breaching her employment agreement. A few months after Fox News initiated arbitration, the plaintiff brought suit against Fox News and some of its senior executives in New York state court alleging “sexual harassment, hostile work environment, tortious interference with business expectancy, and retaliation for her complaints of sexual harassment.” Thereafter, the New York state court granted a motion to compel arbitration filed by the defendants, compelling the plaintiff’s claims to arbitration.
While the claims of all the parties were being arbitrated, the New York State Legislature passed a law declaring void mandatory arbitration clauses covering sexual harassment claims “‘[e]xcept where inconsistent with federal law.’” The law was later amended to cover all employment discrimination claims, not just sexual harassment claims. Based on the new law, the plaintiff sought a temporary restraining order and injunctions against being required to continue to arbitrate her employment claims and a declaratory judgment action that the new law prohibited enforcement of the arbitration agreement. The defendants removed to federal court arguing that the plaintiff’s new suit “necessarily raise[d] an issue of federal law: whether [the plaintiff’s] claim is consistent with the FAA.” The district court agreed, and relying on Supreme Court precedent, denied remand, finding that the plaintiff’s case arose under federal law. On appeal, the plaintiff argued the district court erred in failing to remand because: “(1) the action [did] not necessarily raise an issue of federal law because preemption [was] an anticipated defense; (2) any federal issue [was] not substantial; and (3) the exercise of federal jurisdiction [in the case] would upset the federal-state balance.” The Second Circuit disagreed.
The court first explained that although federal question jurisdiction is commonly based on a plaintiff specifically pleading a federal cause of action, a “special and small category” of cases brought pursuant to state law can implicate a federal issue. As explained by the court, federal jurisdiction will exist over this smaller set of claims if a federal issue is: “(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.”
As it relates to the first element, the court found that federal law was necessarily raised because the New York state statute specifically required the plaintiff plead her claims consistent with federal law. The court also found that the plaintiff’s claims presented a substantial question of federal law because “the issue [would] inform all future claims brought” under the New York state statute and because the case implicated the FAA and national policy favoring arbitration. Lastly, the court found that the exercise of federal jurisdiction in the case did not threaten the balance of federal and state responsibilities because although New York had a competing interest in interpreting its own laws, the New York legislature expressly drafted the disputed state law while being cognizant that federal law might be at issue. Accordingly, finding that “resolution of a significant federal issue” was necessary to the plaintiff’s claims, the Second Circuit affirmed the district court’s denial of remand.
Doe v. Trump Corp., 6 F.4th 400 (2d Cir. (N.Y.) 2021). Courts do not possess jurisdiction to grant a motion to compel arbitration filed by a nonparty to a lawsuit in response to a subpoena that was served on the nonparty.
In Trump Corp., business owners who had lost investments after entering into business relationships with a multilevel marketing company brought suit against the Trump Corporation and members of the Trump family alleging the defendants falsely represented that the marketing company was successful and that the defendants were independent of the marketing company. The plaintiffs did not name the marketing company as a defendant, presumably because the agreements between the business owners and the marketing company contained arbitration clauses. After suit was filed, the plaintiffs served a subpoena on the marketing company seeking documentation related to its relationship to, and communications with, the defendants. After the marketing company failed to produce responsive materials, the plaintiffs moved to compel production. In response, the marketing company moved to compel arbitration of the discovery dispute and the disputes between the plaintiffs and the defendants. The district court granted he plaintiffs’ motion to compel production, in part, and denied the marketing company’s motion to compel arbitration.
Regarding the marketing company’s motion to compel arbitration, the district court explained that the discovery dispute did not fall within the scope of the arbitration agreement because the lawsuit was about the defendants’ purported bad acts and did not relate to the plaintiffs’ obligations under the agreement between the plaintiffs and the marketing company. Additionally, the district court held that the marketing company lacked standing to compel the lawsuit between the plaintiffs and the defendants to arbitration because it was not a party to the lawsuit and, therefore, lacked standing to move to compel arbitration. Similarly, the district court held that it lacked jurisdiction to compel the discovery dispute to arbitration. The Second Circuit affirmed, finding that the district court’s lack of jurisdiction was dispositive as to whether the district court improperly failed to compel arbitration.
The Second Circuit opened its review with an acknowledgment that the FAA does not create federal jurisdiction and, instead, requires an independent jurisdictional basis over the parties’ dispute. Accordingly, a federal court can only compel arbitration if the dispute between the parties could be litigated in federal court if it were not for an arbitration agreement. In this respect, the court found that there was no “actual case or controversy” between the plaintiffs and the marketing company because the plaintiffs did not assert any claims against the marketing company and the marketing company had not intervened or otherwise been impleaded into the lawsuit. Accordingly, because there was no live case or controversy between the plaintiffs and the marketing company, the Second Circuit ruled that the district court properly found that it was without jurisdiction to compel arbitration. The Second Circuit, therefore, affirmed the district court’s denial of the marketing company’s motion to compel arbitration.
§ 1.6.1. Federal Appellate Jurisdiction Under Section 16 of the Federal Arbitration Act
Hamrick v. Partsfleet, LLC, 1 F.4th 1337 (11th Cir. (Fla.) 2021). Federal appellate courts lack jurisdiction to hear appeals based on a district court’s state-law-based denial of a motion to compel arbitration.
