For the first time in its history, during its 2021-22 Term, the United States Supreme Court decided five cases directly addressing arbitration issues: Southwest Airlines v. Saxon; Badgerow v. Walters; Morgan v. Sundance, Inc;. ZF Automotive US, Inc. v. Luxshare, Ltd.; and Viking River Cruises v. Moriana. The rulings in several of these cases will have a far-reaching effect on the role of federal courts in the arbitration process.
The first arbitration decision, Southwest Airlines v. Saxon, focused on the breadth and scope of Section 1 of the Federal Arbitration Act (FAA), 9 U.S.C. § 1, the section that exempts from arbitration “contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce.”
The Saxon case originated under a Fair Labor Standards Act (FLSA) claim by an airline ramp supervisor seeking to pursue a collective action for unpaid overtime wages. Arbitrability arose against the backdrop of two recent Supreme Court decisions, Circuit City v. Adams and New Prime v. Oliveira. In Circuit City, the Court had ruled that the Section 1 exemption was narrow, applying only to transportation workers actually engaged in moving goods in interstate commerce, such that the residual category encompassed only classes of workers who were similar to seamen and railroad employees in that they worked in interstate commerce.
In contrast, in the more recent New Prime case, the Court unanimously decided that independent contractors who work in interstate commerce are covered by the exception, even in the absence of a typical employer/employee relationship. The Court focused microscopically on Congress’ intent in adopting the FAA in 1925 and reasoned that the phrase “contracts of employment” reached all contracts to perform work. However, the New Prime decision did not define with any precision the FAA’s Section 1 phrase “engaged in foreign or interstate commerce.” It likewise did not elaborate on the “class[es] of workers” covered by the exemption.
Saxon worked as a ramp supervisor at an airport in Chicago. She performed her job entirely in one state, overseeing the handling of items that eventually moved across state lines. When she sued to recover unpaid overtime wages for herself and others, Southwest Airlines contended that her claim was arbitrable solely as an individual action on the basis of an arbitration agreement valid under Illinois law.
Southwest asserted that Saxon’s work was too far removed from interstate commerce to qualify for the Section 1 exemption. Saxon responded that although she was classified as a cargo supervisor, she frequently had to cover for absent cargo loaders by loading cargo herself onto airplanes transporting these items interstate. Accordingly, she characterized her work as undertaking the initial step in sending goods and customers on interstate transport. She contended that FAA Section 1 was intended to include her because she facilitated shipping or railway transportation. She thus characterized airline employees “as necessary to the free flow of goods” by air, just as seamen and railroad employees are “necessary to the free flow of goods” by sea and rail.
In granting certiorari to resolve a circuit court split, the Supreme Court framed the question presented as “[w]hether 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.” By an eight to zero vote, the Supreme Court answered this question “yes,” affirming the decision by 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 on the dictionary definitions of those terms as understood in 1925. The Court specifically declined Southwest’s invitation to construe the phrase “a transaction involving commerce” in FAA Section 2 as narrowing the scope of the reference to “commerce” in Section 1. Therefore, relying on its holding in New Prime, the Court concluded that the plain text of Section 1 sufficed to show that airplane cargo loaders are exempt from the FAA’s scope.
The second arbitration decision, Badgerow v. Walters, constricted the role of federal courts in the arbitration process. In this case, Plaintiff Badgerow worked as an adviser for a financial advisory company. Her employment agreement was subject to the requirements of the Financial Industry Regulatory Authority (FINRA), including arbitration of any employee disputes. She was fired after raising concerns about workplace harassment and alleged securities law violations. She initiated a FINRA arbitration proceeding against her employer’s three principals, but the FINRA panel ruled against her, issuing an award that dismissed her claims with prejudice.
Badgerow then filed suit in Louisiana state court, seeking to vacate the arbitration award as having been obtained by respondents’ fraud. Respondents removed the case to federal court, asserting federal question jurisdiction over Badgerow's claims. They then moved to confirm the award under FAA Section 9.
