This article discusses recent developments in the field of alternative dispute resolution. During the past year, the United States Supreme Court ruled on an unprecedented five separate cases in the field. Each of these decisions is discussed herein: (i) Badgerow v. Walters, addressing a federal district court’s subject matter jurisdiction over claims brought under the Federal Arbitration Act (FAA); (ii) Southwest Airlines Co. v. Saxon, addressing the scope of the interstate transportation workers exception to the FAA, under which workers may avoid contractual provisions mandating individualized arbitration; (iii) Viking River Cruises, Inc. v. Moriana, addressing the extent to which the FAA preempts a California statute authorizing individuals to act as “private attorneys general” to enforce California labor laws;
(iv) ZF Automotive US, Inc. v. Luxshare, Ltd., addressing the availability of discovery in aid of foreign arbitrations under 28 U.S.C. § 1782(a); and
(v) Morgan v. Sundance, addressing whether a showing of prejudice is required to demonstrate waiver of a contractual right to arbitrate. The article also discusses a decision addressing the significant issue of confidentiality in mediation proceedings.
The extent of a federal district court’s limited subject matter jurisdiction over claims brought under the FAA was clarified in Badgerow v. Walters. In general, federal district courts have jurisdiction in diversity cases and federal question cases. While typically, a federal-question case is one that “arises under” federal law if the federal law creates the cause of action asserted, that is not necessarily the case for FAA-created arbitration actions and this year the Supreme Court in Badgerow made clear that the jurisdiction determination turns on whether a party is seeking to compel arbitration in the f irst instance or to confirm or vacate an arbitral award already issued. The FAA authorizes parties to arbitration agreements to file actions in federal court both to compel arbitration under Section 4, and to confirm, vacate, or modify arbitral awards under Sections 9, 10 and 11. The Supreme Court has held, however, that these provisions do not themselves support federal jurisdiction – reasoning that otherwise “every arbitration in the country, however distant from federal concerns, could wind up in federal court.” Rather, a federal court must have an “independent jurisdictional basis” to entertain an action brought under the FAA.
In some cases, a federal court may have an independent basis for jurisdiction where the application itself alleges entitlement to relief – based either on other (non-FAA) federal law or by demonstrating diversity jurisdiction. In many cases, however, where neither basis supports jurisdiction, the question arises of where else the court can look to determine if an action brought under the FAA has an “independent jurisdictional basis” to authorize the federal court to hear the case.
In a 2009 decision, Vaden v. Discover Bank, the Supreme Court addressed whether “there was a jurisdictional basis to decide a Section 4 petition to compel arbitration by means of examining the parties’ underlying dispute.” The Court in Vaden determined that the “the text of Section 4, … instructs a federal court to ‘look through’ the petition to the ‘underlying substantive controversy’ between the parties—even though that controversy is not before the court.” “If the underlying dispute falls within the court’s jurisdiction—for example, by presenting a federal question—then the court may rule on the petition to compel. That is so regardless of whether the petition alone could establish the court’s jurisdiction.”
This year in Badgerow, the Supreme Court resolved the related question that had divided the lower courts – namely “whether the look-through approach used in Vaden can establish jurisdiction in a case … when the application before the court seeks not to compel arbitration under Section 4 but to confirm, vacate, or modify an arbitral award under other sections of the FAA.” Relying on the text of the FAA – and specifically the differences between the language of Section 4 and Sections 9 and 10 – the Court held that it does not. The Court reasoned that Sections 9 and 10 “lack Section 4’s distinctive language directing a look-through, on which Vaden rested,” and “[w]ithout that statutory instruction, a court may look only to the application actually submitted to it in assessing its jurisdiction.”