A final-mile delivery driver brought a collective action, on behalf of himself and those similarly situated, against U.S. Pack Holdings, LLC, a final-mile delivery company, arguing that U.S. Pack failed to pay wages owed under the Fair Labor Standards Act. U.S. Pack moved, pursuant to both the FAA and state arbitration law, to compel arbitration based on arbitration provisions that were contained in the plaintiffs’ independent contractor agreements with U.S. Pack. The district court denied U.S. Pack’s motion to compel finding that the drivers were exempt from the FAA due to section 1’s transportation worker exemption. Additionally, the district court ruled that U.S. Pack could not compel arbitration under state law because the parties expressly chose the FAA to govern the independent contractor agreements. U.S. Pack, thereafter, sought to appeal the district court’s denial based on both the FAA and state law. Although the Eleventh Circuit ultimately determined that the district court failed to properly consider whether the plaintiffs were in a class of workers that engaged in interstate commerce and, therefore, remanded the case so that the district court could conduct a proper analysis, the Eleventh Circuit ruled that it was without jurisdiction to review the district court’s decision regarding arbitration based on state law.
The Eleventh Circuit first acknowledged that the district court’s denial of U.S. Pack’s motion to compel was an interlocutory order. The court then noted that appellate courts generally are “precluded from hearing interlocutory appeals under the final judgment rule.” Nonetheless, as explained by the court, the FAA expressly allows appellate review of interlocutory orders denying motions to compel pursuant to the FAA. That allowance, however, does not apply to denials of motions to compel arbitration based on state law. Additionally, general pendent appellate jurisdiction which allows review of non-appealable decisions that are “inextricably intertwined” with appealable decisions, did not provide an avenue for the Eleventh Circuit’s review. As explained by the court, a determination of whether the plaintiffs were transportation workers under the FAA could be made without referencing or relying on state arbitration law. Thus, the court found that the district court’s FAA arbitration determination and its state law determination were not inextricably intertwined or interwoven. As such, the court dismissed for lack of appellate jurisdiction the part of U.S. Pack’s appeal that was based on the district court’s denial of arbitration under state law.
§ 1.7. Nonsignatories to an Arbitration Agreement
§ 1.7.1. Can Nonsignatories Compel Signatories to Arbitrate?
Reeves v. Enterprise Products Partners, LP, 17 F.4th 1008 (10th Cir. (Okla.) Nov. 9, 2021). Where a party to an arbitration agreement alleges substantially independent and concerted misconduct between a signatory and nonsignatory to an arbitration agreement, the nonsignatory may properly compel arbitration based on equitable estoppel.
Two welders brought a putative class action against an energy company after performing work for the energy company through third-party staffing agencies, for which the welders allegedly were not properly compensated. The employment contracts between the plaintiffs and the staffing agencies contained arbitration clauses. Accordingly, the energy company moved to compel arguing that the plaintiffs’ claims raised allegations of “substantially interdependent and concerted misconduct” by the energy company and the staffing agencies. Therefore, according to the energy company, the plaintiffs should have been equitably estopped from contesting arbitration. The district court rejected the energy company’s arguments and denied the company’s motion to compel. The Tenth Circuit reversed.
The Tenth Circuit first explained that an arbitration agreement’s scope, including who it binds, is a question of state law. Therefore, according to the court, its task was to determine whether the Oklahoma Supreme Court would allow the nonsignatory energy company to enforce the arbitration clause. However, as explained by the court, the Oklahoma Supreme Court had not yet addressed the applicability of concerted misconduct estoppel. Nonetheless, the court noted that two Oklahoma Court of Appeals cases affirmatively adopted “the two-prong misconduct equitable estoppel test,” finding that “equitable estoppel applied for nonsignatories in two circumstances[.] The circumstance applicable in Reeves, according to the Tenth Circuit, was where “the signatory raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract.”
The court explained that equitable estoppel is centered on “fairness,” and that the plaintiffs sought to hold the energy company liable based on duties imposed by the employment contracts but simultaneously sought to avoid the arbitration provisions contained in the contracts. Additionally, as explained by the court, the staffing agencies actually were the parties who paid the plaintiffs and not the energy company and, therefore, the plaintiffs’ allegations against the energy company and the staffing agencies were substantially interdependent essentially requiring the staffing agencies to become parties to the case. The court then noted that equitable estoppel seeks to prevent parties from “playing fast and loose with the courts” and that the plaintiffs carefully left the staffing agencies out of their pleadings. However, as explained by the court, the plaintiffs were nonetheless required to honor the arbitration agreements with the staffing agencies and arbitrate their claims against the energy company because the claims were based on the energy company’s and staffing agencies’ substantially interdependent and concerted misconduct. The Ninth Circuit, therefore, reversed the district court’s denial of the energy company’s motion to compel arbitration.
Setty v. Shrinivas Sugandhalaya LLP, 3 F.4th 1166 (9th Cir. (Wash.) 2021). Although a nonsignatory to an arbitration agreement can, in some instances, equitably estop a signatory from contesting arbitration, even under the New York Convention, the claims asserted by the nonsignatory must actually be related to the agreement that includes the arbitration provision.
On remand from the United States Supreme Court, the Ninth Circuit reconsidered its earlier decision that an Indian manufacturing company, which was not a signatory to a disputed partnership deed containing an arbitration agreement, could not equitably estop a competitor company and its principal, signatories to the deed, from avoiding arbitration of a trademark infringement claim. As the matter originally existed before the Ninth Circuit, the manufacturing company had appealed a district court order denying its motion to compel arbitration. Relying on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”), the manufacturing company had sought to compel arbitration based on a partnership deed between the competitor and its principal that contained an arbitration provision. However, because the manufacturing company was not even in existence at the time the competitor and its principal entered into the arbitration agreement and, therefore, not a party to the agreement, the court summarily affirmed the district court’s denial of the motion to compel.
