2022: A Supreme Year for Arbitration Decisions, and Congress Amends the FAA

Introduction

In 2022, the U.S. Supreme Court issued five opinions dealing with a variety of Federal Arbitration Act (“FAA”) issues: Viking River Cruises, Inc. v. Moriana held that the FAA partially preempts California’s Private Attorneys General Act; Morgan v. Sundance, Inc. held that a party asserting waiver of arbitration is not required to show that it was prejudiced by the other party’s conduct; Badgerow v. Walters narrowed the circumstances in which federal courts have jurisdiction to rule on motions to confirm, modify, or vacate arbitration awards; Southwest Airlines Co. v. Saxon expanded the categories of workers whose claims are exempt from arbitration under section 1 of the FAA; and ZF Automotive US, Inc. v. Luxshare, Ltd. and a consolidated appeal, AlixPartners, LLP v. Fund for Protection of Investors’ Rights in Foreign States, held that a law enabling foreign governmental entities to obtain discovery in U.S. district courts does not authorize those courts to order discovery for use in private arbitration proceedings.

In addition, Congress amended the FAA in connection with claims asserting sexual harassment or sexual assault.

U.S. Supreme Court Decisions

Viewed collectively, the Supreme Court’s rulings reflect a greater emphasis on text-based statutory analysis, a decreased reliance on the pro-arbitration policies embodied in the FAA, and a more nuanced approach to FAA preemption.

Viking River Cruises, Inc. v. Moriana

In this case, the Court held that the FAA preempts California case law refusing to compel arbitration of employees’ individual claims under the state Private Attorneys General Act (PAGA). Representative PAGA claims are not preempted by the FAA, though they may be subject to dismissal for lack of statutory standing.

PAGA authorizes any “aggrieved employee” to bring an action against an employer “on behalf of himself or herself and other current or former employees” to obtain civil penalties that previously could have been recovered only by the State in an administrative enforcement action. There are two components to a PAGA action: “individual” PAGA claims are premised on Labor Code violations actually sustained by the plaintiff, while “representative” PAGA claims are premised on events involving other employees. In a 2014 decision, Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court held that predispute agreements that waive the right to bring representative PAGA claims are invalid as a matter of public policy and that individual and representative PAGA claims cannot be resolved separately.

The employment agreement in Viking River Cruises contained a class action waiver providing that, “in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action.” It also contained a severability clause specifying that, if the waiver was found invalid, any class, collective, or representative PAGA action would be litigated in court. However, the severability clause further provided that, if any “portion” of the waiver remained valid, it would be “enforced in arbitration.” After leaving her position at Viking, Moriana filed a PAGA action alleging that the company failed to provide her with final wages within seventy-two hours as required by the California Labor Code. Her complaint also asserted a wide array of other Code violations allegedly sustained by other Viking employees. Viking moved to compel arbitration of Moriana’s individual PAGA claim and to dismiss her representative PAGA claims. The trial court denied Viking’s motion and the California Court of Appeal affirmed, holding that, under Iskanian, PAGA claims could not be split into arbitrable individual claims and non-arbitrable representative claims.

In an opinion by Justice Alito (in which all of the other Justices but Justice Thomas joined or concurred in part), the Supreme Court reversed, holding that Iskanian was preempted by the FAA insofar as it imposed an “expansive rule of joinder in the arbitral context” that precluded the parties from dividing PAGA actions into individual and representative claims in their arbitration agreement. The Court emphasized:

If the parties agree to arbitrate “individual” PAGA claims based on personally sustained violations, Iskanian allows the aggrieved employee to abrogate that agreement after the fact and demand either judicial proceedings or an arbitral proceeding that exceeds the scope jointly intended by the parties. The only way for parties to agree to arbitrate one of an employee’s PAGA claims is to also “agree” to arbitrate all other PAGA claims in the same arbitral proceeding. The effect of Iskanian’s rule mandating this mechanism is to coerce parties into withholding PAGA claims from arbitration …. Iskanian’s indivisibility rule effectively coerces parties to opt for a judicial forum rather than “forgo[ing] the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution.” … This result is incompatible with the FAA.