Badgerow challenged removal, contending lack of subject matter jurisdiction. The federal court rejected her remand request, determining that it had “federal question” subject matter jurisdiction under the jurisdiction formula devised by the Supreme Court in Vaden v. Discover Bank. The Vaden Court held that a federal court had jurisdiction over motions to compel arbitration under Section 4 of the FAA if the court would have had jurisdiction over the underlying controversy, absent the arbitration agreement. The federal court in Badgerow acknowledged that Sections 9 and 10 of the FAA lack the distinctive text on which Vaden relied, but it nevertheless applied the Vaden “look-through” approach to foster “consistent jurisdictional principles” governing all FAA applications. In doing so, the court confirmed the arbitration award.
In affirming this ruling, the Fifth Circuit adhered to the requirement that when faced with a motion to confirm or vacate an arbitration award, federal courts are entitled to assess subject matter jurisdiction by using the Vaden look-through methodology. Under this methodology, it reasoned, a court should assess the propriety of evaluating the merits of the FINRA arbitration proceeding. It approved the lower court’s ruling enforcing the award.
The Supreme Court granted certiorari to resolve a circuit split over whether federal courts have subject matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the FAA where jurisdiction is based solely on the federal question in the underlying dispute. The Court focused on whether the Vaden look-through jurisdictional approach applied to motions to confirm or vacate arbitration awards. The Court concluded that Vaden did not apply and that, consequently, federal courts do not have such subject matter jurisdiction regarding motions presented under FAA Sections 9 or 10.
The Court recognized that under the FAA, parties can seek assistance from a federal court, such as by filing a motion to compel arbitration under Section 4 or by requesting review with either confirmation or vacatur of an arbitration award under Sections 9 and 10. Turning its attention to subject matter jurisdiction, the Court reiterated its jurisdictional standard that a court cannot rely on the FAA, standing alone, to support subject matter jurisdiction, but must detect an “independent jurisdictional basis” to resolve the matter. Accordingly, the Court examined the wording in FAA Sections 9 and 10 to determine whether either section supported subject matter jurisdiction in this case.
The Court then distinguished its holding in Vaden, focusing on the fact that Vaden specifically arose under FAA Section 4. The Court concluded that Section 4 permits a federal court to assess subject matter jurisdiction by considering the “underlying substantive controversy” as the way to evaluate jurisdiction on the external dispute over arbitrability. Directing its attention to the specific wording of FAA Sections 9 and 10, the Court decided that the specific wording of those sections precluded use of the same look-through technique because they lacked “lack[ed] Section 4’s distinctive language directing a look-through.” Therefore, the Court held that to assess subject matter jurisdiction, a federal court could only look to the application actually submitted to it under FAA Sections 9 or 10. The Court determined that those Sections did not clothe a federal court with jurisdiction to evaluate the controversy without consideration of the arbitration agreement.
Invoking its Hall Street independent jurisdictional basis principle, the Court concluded that a party seeking to confirm or vacate an award under the FAA must identify a grant of jurisdiction, apart from the FAA itself, that confers “access to a federal forum.” If such access is lacking, the party must defer to a state court to rule on the matter. Applying that principle, the Court articulated the standard that to determine independent jurisdiction, a court must resort to the face of the application itself, i.e., whether the contending parties are citizens of different states or whether a federal law beyond Sections 9 or 10 entitles the applicant to relief.
The Court found that there was no basis for subject matter jurisdiction based on diversity or an underlying federal question. The Court pointed out that the application in question was not based on the legality of Badgerow’s firing, but, rather, on the enforceability of an arbitral award, which it depicted as “no more than a contractual resolution of the parties’ dispute—a way of settling legal claims.” The Court stated that quarrels about legal settlements—even settlements of federal claims—typically involve only state law, like disagreements about other contracts.
The Court therefore rejected the district court’s process of locating subject matter jurisdiction under 28 U.S.C. § 1331, because that process required the lower court to “proceed downward to Badgerow’s employment action, where a federal-law claim satisfying §1331 indeed exist[ed].” The Court discarded this technique and, accordingly, concluded that the federal court lacked subject matter jurisdiction to evaluate the arbitration award under FAA Section 9 or 10.