On appeal to the United States Supreme Court, the Court asked the Ninth Circuit to reconsider its ruling in light of the Court’s ruling in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020). In Outokumpu, the Court held that the New York Convention does not prohibit the enforcement of arbitration agreements by nonsignatories who can meet the elements of equitable estoppel. On remand, the Ninth Circuit “accept[ed] that a nonsignatory could compel arbitration in a New York Convention case” but that the manufacturing company’s allegations did “not implicate the agreement that contained the arbitration clause—a prerequisite for compelling arbitration under the equitable estoppel framework.” Quite simply, according to the court, the manufacturing company’s claims had no relationship to the partnership deed between the competitor and its principal. More specifically, the trademarks at issue, according to the court, were based on mere “prior use” of the contested marks over a period of time and were not based on the disputed partnership deed. Accordingly, finding that because the manufacturing company’s claims were not based on the disputed partnership deed, the court found that the company could not rely on equitable doctrine principles to enforce the deed’s arbitration clause as a nonsignatory. The court, therefore, again affirmed the district court’s denial of the manufacturing company’s motion to compel arbitration.
Doe v. Carmel Operator, LLC, 160 N.E.3d 518 (Ind. 2021). Although the doctrine of equitable estoppel may, in some instances, allow a nonparty to an arbitration agreement to enforce the agreement against a party to the agreement, the nonparty must show that it knew of, and relied upon, the agreement.
A guardian for an elderly resident of a senior living facility brought suit against the facility and a background check company after one of the facility’s employees sexually abused the resident. Both the facility and company moved to compel arbitration based upon a residency agreement between the resident and the facility. Although the company was not a signatory to the agreement, it contended that it was an agent of the facility and, therefore, explicitly contemplated by the terms of the agreement. Alternatively, the company argued that it was covered by the arbitration agreement under the doctrine of equitable estoppel. The trial court agreed with the company and compelled arbitration of the guardian’s claims. The Court of Appeals affirmed. The Supreme Court, however, reversed finding that the company was neither an agent of the facility nor entitled to the protections afforded by equitable estoppel.
As it relates to the company’s contention that it was agent and, therefore, protected under the agreement’s provision extending protection to the facility’s employees and agents, the Supreme Court found that there was no evidence that the facility controlled the company’s process for conducting the disputed background check. Thus, according to the Supreme Court, the company was not acting as an agent for the facility when it was conducting its background check of the subject employee. Furthermore, as it relates to equitable estoppel, the Supreme Court ruled that the company could not prove that it knew about the agreement or that it detrimentally relied upon the agreement. The Supreme Court expressly rejected the company’s suggestion that the Court adopt an alternative theory of estoppel based on “substantial interdependence” of the guardian’s claims against the facility and the company. Accordingly, finding that the company neither was an agent of the facility nor entitled to protection under the doctrine of equitable estoppel, the Supreme Court reversed the trial court’s order compelling arbitration of the guardian’s claims against the company.
§ 1.7.2. Can Signatories Compel Nonsignatories to Arbitrate?
O’Hanlon v. Uber Technologies, Inc., 990 F.3d 757 (3d Cr. (Pa.) 2021). Nonusers of rideshare services are not bound by arbitration provisions generally governing the use of service where the nonusers allege that the service is engaging in discriminatory practices.
The Third Circuit first noted that under Pennsylvania law, “only parties to an arbitration agreement are subject to arbitration[.]” However, according to the court, equitable estoppel may, in some instances, bind a nonsignatory to an arbitration clause when “the non-signatory knowingly exploits the agreement containing the arbitration clause despite having never signed the agreement.” A nonsignatory exploits a disputed agreement by embracing the agreement and directly benefiting from it. In those situations, a nonsignatory cannot later reject those portions of the respective agreement with which it disagrees. However, these principles do not govern instances where there is no evidence that the nonsignatory availed itself of the agreement or received any benefits under the agreement. Accordingly, a nonsignatory who does not avail itself of benefits under an agreement containing an arbitration clause can properly litigate its claims against another in court.
Considering the above, the court found that the plaintiffs had alleged that they had “not downloaded Uber’s app, used its service, or otherwise availed themselves of any aspect of Uber’s service agreement.” Indeed, according to the court, the plaintiffs have alleged that Uber’s discriminatory conduct prevented them from using the application in the first instance. Accordingly, the court found that the plaintiffs could not be equitably estopped from rejecting the Uber’s service agreement’s arbitration clause and affirmed the district court’s denial of Uber’s motion to compel.
Wagner v. Apache Corp., 627 S.W.3d 277 (Tex. 2021). A party that contractually assumes the obligations and responsibilities of another is bound by an arbitration provision that is contained in the assumed contract, despite not being an original signatory to the contract.
