As a result, the Supreme Court scrambled to find another case to allow it to review § 1782. The Supreme Court took the unusual step of reaching down to a district court in Michigan, granting certiorari before judgment in ZF Automotive US, Inc. v. Luxshare, LTD, quashing the discovery granted by that court pending its review of the case. At the same time, the Supreme Court granted certiorari in a second case, AlixPartners, LLP v. The Fund For Protections of Investors’ Rights in Foreign States, ordering that AlixPartners should be consolidated into ZF Automotive so that the two cases could be argued together. ZF Automotive was an international commercial arbitration and AlixPartners involved an investor-state arbitration arising from the Second Circuit, which court decided to allow § 1782 discovery in investor-state arbitrations even though it was the leading circuit court holding the statute did not apply to private commercial arbitrations.
A very large number of amicus briefs were filed by a wide-range of interested parties in ZF Automotive and AlixPartners. The most influential amici, however, was the brief filed by the Solicitor General on behalf of the United States. The Solicitor General urged the court to hold § 1782 did not apply to either international commercial arbitrations or international investor-state arbitrations. The Solicitor General argued § 1782 was intended to assist the United States fulfill its obligations to provide discovery assistance to foreign governmental tribunals. Since the doctrines of comity and reciprocity have no application to private international arbitrations, the Solicitor General argued that § 1782 should not be interpreted to apply to such arbitrations.
In a unanimous decision, the Supreme Court held that § 1782 did not apply to commercial and investor-state arbitrations. It ruled that only a “governmental or intergovernmental adjudicative body” constitutes a “foreign or international tribunal” under § 1782. It found that neither the private commercial arbitral panel in ZF Automotive, nor the ad hoc arbitration panel appointed in the AlixPartners investor-state arbitration was a “foreign or international tribunal” as that term is used in § 1782. Accordingly, the order of the district court denying the motion to quash discovery in ZF Automotive was reversed, and the judgment of the Second Circuit in AlixPartners was reversed.
The Supreme Court began its analysis, like all the circuit courts considering this issue, with a “textualist” interpretation of the statute. It considered whether the phrase “foreign or international tribunal” included private adjudicative bodies or only governmental or intergovernmental bodies. The Court looked to dictionary definitions and to statutory history to determine how Congress had used the word “tribunal.” The Court concluded that “tribunal” was not limited just to “court.” If the word “tribunal” had been used in isolation, the Court said “there would be a good case for including private arbitral panels.” But since the word “tribunal” did not stand alone, the Court had to considered how to interpret the entire phrase “foreign or international tribunal.” The Court asserted that Congress could have used “foreign tribunal” in one of two ways. It could mean something like “[b]elonging to another nation or country,” which would support reading “foreign tribunal” as a governmental body. Or it could more generally mean “from” another country, “which would sweep in private adjudicative bodies too.” The Court concluded that “[t]he first meaning is the better fit.”
The Court then turned to the words “international tribunal,” and using dictionaries concluded that the word “international” can “mean either (1) involving or of two or more “nations,” or (2) involving or of two or more “nationalities.” The later definition was considered unlikely in the context of the § 1782. So read, the Supreme Court concluded “‘foreign tribunal’ and ‘international tribunal’ complement one another; the former is a tribunal imbued with governmental authority by one nation and the latter is a tribunal imbued with governmental authority by multiple nations.”
Readers will have to draw their own conclusions whether the Supreme Court’s textual analysis of § 1782 is more persuasive than the contrary constructions offered by the Sixth and Fourth Circuits. The ADR Committee’s view is that the language of the statute, considered in a vacuum and without consideration of its purpose, prior application, or analysis of its extensive legislative history, provides no definitive answer. Read in a textualist vacuum with only a 1964 dictionary as a guide, the statute is arguably equally capable, and indeed perhaps more easily read, as allowing application of § 1782 to private international arbitration.
The ADR Committee considers that the Supreme Court’s more persuasive arguments result from its (admittedly truncated) analysis of the statute’s history and purpose, and a comparison to the Federal Arbitration Act. The purpose of the statute in 1855 was to give the Executive Branch statutory authority to invoke the judicial power of U.S. courts to compel testimony of witnesses or production of documents to assist the Government to respond to letters rogatory and other discovery requests from foreign governments. The U.S. Government, for reasons of comity and reciprocity, sought to provide this assistance to foreign governmental requests, even though such assistance was discretionary.
