§ 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:
(1) whether the person from whom discovery is sought is a participant in the foreign proceeding;
(2) the nature of the foreign tribunal, the character of the proceedings, and the receptivity of the agency abroad to federal-court judicial assistance;
(3) whether the application conceals an attempt to circumvent foreign proof-gathering restrictions or other policies; and
(4) 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.