After purchasing and being assigned certain oil assets from Apache, Wagner Oil then assigned the assets to several other assignees. The subsequent assignment provided that the assignees would assume and agree to be bound for all obligations contained in the earlier assignment between Wagner Oil and Apache. The purchase agreement between Wagner Oil and Apache contained an arbitration provision that bound successors and assigns of Wagner Oil and Apache. Several years after Apache and Wagner Oil entered into the purchase and assignment agreement and after Wagner Oil assigned its rights to other assignees, individual landowners brought suit against Apache related to environmental contamination caused by Apache prior to selling its assets to Wagner Oil. Apache, thereafter, filed a demand for arbitration against Wagner Oil and its assignees seeking indemnity and defense. In response, Wagner Oil and its assignees filed a declaratory judgment action in a state trial court seeking a declaration that the Wagner Oil assignees were not parties to the original purchase agreement and, therefore, not subject to arbitration. The trial court agreed with the Wagner Oil assignees and denied Apache’s motion to compel arbitration. The Court of Appeals reversed, finding that the Wagner Oil assignees assumed the obligations under the original purchase agreement and, therefore, were bound by the arbitration provision. The Supreme Court affirmed.
The Supreme Court first expressed that under federal arbitration law, not only are signatories to arbitration agreements bound to arbitrate, but non-signatories can similarly be bound under various theories, including assumption. The Court then explained that the original purchase agreement between Wagner Oil and Apache expressly stated that the arbitration clause was binding upon the parties and their successors and assigns. Similarly, the original assignment between Apache and Wagner Oil provided that the parties’ successors and assignees would forever be subject to the assignment and the terms and conditions of the original purchase agreement. Furthermore, the assignment from Wagner Oil to the other assignees provided that the assignees assumed and agreed to be bound by all obligations imposed on Wagner Oil in its earlier assignment with Apache. Accordingly, the Court found that the Wagner Oil assignees expressly assumed Wagner Oil’s obligations imposed in the original purchase agreement and assignment and, therefore, were subject to the arbitration provision contained in the purchase agreement. The Supreme Court, therefore, affirmed the Court of Appeals and remanded the matter to the trial court so that it could order the parties to arbitrate.
NC Financial Solutions of Utah, LLC v. Commonwealth ex rel. Herring, 854 S.E.2d 642 (Va. 2021). State attorneys general are not bound by arbitration provisions contained in contracts between loan companies and consumers when seeking remedies on behalf of the consumers under state consumer protection laws.
The Attorney General of the Commonwealth of Virginia brought an action against an online lender for violations of Virginia’s consumer protection laws seeking, in part, the return of monies that were paid by state consumers. The online lender moved to dismiss the action contending that because the subject contracts with the consumers contained arbitration provisions, Virginia was required to arbitrate its claims against the online lender. Virginia responded by arguing that it was not a party to the consumer contracts and, therefore, was not bound by the arbitration provisions contained in the contracts. Relying on precedent from the United States Supreme Court, the trial court found that Virginia was not bound by the arbitration provisions. The Virginia Supreme Court affirmed.
The Supreme Court first acknowledged that the FAA reflects the liberal federal policy of favoring arbitration agreements. However, even this liberal federal recognition, as explained by the Court, cannot alter general state contract law regarding the scope of agreements containing arbitration provisions. Accordingly, the Court explained that a party cannot be compelled to arbitration unless it has agreed to arbitrate. The Court then discussed the U.S. Supreme Court’s opinion in EEOC v. Waffle House, Inc., 534 U.S. 279 (2002), wherein the U.S. Supreme Court found that because the EEOC was not a party to an arbitration agreement between an employer and an employee, the EEOC was not required to arbitrate claims it asserted on behalf of the employee against the employer. Finding that the principles elucidated in Waffle House applied in the instant NC Financial Solutions case, the Vermont Supreme Court held that Virginia was not bound by the arbitration provisions between the lender and the consumers. Accordingly, the Supreme Court affirmed the trial court’s order compelling arbitration.
§ 1.8. Scope of Arbitration Agreement
§ 1.8.1. Scope of Arbitration Clauses in Labor and Employment Actions
Cooper v. Ruane Cunniff & Goldfarb Inc., 990 F.3d 173 (2d Cir. (N.Y.) 2021). In employment matters, a claim relates to employment only if the merits of the claim specifically involve facts particular to a plaintiff’s own employment.
An employee brought a putative ERISA class action for breach of fiduciary duty against Ruane, a retirement management company, alleging Ruane mismanaged retirement monies contributed by the employee and his employer. Based on an arbitration provision between the employee and his employer that required the employee to arbitration all claims related to his employment, Ruane moved to compel. The district court granted the motion to compel, finding that the management company was entitled to enforce the arbitration provision under the doctrine of equitable estoppel. Additionally, the district court found that the employee’s claims related to his employment because the claims concerned Ruane’s alleged poor management of the retirement funds, which could be considered the employee’s compensation. On appeal, the Second Circuit reversed holding that the employee’s claims were not related to his employee. Because the court found that the employee’s claims were not encompassed by the arbitration provision in the first instance, the court did not address whether the employee was equitably estopped from contesting Ruane’s ability to enforce the arbitration provision.