The Supreme Court address the underlying policy reasons for § 1782 and its amendments in 1964, stating:
. . . the 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. * * * Why would Congress lend the resources of district courts to aid purely private bodies adjudicating purely private disputes abroad?
That was especially true, in the Court’s view, when extending broader discovery in international proceedings risked conflict with the more limited discovery permitted by the FAA in domestic arbitrations. The Court concluded, “[i]nterpreting § 1782 to reach private arbitration would therefore create a notable mismatch between foreign and domestic arbitration.” The Court doubted Congress intended to extend the discovery authority of U.S. district courts to private international tribunals when a similar breadth of discovery was not extended to parties to U.S. arbitrations by the FAA. Further, construing § 1782 to apply to private international arbitrations would place U.S. parties at a structural disadvantage, because foreign parties could invoke § 1782 to obtain third-party discovery, but the U.S. party would have no right under international law or the laws of most foreign states to reciprocal discovery from a third party in a foreign country.
In reviewing the opinion, it is clear the Supreme Court had little difficulty concluding that a panel of private international arbitrators appointed between two private commercial parties did not qualify as a “foreign or international tribunal” under § 1782. But in the Court’s view, the AlixPartners arbitration presented a harder question. For the Supreme Court, the critical question was “Did these two nations intend to confer governmental authority on an ad hoc panel formed pursuant to a treaty?” The Court noted that the treaty gave the parties the option to present their disputes to a domestic court in Lithuania or to one of several arbitral bodies. The domestic court in Lithuania would clearly be “governmental.” Nothing in the treaty, however, suggested that the ad hoc arbitration panels were imbued with governmental authority, as the treaty did not create the tribunal, but simply designated the applicable rules for the parties themselves to form the tribunal. In addition, the ad hoc tribunal appointed by the parties functioned independently of either Lithuania or Russia and lacked any official affiliation with the governments.
The Supreme Court struggled somewhat to persuasively distinction the AlixPartners tribunal from the tribunals formed by the United States in the 1930s to resolve the disputes (1) with England and Canada concerning the U.S. Coast Guard’s sinking of the I’m Alone rum runner, and (2) the United States-German Mixed Claims Commission established to address World War I reparation claims. The Court acknowledged with respect to the I’m Alone tribunal and the Mixed Claims Commission: “There appears to be broad consensus that these bodies would qualify as intergovernmental.”
In the ADR Committee’s view, there is a clear difference between modern-day investor- state arbitrations and the claims asserted in the I’m Alone and the United States-German Mixed Claims tribunals. The latter tribunals involved sovereigns asserting claims directly against one another for violations of a treaty or customary international law. The same would be true prior to the adoption of the ICSID Convention for an investment claim asserted by a State on behalf of its national under the doctrine of diplomatic protection. In that situation, the State was asserting its rights as a sovereign state for the insult caused by a violation of international law to its national directly against the other state in its capacity as a sovereign state.
By contrast, in modern (i.e., post-ICSID Convention) investor-state arbitration, the Home State of the investor is removed from the dispute process on behalf of its national. Through the combination of either an investment agreement, a bilateral investment treaty, or a multilateral treaty such as a Free Trade Agreement, the investor (i.e., not the investor’s Home State) and the Host State agree to arbitrate their investment dispute without any involvement of the government of the Home State of the investor. The arbitrators deciding the dispute do not derive their authority directly from the ICSID Convention or from the bilateral investment treaty executed by the sovereigns. Rather, the authority of the arbitrators stems from their selection and appointment by the parties to serve as arbitrators. This is a private not governmental contract. Most importantly, the Host State of the investor in neither a party to the arbitration, nor in any way sponsoring its national’s claim, as happened under prior regimes where the Home State advanced its national’s claim under the doctrine of diplomatic protection such that the claim was in fact the claim of the sovereign rather than the private party.
The difference between investment protection through diplomatic protection and investment protection under the ICSID regime is spelled out in the ICSID Convention. Under Article 27 of the ICSID Convention provides:
No Contracting State shall give diplomatic protection, or bring an international claim, in respect of a dispute which one of its nationals and another Contracting State shall have consented to submit or shall have submitted to arbitration under this Convention, unless such other Contracting State shall have failed to abide by and comply with the award rendered in such dispute.
