According to a recent Lexis® query, the U.S. Supreme Court issued ninety opinions dealing with the Federal Arbitration Act (“FAA”) between 1925 (the year of its enactment) and June 2023. In 2024, the Court added three more opinions, while numerous federal appeals courts also weighed in with important decisions analyzing the meaning, scope, and application of the FAA.
In Smith v. Spizzirri, the Court unanimously held that section 3 of the FAA requires the district court to stay a lawsuit rather than dismiss it when it involves an arbitrable dispute and a party requests the court to stay its proceedings pending arbitration, even if all of the claims are subject to arbitration. The decision resolved a longstanding split between the Second, Third, Sixth, Seventh, Tenth, and Eleventh Circuits (finding that a stay is mandated) and the First, Fifth, Eighth, and Ninth Circuits (finding that a district court has discretion to dismiss proceedings).
Section 3 of the FAA provides in relevant part that when any issue in a suit is subject to arbitration, the court “shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement.” Writing for the Court, Justice Sonia Sotomayor found that the FAA’s plain text, as well as its structure and purpose, supported the issuance of a stay rather than a dismissal.
With respect to the FAA’s text, the Court reasoned that the word “shall” in section 3 “‘creates an obligation impervious to judicial discretion.’” Moreover, the Court emphasized, the word “‘stay’ means ‘stay.’” Even at the time that the FAA was enacted, “stay” meant the “‘temporary suspension’ of legal proceedings, not the conclusive termination of such proceedings.” Section 3 “ensures that the parties can return to federal court if arbitration breaks down or fails to resolve the dispute. That return ticket is not available if the court dismisses the suit rather than staying it.”
Regarding the FAA’s “structure and purpose,” the Court explained that section 16 of the statute authorizes an immediate appeal when a motion to compel arbitration is denied, but not when arbitration is compelled. That promotes the FAA’s purpose of moving arbitrable disputes out of court and into arbitration as quickly and easily as possible. However, “[i]f a district court dismisses a suit subject to arbitration even when a party requests a stay, that dismissal triggers the right to an immediate appeal where Congress sought to forbid such an appeal.”
In addition, the Court emphasized, “staying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts.” The Court instructed:
The FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, appointing an arbitrator, see 9 U.S.C. § 5; enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, see § 7; and facilitating recovery on an arbitral award, see § 9. Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections.
The Court reversed the judgment of the Ninth Circuit, which had affirmed a district court order compelling arbitration and dismissing the case without prejudice.
Although the Court’s opinion provides a uniform rule for federal courts to follow, its effect on state court practice is less certain. While the FAA preempts state laws that contravene its substantive policies, it is questionable whether state procedural rules are preempted. Sections 3 and 16 of the FAA have been characterized as procedural rules, and section 3 refers specifically to the “courts of the United States.” In Spizzirri, the litigation was filed in state court, but it was subsequently removed to federal court. Accordingly, the impact of this decision on state courts remains to be seen.
Bissonnette v. LePage Bakeries Park St. LLC concerned the scope of the exception in section 1 of the FAA that excludes from its application “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The Court unanimously held that workers in jobs that involve interstate transport can be exempt from arbitration under the FAA even if their employer is not in the transportation industry.
In Bissonnette, independent distributors of Flowers Foods products filed a class action lawsuit alleging they had been underpaid in violation of state and federal law. Flowers moved to compel arbitration pursuant to an arbitration clause in the distributor agreement requiring “any claim, dispute, and/or controversy” to be arbitrated under the FAA. The district court compelled arbitration after determining that the section 1 exemption did not apply because under the distribution agreement the distributors were not “principally truck drivers.” Rather, they were “‘more akin to sales workers or managers who are generally responsible for all aspects of a bakery products distribution business’ than they are to ‘traditional transportation workers like a long-haul trucker, railroad worker, or seaman.’” The Second Circuit affirmed on the alternative ground that “an individual works in a transportation industry if the industry in which the individual works pegs its charges chiefly to the movement of goods or passengers, and the industry’s predominant source of commercial revenue is generated by that movement.” Applying that standard, the Second Circuit decided that Flowers’ revenue was primarily from baked goods, not trucking, and upheld the arbitrability of the distributors’ claims.
The Supreme Court reversed, holding that a transportation worker does not need to work in the transportation industry to be exempt from the FAA. Writing for the Court, Chief Justice Roberts found that section 1 focuses on the employee, not an entire industry:
[Section] 1 refers to “seamen” and “railroad employees” without specifying any industry to which they must belong. It would be strange to read the conspicuous absence of similar industry-specific language in § 1 as a sign that Congress defined the exemption on an industrywide basis. The far more natural inference . . . is that “seamen” and “railroad employees” share the employment characteristic of being transportation workers.