FAA Section 4 allows a party to an arbitration agreement to petition for an order to compel arbitration in a “United States district court which, save for [the arbitration] agreement, would have jurisdiction” over “the controversy between the parties.” In Vaden, the Court determined that language “drives our conclusion that a federal court should determine its jurisdiction by ‘looking through’ a § 4 petition to the parties’ underlying substantive controversy” and found that “[t]he phrase ‘save for [the arbitration] agreement’ … indicates that the district court should assume the absence of the arbitration agreement and determine whether [the court] ‘would have jurisdiction ...’ without it.” In then determining “[j]urisdiction over what?”, the Court in Vaden found that the “text of Section 4 refers us to ‘the controversy between the parties’” which would thus have to mean their “underlying substantive controversy,” since the “save for” clause had “direct[ed] courts” to assume that agreement away.
In Badgerow, however, the Supreme Court reasoned that “Sections 9 and 10, in addressing applications to confirm or vacate an arbitral award, contain none of the statutory language on which Vaden relied. Most notably, those provisions do not have Section 4’s ‘save for’ clause.” Finding this textual difference determinative, the Court concluded that “under ordinary principles of statutory construction, the look-through method for assessing jurisdiction should not apply.”
The Supreme Court also rejected claims that policy arguments – including promotion of “administrative simplicity” in having a uniform jurisdictional rule apply to all actions under the FAA (i.e., regardless of whether applications to compel arbitration or to confirm or vacate awards) – could overcome what the court found to be “‘a clear statutory directive.’”
Applying these principles to the facts at issue in Badgerow, the Court found federal jurisdiction lacking. The case involved an arbitration action brought by a financial advisor against her employer alleging unlawful termination under state and federal law. The arbitrator dismissed the claims, but the financial advisor sued in state court alleging that fraud had tainted the arbitration proceeding. The company removed the case to federal court and sought to confirm the arbitral award. The petitioner then moved to remand the case, arguing lack of jurisdiction. In explaining its ruling, the Supreme Court stated, “we can see why Congress chose to place fewer arbitration disputes in federal court” since the statute “makes Section 9 and 10 applications conform to the normal—and sensible—judicial division of labor: The applications go to state, rather than federal, courts when they raise claims between non-diverse parties involving state law.” The Court explained that although the claims originated in the arbitration of a
federal-law dispute, that underlying dispute was no longer at issue: “Rather, the application concerns the contractual rights provided in the arbitration agreement, generally governed by state law. And adjudication of such state-law contractual rights—as this Court has held in addressing a non-
arbitration settlement of federal claims—typically belongs in state courts.”
The Supreme Court’s decision thus limits the availability of litigants to seek relief in federal court in order to confirm or challenge arbitration determinations.
Employees seeking to avoid contracts mandating individual arbitration—and Supreme Court precedent mandating the enforcement of such agreements under the FAA—have sought safe harbor under the interstate commerce exception to the FAA. Section 1 of the FAA states that “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” If Section 1 applies (and the FAA is not applicable to a dispute), then state or other federal law may preclude reliance on contractual provisions mandating individual arbitration of certain claims and parties may be free to pursue individual or class or collective litigation. After the Supreme Court held in 2019 in New Prime Inc. v. Oliveira that this exception applies to independent contractors as well as employees, the scope of the exception has gained greater prominence, bringing a vast range of workers potentially under the exception.
This year in Southwest Airlines Co. v. Saxon, the Supreme Court clarified that the determination of whether a worker is engaged in interstate commerce under the statute is based on the work performed, not simply the company where the person worked. The worker need not personally have moved goods or people across state lines in order to qualify. Under the facts presented in the case, the Court addressed the question of whether Latrice Saxon, a ramp supervisor for Southwest Airlines at Chicago Midway International Airport whose work frequently required her to load and unload baggage and cargo on and off airplanes, belonged to a “class of workers engaged in foreign or interstate commerce” under Section 1 of the FAA. Saxon’s employment contract required her to arbitrate wage disputes individually, but she nevertheless filed a putative class action against Southwest Airlines under the Fair Labor Standards Act of 1938 alleging that Southwest failed to pay proper overtime wages to her and other ramp supervisors. The district court dismissed the case, holding that only those involved in “actual transportation,” and not the “mer[e] handling [of ] goods,” fell within the Section 1 exemption. The Court of Appeals for the Seventh Circuit reversed, holding that “[t]he act of loading cargo onto a vehicle to be transported interstate is itself commerce, as that term was understood at the time of the [FAA’s] enactment in 1925.” The Seventh Circuit’s decision created a split with the Fifth Circuit, and the Supreme Court granted certiorari to resolve the disagreement.