In determining that the employee’s claims were not related to his employment, the court made several observations. As an initial matter, the court acknowledged that the FAA reflects a national policy of favoring arbitrations. However, as explained by the court, arbitration can be ordered only where a court is satisfied that parties to an arbitration agreement have agreed to arbitrate the particular dispute. Accordingly, the dispositive issue was whether the employee’s claim for breach of fiduciary duty related to employment. Analyzing the Ninth Circuit’s decision in United States ex rel. Welch v. My Left Foot Children’s Therapy, LLC, 871 F.3d 791 (9th Cir. 2017), the court explained the Welch court found that an employee’s False Claims Act claim was not covered by the phrase “any claims.” More specifically, the Welch court found that the employee’s claims, which were based on her employer’s alleged fraudulent submission of Medicaid claims to the government, were not “related to” her employment for purposes of that dispute. In reaching its conclusion, the Welch court explained that the subject matter of the employee’s FCA claim did not implicate facts particular to that employee’s employment. In addition to the Ninth Circuit’s Welch decision, the Cooper court cited opinions from the Fifth and Eleventh Circuits holding that sexual assaults suffered by employees at employer-provided residential dwellings were not related to the employees’ employment and, therefore, claims regarding the assaults were outside the scope of the respective arbitration agreements.
Similar to the plaintiffs in the aforementioned cases, the Cooper court found that none of the facts relevant to consideration of the merits of the plaintiff’s claims related to his employment. More specifically, the court explained that the employee’s claims principally rested on Ruane’s retirement investment decisions and did not concern the employee’s work performance, evaluations, supervisorial treatment, compensation, workplace conditions, or anything immediately related to the employee’s work experience. Furthermore, as explained by the court, nonemployees, such as other beneficiaries of the retirement plan, plan fiduciaries, and the Secretary of Labor, could have pursued similar claims. Accordingly, finding that the employee’s claims did not relate to his employment because the merits of the claims did not involve facts particular to the employee himself, the court ruled that the claims did not relate to his employment and, therefore, were not subject to arbitration. Accordingly, the court reversed the district court and remanded the case.
Cunningham v. Lyft, Inc., 17 F.4th 244, (1st Cir. (Mass.) 2021). Lyft drivers are not engaged in interstate commerce so as to fall within exemption provided under section 1 of the FAA.
Drivers who used the Lyft application to locate riders brought putative class action against Lyft alleging that Lyft improperly misclassified them as independent contractors instead of employees. Lyft moved to compel arguing that an arbitration agreement contained in the drivers’ terms of service required the plaintiffs to individually arbitrate their claims against Lyft. In response, the drivers contended they were engaged in interstate commerce, thus falling within FAA’s section 1 exemption and, therefore, not bound by the arbitration agreement. More specifically, the drivers contended that they were engaged in interstate commerce because they (1) transported passengers to and from the Logan Airport in Massachusetts for trips to and from other states and countries and (2) some drivers transported customers across state lines. The district court agreed that the drivers were exempt from the FAA and, therefore, denied Lyft’s motion to compel arbitration. The First Circuit reversed.
The First Circuit first discussed the U.S. Supreme Court’s decision in United States v. Yellow Cab Co. and explained that in Yellow Cab, the Supreme Court found that that when local cab drivers merely transferred passengers between their homes and the local railroad station, the drivers were not involved in interstate transportation under the Sherman Act. Instead, a passenger’s interstate journey began when the passenger boarded the train at the station. The First Circuit likened the Lyft drivers’ activities to those of the cab drivers in Yellow Cab and found that if the cab drivers were not affecting interstate commerce under the Sherman Act, then the Lyft drivers were not engaged in interstate commerce when transporting passengers to and from the Logan Airport.
The court then considered the drivers’ contention that they fell within the section 1 exemption because they occasionally transported passengers across state lines. Reviewing uncontested data in the record related to the distances and respective locations traveled by Lyft drivers, the court noted that the question was essentially whether a class of workers qualify for section 1 exemption when many, but not all, of those workers transport passengers across state lines and only for a small percentage of their trips. The court then acknowledged that there was a split between the two circuits that had already considered the issue.
The court explained in Int’l Brotherhood of Teamsters Local Union No. 50 v. Kienstra Precast, Inc., the Seventh Circuit found that cement drivers who traversed interstate for approximately two percent of their trips fell within the section 1 exemption. However, in Capriole v. Uber Technologies, Inc., the Ninth Circuit found that Uber drivers were not engaged in interstate commerce when they transported passengers across state lines only about 2.5% of the time. Agreeing with the 9th Circuit’s rationale, the Cunningham court provided three reasons why the Lyft drivers were not engaged in interstate commerce: (1) not all Lyft drivers transport passengers interstate, (2) the section 1 exclusion must be applied narrowly and Lyft drivers are not primarily devoted to moving goods and people beyond state lines, and (3) Lyft’s primary business is to facilitate local, intrastate trips.
The court, therefore, found that the Lyft drivers were not engaged in interstate commerce and, therefore, the FAA and the respective arbitration agreement governed the drivers’ claims. Accordingly, the First Circuit reversed the district court’s order denying Lyft’s motion to compel.
Capriole v. Uber Technologies, Inc., 7 F.4th 854 (9th Cir. (Ca.) 2021). Uber drivers are not sufficiently involved in interstate commerce to fall within the FAA section 1 exemption.
Drivers with Uber brought a putative class action against Uber alleging Uber failed to properly pay the drivers all compensation that was owed and improperly required the driver to pay certain business expenses. In response, Uber moved to compel based on arbitration provisions that were contained in its agreements with the drivers. The plaintiffs contested arbitration contending that they were engaged in foreign or interstate commerce. The district court disagreed and granted Uber’s motion to compel. The Ninth Circuit affirmed.
