The Supreme Court holds oral argument in 70–80 cases per year. This year, the Court granted oral argument in six arbitration cases. One of the reasons for the Court’s disproportionately large focus on the Federal Arbitration Act (FAA) is that arbitration is at the center of an ongoing battle between businesses and class action lawyers.
The Supreme Court’s decisions in the last decade 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 pre-dispute 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 six arbitration cases 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.
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 declining to establish a bright-line rule.
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 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 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 supervisorwas 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, it is clear that 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.
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 that 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 Viking River Cruises Court rejected the California Supreme Court’s analysis. 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 businesses have not only near plenary power to insist on bilateral arbitration, but also wide discretion to craft the arbitral procedures for resolvingindividual disputes as long as those procedures do not upset fundamental concepts of due process.
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 that they stay abreast of changes in the existing law.
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. Lewiscase, to argue that 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 that 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 that 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 assert multiple legal theories to oppose arbitration, including waiver, estoppel, and forfeiture.
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 that 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 that 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 reversed, in an opinion joined by all of 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.
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.
This past term, the Supreme Court devoted a disproportionate amount of time resolving disputes over the application of the FAA. In light of its narrow decisions declining to provide clarity on the scope of the transportation worker exception to the FAA, declining to allow claim joinder to impact arbitration, declining to set the standard for what constitutes a waiver of the right to arbitrate, and declining to recognize federal jurisdiction over arbitration enforcement disputes even when federal courts would have had jurisdiction to compel arbitration, the Court is destined to continue to spend a disproportionate amount of its time resolving arbitration disputes in the coming years.