In a unanimous decision by Justice Thomas, the Supreme Court affirmed the decision of the Seventh Circuit. In determining that ramp supervisors like Saxon were in a class of workers engaged in foreign or interstate commerce, the Court interpreted the language “according to its ‘ordinary, contemporary, common meaning.’” Initially, the Court rejected the broad argument put forth by Saxon that all airline employees should be deemed to constitute a “class of workers” covered by Section 1 because “air transportation ‘[a]s an industry’ is engaged in interstate commerce.’” Rather, the Court found that Saxon is “a member of a ‘class of workers’ based on what she does at Southwest, not what Southwest does generally.”
The Court then held that airplane cargo loaders – as a class of workers – are “engaged in foreign or interstate commerce” under Section 1. The Court looked to the statutory text, reasoning that to “be ‘engaged’ in something means to be ‘occupied,’ ‘employed,’ or ‘involved’ in it,” and that “‘[c]ommerce’ …includes, among other things, ‘the transportation of ... goods, both by land and by sea,’” and thus “any class of workers directly involved in transporting goods across state or international borders falls within § 1’s exemption.” The Court held that airplane cargo loaders are such a class, concluding “[w]e think it 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 Supreme Court in Saxon declined to resolve the question of whether the exemption applies to classes of workers “further removed from the channels of interstate commerce or the actual crossing of borders.” As examples of cases where “the answer will not always be so plain,” the Court cited the Ninth Circuit’s decision in Rittmann v. Amazon.com, Inc., which held that a class of “last leg” delivery drivers falls within Section exemption, and the Seventh Circuit ruling in Wallace v. Grubhub Holdings, Inc., which held that food delivery drivers do not.
Following the Saxon decision, courts have applied the Supreme Court’s reasoning in continuing to examine the extent of the exemption’s reach. For example, the United States Court of Appeals for the Second Circuit in Bissonnette v. LePage Bakeries Park St., LLC, addressed whether independent distributors who market, sell, and distribute baked goods produced by Flowers Foods, Inc. (“Flowers”)—a holding company of subsidiaries that produce breads (including Wonder Bread) and snack cakes in numerous bakeries—fell within the Section 1 exemption. Despite arbitration provisions in the agreement, the distributors filed litigation on behalf of a putative class alleging violations by Flowers of the Fair Labor Standards Act and Connecticut wage laws. In an initial decision in May 2022, the Second Circuit had held that such plaintiffs were not “transportation workers” within the meaning of the Section 1 exception. However, the court then granted a motion for rehearing and withdrew its opinion in light of the Supreme Court’s subsequent decision in Saxon.
After considering Saxon, the Second Circuit reached the same conclusion and again affirmed the district court’s order that had compelled arbitration and dismissed the case. The court held that “the plaintiffs are not ‘transportation workers,’ even though they drive trucks, because they are in the bakery industry, not a transportation industry.” The court concluded that although its precedent did not define “transportation industry,” “an individual works in a transportation industry if the industry in which the individual works pegs its charges chiefly to the movement of goods or passengers, and the industry’s predominant source of commercial revenue is generated by that movement.” The court noted that the Supreme Court in Saxon had no need to elaborate on Second Circuit precedent that only a worker in a transportation industry can be classified as a transportation worker, since in Saxon the plaintiff worked for an airline, an industry clearly involved in transportation. The Second Circuit stated that while, “as Saxon teaches, not everyone who works in a transportation industry is a transportation worker …. in our case, the distinctions drawn in Saxon do not come into play” since “those who work in the bakery industry are not transportation workers, even those who drive a truck from which they sell and deliver the breads and cakes.”