The third arbitration decision, Morgan v. Sundance, involved another dispute potentially affecting the federal courts’ role in assessing arbitrability. In this case, the employee plaintiff worked at a Taco Bell restaurant. When she began employment, she signed an agreement that included a provision requiring arbitration of all disputes. She eventually sued Taco Bell in the US District Court for the Southern District of Iowa on behalf of herself and others similarly situated, claiming entitlement to unpaid overtime wages.
In this case, events occurring during the litigation proved significant. In its initial response to the lawsuit, Taco Bell, the employer, filed a motion to dismiss or stay, arguing that such action was appropriate because the employer was already being sued for that same claim in the Eastern District of Michigan. The motion did not mention arbitration or any effort to compel arbitration.
The district court denied this motion. Taco Bell then filed an answer, raising fourteen affirmative defenses, but omitting any mention of a right to compel arbitration. Following unsuccessful settlement negotiations, Taco Bell filed a motion to compel arbitration some eight months after initiating the lawsuit.
The district court denied the motion on the basis of waiver, determining that Taco Bell had substantially invoked the “litigation machinery.” The Eighth Circuit reversed the district court’s ruling, concluding on the basis of Erdman Co. v. Phoenix Land & Acquisition that Taco Bell’s conduct, even if inconsistent with a right to compel arbitration, did not prejudice the employee in any meaningful way, given how little time the parties had spent litigating or engaging in discovery. The court indicated that its engrafting of a prejudice requirement comported with federal policy favoring arbitration.
In granting certiorari, the Supreme Court agreed to consider whether a showing of prejudice represented an additional requirement in the “waiver equation,” thus placing arbitration on an “unequal footing” with other contracts. This analytical approach derived from the Supreme Court’s ruling in the seminal decision in AT&T Mobility LLC v. Concepcion, in which the Court indicated that courts must “place arbitration agreements on an equal footing with other contracts.” Reasoning that there was no basis to engraft consideration of prejudice in the waiver equation, the Supreme Court unanimously overturned the Eighth Circuit’s decision.
The Court first noted that the FAA does not authorize federal courts to create an arbitration-specific procedural rule. Second, the Court noted that the “prejudice requirement” is not a feature of federal waiver law generally. Third, and critically, the Court stated that the issue in this case was grounded in federal law interpreting “waiver” rather than any individual state laws.
As a result, the Court turned its attention to the waiver issue outside the arbitration context, noting that federal courts generally do not inquire about prejudice, but focus instead on whether a party intentionally relinquished or abandoned a known right. Using that framework, the Court opined that when determining whether a waiver occurred, a court must focus on the actions of the person holding the right, rather than on the effects of that party’s actions on the opposing party—that is, without any showing of “detrimental reliance.”
From this vantage point, the Court concluded that the Eighth Circuit had impermissibly imposed an “arbitration specific” rule, what it called a “bespoke rule of waiver for arbitration.” It therefore stated that the FAA’s “policy favoring arbitration” does not authorize federal courts to invent special, arbitration-preferring procedural rules. The Court determined that while a court must hold a party to the contractual obligation to arbitrate, just as a court would uphold any other contractual obligation, it could not devise novel rules to favor arbitration over litigation.
In concluding, the Court noted that, stripped of its prejudice requirement, the Eighth Circuit’s waiver inquiry should have focused on the employer’s conduct, e.g., whether such conduct constituted knowing relinquishment of the right to arbitrate. It therefore remanded the case, directing the Eighth Circuit to resolve that question.
Under 28 U.S.C. § 1782, which governs “[a]ssistance to foreign and international tribunals and to litigants before such tribunals,” a US federal court may order a person who resides in its district to testify in or produce documents for use in a proceeding in a foreign or international tribunal. The statute is silent on what constitutes “a proceeding in a foreign or international tribunal.” It also does not indicate whether federal court authority applies to a private arbitration occurring outside the United States.