As support for its holding, the Court cited its earlier FAA preemption decisions in AT&T Mobility LLC v. Concepcion, Epic Systems Corp. v. Lewis, and Lamps Plus, Inc. v. Varela, each of which upheld the use of class action waivers in consumer and employment arbitration agreements.

However, the Court found that the FAA did not preempt Moriana’s representative PAGA claims. Viking argued that the representative claims were preempted because PAGA creates a form of class or collective proceeding, which is inconsistent with the individualized arbitrations contemplated by the FAA. The Court rejected that position on the ground that “important structural differences between PAGA actions and class actions … preclude any straightforward application of our precedents invalidating prohibitions on class-action waivers.” It further emphasized that “our precedents do not hold that the FAA allows parties to contract out of anything that might amplify defense risks.” Accordingly, “the FAA preempts the rule of Iskanian only insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.” Nevertheless, the Court concluded that Moriana’s representative PAGA claims should be dismissed for lack of statutory standing because “PAGA provides no mechanism to enable a court to adjudicate … [representative] PAGA claims once an individual claim has been committed to a separate proceeding.”

Viking River Cruises may not be the last word on the viability of representative PAGA actions. In a concurring opinion, Justice Sotomayor stated that California’s courts and legislature are best suited to address a PAGA plaintiff ’s standing to litigate “non-individual” claims: “[I]f this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word. Alternatively, if this Court’s understanding is right, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.”

Morgan v. Sundance, Inc.

In this case, the Supreme Court held that a party alleging that another party waived the right to arbitrate by litigating is not required to show that it was prejudiced by the other party’s conduct. The unanimous opinion by Justice Kagan reversed the Eighth Circuit, which had held that a party waives the right to arbitrate if it knew of the right, acted inconsistently with that right, and prejudiced the other party by its inconsistent actions. According to the Court, the Eighth Circuit erred by creating an arbitration-specific waiver rule that favored arbitration, whereas federal waiver law generally does not require a showing of prejudice. The decision resolved a circuit split in which nine circuits (including the Eighth) required a showing of prejudice, while two circuits did not.

Morgan brought a nationwide collective action against Sundance for violating the Fair Labor Standards Act. Sundance initially defended the case in court, where it moved to dismiss the complaint and later filed an answer and numerous affirmative defenses, none of which mentioned arbitration. Sundance also engaged in mediation. Not until eight months after the suit was filed did Sundance move to compel arbitration under the FAA. The district court denied the motion, concluding that, by participating in the litigation, Sundance waived its right to arbitration. The Eighth Circuit reversed, holding that prejudice must be shown as a result of the delay in seeking arbitration because of the federal policy favoring arbitration. It found that there was no waiver of arbitration because the petitioner was not prejudiced and it sent the case to arbitration.

In reversing the Eighth Circuit, the Supreme Court emphasized that, while the FAA reflects a policy favoring arbitration, a court may not devise novel rules to favor arbitration over litigation. Rather, the pro-arbitration policy of the FAA “is merely an acknowledgement of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.” The FAA’s pro-arbitration policy “is about treating arbitration contracts like all others, not about fostering arbitration.” The Court remanded the case to the Eighth Circuit to resolve the waiver issue without considering prejudice or to “determine that a different procedural framework (such as forfeiture) is appropriate.” This decision is a reminder that the FAA’s pro-arbitration policy “make[s] ‘arbitration agreements as enforceable as other contracts, but not more so.’”

Badgerow v. Walters

Ruling on an FAA procedural issue that has divided the circuit courts, the Supreme Court held, in this case, that the “look-through” approach often used in determining whether federal jurisdiction exists to decide motions to compel arbitration filed under section 4 of the FAA does not apply to motions to confirm or vacate arbitration awards filed under sections 9 and 10 of that statute. The Court’s eight-to-one opinion, authored by Justice Kagan, rested primarily on the principle of statutory construction that, when Congress includes particular language in one section of a statute but omits it in another section of the same statute, that choice should generally be treated as deliberate.