In another post-Saxon decision, the United States Court of Appeals for the Fifth Circuit in Lopez v. Cintas Corporation, determined that the Section 1 exemption did not apply to a “last-mile” driver whose work involved picking up from a Houston warehouse items that had been shipped from out of state and delivering them to local customers. Following the framework laid out in Saxon, the Firth Circuit found that it must first define the relevant “class of workers” that the plaintiff belongs to, and second determine whether that class of workers is “engaged in foreign or interstate commerce.” The court found that plaintiff was in a class of “local delivery drivers” and then held such drivers were not “engaged” in “interstate commerce” as contemplated by the Section 1 exception. The court reasoned that “[o]nce the goods arrived at the Houston warehouse and were unloaded, anyone interacting with those goods was no longer engaged in interstate commerce.” In another decision after Saxon, the Supreme Judicial Court of Massachusetts in Archer v. Grubhub, Inc. similarly concluded that local food delivery drivers were not a “class of workers engaged in foreign or interstate commerce.”
Given the varied factual situations presented and the significance and still unsettled status of the scope of the Section 1 exemption after the Saxon decision to large number of employees and independent contractors through the country, questions on the application of the interstate commerce exception to the FAA may return again to the Supreme Court.
California courts and legislature are frequently at the forefront of disputes regarding the enforceability of contractual provisions mandating arbitration under the FAA. In Viking River Cruises, Inc. v. Moriana, the Supreme Court addressed the question of whether the FAA preempts a rule of California law that invalidates arbitration provisions which contractually waive the right to assert representative claims under California’s Labor Code Private Attorneys General Act of 2004 (PAGA). PAGA was enacted to “address a perceived deficit in the enforcement of the State’s Labor Code” due to insufficient resources available to California’s Labor and Workforce Development Agency (LWDA), which has the “authority to bring enforcement actions to impose civil penalties on employers for violations of many of the code’s provisions. …. The legislature thus decided to enlist employees as private attorneys general to enforce California labor law.” California precedent holds that that “a PAGA suit is a ‘representative action’ in which the employee plaintiff sues as an ‘agent or proxy’ of the State.” The statute also created individual rights, the violation of which are actionable through private causes of action for compensatory or statutory damages. “California precedent also interprets the statute to contain what is effectively a rule of claim joinder. … An employee with statutory standing may ‘seek any civil penalties the state can, including penalties for violations involving employees other than the PAGA litigant herself.’” This “additive dimension” under the state law thus allows individual claims to be transformed into high-stakes lawsuits.
In the case at issue, respondent Angie Moriana was hired as a sales representative for Viking River Cruises, Inc. (Viking). Moriana executed an agreement to arbitrate any dispute arising out of her employment. The agreement included a “‘Class Action Waiver’ providing that in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action.” A severability clause in the contract specified “that if the waiver was found invalid, any class, collective, representative, or PAGA action would presumptively be litigated in court. But under that severability clause, if any ‘portion’ of the waiver remained valid, it would be ‘enforced in arbitration.’”
Moriana commenced a state court PAGA action against Viking alleging that the company failed to provide her with her final wages as required by the California Labor Code and asserting numerous other Code violations allegedly sustained by other Viking employees. Viking “moved to compel arbitration of Moriana’s ‘individual’ PAGA claim—here meaning the claim that arose from the violation she suffered—and to dismiss her other PAGA claims.” The California trial court and the California Court of Appeal rejected Viking’s effort, “holding that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be split into arbitrable individual claims and nonarbitrable ‘representative’ claims.”
