The third reason for the abnormally large number of arbitration cases on the Supreme Court’s docket is the continuing dispute over the extent to which labor disputes were excluded from the FAA’s jurisdiction. Prior to the FAA’s enactment, union leaders believed that they had succeeded in excluding most labor disputes from coverage under Section 1 of the Act, which exempted “contracts of employment of seamen, railroad workers or any other class of workers engaged in foreign or interstate commerce.” Subsequently, however, the Supreme Court interpreted this language narrowly, to exclude only “transportation workers” engaged in foreign or interstate commerce. By so limiting the scope of the labor exclusion, the Court has spawned a litigation boom over whether workers (employees and independent contractors) are “transportation workers” and therefore exempt from the FAA and its forced bilateral arbitration of employment disputes. That issue is the subject matter of the Saxon v. Southwest Airlines case discussed in this report.
As the Supreme Court continues to refashion the FAA, it encounters numerous open questions about how to interpret the FAA or apply some of its most basic provisions. One open issue that the Supreme Court decided not to decide this term is the question of the standard to apply to determine whether a party has delayed for too long invoking the right to arbitrate, thereby waiving that right. This report discusses the Court’s decision in Morgan v. Sundance holding that the Eighth Circuit applied the wrong standard, but also declining to identify the correct standard, instead sending the case back to the circuit court to make a de novo decision on the standard that should be applied. The Badgerow case referenced above also reflects a key fork in the road for the Supreme Court. By forcing most litigation over enforcement of the FAA into state courts, the Court is losing some degree of control over the future development of the statute. The ADR Committee would not be surprised to see more FAA cases appearing on the Supreme Court’s docket as a result of writs of certiorari issued to state courts.
This report begins, however, with a dispute in which the FAA is only tangentially involved. On an almost emergency basis, the Supreme Court granted certiorari petitions to review an obscure discovery provision that has in various forms been in the United States Code for 164 years, 28 U.S.C. § 1782. Originally enacted in 1855 at the behest of the U.S. State Department, the Act gave the judiciary authority to compel discovery to assist the government fulfill its comity and reciprocity obligations, providing discovery sought by foreign governments in Letters Rogatory. The Second and Fifth Circuits held in 1999 that § 1782 did not apply to parties seeking documents in private international commercial arbitrations. Those rulings were unchallenged for twenty years until judges in the Sixth and Fourth Circuits decided within months of one another, based on reading dictionaries and “textual” analysis of § 1782—which essentially ignored its legislative history—that discovery under the statute was available in private arbitrations. This conclusion ignited controversy in the world of international commercial and investment arbitration, as parties flocked to the United States to obtain discovery unavailable anywhere else in the world. The Supreme Court scrambled to find appropriate cases to allow it to resolve the circuit split, eventually granting certiorari in two cases, as described below.
B. Section 1782 Discovery in Commercial and Investment Arbitration
The issue in ZF Automotive US, Inc. v. Luxshare, LTD is whether parties can invoke the jurisdiction of federal district courts under 28 U.S.C. § 1782 to obtain discovery for use in private international commercial and investor-state arbitrations. Any meaningful discussion of ZF Automotive requires a brief introduction to the statute’s colorful legislative history and at least a superficial understanding of the similarities and differences between commercial and investor-state disputes.
1. Brief History of § 1782
Beginning with the Act of 1855, Congress authorized the federal courts to appoint commissioners to compel unwilling witnesses to provide evidence sought in letters rogatory received through diplomatic channels from foreign governments. Congress and the U.S. State Department believed that the doctrines of comity and reciprocity required the federal government to provide government-to-government diplomatic assistance to compel compliance with letters rogatory. The Act of 1855 was intended to provide statutory authority for the executive branch to invoke the federal judiciary’s jurisdiction to force compliance with disclosure requests.