In short, the Home State sovereign cannot assert diplomatic protection on behalf of its national until or unless an award is issued in the arbitration and the Host State fails to pay or otherwise abide by that award. ICSID tribunals are, by design, not state-appointed, and not imbued with “state” or “sovereign” governmental authority. The system is designed to avoid sovereign to sovereign conflict by having a private arbitration between the investor and the Host State of the investment.
In summary, the ADR Committee believes the Supreme Court correctly resolved these cases by saying “no” to § 1782 discovery.
The Domestic Arbitration Cases Arising Under the FAA
The Supreme Court’s decisions in the last decade have significantly limited the use of class actions by permitting businesses to require consumers and employees to waive their right to pursue class actions in favor of arbitration. The Court achieved this result primarily by broadening the scope of the FAA’s preemption of state law, which in some instances prohibits waivers of class actions or limits the use of forced arbitration clauses in “adhesion” contracts where a consumer or employee lacks equal bargaining power with a large corporation.
Congress has largely acquiesced to the use of so-called forced arbitration agreements, where businesses require consumers and employees to consent to predispute waiver of any right to bring a class action lawsuit in favor of individual arbitration. One exception to the enforceability of forced arbitration clauses, though, involves contracts that fall within the scope of FAA § 1. Section 1 excludes FAA arbitration of “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” However, the Supreme Court has interpreted the italicized language narrowly such that only employment contracts of “transportation workers” engaged in foreign or interstate commerce are excluded from the FAA.
Three of the arbitration cases that the Supreme Court decided this year relate to the validity or enforceability of forced arbitration clauses. Together, the cases further close the door on class action litigation if businesses select arbitration. But the Court’s expansion of the FAA beyond the statute’s narrow original intent has left many other open issues. A divided Congress appears unlikely to amend significantly or replace altogether the nearly 100-year-old FAA. Accordingly, the Supreme Court will have to continue to remake the statute one case at a time for the foreseeable future.
Southwest Airlines Co. v. Saxon
At issue in Southwest Airlines Co. v. Saxon, decided in 2022, was whether an airline employee, Saxon, who works as a ramp supervisor managing workers loading passenger bags and who also loads bags herself, is a “transportation worker” “engaged in foreign or interstate commerce,” as defined in FAA § 1. If so, she would be exempt from forced arbitration under the FAA. The Court affirmed the appeals court judgment, holding that Saxon is a transportation worker exempt from the FAA, but declined to establish a bright-line rule for identifying who qualifies as a “transportation worker.”
Southwest Airlines follows the Supreme Court’s surprising 2019 decision in New Prime Inc. v. Oliveira. New Prime asserted that because its truck drivers were independent contractors rather than employees, they were not exempt from coverage under the FAA. In support of its argument, New Prime pointed to the language in FAA § 1 referring to employees and contracts of employment when referencing seamen and railroad workers excluded from coverage under FAA § 1. But the Supreme Court held in New Prime that the term workers as used in the statute included independent contractors as well as employees. As such, the FAA did not apply to interstate truck drivers, regardless of whether they were employees or independent contractors, because they were all transportation workers.
In the three years since New Prime, district and circuit courts have struggled to define which workers are covered by application of the FAA versus which workers are exempt from it. The U.S. Courts of Appeals for the First and Ninth Circuits agreed that so-called last-mile delivery drivers who make intrastate delivery of goods traveling in interstate commerce, but who play no part in transporting those goods across state lines, are nevertheless transportation workers. By contrast, the U.S. Court of Appeals for the Seventh Circuit held that local food delivery drivers are not exempt. Nor are Uber drivers normally exempt, according to the Ninth Circuit. After that, lines become more blurred. The U.S. Court of Appeals for the Third Circuit held that supervisors generally are not exempt, but their job duties must be scrutinized on a case- by-case basis to make an actual determination. Managers who directly supervise workers like truckers engaged in interstate transportation of goods would be exempt. Airline employees present especially difficult distinctions because they support functions that are vital to interstate transportation, but many do not themselves engage in interstate travel as part of their jobs.
When the Supreme Court granted certiorari to resolve the split between the Seventh Circuit in Southwest Airlines and the U.S. Court of Appeals for the Fifth Circuit in Eastus v. ISS Facility Services, Inc., there was hope that the Court might formulate a bright-line test to help employers, employees, and district courts decide which categories of workers are subject to arbitration versus which are exempt. Currently, many suits are filed as class actions claiming that the employees are exempt from the FAA, generating motions to compel arbitration asserting that the FAA applies.