The Supreme Court noted that the state court ruling was “dictated” by the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC, which had “held that pre-dispute agreements to waive the right to bring ‘representative’ PAGA claims are invalid as a matter of public policy.” The Supreme Court, however, noted that the term “representative” is used both because (i) all PAGA actions brought by employees are representative claims in the sense that they are acting as proxies for the state, and (ii) PAGA actions may be “predicated on code violations sustained by other employees.” In one scenario, “individual” PAGA claims are those based on violations relevant to the plaintiff, while such individual’s “representative” claims arise out of events related to other employees. The California Supreme Court in Iskanian prohibited waivers of representative actions in the latter as well as the former sense, “on the theory that resolving victim-specific claims in separate arbitrations does not serve the deterrent purpose of PAGA.” In light of Iskanian, California courts have uniformly “rejected efforts to split PAGA claims into individual and representative components.” The Supreme Court explained the issue to be resolved in Viking:
In this case, Iskanian’s principal prohibition required the lower courts to treat the representative-action waiver in the agreement between Moriana and Viking as invalid insofar as it was construed as a wholesale waiver of PAGA standing. The agreement’s severability clause, however, allowed enforcement of any “portion” of the waiver that remained valid, so the agreement still would have permitted arbitration of Moriana’s individual PAGA claim even if wholesale enforcement was impossible. But because California law prohibits division of a PAGA action into constituent claims, the state courts refused to compel arbitration of that claim as well. We granted certiorari, … and now reverse.
The Supreme Court began its analysis noting that Section 2 of the FAA “makes arbitration agreements ‘valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’” The Court’s precedent makes clear that under that principle, the FAA not only “preempts any state rule discriminating on its face against arbitration,” but also protects against more generally applicable state law that “could be used to transform ‘traditiona[l] individualized ... arbitration’ into the ‘litigation it was meant to displace’ through the imposition of procedures at odds with arbitration’s informal nature.” Applying these principles, in recent years the Supreme Court has held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” The Court’s reasoning in such cases is that the “‘shift from bilateral arbitration to class-action arbitration’ mandates procedural changes that are inconsistent with the individualized and informal mode of arbitration contemplated by the FAA” such that “class procedures cannot be imposed by state law without presenting unwilling parties with an unacceptable choice between being compelled to arbitrate using procedures at odds with arbitration’s traditional form and forgoing arbitration altogether.”
In Viking, however, the Supreme Court recognized that “important structural differences between PAGA actions and class actions … preclude any straightforward application of our precedents invalidating prohibitions on class-action waivers.” The Court found that the FAA did not mandate categorical enforcement of waivers of standing to assert representative claims (citing such permissible examples such as shareholder-derivative
suits, wrongful-death actions, and trustee actions). Nevertheless, the Court found that PAGA’s mechanism for claim joinder did create a conflict with the FAA because Iskanian “prohibits parties from contracting around this joinder device because it invalidates agreements to arbitrate only ‘individual PAGA claims for Labor Code violations that an employee suffered.” The Supreme Court concluded such a prohibition “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 Court explained its conclusion as follows:
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. Rules of claim joinder can function in precisely that way. … A state rule imposing an expansive rule of joinder in the arbitral context would defeat the ability of parties to control which claims are subject to arbitration. ... Requiring arbitration procedures to include a joinder rule of that kind compels parties to either go along with an arbitration in which the range of issues under consideration is determined by coercion rather than consent, or else forgo arbitration altogether. Either way, the parties are coerced into giving up a right they enjoy under the FAA.
Applying these principles to California’s interpretation of PAGA under Iskanian, the Supreme Court found that where parties agree to arbitrate individual PAGA claims, Iskanian permits the employee “to abrogate that agreement after the fact and demand either judicial proceedings or an arbitral proceeding that exceeds the scope jointly intended by the parties. The only way for parties to agree to arbitrate one of an employee’s PAGA claims is to also ‘agree’ to arbitrate all other PAGA claims in the same arbitral proceeding.” Applying reasoning similar to that in addressing class arbitration, the Court reasoned that “mandatory freeform joinder allows plaintiffs to unite a massive number of claims in a single-package suit. But as we have said, ‘[a]rbitration is poorly suited to the higher stakes’ of massive-scale disputes of this kind.” The Court thus concluded that Iskanian’s indivisibility rule was “incompatible” with the FAA since it “effectively coerces parties to opt for a judicial forum.”