Additional legislative Acts in 1863, 1930, and 1933 expanded assistance to foreign courts and government-appointed tribunals to obtain discovery in the United States. In 1948, Congress further broadened the scope of discovery assistance that federal courts could provide through legislation, codified at 28 U.S.C. § 1782, that eliminated the requirement that a foreign country be a party to or have an interest in the proceeding. The new statute allowed depositions to be taken for use “in any civil action pending in any court in a foreign country.” The next year, Congress broadened the statute further by deleting “civil action” and substituting “judicial proceeding” to ensure criminal actions were included in the scope of judicial assistance provided by the United States.
Finally, in 1958, Congress created a Commission on International Rules of Judicial Procedure to study “judicial assistance and cooperation between the United States and foreign countries with a view to achieving improvements.” In 1964, Congress unanimously adopted the Commission’s recommendation for a complete revision of § 1782. As currently formulated, § 1782(a) provides in relevant part as follows:
The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal. . . . The order may be made pursuant to a letter rogatory issued, or request made, by a foreign or international tribunal or upon the application of any interested person and may direct that the testimony or statement be given, or the documents or other thing be produced, before a person appointed by the court. . . .
A person may not be compelled to give his testimony or statement or to produce a document or other thing in violation of any legally applicable privilege.
From 1855 to 1964, there is no hint that this discovery statute was ever intended to apply, or was actually applied, to anything but foreign or international governmental tribunals, in satisfaction of the United States’ obligations to provide discovery under the doctrines of comity and reciprocity.
2. Major Developments in International Arbitration
Two major developments occurred contemporaneously with, but entirely independent of, the work of the Commission charged with updating § 1782. These developments substantially changed international dispute resolution, setting the stage for future disputes over § 1782. First, the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) was adopted on June 10, 1958. Over the last sixty-four years, the New York Convention has been ratified by 169 nations, making this multilateral convention one of the most widely adopted international agreements of all time. The ability to enforce arbitral awards in almost every country under this Convention spawned widespread growth in arbitration of international disputes.
Second, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (commonly known as the “ICSID Convention” after the World Bank’s International Centre for Settlement of Investment Disputes) was negotiated over the period from 1961 through 1964, and entered into force on October 16, 1966. Today, the ICSID Convention has 164 Contracting and Member States. ICSID arbitration, typically arising under bilateral investment treaties (BITs), is the world’s primary forum for resolving investor-state disputes, with hundreds of active cases pending, and a total of 124 new cases filed in 2020 and 2021.
International arbitration rules in private commercial and investor-state disputes do not authorize third-party discovery. Attempts by counsel to utilize § 1782(a) to obtain discovery in international commercial disputes were rejected by the Second and Fifth Circuits in 1999. For twenty years, no circuit court permitted the use of § 1782(a) to obtain discovery in a commercial or investor-State arbitration.
3. The Circuit Courts Split over the Proper Application of § 1782
The lid came off the honey pot when in quick succession the Sixth and Fourth Circuits, relying primarily on dictionaries to provide “textual” interpretations of the statute without substantive review of its legislative history, held that § 1782 authorized discovery in private international commercial arbitrations. Within months, district courts around the country were swarmed with applications for discovery for use in international arbitrations. Adding fuel to the fire, the Second Circuit, while maintaining its view that § 1782 did not apply to international commercial arbitrations, decided that the statute could be used to obtain discovery in at least some investor-state arbitrations.
The Supreme Court granted two petitions for certiorari, one to the district court in Michigan in ZF Automotive, and the other to Alixpartners, based on the Second Circuit decision. Granting two petitions allowed the court to address § 1782 discovery in the context of both commercial and investor-state arbitration. The Solicitor General filed an amicus brief on behalf of the United States and requested time to present oral argument, which request was granted. The Solicitor General’s amicus brief forcefully advocated against permitting § 1782 discovery in either commercial and investor-state arbitrations. At oral argument, the Justices seemed deferential to the views of the United States, if for no other reason than that the discovery statute at issue had historically always been for the use and benefit of the U.S. State Department in meeting the government’s comity and reciprocity obligations to other states.