The outcome in Southwest Airlines suggests that the Supreme Court will allow district and circuit courts to resolve employment categorization disputes on a case-by-case basis, giving close scrutiny to the job descriptions and actual daily activities of individual workers. The Court’s decision declined to adopt bright-line tests offered by both parties that would have made categorization of workers easier while ignoring details of their day-to-day work.
For example, Saxon argued that all airline employees are involved in interstate commerce—an argument that the Court rejected as overbroad. Justice Thomas asserted that because the FAA focuses on “workers” rather than “employees” and the “FAA directs attention to ‘the performance of work,’” Saxon’s proposed definition was too broad: the FAA does not exempt all employees, but only those who actually function as transportation workers.
By contrast, Southwest Airlines argued that Saxon was not engaged in “foreign or interstate commerce” because as a cargo loader, she did not physically accompany baggage across state or international boundaries. The Supreme Court rejected this definition as too narrow. Citing the Court’s decision in Baltimore & Ohio Southwestern Railroad Co. v. Burtch, which held that “the loading or unloading of an interstate shipment by employees of a carrier is so closely related to interstate transportation as to be practically a part of it,” the Court held that it was “equally plain that airline employees who physically load and unload cargo on and off planes traveling in interstate commerce are, as a practical matter, part of the interstate transportation of goods.”
The narrowness of the Court’s holding in Southwest Airlines is emphasized by the Court’s reliance on Saxon’s uncontested affidavit that she regularly loaded and unloaded bags. Justice Thomas made clear that, “[l]ike the Seventh Circuit, we ‘need not consider . . . whether supervision of cargo loading alone would suffice’ to exempt a class of workers under § 1.”
The obvious takeaway from this case is that there will continue to be a substantial amount of litigation related to sorting out the U.S. economy job by job for purposes of determining which jobs are held by transportation workers involved in foreign or interstate commerce.
Companies that require employees or independent contractors to arbitrate employment disputes, and to waive their right to participate in class or collective dispute resolution, should consider in advance whether their workers perform duties involving foreign or interstate transportation. If so, those workers may be exempt from any obligation to arbitrate disputes. Using standard form or one-size-fits-all employment terms to cover all workers when some of them may be exempt from the FAA is not advisable.
To the extent feasible, segregating work between transportation duties and nontransportation duties may help reduce the number of workers engaged in transportation services. This is reflected in Southwest Airlines, where Justice Thomas noted that the supervisor was physically involved in moving bags. A different result could have occurred if the supervisor did not actually load bags herself. If the duties of workers are more carefully organized so that all transportation functions are performed by a select group of workers who are acknowledged to be transportation workers, fewer workers will be exempt from coverage of the FAA.
Regardless, there will continue to be substantial litigation to classify workers as exempt or not exempt, and the exact details of the workers’ job duties will be critical to the outcome of these disputes. Employers should scrutinize job descriptions to avoid inadvertently giving any transportation duties to workers who primarily perform nontransportation activities.
Viking River Cruises, Inc. v. Moriana
At issue in Viking River Cruises, Inc. v. Moriana was whether the FAA requires enforcement of a bilateral arbitration agreement barring an employee from raising claims on behalf of others, including claims under the California Private Attorneys General Act (PAGA). The Court ruled that the FAA does in fact require enforcement of such an agreement. This is another in a series of cases, notably including AT&T Mobility LLC v. Concepcion, in which the California legislature and courts have tried to circumvent the Supreme Court’s ever-broadening construction of the FAA’s preemptive power.
Plaintiff Moriana worked as a sales representative for Viking selling cruises. Before beginning her employment, she agreed to resolve all future employment-related disputes via bilateral arbitration. The arbitration agreement provided:
There will be no right or authority for any dispute to be brought, heard or arbitrated as a class, collective, representative or private attorney general action, or as a member in any purported class, collective representative or private attorney general proceeding, including, without limitation, uncertified class actions (“Class Action Waiver”).
The agreement explicitly permitted Moriana to opt out of the class action waiver by clicking a box on her application, but she elected not to opt out. Despite agreeing not to file or participate in a private attorney general claim in a representational capacity, Moriana filed a suit under PAGA following termination of her employment, asserting there was a delay in receiving her final paycheck.