He further reasoned that an industry-based test would turn on “arcane riddles” such as whether a pizza delivery service receives its revenue mainly from pizza or delivery or whether Amazon and Walmart, which both sell products of their own and transport products sold by third parties, derive their revenue mainly from retail or shipping. Such questions could spawn lengthy court proceedings to determine sources of revenue, contradicting the FAA’s goal of streamlining disputes. The case was remanded to the Second Circuit for further proceedings consistent with the Court’s opinion.
In Coinbase v. Suski, the Supreme Court, affirming the Ninth Circuit, unanimously held that a court, not an arbitrator, should decide whether the arbitration agreement in Coinbase’s User Agreement—which delegated disputes about arbitrability to the arbitrator—was superseded by a subsequent contract between the parties that contained a forum selection clause and was silent as to arbitration. Writing for the Court, Justice Ketanji Brown Jackson rested the decision on the “[b]asic legal principle” that “disputes are subject to arbitration if, and only if, the parties actually agreed to arbitrate those disputes.” Therefore, “before either the delegation provision or the forum selection clause can be enforced, a court needs to decide what the parties have agreed to—i.e., which contract controls.”
In this case, users of Coinbase, a cryptocurrency exchange platform, filed a class action lawsuit alleging that a sweepstakes offered by the company violated California consumer protection statutes. The users had entered into an arbitration agreement when they created their Coinbase accounts. The agreement contained a delegation clause providing that an arbitrator, not a court, would decide disputes concerning the interpretation or application of the arbitration agreement. Subsequently, when they entered the sweepstakes, they agreed to the promotion’s Official Rules, which contained a forum selection clause granting California courts sole jurisdiction of any controversies arising out of the sweepstakes.
The district court denied Coinbase’s motion to compel arbitration on the ground that the question of which contract controlled was a question for the court. It proceeded to decide that question and concluded that, under California law, the Official Rules’ forum selection clause controlled. It therefore declined to compel arbitration. The Ninth Circuit affirmed, and the Supreme Court granted certiorari to answer the question of “who—a judge or an arbitrator—should decide whether a subsequent contract supersedes an earlier arbitration agreement that contains a delegation clause.” The Court characterized this question as presenting a “fourth” layer of arbitration disputes:
In prior cases, we have addressed three layers of arbitration disputes: (1) merits, (2) arbitrability, and (3) who decides arbitrability. This case involves a fourth: What happens if parties have multiple agreements that conflict as to the third-order question of who decides arbitrability? As always, traditional contract principles apply.
Applying those principles, the Court concluded that the parties agreed to have a court decide that question:
[T]he question whether these parties agreed to arbitrate arbitrability can be answered only by determining which contract applies . . . . When we home in on the conflict between the delegation clause in the first contract and forum selection clause in the second, the question is whether the parties agreed to send the given dispute to arbitration—and, per usual, that question must be answered by a—court.
The Court emphasized that it was not deciding whether the Ninth Circuit properly held that the Official Rules superseded the User Agreement under California law, as that issue was outside the scope of the question presented. Its decision solely concerned “whether, under the FAA, a court or an arbitrator decides which of the two contractual provisions controls.”
Section 4 of the FAA provides that a court may compel arbitration only when there is a “failure, neglect, or refusal … to arbitrate under a written agreement.” Applying section 4, the Third Circuit held in Hernandez v. MicroBilt Corp. that it lacked authority to compel arbitration where the plaintiff agreed to arbitrate before the American Arbitration Association (“AAA”) at the defendant’s behest, but the AAA declined to handle the matter because the defendant failed to comply with its due process standards.
The plaintiff in Hernandez brought a Fair Credit Reporting Act class action alleging that the defendant’s Instant Bank Verification report contained inaccurate information that caused her loan application to be denied. When the defendant moved to enforce the arbitration clause in the loan application, the plaintiff voluntarily dismissed her lawsuit and submitted her claims to the AAA for arbitration. However, the AAA declined to administer the arbitration because the defendant refused to waive a damages limitation that conflicted with the AAA’s consumer due process protocol. The plaintiff then reinstated her claims in the district court, and the defendant again moved to compel arbitration, arguing, inter alia, that the AAA erred in declining to arbitrate the dispute. The district court denied the motion and the Third Circuit affirmed, holding that section 4 of the FAA does not authorize a court to compel arbitration where the plaintiff “did not ‘fail[] to comply’ with the arbitration provision.” The court further explained:
MicroBilt’s arbitration provision, including the AAA rules that it incorporates, does not condition [the plaintiff ’s] return to court on the AAA’s decision being correct, or even reasonable. That is the deal the parties struck. And under 9 U.S.C. § 4, we may compel arbitration only if Hernandez failed to comply with that deal. She did not. She fully complied. We therefore lack the authority to review the AAA’s decision.