4. The Supreme Court’s Decision in ZF Automotive and Alixpartners
In its 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 of § 1782 by considering whether the phrase “foreign or international tribunal” included private adjudicative bodies or only governmental or intergovernmental bodies. The Court looked both to dictionary definitions and to statutory history to determine how Congress has used the word “tribunal.” The Court concluded that “tribunal” was not limited just to “court,” but had been used to include administrative and quasi-judicial proceedings abroad. 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 consider 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.” The Court then asserted that § 1782’s “focus on governmental and intergovernmental tribunals is confirmed by both the statute’s history and a comparison to the Federal Arbitration Act. . . .”
The Court then addressed 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. In the Court’s view, “Interpreting § 1782 to reach private arbitration would therefore create a notable mismatch between foreign and domestic arbitration.”
In reviewing the opinion, it is clear that the 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 distinguish the tribunal formed in Alixpartners from the tribunals formed by the United Stated in the 1930s to resolve the dispute with England and Canada concerning the U.S. Coast Guard’s sinking of the I’m Alone rum runner and 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 claims that sovereigns assert directly against one another for violations of a treaty or customary international law. The same is true for investment claims that used to be asserted by States on behalf of their nationals under the doctrine of diplomatic protection (or diplomatic espousal). In both of these cases, the State is asserting its rights as a sovereign state for the insult cause 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 sovereign of the national of the Home State 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 and the Host State agree to arbitrate their investment dispute without any involvement of the government of the Home State of the investor. Despite the existence of a bilateral or multilateral treaty between the sovereigns, the tribunal hearing the dispute is not appointed by the two sovereigns, but by the investor and the Host State. The arbitrators do not derive their authority from the two sovereigns or the bilateral investment treaty that the sovereigns signed. Rather, the authority of the arbitrators stems from their selection and appointment by the parties, including the parties’ agreement to be bound by the arbitral decision. Most importantly, the Host State of the investor is neither a party to the arbitration, nor is any way sponsoring its investor’s claim, as happened under prior regimes where the Home State advanced its investor’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. 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.
Bilateral investment treaties also recognize the structural difference between state-to-state arbitration and investor-state arbitration. Almost all bilateral investment treaties have two different arbitrations agreements. One arbitration agreement is used for arbitrations between the investors and the host state, which addresses investor-state claims, and the other arbitration clause addresses disputes that might arise under the treaty directly between the two sovereigns, such as how a certain provision in the treaty should be interpreted. If the sovereigns fall into dispute, they have different procedures to appoint a tribunal to resolve their state-to-state disputes.
In summary, in the view of the ADR Committee, the Supreme Court called this case correctly. International arbitration—whether commercial or investor-state—has its own self-contained dispute resolution process. It also has its own unique rules for discovery. Most arbitrators neither need nor want national courts to interfere in their dispute resolution process, especially by allowing a non-party to the arbitration to seek production of documents, which is precisely what § 1782 allows. Arbitrators would have difficulties maintaining an “equality of arms” between the parties if the Host State could access discovery in the United States but the other investor could not obtain similar discovery from the Host State.
C. Morgan v. Sundance, Inc.
The issue in Morgan v. Sundance, Inc. is whether, under the FAA, an employee is required to show that she incurred actual prejudice from her employer’s delay in seeking to compel arbitration in order to prove her employer waived its contractual right to arbitrate employment disputes.
In Morgan, the Eighth Circuit joined eight other federal circuits 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 in the FAA 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 a circuit split because two other circuit courts had reached the opposition conclusion, rejecting that some element prejudice is required to prove waiver of the right to arbitrate under the FAA.
The Supreme Court unanimously held that the Eighth Circuit erred in its application of 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 long-standing 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 either to single-out arbitration contracts for less favorable treatment, or to “devise novel rules to favor arbitration over litigation.”
Finally, the Court was not persuaded that “waiver” was in fact the correct doctrine of law to be applied 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 under the Federal Rules of Civil Procedure 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 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, as delay solely to obtain two bites at the apple, first in litigation and then 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.