Under the facts presented, the Court concluded that its holding – that the FAA preempts the state law rule under Iskanian “insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate” – compelled reversal of the state court’s denial of the motion to compel arbitration. The Supreme Court looked to the agreement’s severability clause, and the Supreme Court explained:
Based on this clause, Viking was entitled to enforce the agreement insofar as it mandated arbitration of Moriana’s individual PAGA claim. The lower courts refused to do so based on the rule that PAGA actions cannot be divided into individual and non-individual claims. Under our holding, that rule is preempted, so Viking is entitled to compel arbitration of Moriana’s individual claim.
Left unanswered was how to proceed with Moriana’s non-individual claims because, as the Supreme Court viewed the California statute, PAGA “provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding.” The Court thus concluded that Moriana lacked standing under the statute to maintain her non-individual claims in court, and her remaining claims should thus be dismissed.
28 U.S.C. § 1782(a) governs “[a]ssistance to foreign and international tribunals and to litigants before such tribunals.” Under this provision, a U.S. federal court may order a resident of its district to testify in or produce documents for use in a foreign tribunal or proceeding. However, the statute does not specify what constitutes a “foreign tribunal or proceeding.” In 2021, the Supreme Court granted petitions for certiorari in two cases (and consolidated those cases) to resolve a split among the Courts of Appeals over the application of the statute to private arbitration proceedings conducted in foreign countries. In 2022, the Supreme Court rendered its decisions in both cases in a consolidated opinion: ZF Auto. US, Inc. v. Luxshare, Ltd.
In the first case, Luxshare, Ltd., a Hong Kong-based company, alleged fraud in a sales transaction with ZF Automotive US, Inc., a Michigan-based automotive parts manufacturer and subsidiary of a German corporation. The sales contract signed by the parties provided that all disputes would be resolved by three arbitrators under the Arbitration Rules of the German Institution of Arbitration E.V. (DIS), a private dispute resolution organization based in Berlin. To prepare for a DIS arbitration against ZF, Luxshare filed an application under § 1782 in a United States District Court, seeking information from ZF and its officers. The District Court granted the request, and ZF moved to quash, arguing that the DIS panel was not a “foreign or international tribunal” under § 1782 (although, as ZF acknowledged, Circuit precedent foreclosed that argument). The District Court ordered ZF to produce documents and an officer to sit for a deposition, and the Sixth Circuit denied ZF’s request for a stay. The Supreme Court granted a stay and certiorari before judgment to resolve a split among the Courts of Appeals over whether the phrase “foreign or international tribunal” in § 1782 includes private arbitral panels.
The second case, AlixPartners, concerned AB Bankas Snoras (Snoras), a failed Lithuanian bank declared insolvent and nationalized by Lithuanian authorities. The Fund for Protection of Investors’ Rights in Foreign States—a Russian corporation assigned the rights of a Russian investor in Snoras—initiated a proceeding against Lithuania under a bilateral investment treaty between Lithuania and Russia and claimed that Lithuania expropriated investments. That treaty established a procedure for resolving “any dispute between one Contracting Party and [an] investor of the other Contracting Party concerning” investments in the first Contracting Party’s territory, and offers parties four options for dispute resolution. The Fund chose an ad hoc arbitration in accordance with Arbitration Rules of the United Nations Commission on International Trade Law. After initiating arbitration, the Fund filed a § 1782 application in federal court, seeking information from the Simon Freakley, the temporary administrator of Snoras, and AlixPartners, LLP, a New York-based consulting firm where Freakley served as CEO. AlixPartners resisted discovery on the grounds that the arbitration panel was not a “foreign or international tribunal” under § 1782 but instead was a private adjudicative body. The district court rejected that argument and granted the Fund’s discovery request. The Second Circuit affirmed.