In Bielski v. Coinbase Inc., the Ninth Circuit decided, as a matter of first impression, “what a party must do to specifically challenge a delegation provision and what a court may consider when evaluating this challenge.” The user agreement in Coinbase’s cryptocurrency account contained an arbitration agreement that included a “delegation provision” providing that disputes arising out of the agreement, including the “enforceability, revocability, scope, or validity” of the agreement, were delegated to the arbitrator.
Subsequently, Bielski filed a lawsuit under the Electronic Fund Transfer Act alleging that Coinbase failed to investigate the unauthorized transfer of funds from his account. Coinbase moved to compel arbitration of the claims under the user agreement, arguing that arbitrability questions were delegated to the arbitrator. The district court denied the motion to compel on the grounds that the arbitration agreement and its delegation provision were unconscionable.
On appeal, the Ninth Circuit reversed. The court first concluded that by specifically objecting to the delegation provision in his opposition to the motion to compel, Bielski sufficiently challenged the provision. The court noted that its approach was consistent with decisions in the Second, Third, and Fourth Circuits, but contrary to the approach in the Sixth and Eleventh Circuits, which requires a party to provide “more substance in their delegation provision challenge.” The court then concluded that, under California law, “a court must be able to interpret that provision in the context of the agreement as a whole, which may require examining the underlying arbitration agreement as well.”
Although the Ninth Circuit found that the district court applied these principles, it disagreed with the district court’s conclusion that the arbitration agreement, and by extension the delegation provision, was unconscionable. First, it rejected Bielski’s argument that it was procedurally unconscionable, even though it was a take-it-or-leave-it adhesion contract, because the dispute resolution process was neither hidden nor beyond the reasonable expectation of the user. Second, it rejected Bielski’s argument that the delegation provision was substantively unconscionable because, inter alia, it required the parties to attempt to settle the dispute informally before an arbitration proceeding could be commenced. The Ninth Circuit emphasized that “[p]re-arbitration dispute resolution procedures are commonplace and can be both ‘reasonable’ and ‘laudable.’”
In Patrick v. Running Warehouse, the Ninth Circuit affirmed a district court’s decision to grant motions to compel arbitration in six putative class actions because the arbitration provisions in the defendant’s online terms and conditions were “sufficiently conspicuous.” Each defendant’s website hyperlinked to substantially identical terms of use providing, in relevant part, that “[y]ou agree to arbitrate any and all claims, including all statutory claims, and any state or federal claims. By agreeing to arbitration, you understand and agree that you are giving up any rights to litigate claims in a court or before a jury, or to participate in a class action or representative action with respect to a claim.” The arbitration agreement further provided that any claim, dispute, or controversy would be “resolved exclusively and finally by binding arbitration” pursuant to the JAMS commercial arbitration rules and procedures. Based on these provisions, the defendants moved to compel arbitration.
The district court granted the defendants’ motions to compel arbitration and dismissed the class actions without prejudice. On appeal, the Ninth Circuit affirmed, holding that the hyperlinked terms of service put the plaintiffs on sufficient “inquiry notice” of the arbitration provision. The court emphasized, inter alia, that the notice was clear and legible; it was located directly below key information such as the purchase total and the button plaintiff tapped to complete his purchase; and it was on an uncluttered page that was “not hidden or obscured.” In addition, the hyperlinked phrase “terms of use” was colored bright green, in contrast with the background and adjacent text. The Ninth Circuit also found that the plaintiffs agreed to arbitrate because, by clicking the “Place Order” button to complete their purchases, they thereby confirmed that they “agree[d] to [the website’s] privacy policy and terms of use.”
In Keebaugh v. Warner Bros. Entertainment Inc., the Ninth Circuit reversed the denial of a motion to compel arbitration after concluding that a “sign-in wrap agreement” provided conspicuous notice of an arbitration clause in the agreement and was therefore enforceable. Plaintiffs brought suit for false advertising in connection with a mobile game developed by the defendant that users could download on their phones. To play the game, users had to press a button labeled “play” that was directly over a notice informing them that, by pressing “play,” they agreed to the game’s terms of use. The phrase “terms of use” was a hyperlink to the terms, the first paragraph of which advised users in all capital letters that the terms required “the use of arbitration on an individual basis to resolve disputes” and involved “waiving your right to a jury trial and class action relief.”