D. Southwest Airlines Co. v. Saxon
The issue in Southwest Airlines Co. v. Saxon is whether an airline employee, who works at an airport as a ramp supervisor managing workers loading passenger bags, and who also loads bags herself, is a “transportation worker” who is “engaged in foreign or interstate commerce” as defined in § 1 of the FAA. If so, she is thereby exempt from arbitration under FAA.
Southwest Airlines arises directly from the Supreme Court’s surprising 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, which applied only to employees. 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 whether they were employees or independent contractors, because they were all “transportation workers.”
In the three years since New Prime was decided, district and circuit courts have struggled to define which workers are covered versus exempt from application of the FAA. The First and Ninth Circuits agree 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 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 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 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 those who are exempt. At present, many suits are filed as class actions claiming that the employees are exempt from the FAA under New Prime, only to be faced with a motion to compel arbitration asserting that the FAA applies.
The resolution of the Southwest Airlines case suggests that the Supreme Court is content to allow the 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. Saxon brought her class action lawsuit against Southwest Airlines alleging violations of the Fair Labor Standards Act, and Southwest sought to enforce their bilateral arbitration agreement. Saxon argued that all airline employees are involved in interstate commerce, which argument the Court rejected as overbroad. Justice Thomas asserted that because the FAA focused on “workers” rather than “employees,” and the “FAA directs attention to ‘the performance of work,’” Saxon’s proposed definition was too broad, as the FAA did not exempt all employees, but only those who actually functioned 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 Southwest Railroad Co. v. Burtch, which held that employees “loading or unloading an interstate shipment are so closely related to interstate transportation as to be practically 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.”
E. Badgerow v. Walters
The issue in Badgerow v. Walters is 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. 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 means “look through” jurisdiction also does not apply to FAA §§ 5–7. Badgerow abrogates decisions by four different circuit courts holding that “look through” jurisdictions applied to FAA §§ 9–10.
To place the Badgerow decision in context, it is important to recall that FAA Chapter 1, pertaining to domestic arbitrations, does not have a provision creating an independent jurisdictional basis for filing a suit in federal court. The traditional rules for invoking federal court jurisdiction under 28 U.S.C. §§ 1331–1332 apply. A party must either allege in its petition that there is complete diversity of citizenship with an amount in controversy greater than $75,000 or that the dispute involves a federal question. The only exception following the Court’s decision in Badgerow is that a party can file a petition to compel arbitration under FAA § 4 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.
The relevant facts in Badgerow are that the petitioner became embroiled in an employment dispute with her employer, Walters, and was fired. Badgerow filed an arbitration raising both federal and state law claims for wrongful termination. The arbitrators rendered their award in favor of Walters. Asserting that fraud tainted the arbitral process, Badgerow sued Walters in Louisiana state court to vacate the arbitral award. Walters removed the case to federal court and sought to confirm the award under FAA § 9. Badgerow moved to remand the case to state court, asserting the federal court lacked subject matter jurisdiction. While recognizing that FAA §§ 9 and 10 lacked the “look through” language in § 4, the district court nevertheless exercised “look-through” jurisdiction as the underlying substantive claim raised federal question claims and the court believed that it was important that “consistent jurisdictional principles” should govern all kinds of application under the FAA. The district court proceeded to confirm the award and deny Badgerow’s petition to vacate. The Fifth Circuit affirmed.
The Supreme Court 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 was only authorized for § 4 to compel arbitration. The other procedures authorized in the FAA could only be exercised by the federal court if it otherwise had an independent basis to exercise federal jurisdiction.
The Court’s decision is likely to result in greater time and cost through increased litigation in the arbitral process. It is no secret that, compared to federal courts, the courts in certain states are either less amenable, and in a few instances outright hostile, to arbitration, particularly in instances involving labor and employment and consumer issues where “forced arbitration” through mandatory adhesion contracts is commonplace. Class action lawyers regularly file suits in state court despite the existence of arbitration clauses, seeking to challenge the arbitration clause on any number of grounds, as discussed below in the Viking River Cruises case. Many parties elect to file motions to compel arbitration in federal court whenever possible. If the court compels arbitration, it is required to stay the pending court action. If problems arise during the course of the arbitration, or if there is a dispute about confirmation or annulment of the award, the parties typically return to the federal court to resolve those issues, at least in the jurisdictions that permitted “look though” jurisdiction for all the relief available under the FAA.