The Ninth Circuit first explained that the residual clause contained in section 1 of the FAA which covers workers engaged in foreign or interstate commerce must be interpreted narrowly. Echoing the United States Supreme Court’s decision in Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186 (1974), the Ninth Circuit explained that being “engaged in commerce” for purposes of section 1 exemption, was narrower than “affecting commerce” or “involving commerce.” Accordingly, and in determining whether the exemption applied, the court explained that what mattered most is the “nature of the business for which a class of workers perform their activities,” not the item being transported in interstate commerce or whether the transporters, themselves, cross state lines. Further, according to the court, the residual category of “any other class of workers” contained in Section of the FAA is constrained by the references to “seamen” and “railroad employees,” which immediately precede the text of the residual category. As such, according to the court, the determination of whether Uber drivers are engaged in interstate commerce must be assessed on a national level, instead of a narrower geographic region.
With the aforementioned parameters in mind, the court considered whether Uber drivers were engaged in foreign or interstate commerce. The court rejected the drivers’ contention that because they “sometimes cross[ed] state lines or pick[ed] up and drop[ped] off passengers at airports who [were] heading to (or returning from) interstate travel,” they were engaged in interstate commerce. Comparing the services provided by Uber drivers to those provided by local taxicab drivers, the court explained that Uber drivers are not engaged in interstate commerce because “their work predominantly entails intrastate trips[.]” More specifically, the court explained that only 2.5% of Uber trips between 2015 and 2019 started and ended in different states. Additionally, as explained by the court, only 10.1 of Uber trips taken in 2019 began or ended at an airport. Therefore, according to the court, interstate movement could not be said to be a central part of Uber drivers’ job description and most Uber drivers and riders would concede that Uber trips often are short and local, not involving crossing state lines or trips to transportation hubs.
The court then distinguished Uber drivers from Amazon Flex workers at issue in the court’s 2020 Rittmann v. Amazon.com, Inc. decision. In Rittmann, the court explained that AmFlex workers were engaged in interstate commerce because they “‘complete[d] the delivery of goods that Amazon ship[ped] across state lines and for which Amazon hire[d] AmFlex workers to complete the delivery’ as the last leg of a single, unbroken stream of interstate commerce.” As explained by the Capriole court, Uber drivers generally are “unaffiliated, independent participates in the [a] passenger’s overall trip,” instead of being “an integral part of a single, unbroken stream of commerce[.]”
Accordingly, and in light of the above, the court ultimately concluded that the Uber drivers did not fall within FAA’s interstate commerce exemption and affirmed the district court’s grant of Uber’s motion to compel.
§ 1.8.2. Scope of Arbitration Clauses in other Contracts
Selden v. Airbnb, Inc., 4 F.4th 148 (D.C. Cir. 2021). Race discrimination claims brought pursuant to Title II of the Civil Rights Act of 1964 are arbitrable.
A prospective African American renter who attempted to use Airbnb to rent a room in an occupied home brought suit against Airbnb after the prospective host denied his rent request but allegedly accepted rent requests from purported white individuals who requested the same room on the same dates. More specifically, the plaintiff alleged that Airbnb violated, among other laws, Title II of the Civil Rights Act of 1964, which prohibits race-based discrimination in public accommodations. Because the terms of service of Airbnb contained an arbitration clause, the district court compelled the plaintiff’s claims to arbitration. The claims were eventually arbitrated with the arbitrator ruling in favor of Airbnb.
Thereafter, the plaintiff moved to vacate the arbitrator’s award which was denied by the district court. On appeal, the plaintiff argued, among other things, that the district court erred by ordering arbitration of his discrimination claims, which, according to the plaintiff, were prohibited from being arbitrated pursuant to Title II. The D.C. Circuit disagreed.
The D.C. Circuit first acknowledged that the question of whether Title II claims were arbitrable was a matter of first impression for the court. However, according to the court, there is nothing in Title II which forecloses arbitration. Although Title II states that district courts possess jurisdiction over proceedings brought pursuant to Title II, the court explained that “[a] statutory grant of jurisdiction neither guarantees a right to a federal court trial nor forbids arbitration as an alternate forum.” According to the court, if Congress wanted to prohibit arbitration of Title II claims, it expressly could have done so. Finding that there was no language in Title II overcoming “the FAA requirement to enforcement agreements to arbitrate,” the court ruled that the district court properly compelled arbitration of the plaintiff’s Title II claim.
§ 1.9. Waiver of Arbitration
Forby v. One Technologies, L.P., 13 F.4th 460 (5th Cir. (Tex.) 2021). A waiver of the right to arbitrate claims that are initially presented in a lawsuit does not extend to waiver of additional claims that are asserted in the future.
A consumer brought a class action against One Tech arguing that One Tech deceived consumers by advertising that it provided “free” credit reports while simultaneously charging the consumers for the reports. One Tech moved to arbitrate the consumer’s claims as initially filed but the Fifth Circuit ruled that One Tech waived its right to arbitrate those claims because it had sought to move to dismiss some of the consumer’s claims and did not move to arbitrate until obtaining a ruling on the motion to dismiss. However, after the case was remanded to the district court, the consumer added an additional federal statutory claim against One Tech. Arguing that the additional claim substantially reshaped the consumer’s case, One Tech again moved to compel the consumer’s claims contending that it could not have waived, at least, the additional claim. The district court denied One Tech’s motion explaining that the amended complaint did not alter the consumer’s case in any unforeseeable way. The Fifth Circuit disagreed and reversed.