PAGA allows a claimant to bring a claim on behalf of herself and all other aggrieved employees, regardless of whether the claimant suffered the same alleged violation of the law or the same damages as the other employees. PAGA, like the federal Fair Labor Standards Act, does not confer any “substantive rights” or “impose any legal obligations.” Rather, PAGA is “simply a procedural statute” that permits an employee to pursue specified penalties on behalf of herself and other former and current employees for violations of substantive sections of the California Labor Code.
PAGA allows class action lawyers to bring “representative claims” on behalf of persons who have agreed to arbitrate claims on an individual basis. Under California law, waiver of a person’s right to bring or participate in a representational PAGA action is deemed unconscionable and therefore unenforceable as against public policy. This was established by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC. In Iskanian, the California Supreme Court explicitly acknowledged that the U.S. Supreme Court’s decision in AT&T Mobility preempted California’s general unconscionability law as set out in its Discover Bank v. Superior Court decision. Nevertheless, the California Supreme Court distinguished PAGA waivers from waivers barring parties from participating in class actions.
Not surprisingly, the Supreme Court rejected the California Supreme Court’s analysis in Viking River Cruises. The Court’s opinion began with a discussion of the PAGA and California cases interpreting the statute, noting that the PAGA statute used the term representative claims to mean two distinctively different things. In the first sense, PAGA actions are representative in that they are filed by employees acting as representatives—that is, as agents or proxies—of the state. But PAGA claims are also called representative when they are predicated on California Labor Code violations sustained by individual employees.
The Supreme Court focused on this second so-called representative claim as conflicting with the FAA. To the extent that California law interprets PAGA to prohibit an employee from waiving representative standing in order to resolve whether an employer’s action violated the California Labor Code vis-à-vis the individual employee, the Supreme Court characterized PAGA as a forced joinder rule, stating, “California precedent also interprets the statute to contain what is effectively a rule of claim joinder. Rules of claim joinder allow a party to unite multiple claims against an opposing party in a single action.”
The Court held there was a conflict between PAGA’s procedural structure and the FAA because of the statute’s built-in mechanism of claim joinder, stating:
This prohibition on contractual division of PAGA actions into constituent claims unduly circumscribes the freedom of parties to determine “the issues subject to arbitration” and “the rules by which they will arbitrate,” and does so in a way that violates the fundamental principle that “arbitration is a matter of consent.” The most basic corollary of the principle that arbitration is a matter of consent is that “a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration.” This means that parties cannot be coerced into arbitrating a claim, issue, or dispute “absent an affirmative ‘contractual basis for concluding that the party agreed to do so.’”
For this reason, the Court held that state law cannot condition the enforceability of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the arbitration by introducing claims that the parties did not jointly agree to arbitrate.
Because rules of claim joinder can function in precisely this manner, the FAA licenses contracting parties to depart from standard rules “in favor of individualized arbitration procedures of their own design.” Hence, the Court held that parties are free under the FAA to craft arbitration agreements that require individualized arbitration rather than following a contrary, state-law-mandated, joined-claim approach, even if it results in bifurcated proceedings.
The holding in Viking River Cruises continues the Supreme Court’s expansive reading of the FAA’s preemptive effect. In the context of consumer and labor disputes, where adhesion contracts are often the norm, the Court’s ruling suggests that businesses have not only near plenary power to insist on bilateral arbitration but also wide discretion to craft the arbitral procedures for resolving individual disputes as long as those procedures do not upset fundamental concepts of due process.
Going forward, it is certain that class action lawyers and the California legislature will seek to modify PAGA to address the objections raised by the Supreme Court. Companies with facilities and employees in California should closely monitor developments to make sure they stay abreast of changes in the existing law.
Morgan v. Sundance, Inc.
At issue in Morgan v. Sundance, Inc. was whether an employee is required to show actual prejudice from her employer’s delay in seeking to compel arbitration in order to prove a waiver of the employer’s right to arbitrate. Once again, this dispute arises from the battle between corporations and class action lawyers. The class action lawyers in Morgan sought to use the Supreme Court’s newly minted “equal treatment rule,” articulated in the Epic Systems Corp. v. Lewis case, to argue Sundance had waived its right to compel arbitration by filing a dilatory motion in federal court. The class action lawyers argued that grafting a “prejudice” requirement onto the doctrine of waiver treated arbitration agreements more favorably than other contracts in violation of the Supreme Court’s Epic Systems case.