Though the two cases concerned different factual contexts, they both presented the same threshold question: whether the arbitral panel at issue qualified as a “foreign or international tribunal” under the statute. The Supreme Court first addressed the question as to whether the phrase “foreign or international tribunal” in § 1782 includes private adjudicative bodies or only governmental or intergovernmental bodies. The Court found that, standing alone, the word “tribunal” need not be a formal “court,” and the broad meaning of “tribunal” does not itself exclude private adjudicatory bodies, but that, when attached to the modifiers “foreign or international,” it is best understood as an adjudicative body that exercises governmental authority. Turning first to the word “foreign,” the Court reasoned that word takes on its more governmental meaning when modifying a word with potential governmental or sovereign connotations (comparing the phrase “foreign leader” with “foreign films”). The Court noted that this interpretation is reinforced by the language of the statute, which permits district courts to “prescribe the practice and procedure, which may be in whole or part the practice and procedure of the foreign country or the international tribunal, for taking the testimony or statement or producing the document or other thing.” (emphasis added). The statute therefore operates on the assumption that a “foreign tribunal” follows “the practice and procedure of the foreign country.” Thus, reasoned the Court, where the default discovery procedures for a “foreign tribunal” are governmental, this suggests that the body is governmental too. Regarding the word “international,” the Court determined that a tribunal is “international” when it involves or is of two or more nations, meaning that those nations have imbued the tribunal with official power to adjudicate disputes. The Court ultimately concluded that the phrase “foreign or international tribunal” in § 1782 does not include private adjudicative bodies; after all, asked the Court, “[w]hy would Congress lend the resources of district courts to aid purely private bodies adjudicating purely private disputes abroad?”
The Court then applied this reasoning to the two cases before it. In ZF, the Supreme Court found that the foreign tribunal in question—a private commercial arbitral tribunal—did not qualify as a “foreign tribunal or proceeding” for the purposes of the statute because the parties were private entities who had agreed, in a private contract, to resolve their disagreements at a private tribunal. The fact that the private tribunal applied the law of the state (in this case, Germany) where the arbitration took place did not render the private organization a government entity.
In AlixPartners the Court reversed the appellate court’s decision. The Court acknowledged that, unlike ZF, which was a dispute between two private parties, AlixPartners posed a thornier question because a sovereign was on one side of the dispute and the option to arbitrate was contained in an international treaty rather than a private contract. The Court found that the dispositive question was whether the two nations intended to confer governmental authority on an ad hoc panel formed pursuant to the treaty.
Under the facts of the case, the Supreme Court held that the nations did not intend that the ad hoc panel exercise governmental authority, reasoning that an ad hoc arbitration panel is not a pre-existing body, but one formed for the purpose of adjudicating investor-state disputes, and that nothing in the treaty reflected Russia and Lithuania’s intent that an ad hoc panel exercise governmental authority. Factors that drove the Court’s decision included the following: the treaty created the panel but merely referenced the set of rules that governed the panel’s formation and procedure if an investor chooses that forum; the ad hoc panel functioned independently of and was not affiliated with either Lithuania or Russia; the panel consisted of individuals chosen by the parties who lacked any official affiliation with Lithuania, Russia, or any other governmental or intergovernmental entity; and the panel lacked other possible indicia of a governmental nature (such as government funding). As the Court observed, the panel in AlixPartners was “materially indistinguishable in form and function” from that in ZF: in AlixPartners, the panel derived its authority from the parties’ consent to arbitrate.
When a party who is subject to an arbitration agreement nevertheless seeks to pursue litigation, the FAA entitles the defendant to file an application to stay the litigation. A defendant is not obliged to seek that relief immediately and can engage in months, or even years, of litigation before deciding it would prefer to arbitrate. But when the defendant fails to do so promptly, the question arises whether it has waived the right to stay the litigation and compel arbitration. In Morgan v. Sundance, Inc., the Supreme Court addressed whether, when determining if a litigant has waived the right to arbitrate, a finding of prejudice is required.