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 such that the federal judge is already familiar with the case, thus promoting efficiency on a subsequent motion to confirm or annul an award. He, like the district court judge, preferred a solution that allowed federal courts to enforce the FAA.
Without in any way criticizing the outcome in Badgerow, it is nevertheless likely that the decision is going to generate more litigation, and much of that litigation will occur in state courts that often have little or no familiarity with the FAA. Additionally, there remains some uncertainty in the current law as to the extent that the state courts are required to apply the FAA as opposed to a state arbitration statute when addressing motions to confirm or annul an arbitral award. Indeed, there is even uncertainty about whether federal or state law should govern the arbitration clause if the case is filed in state court and the arbitration clause is silent about whether state or federal law should govern the arbitration.
Invariably, the Supreme Court will have more problems policing decisions in state courts that should be applying the FAA and are not doing so correctly. Appeal of those disputes will go through state courts and will generally be reviewable by the Supreme Court only after all state appeals are exhausted. Inevitably, there will be more litigation as a number of threshold issues are worked out. In short, the Supreme Court did not want to turn every arbitration into a federal case, but, at least in the short run, parties may incur more costs and delays, including, in some instances, trips to both the federal and state courts, to enforce their right to arbitrate disputes. This sequence risks undermining some of what the Supreme Court describes as the fundamental advantages of arbitration, namely simplicity, speed, and lower cost.
F. Viking River Cruises v. Moriana
The issue in Viking River Cruises v. Moriana is 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). This suit 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 every 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 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 whether 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 conclusion 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 Discovery Bank decision. Nevertheless, the California Supreme Court distinguished PAGA waivers from waivers barring parties from participating in class actions. The California Supreme Court noted that, under PAGA, seventy-five percent of the civil penalties awarded had to be paid to the State. The court stated these PAGA civil penalties were an important tool in California’s quiver for enforcing its labor laws. The court therefore concluded that “the rule against PAGA waivers does not frustrate the FAA’s objectives because . . . the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state.” Having characterized the PAGA claim as an action belonging to the state, in the nature of a qui tam suit, the California Supreme Court cited the U.S. Supreme Court’s decision in EEOC v. Waffle House, Inc. The Supreme Court held in that case that an action brought by the Equal Employment Opportunity Commission (EEOC) to vindicate an injury to an employee was not precluded by an arbitration agreement signed by the employee because the EEOC had near total control of the action such that it was an action by the federal agency and not the individual employee.
Not surprisingly, the U.S. Supreme Court rejected the California Supreme Court’s analysis. Somewhat surprisingly, all the Justices except Justice Clarence Thomas, who maintained his usual position that the FAA does not apply in state court proceedings, voted on at least one ground to reverse the California Supreme Court’s decision.
The Court’s opinion began with a relatively long 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 to waive representative standing in order to resolve whether an employers’ action violated California’s 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. The Court stated:
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,” Lamps Plus, 587 U.S. at ___, 139 S. Ct., at 1416, and does so in a way that violates the fundamental principle that “arbitration is a matter of consent,” Stolt-Nielsen, 559 U.S. at 684, 130 S. Ct. 1758. 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,” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). 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.’” Lamps Plus, 587 U.S., at ___, 139 S. Ct. at 1416 (quoting Stolt-Nielsen, 559 U.S. at 684, 130 S.Ct. 1758); see also Concepcion, 563 U.S. at 347–348, 131 S. Ct. 1740.
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.
Since rules of claim joinder can function in precisely in 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 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 Court’s holding in Viking River Cruises continues its 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 suggest businesses have near plenary power not only to insist on bilateral arbitration, but also wide discretion to craft the arbitral procedures for resolvingindividual disputes so long as those procedures do not upset fundamental concepts of due process.