The Fifth Circuit first explained that there is a strong presumption against waiver. Accordingly, as explained by the court, a party can only invoke the judicial process in a manner sufficient to evidence waiver for “a specific claim it subsequently seeks to arbitrate.” In other words, “waiver of arbitral rights is claim-specific[.]” Instead of litigating the consumer’s additional claim, according to the court, One Tech moved to compel the claim’s arbitration. Finding that One Tech could not have waived the consumer’s additional claim when it moved to dismiss the original claims because the claim had not yet been pleaded, the court ruled that One Tech did not waive its right to arbitrate that claim. Accordingly, the Fifth Circuit reversed the district court and remanded the case.
Health Care Authority for Baptist Health v. Dickson, __ So.3d __, 2021 WL 138859 (Ala. Jan. 15, 2021). A party waives its right to arbitration when it has notice that claims are potentially subject to arbitration but fails to seek discovery of the relevant documentation necessary to determine arbitrability and, instead, actively participates in litigation for two years in court.
Hospital patient in a putative class action brought breach of contract and related claims against a hospital and other defendants contesting the amount of insurance that was reimbursed by an insurer for services received at the hospital. In response, the hospital moved to dismiss the case for the patient’s failure to join the insurer as a party and because of improper venue. Although the hospital’s motion to dismiss was denied, the case was ultimately transferred to another trial court under the forum non conveniens doctrine. The hospital, thereafter, answered the patient’s complaint but failed to assert arbitration as a defense.
Instead, the parties continued to litigate the case in the trial court, including, among other things, requesting the court enter a joint class discovery and certification scheduling order. After the case had been pending for a little over two years, the hospital moved to compel arbitration arguing that the provider agreement between the hospital and the insurer required the patient to submit his claims to arbitration since his insurance policy with the insurer required arbitration. More specifically, the provider agreement between the hospital and the insurer provided for arbitration contingent upon whether there was an arbitration provision in the patient’s insurance policy with the insurer. The hospital argued that it did not learn of the right to arbitrate until it received a copy of the patient’s health insurance policy during discovery, which was only a couple of months prior to moving for arbitration. In response, the patient contended that the hospital waived its right to arbitrate because the hospital substantially invoked the litigation process. The trial court apparently agreed with the patient because it denied the hospital’s arbitration motion, although it did not provide a rationale for doing so. Nonetheless, the Alabama Supreme Court affirmed the denial.
As explained by the Supreme Court, the hospital knew that the provider agreement between it and the insurer contained an arbitration provision even though it was contingent upon the language used in the insurance policy covering the patient. Accordingly, the hospital should have more-diligently and timely sought a copy of the insurance policy so that it could determine where the patient’s claims were subject to arbitration. Instead, according to the Supreme Court, the hospital improperly waited over two years, and after the action had been transferred to another trial court and after class-related discovery had already began, to pursue arbitration. Due to its motions to dismiss or transfer and because of its participated in class-related discovery, the Supreme Court found that the hospital had substantially-invoked the litigation process before moving to compel. Additionally, the Supreme Court found that the patient had been prejudiced due to incurring litigation expenses that would otherwise have been avoided through arbitration. Accordingly, the Supreme Court found that the hospital had waived its right to arbitration and affirmed the denial of the hospital’s motion to compel arbitration.
§ 1.10. Confirmation and Vacatur of Arbitration Awards
Seneca Nation of Indians v. New York, 988 F.3d 618 (2d Cir. (N.Y.) 2021). Arbitration panel did not manifestly disregard the Indian Gaming Regulatory Act (“IGRA”) by requiring the Seneca Nation of Indians to continue making payments to the state of New York under a gambling compact between the Nation and New York after an express initial time period expired.
The Nation and New York entered into a gambling compact wherein the Nation was provided exclusive rights to maintain specified gambling machines in parts of Western New York in exchange for making graduated revenue-sharing payments to New York from the machines. The agreement provided for an initial 14-year term but that term automatically renewed for 7 years, unless one of the parties objected. The agreement also provided that the highest graduated amount, which expressly covered years 8 through 14 of the initial term, that the Nation would be required to pay to New York would be 25% of the monies made on the machines. The agreement did not expressly address the terms of the Nation’s payments to New York after the initial 14-year period ended, despite the agreement’s provision that the term would automatically extend seven years absent objection. Nonetheless, because neither party objected to renewal after the initial 14-year term ended, the agreement renewed for an additional 7 years.
A few months following the renewal, the Nation informed the State of New York that it did not intend to make any additional payments during the 7-year renewal period. In response, New York contended that it was entitled to continued payments at 25%, and the parties ultimately submitted the dispute to arbitration. Two members of a three-member panel ultimately found that the renewal provision was ambiguous and based on consideration of extrinsic evidence, ultimately determined that it would be “commercially unreasonable and against common sense to find that the word ‘renew’ would extend the Nation’s exclusivity without obligating the Nation to provide any continuing consideration to New York.”
Nonetheless, the Nation argued that the panel could not award additional payments because the Secretary of the Interior did not approve additional revenue sharing as purportedly required under the IGRA. The panel majority responded by explaining that it was simply finding that the renewal terms in the agreement, which had already been approved by the Secretary of Interior when the agreement was executed, included revenue sharing obligations – it was not approving “additional” payments. Accordingly, the Panel ordered the Nation to continue making the 25 percent payments during the seven-year renewal term.
The Nation moved to vacate the award in district court, arguing that “the panel majority manifestly disregarded IGRA’s requirement that the Secretary review and approve compact obligations or amendments—in this case, any payments beyond the 14-year term.” The district court affirmed the arbitration award, finding that the panel did not create a new payment obligation. Instead, according to the court, the Secretary had “approved the renewal provision, and the panel simply interpreted that approved provision to require further payments.” Thus, according to the district court, the panel did not manifestly disregard the IGRA. The Second Circuit agreed.