The U.S. Court of Appeals for the Eighth Circuit rejected this argument. It joined eight other circuit courts (two circuit courts had reached the contrary result) in grafting a prejudice requirement on top of the other common law requirements necessary to prove waiver of contractual rights. These circuit courts imposed the prejudice requirement solely for arbitration agreements because of the perceived federal policy favoring arbitration. The circuit courts differed significantly, however, in determining the amount of prejudice that was necessary to find a waiver of arbitration rights. The Supreme Court granted certiorari to resolve the circuit split.
The Supreme Court unanimously held that the Eighth Circuit erred in applying the doctrine of waiver by imposing a prejudice requirement specific to arbitration contracts because of a supposed FAA policy favoring arbitration. Justice Kagan noted that the Court’s case law interpreting the doctrine of waiver under the Federal Rules of Civil Procedure simply required evidence of “the intentional relinquishment or abandonment of a known right. To the extent the Eighth Circuit imposed an additional prejudice requirement because of the FAA’s policy favoring arbitration, that was a misconstruction of the Court’s “equal treatment rule” for arbitration contracts. The Court clarified that the FAA’s policy favoring arbitration “is merely an acknowledgment 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.” As such, the FAA’s policy “is based upon the enforcement of contract, rather than a preference for arbitration as an alternative dispute resolution mechanism.” What the Supreme Court refers to as the FAA’s “equal treatment rule” prohibits courts from either singling out arbitration contracts for less favorable treatment or “devis[ing] novel rules to favor arbitration over litigation.”
Futhermore, the Court was not persuaded that “waiver” was in fact the correct doctrine of law to apply to Sundance’s alleged delay in seeking arbitration. In remanding the case, the Court invited the Eighth Circuit to consider de novo whether waiver, estoppel, forfeiture, or some other doctrine of law provides the appropriate paradigm for deciding whether Sundance waited too long to assert its right to arbitration. The Court provided no guidance as to its views in its invitation to the Eighth Circuit to decide the appropriate procedural framework.
The extremely narrow grounds for decision in this case likely make Morgan the least consequential of the Supreme Court’s arbitration decisions this term. The more important issue is likely to be the procedural framework the Eighth Circuit elects to apply to decide the waiver issue. It is possible that the Morgan case, like the Henry Schein, Inc. v. Archer & White Sales, Inc. case last term, will make another appearance before the Supreme Court.
Despite the narrowness of the Court’s holding, there are a few takeaways from this case. First, if a contract requires arbitration but the plaintiff instead files an action in court and the defendant does not immediately attempt to stay the litigation and compel arbitration, then the defendant’s responsive pleading or other motion should reference the arbitration clause and reserve all rights to arbitrate. Second, if there is a delay in seeking arbitration, there should be a substantial argument that litigation of some narrow issue would benefit the eventual arbitral process because delay solely to obtain two bites at the apple—first in litigation and then in arbitration—is more likely to constitute waiver or estoppel. Finally, until the legal paradigm for evaluating delay is resolved, a party should consider asserting multiple legal theories to oppose arbitration, including waiver, estoppel, and forfeiture, as may be applicable based on the facts of the case.
Badgerow v. Walters
At issue in Badgerow v. Walters was whether the FAA’s § 4 “look-through” provision, which allows a federal court to compel arbitration if the substance of the underlying dispute is within the court’s subject-matter jurisdiction, also applies to FAA §§ 9 and 10, thereby authorizing federal courts to confirm or vacate arbitral awards based solely on the subject matter of the underlying dispute. The Supreme Court held look-through jurisdiction only applies to petitions to compel arbitration filed under § 4, not petitions to confirm or vacate awards. That holding also prevents application of the look-through doctrine to FAA §§ 5–7. Badgerow abrogates decisions by four different circuit courts holding that look-through jurisdiction applies to FAA §§ 9–10 (and, by implication, §§ 5–7).
FAA chapter 1 does not have a provision creating an independent jurisdictional basis for filing suit in federal court with respect to domestic arbitrations. Instead, the traditional rules for invoking federal court jurisdiction under 28 U.S.C. §§ 1331–1332 apply. A party must allege in its petition either that there is complete diversity of citizenship with an amount in controversy greater than $75,000 or that the dispute involves a federal question. In light of the Court’s decision in Badgerow, a party can file a petition to compel arbitration under FAA § 4 only if the underlying dispute, which is not actually before the court because it is subject to the arbitration provision, would, in the absence of the arbitration agreement, be subject to the jurisdiction of the federal court.