This statutory void has resulted in inconsistent decisions about whether US district courts have the power to interject themselves into prehearing discovery efforts emanating from private arbitration proceedings that occur exclusively outside the United States. To decide this issue, the Supreme Court granted certiorari in two cases: ZF Automotive US, Inc., v. Luxshare, Ltd. and AlixPartners, LLP v. The Fund for Protection of Investors’ Rights in Foreign States.
In ZF Automotive, the parties had entered an agreement for Luxshare, a Hong Kong-based company, to purchase goods from ZF Automotive, a Michigan-based automotive parts company. The dispute arose when Luxshare accused ZF Automotive of misrepresenting or concealing certain material facts to induce the agreement. The agreement’s dispute resolution clause required the parties to arbitrate any disputes in Munich, Germany, pursuant to the fast-track DIS Rules (Supplementary Rules for Expedited Proceedings of the Arbitration Rules of the German Institution of Arbitration).
Luxshare filed an ex parte application for subpoena discovery pursuant to 28 U.S.C. § 1782(a) in the US District Court for the Eastern District of Michigan. The district court issued the subpoenas. ZF Automotive moved to quash the subpoenas on the basis that the DIS arbitration did not constitute a “tribunal” as contemplated by Section 1782(a). ZF Automotive specifically challenged the district court’s authority to issue a discovery order in connection with a private commercial arbitration taking place in Germany against a Hong Kong electronics company. The district court disagreed and, under Section 1782, ordered ZF Automotive to comply with the discovery requests. ZF Automotive appealed to the Sixth Circuit.
While the appeal was pending, the Sixth Circuit denied ZF Automotive’s request for a stay of the order compelling compliance with the subpoenas. ZF Automotive then sought Supreme Court review, asking whether the phrase “foreign or international tribunal” in Section 1782 meant only governmental and intergovernmental adjudicative bodies, or whether it also encompassed private arbitration proceedings lacking any direct government oversight.
In AlixPartners, LLP v. The Fund for Protection of Investors’ Rights in Foreign States, a Russian company sought to compel discovery from a New York-based consulting firm in an investment arbitration brought by the Russian company against the government of Lithuania. Under the terms of the UNCITRAL (United Nations Commission on International Trade Law) arbitration clause in the parties’ treaty agreement, the Russian company opted for an ad hoc arbitration proceeding, with each party selecting one arbitrator and those two arbitrators choosing a third. The Fund initiated arbitration and then filed a Section 1782 application in US federal court, seeking information from an individual and his company (Alix Partners), who had been appointed as a temporary administrator of the defunct treaty partner.
AlixPartners challenged the subpoena request on the basis that the ad hoc arbitration panel was not a “foreign or international tribunal” under Section 1782 but was instead a private adjudicative body. The district court rejected that argument and granted The Fund’s discovery request. The Second Circuit affirmed, distinguishing between private foreign commercial arbitrations (deemed outside the scope of Section 1782) and investment treaty arbitrations (deemed within the scope of Section 1782), on the basis that investment treaty arbitrations involve at least one state or state-related litigant and take place before an arbitral tribunal established by a treaty. The Second Circuit thus concluded that the dispute in this case involved a “foreign or international tribunal” subject to Section 1782.
The only prior Supreme Court decision addressing Section 1782’s scope, Intel Corp. v. Advanced Micro Devices, Inc., involved discovery in connection with a proceeding before the European Commission. In that case, the Court held that the Commission was a foreign tribunal “to the extent it acts as a first-instance decisionmaker.” That case did not, however, involve a private arbitration.
In the cases being reviewed this Term, the Supreme Court unanimously adopted the view that the specific wording of Section 1782 connoted a narrow reading of the phrase “foreign or international tribunal.” From this vantage point, the Court deduced that federal court involvement could only occur where a governmental or intergovernmental adjudicative body qualified. Employing that standard, the Court ruled that the adjudicative bodies at issue in these cases did not qualify for inclusion within the Section 1782 framework.
The Court explained that the foreign or international tribunal identified in Section 1782 could be analogized to a “court,” but actually had broader reach, such that it could encompass authority beyond that of an ordinary judicial body. This expansive interpretation, combined with Section 1782’s direct juxtaposition of “tribunal” with the qualifying phrase “foreign or international,” dictated that Section 1782 referred to an adjudicative body that exercised governmental authority.