The FAA does not itself create a basis for federal jurisdiction. Rather, a federal court must independently have either diversity or federal question jurisdiction before it can act under the FAA. Earlier, in Vaden v. Discover Bank, the Supreme Court held that federal courts may “look through” a petition to compel arbitration brought under section 4 of the FAA to determine whether the underlying substantive dispute between the parties created a basis for federal jurisdiction. The Court based that decision on the text of section 4, which provides that a “United States district court which, save for [the arbitration] agreement, would have jurisdiction” over “the controversy between the parties” can entertain a motion to compel arbitration. Because sections 9 and 10 of the FAA do not contain such language, the Badgerow Court concluded that federal courts cannot employ the “look-through” approach in determining whether jurisdiction exists to adjudicate a motion to confirm or vacate an arbitration award.

The Court’s ruling means that, even if a federal court employed the “look-through” approach in granting a petition to compel arbitration, it will not be able to decide a subsequent motion to confirm or vacate the arbitration award unless there is an independent basis for exercising federal jurisdiction over that motion. If federal jurisdiction does not exist, a state court will need to decide the motion to confirm or vacate the award. In his dissent, Justice Breyer argued that such a result will cause “unnecessary complexity and confusion.” He queried: “[W]hy prohibit a federal court from considering the results of the very arbitration it has ordered and is likely familiar with? Why force the parties to obtain relief … from a state court unfamiliar with the matter?” Nevertheless, according to the Badgerow majority: “‘Even the most formidable policy arguments cannot overcome a clear statutory directive.’ … However the pros and cons shake out, Congress has made its call.”

Southwest Airlines Co. v. Saxon

In this case, the Court held that the claims of the plaintiff-employee—a supervisor of airplane cargo loaders—were not subject to arbitration under section 1 of the FAA, which exempts from the statute’s ambit “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The decision resolved a split between the Fifth and Seventh Circuits on this technical statutory issue. Justice Thomas authored the opinion, which was joined by all of the other justices except Justice Barrett, who took no part in the consideration or decision of the case. As in Morgan v. Sundance, Inc., the Court rejected arguments based upon the FAA’s pro-arbitration policies, instead basing its conclusion on the plain text of the FAA.

In order to move passenger, commercial, and mail cargo, Southwest employs both ramp agents, who physically load and unload baggage, airmail, and freight, and ramp supervisors, who train and supervise ramp agents but also frequently step in to load and unload cargo alongside ramp agents. Saxon brought a putative class action alleging that Southwest failed to pay ramp supervisors proper overtime wages. Southwest moved to compel individual arbitration pursuant to an arbitration agreement in Saxon’s employment contract. The district court compelled arbitration, but the Seventh Circuit reversed, holding that Saxon’s claims were exempt from arbitration under section 1 of the FAA because the act of loading cargo onto a vehicle to be transported interstate is itself “commerce” as that term was understood when the FAA was enacted in 1925. The Supreme Court affirmed the Seventh Circuit.

Examining the text of the FAA, the Court held that Saxon was a “worker” “engaged” in foreign or interstate “commerce” within the meaning of section 1 based upon the dictionary definitions of those terms as understood during the time the FAA was enacted. It further held that “[c]ontext confirms this reading” because the application of various canons of statutory construction “point to the same place” as the dictionary definitions. Southwest argued that section 2 of the FAA broadly requires courts to enforce arbitration agreements in any “contract evidencing a transaction involving commerce,” while section 1 provides only a narrow exception. According to Southwest, this demonstrated the FAA’s “pro-arbitration purposes” and counseled in favor of an interpretation that erred on the side of fewer (rather than greater) section 1 exemptions. However, the Court disagreed, explaining that:

To be sure, we have relied on statutory purpose to inform our interpretation of the FAA when that “purpose is readily apparent from the FAA’s text.” But we are not “free to pave over bumpy statutory texts in the name of more expeditiously advancing a policy goal.” Here, § 1’s plain text suffices to show that airplane cargo loaders are exempt from the FAA’s scope, and we have no warrant to elevate vague invocations of statutory purpose over the words Congress chose.

ZF Automotive US, Inc. v. Luxshare, Ltd.