Badgerow filed an arbitration raising both federal and state claims for wrongful termination when she was fired, but the arbitrators ruled against her. Asserting fraud, Badgerow sued in Louisiana state court to vacate the arbitral award. The case was removed to federal court. Badgerow moved to remand the case to state court, asserting the federal court lacked jurisdiction. While recognizing that FAA §§ 9 and 10 lacked the look-through language in § 4, the federal court nevertheless exercised look-through jurisdiction because the underlying substantive claim raised federal questions and the court believed it was important that “consistent jurisdictional principles” govern all kinds of application under the FAA. The district court confirmed the award and denied Badgerow’s petition to vacate. The Fifth Circuit affirmed.
The Supreme Court then reversed, in an opinion joined by all the justices except Justice Breyer. The Court held that the plain language of the statute compelled the conclusion that look- through jurisdiction only applied to motions to compel arbitration under § 4. A federal court can only grant the other forms of relief authorized in FAA §§ 9–10 if the court has an independent basis to exercise jurisdiction under 28 U.S.C. §§ 1331–1332.
The Court’s decision is likely to increase the time and cost of the arbitral process by increasing the amount of collateral litigation necessary to enforce the FAA.
It is no secret that compared to federal courts, many state courts are less amenable to arbitration. This is particularly true in labor and consumer disputes, where “forced arbitration” through adhesion contracts is commonplace. Hence, if a party seeking to compel arbitration can file in federal court, that is often the venue of choice. Once the case is pending in federal court, parties often find it convenient to return to the federal court, where the case is stayed pending the outcome of the arbitration, to seek to confirm or annul the arbitral award.
The holding in Badgerow bars such follow-on motions unless there is a separate and independent ground for the federal court to exercise jurisdiction. Failing such jurisdiction, a second litigation must be filed in state court to confirm or annul the award, even though the federal court had jurisdiction to compel arbitration. Filing a second litigation in state court is likely to cost more as a new judge needs to be brought up to speed on the dispute. Also, aside from potential state court hostility to arbitration, state court judges may lack familiarity with the FAA, and the Supreme Court has never actually ruled that the state court judges must apply federal as opposed to state law in a confirmation or annulment case pending in state court.
As a result of the Badgerow decision, the Supreme Court will likely devote more time in the future to policing state court decisions that misapply the FAA. However, the cases will not normally be ripe for Supreme Court review until after all state court appeals are exhausted. This means more cost and litigation delay for parties. Time wasted on collateral litigation enforcing arbitral awards threatens to undermine what the Supreme Court describes as the fundamental advantages of arbitration—namely, simplicity, speed, and lower cost.
Justice Breyer in his dissent was sensitive to concerns about allowing state courts to decide disputes under the FAA, particularly if the parties had already invoked the federal court’s look-through jurisdiction to compel arbitration. In his view, permitting look-through jurisdiction in any case where the FAA applied would promote efficiency and ensure consistent application of the FAA.
A prophylactic measure that parties can take that might reduce some collateral litigation is to state explicitly in their arbitration agreement whether they intend the FAA or the organic arbitration law of a particular state to govern the terms of their arbitration.
Conclusion
This past term, the Supreme Court devoted a disproportionate amount of time to resolving disputes involving arbitration. The ZF Automotive and AlixPartners decisions resolved the issue of application of § 1782 to international commercial and investor-state arbitrations in a manner that likely precludes most future disputes about that statute.
On the other hand, the Court is destined to continue to spend a disproportionate amount of its time resolving arbitration disputes arising under the FAA. That is especially true given the exceptionally narrow scope of its decisions this term, i.e., declining to provide any real clarity on the scope of the transportation worker exception to the FAA; declining to allow PAGA claim joinder but leaving a wide path open for the California legislature to revise that statute; and declining to set the standard for evaluating when excessive delay constitutes a waiver of the right to arbitrate. Many other issues remain open concerning the FAA’s application, and the Court’s decision to leave many of those issues for state courts to resolve suggests the Court’s docket will continue to be filled with a disproportionately large number of arbitration disputes for the foreseeable future.