In assessing the scope of Section 1782, the Court thus determined that the statutory language meant the tribunal in question must belong to a foreign nation, not just be located in that nation. Correspondingly, for a tribunal to “[belong] to a foreign nation,” the tribunal must possess “sovereign authority” conferred by that nation. The Court further reasoned that the international tribunal identified in the discovery structure of Section 1782 necessarily implicated the governmental authority of the adjudicative body.
From there, the Court focused on Section 1782’s use of the phrase “international tribunal,” deciding that such a phrase necessarily involved two or more nations, i.e., that one or more sovereigns had imbued the tribunal in question with official power to adjudicate disputes. The Court accordingly declared that while US federal courts could assist parties in resolving state-based foreign or international disputes, “it is difficult to see how enlisting district courts to help private bodies adjudicating purely private disputes abroad would serve that end.”
Armed with this statutory interpretation, the Court turned to the specific proceedings before it to evaluate the potential impact of Section1782, if any, on US federal court involvement in foreign arbitral discovery matters. In the ZF Automotive case, the Court concluded that the adjudicative body did not qualify as a “foreign or international tribunal” within the ambit of Section 1782, because the case involved a dispute between strictly private parties who agreed in a private contract to resolve their disputes before a private dispute resolution organization in Germany. This essentially “private” characteristic likewise did not convert the private organization into a governmental entity for purposes of Section 1782 solely because it was applying the law of the country in which it was located.
In the AlixPartners case, the Court acknowledged that at least superficially, the dispute at issue was more challenging for Section 1782 purposes, given that a sovereign nation was on one side of the dispute and the option to arbitrate was set forth in an international treaty rather than a private contract. Even so, the Court declined to extend Section 1782 to authorize involvement of US federal courts in the discovery dispute at issue.
Peering below the surface, the Court peeled away the outer layer of sovereign involvement and determined that the adverse parties in that proceeding were empowered to structure the proceeding as they saw fit; that is, the parties were not obliged to adjudicate their dispute before a governmental body. To the Court, the inherent ad hoc authority bestowed by the parties on any such deliberative panel did not imbue that body with governmental authority.
By far the most contentious arbitration decision rendered by the Supreme Court in the 2021-22 Term was Viking River Cruises, Inc. v. Moriana. Whereas the other four decisions were at or near unanimity, the decision in Viking River Cruises was splintered, with five separate opinions expressing diverging views on the appropriate analysis and result in the case. This splintering was most likely due to the interplay of the labyrinthine provisions of the California Private Attorneys General Act (PAGA) and the federal arbitration principles established by the FAA. The analysis below focuses solely on the portion of the opinion addressing the latter point.
Plaintiff Moriana was employed by Viking River Cruises. At the onset of her relationship with Viking, Moriana signed an employment contract that contained a mandatory arbitration agreement, including both a “Class Action Waiver” and a severability clause. Under the agreement, if any portion of the contractual waiver clause was determined to be valid, the claim would be resolved by arbitration. Moriana later initiated a lawsuit pursuant to the California Labor Code’s Private Attorneys General Act of 2004 (PAGA), alleging that Viking had violated the California Labor Code by failing to pay her final wages in a timely fashion. She also purported to represent coworkers allegedly subject to other statutory violations (such as unpaid wages) in what she characterized as an individually authorized statutory claim.
Viking moved to compel arbitration of Moriana’s individual PAGA claim and to dismiss her other PAGA claims. California’s courts denied that motion, rejecting categorical waivers of PAGA standing and holding that PAGA claims cannot be split into arbitrable “individual” claims and nonarbitrable “representative” claims.
The Supreme Court granted certiorari to determine whether the FAA pre-empted California’s invalidation of contractual waivers in the name of pursuing representative claims under PAGA. Confronting the complex enforcement scheme established by PAGA, the Court determined that the FAA did in fact preempt PAGA to the extent that it attempted to preclude the division of PAGA actions into nonarbitrable claims.