The Second Circuit first noted that although an arbitrator’s manifest disregard of either the law or the terms of an arbitration agreement remains a valid ground for vacatur, as long as the arbitrator provides “even a barely colorable justification for his or her interpretation of the contract,” the arbitration award will be affirmed. The Second Circuit explained that to prove a manifest disregard of law, it must be shown that an arbitrator knew of a relevant legal principle and “willfully flouted the governing law by refusing to apply it.” Considering these principles, the Second Circuit found that the panel did not manifestly disregard the IGRA.
The court explained that the IGRA merely requires the Secretary of Interior’s approval of gaming compacts but not “interpretations of existing contractual terms.” The contested renewal term, as explained by the court, had already been approved by the Secretary when the agreement was made. Accordingly, the parties were not required to again seek approval just because they disputed how the renewal term should be interpreted. Additionally, as explained by the court, the panel’s reliance on extrinsic evidence in interpreting the renewal term did not constitute a transformation of the compact requiring separate IGRA approval. Furthermore, according to the court, even if IGRA’s secretarial approval was required where an arbitrator issued an award based on extrinsic evidence, the requirement was not “well defined, explicit, and clearly applicable” and, therefore, it could not be said that the panel willfully flouted that purported requirement. Therefore, the court ruled that the panel did not manifestly disregard governing law and, as such, affirmed the district court’s denial of the Nation’s request to vacate the arbitration award.
§ 1.10.1. Timing for Moving to Confirm or Vacate
BST Ohio Corp. v. Wolgang, 176 N.E.3d 31 (Ohio 2021). Statutory timeframe for moving to vacate arbitration award does not prevent opposing party from seeking confirmation of the award prior to the end of the timeframe nor does it limit the court’s respective confirmation of the award.
BST initiated an arbitration proceeding against Wolgang arising out of the alleged mismanagement of a property that was jointly owned by BST and Wolgang. The same day the arbitrator issued its ruling, BST moved to confirm the award. In response, Wolgang petitioned to vacate the award in California but did not move to oppose the confirmation application in Ohio. The Ohio trial court eventually scheduled a hearing on the confirmation motion and Wolgang sought a stay of the confirmation hearing contending that under Ohio’s statutory scheme, it had three months to move to vacate, modify, or correct the award. During the hearing, Wolgang reiterated that it had three months to move to vacate the award and that the confirmation proceeding, therefore, was premature. During the hearing, the trial judge informed Wolgang that regardless of the three-month period, it should have filed a response to the application for confirmation. Wolgang failed to do so and approximately two weeks after the hearing (and before the three month period for moving to vacate had ended), the trial court denied Wolgang’s motion to stay and confirmed the arbitration award. Wolgang appealed and the Court of Appeals agreed that the because Wolgang had three months to move to vacate the award, the trial court prematurely confirmed the award. The Supreme Court disagreed.
Reviewing the language of the respective statute, the Court found that the three-month time period to move to vacate was an “upper limit” that could be limited by another party filing a pleading or motion requiring a response. Accordingly, the party opposing confirmation must take action to formally oppose confirmation regardless of the three-month deadline to move to vacate. Otherwise, a court considering a motion to confirm may properly confirm an award. The Supreme Court explained that Wolgang could have simply filed a placeholder motion explaining that it opposed confirmation and would be submitted more substantive briefing in the future. Wolgang, however, failed to do so and at its peril. Accordingly, the Supreme Court reversed the Court of Appeals.
§ 1.11. Waiver Of Appellate Review Of District Court Order Confirming Or Vacating Arbitration Award
Beckley Oncology Assocs., Inc. v. Abumasmah, 993 F.3d 261 (4th Cir. (W. Va.) 2021). Parties to an arbitration agreement may properly agree to waive appellate review of a district court’s order confirming or vacating an arbitration award.
A doctor initiated an arbitration action against a medical health facility arguing the health facility owed him certain incentive payments following his termination from employment. The arbitrator ultimately issued an award in favor of the doctor, and the health facility moved to vacate the arbitration award in federal district court. The district court dismissed the health facility’s complaint and confirmed the award. On appeal to the Fourth Circuit, the doctor argued that the health facility had waived its right to appeal the arbitration award because the respective employment agreement expressly contained a judicial appeal waiver. Recognizing that the validity of an arbitration provision waiving appellate judicial review was a matter of first impression for the Fourth Circuit, the court ultimately ruled that such a waiver was valid under the FAA.
Pointing to the Tenth Circuit’s decision in MACTEC, Inc. v. Gorelick, 427 F.3d 821 (10th Cir. (Col.) 2005), the court stated that the waiver of appellate review of an arbitration decision constituted a compromise wherein parties to an agreement trade the risks associated with contested appellate review for a “one-shot opportunity before the district court.” Furthermore, as explained by the Tenth Circuit, a party’s right to obtain review of a district court’s confirmation or vacation of an arbitration award only exists due to statute and, therefore, a party may waive that right. Lastly, according to the court, “reflexive appeal[s] of arbitration awards seem to be an increasingly common course, leading to arbitration no longer being treated as an alternative to litigation, but as its precursor.” Accordingly, the court dismissed the appeal finding that the parties had properly waived appellate review of the district court’s decision.