AlixPartners, LLP v. Fund for Protection of Investors’ Rights in Foreign States

Revisiting an issue on which it had granted certiorari in another case last term, only to have that case settle before argument, the Court in these consolidated appeals considered whether a private adjudicatory body qualifies as a “governmental or intergovernmental adjudicative body” under 28 U.S.C. § 1782(a). That statute provides: “The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation.” Writing for a unanimous court, Justice Barrett concluded that “[o]nly a governmental or intergovernmental adjudicative body constitutes a ‘foreign or international tribunal’ under 28 U.S.C. § 1782. Such bodies are those that exercise governmental authority conferred by one nation or multiple nations.” Neither the private commercial arbitral panel in ZF Automotive nor the ad hoc arbitration panel in AlixPartners was found to qualify as a “foreign or international tribunal.”

In ZF Automotive, a Hong Kong company, Luxshare, Ltd., sought to obtain discovery from ZF Automotive US, Inc., a Michigan subsidiary of a German corporation, in an arbitration proceeding before a private dispute resolution body in Germany. Based on binding precedent of the Sixth Circuit—which had previously ruled that private commercial arbitration panels are “foreign tribunals” for purposes of section 1782—a Michigan district court granted Luxshare’s application for discovery from the U.S.-based company. The Supreme Court agreed to review the decision before the Sixth Circuit completed its appellate process to resolve a split among the circuits over whether the phrase “foreign or international tribunal” in section 1782 includes private arbitral panels.

AlixPartners involved a private arbitration proceeding by a Russian corporation against the government of Lithuania based on the purported fraud of a Lithuanian bank, which was initiated under a bilateral investment treaty entered into by Russia and Lithuania. The treaty featured a dispute resolution procedure and offered parties initiating an action under the treaty four options for dispute resolution. After electing to initiate private arbitration under the rules of the United Nations Commission on International Trade Law, the Russian organization filed a section 1782 application in federal court seeking discovery from AlixPartners, which had served as bankruptcy receiver for the Lithuanian bank. The Second Circuit affirmed the district court’s ruling, which had granted the application, and held that the arbitration panel fell within the ambit of section 1782.

The Supreme Court’s opinion focused on the phrase “foreign or international tribunal,” citing the definitions of “foreign,” “international,” and “tribunal” in Black’s Law Dictionary, among other sources. It concluded:

“Tribunal” is a word with potential governmental or sovereign connotations, so “foreign tribunal” more naturally refers to a tribunal belonging to a foreign nation than to a tribunal that is simply located in a foreign nation. And for a tribunal to belong to a foreign nation, the tribunal must possess sovereign authority conferred by that nation.

Moreover, section 1782 requires a “foreign or international tribunal” to be governmental or intergovernmental. “Thus, a ‘foreign tribunal’ is one that exercises governmental authority conferred by a single nation, and an ‘international tribunal’ is one that exercises governmental authority conferred by two or more nations. Private adjudicatory bodies do not fall within § 1782.” Analyzing the facts in ZF Automotive and AlixPartners, the Court concluded that both matters were private arbitrations which were not subject to section 1782 discovery. The Court found that its conclusion was consistent with the legislative history of section 1782, which focused on discovery for governmental bodies, not private arbitration tribunals, and by comparison to the FAA, which allows far narrower domestic discovery than section 1782. As the Court summarized:

[T]he animating purpose of § 1782 is comity: Permitting federal courts to assist foreign and international governmental bodies promotes respect for foreign governments and encourages reciprocal assistance. It is difficult to see how enlisting district courts to help private bodies would serve that end. Such a broad reading of § 1782 would open district court doors to any interested person seeking assistance for proceedings before any private adjudicative body—a category broad enough to include everything from a commercial arbitration panel to a university’s student disciplinary tribunal.

Congress Amends the FAA

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 amended the FAA to give individuals asserting sexual assault or sexual harassment claims the option to bring those claims in court even if they entered into a “predispute arbitration agreement” or a “predispute joint-action waiver” before the claims arose. The amendment further provides that: (a) it applies only to claims or disputes that arise or accrue on or after March 3, 2022; (b) any issue regarding its applicability to a dispute shall be determined by federal law; and (c) its applicability to an arbitration agreement and the validity and enforceability of that agreement “shall be determined by a court, rather than an arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement, and irrespective of whether the agreement purports to delegate such determinations to an arbitrator.”

In addition, a bill that would more broadly prohibit the use of predispute arbitration provisions and joint-action waivers in consumer and employment agreements passed the U.S. House of Representatives in March 2022. However, a companion bill has not progressed in the Senate as of this writing.