In reaching this decision, the Court invoked its maxim from Stolt-Nielsen S. A. v. Animal Feeds International Corp. that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” The Court reasoned that class action arbitration mandates are inconsistent with the individualized and informal mode of bilateral arbitration contemplated by the FAA. Therefore, the Court held that PAGA’s claim joinder attributes conflict with the FAA. Accordingly, the Court determined that Viking was entitled to compel arbitration of Moriana’s individual claim.
The Supreme Court’s focus on arbitration in the 2021-22 Term signals a potential shift in the Court’s arbitration jurisprudence. Prior to the 2019 decision in New Prime v. Oliveira, the Court generally adopted an approach favoring arbitration in most circumstances, including arbitration agreements that impose class action and collection action waivers. Beginning with the New Prime decision, a decision that closely scrutinized the FAA’s wording using contemporary references and dictionary definitions, the Court has focused more closely on the text of the FAA and statutes affected by it. The decisions this Term make clear that the Court’s mere granting of certiorari in a case involving arbitration issues does not automatically signal support for a pro-arbitration approach.
For example, the Court’s decision in Southwest Airlines v. Saxon is the direct progeny of the New Prime approach to statutory construction of Section 1 of the FAA. The Court might have readily applied a narrow view of Section 1’s scope in the twenty-first century, as it did in Circuit City. Instead, it painstakingly scrutinized the wording of Section 1 and, on that basis, viewed the scope of immunity to compelled arbitration by “workers in interstate commerce” as broad enough to encompass a dispute raised by an individual who 1) never herself transported goods across state lines; and 2) was never explicitly employed to handle such goods for interstate transport, but only occasionally assumed that role.
Badgerow v. Walters highlights the Court’s trend towards examining the FAA’s text. The Court’s prior standard for analyzing subject matter jurisdiction in a case filed pursuant to the FAA was to “look through” the relief requested to the underlying substantive dispute. In Badgerow, the Court made clear that no such approach would suffice when the FAA does not overtly empower a US court to assess such matters, e.g., the court’s authority to confirm or vacate an award under FAA Sections 9 and 10. Badgerow thus prophesies that most post-award proceedings may now be conducted in state courts of proper jurisdiction, even where the underlying dispute involves a federal question (as in the Badgerow case). It also may presage differing attitudes about confirmation or vacatur of arbitration awards between state and federal court rulings, or between one state’s rulings and another state’s rulings.
The same theme permeates the Court's decision in Morgan v. Sundance. In rejecting the engrafting of a “prejudice” requirement to an arbitration opponent’s challenge to arbitrability, the Court detoured from the previous tendency to always favor arbitration, directing lower courts towards meticulous analysis of the FAA's text. In Morgan, the Court clearly signaled that federal courts should no longer decide arbitrability from a pro-arbitration vantage point, but instead must apply well-established (and neutral) nonarbitration rules when determining waiver of a right to compel arbitration.
The ZF Automotive decision closes US federal courthouse doors to most prehearing discovery disputes arising in foreign arbitral proceedings. Importantly, to validate its conclusion limiting Section1782 jurisdiction to matters arising through the involvement of foreign governments/sovereigns, the Court noted in passing the impact of its interpretation of Section 1782’s scope by invoking FAA Section 7 as a comparison point. The Court relied on FAA Section 7 to show that Congress could not have intended for Section 1782 to authorize US federal courts to aid discovery when private bodies adjudicated purely private disputes abroad, because endorsing such an enlargement of Section 1782’s reach would theoretically trigger significant “tension” with the FAA’s role in domestic arbitrations.
The Court thus concluded that interpreting Section 1782 to reach private arbitration “would therefore create a notable mismatch between foreign and domestic arbitration,” an expansion it was unwilling to countenance. In keeping with its increasingly restrictive view of federal court involvement in arbitration matters, as exemplified by other decisions during the 2021 Term, the Court’s ruling in ZF Automotive bespeaks the same theme of scrutiny of statutory text. Under such scrutiny, the Court consistently excludes US federal courts from involvement in the prehearing stages of foreign or international arbitration proceedings in most instances.