The district court denied the defendant’s motion to compel arbitration on the ground that the notice of the terms was insufficiently conspicuous to bind users to them. The Ninth Circuit, however, concluded that the terms were “sufficiently conspicuous” under California law. It found that the “context of the transaction” supported the enforceability of the terms because users downloaded the app to play the game rather than just accessing a website and thus knew that they would be playing the game for extended periods. Such extended use contemplated a continuing, forward-looking relationship governed by terms of use. The Ninth Circuit also determined that the visual placement of the notice of the terms—immediately under the “play” button—was clear and conspicuous, such that a reasonable user would be put on notice that they were agreeing to be governed by the terms of service.
In Herrera v. Cathay Pacific Airways Ltd., the Ninth Circuit reversed a district court’s decision to deny a motion to compel arbitration in a case involving a request to refund the cost of airline tickets after a cancellation. Plaintiffs purchased airline tickets on Cathay Pacific flights through a third-party booking website, ASAP Tickets, whose terms and conditions included an arbitration clause requiring binding arbitration through the AAA. During their trip, Cathay Pacific canceled the Herreras’ return flight and told them to talk to ASAP about a refund. After ASAP denied the Herreras’ request for a refund, they filed suit against Cathay Pacific, which moved to compel arbitration pursuant to ASAP’s terms and conditions. The district court denied Cathay Pacific’s motion, reasoning that the Herreras’ dispute was with Cathay Pacific, not with ASAP. The Ninth Circuit held that California equitable estoppel law allowed Cathay Pacific to invoke ASAP’s arbitration clause because the plaintiffs’ breach of contract claim was “intimately founded in and intertwined with” ASAP’s terms and conditions. ASAP had effectively acted as a “middleman” for “refund-processing purposes.”
In Carpenter v. Opportunity Financial, LLC, the Ninth Circuit upheld an arbitration clause in an agreement governing loans serviced by fintech Opportunity Financial, LLC (“OppFi”), reversed the district court decision denying its motion to compel arbitration, and directed the district court to refer the matter to arbitration. The complaint in Carpenter asserted that OppFi, not its out-of-state, state bank partner, was the “true lender” on the subject loans, and the interest rates therefore should not be higher than those permitted under the laws of the plaintiffs’ states. The district court denied OppFi’s motion to compel arbitration, finding the arbitration clause to be substantively unconscionable because, inter alia, it required the arbitrator to apply Utah law to the loan agreement which, according to the district court, would allegedly “eliminate the substantive basis for [Carpenter’s] claims.” The Ninth Circuit disagreed because courts cannot speculate on what substantive law the arbitrator “might” apply. Therefore, application of the loan agreement’s choice of law provision “must be decided in the first instance by the arbitrator.” For the same reason, the court rejected as “premature” the plaintiffs’ contention that the arbitration clause was substantively unconscionable because the arbitrator “must enforce” the loan agreement’s choice of law provision even if doing so would render the loan illegal under California law.
In Schwebke v. United Wholesale Mortgage LLC, the Sixth Circuit applied the Supreme Court’s holding in Morgan v. Sundance, Inc. that waiver of the right to arbitrate does not require a showing of prejudice and depends on whether there is an “intentional relinquishment or abandonment” of the contractual right. The employer in Schwebke participated extensively in discovery in litigation for seven months—including producing tens of thousands of pages of documents, taking and defending depositions, and issuing third-party subpoenas—without ever mentioning arbitration, not even in its affirmative defenses. Discovery was nearly complete when the employer finally decided to compel arbitration. The Sixth Circuit held that, after Morgan, proof of prejudice was unnecessary because the employer’s “conduct was completely inconsistent with reliance on its arbitration” and thereby “implicitly waived” its right to arbitration.
In SmartSky Networks, LLC v. DAG Wireless, Ltd., the Fourth Circuit applied the Supreme Court’s decision in Badgerow v. Walters, which held that to enforce or vacate an arbitration award under sections 9 or 10 of the FAA, a court “must have a basis for subject matter jurisdiction independent from the FAA and apparent on the face of the application.” In this case, the Fourth Circuit held that, under Badgerow, the district court lacked jurisdiction to confirm an arbitration award in favor of SmartSky because there was no independent basis for jurisdiction on the face of the application and the district court could not “look through” the pleadings to see if it had such jurisdiction. The appeals court also rejected SmartSky’s argument that the district court had jurisdiction because it had stayed the action pending arbitration, reasoning that: “Section 8 [of the FAA] is the only section that expressly provides that a district court may ‘retain’ jurisdiction to enforce, vacate, or modify an award. Sections 9 and 10 do not contain such language and . . . do not provide any escape from Badgerow’s holding that there must be an independent basis for subject matter jurisdiction for applications.”
The views expressed in this survey are those of the authors and are not intended to represent the views of their firm or their clients.