The petitioner in this case, Robyn Morgan (Morgan), worked as an hourly employee at a Taco Bell franchise owned by respondent Sundance Inc. (Sundance). When Morgan applied for the job, she signed an agreement to “use confidential binding arbitration, instead of going to court,” to resolve any employment dispute. Despite the agreement, Morgan subsequently brought a nationwide class action against Sundance in federal court for violations of the Fair Labor Standards Act (specifically, under the statutory provision which requires employers to pay overtime to covered employees who work more than 40 hours in a week). As the Supreme Court explained, “Sundance initially defended itself against Morgan’s suit as if no arbitration agreement existed” – Sundance answered Morgan’s complaint, asserting 14 affirmative defenses (none of which referred to the arbitration agreement); met in a joint mediation with Morgan and the named plaintiffs in a similar collective action; and, once the other suit had settled, entered into discussion with Morgan regarding scheduling the rest of the litigation. Then, nearly eight months after the complaint was filed, Sundance moved to stay the litigation and compel arbitration under the FAA. Morgan opposed the motion and argued that Sundance had waived its right to arbitrate by litigating for so long. Sundance responded that it had asserted its right as soon as the Supreme Court’s decision in Lamps Plus, Inc. v. Varela had clarified that the arbitration would proceed on a bilateral (not collective) basis.
Under existing Eighth Circuit precedent, a party waives its contractual right to arbitration “if it knew of the right; ‘acted inconsistently with that right’; and … ‘prejudiced the other party by its inconsistent actions.’” Applying that standard, the United States District Court for the Southern District of Iowa found the prejudice requirement satisfied, ruling in favor of Morgan, but the Eighth Circuit reversed, finding insufficient prejudice and referring the case for arbitration. Judge Colloton dissented and questioned the requirement for a showing of prejudice, observing that there was a circuit split on that matter. The Supreme Court granted certiorari in order to resolve this circuit split.
The Supreme Court reversed the Eighth Circuit’s decision. The Supreme Court first reviewed the law on waiver outside the context of arbitration and observed that usually, a court does not consider the matter of prejudice. As the Supreme Court noted, “[t]o decide whether a waiver has occurred, the court focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party.” The Court reasoned that this analysis should apply equally to a contractual right, which renders the Eighth Circuit’s requirement of an additional showing of prejudice “a bespoke rule of waiver for arbitration.”
The Eighth Circuit had adopted the requirement in the arbitration context because of the “federal policy favoring arbitration.” The Supreme Court explained that the Eighth Circuit’s approach followed Carcich v. Rederi A/B Nordie, which itself was purportedly grounded in the FAA’s policy. In Carcich, the Second Circuit stated that there was an “overriding federal policy favoring arbitration.” However, according to the Supreme Court, the FAA’s “policy favoring arbitration” does not authorize federal courts to invent special, arbitration-preferring procedural rules. The Supreme Court instead stated that “[t]he federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” Furthermore, as the Supreme Court noted, Section 6 of the FAA provides that any application under the statute—including an application to stay litigation or compel arbitration—“shall be made and heard in the manner provided by law for the making and hearing of motions.” This amounts to a command to apply the usual federal procedural rules, including any rules relating to a motion’s timeliness and forbids the use of “custom-made rules” to either promote or discourage arbitration. Based on this reasoning, the Supreme Court vacated the judgment of the Court of Appeals and remanded the case for further proceedings, holding that a party may not rely upon a lack of prejudice to the other side to avoid a waiver of its right to arbitrate. Courts may not construct special, arbitration-preferring procedural rules in order to resolve such disputes.
Courts this year have also continued to address issues related to mediation and settlement confidentiality. The Northern District of California examined the scope of settlement conference confidentiality in Shields v. Federation Int’l de Natation. The procedural context in Shields was an application for sanctions and to strike a sur-reply that contained references to settlement negotiations during, and in the aftermath of, a court-annexed settlement conference. The applicable local rule, “Settlement Conference Confidentiality,” mandated that “anything that was said [and] any position taken” in the course of a settlement conference be deemed confidential (ADR L.R. 7-4).
The plaintiff in Shields had moved for class action certification. In opposing the motion, FINA moved for leave to file a sur-reply to address what it alleged was a change in FINA’s expert’s damages theory. The Court allowed the sur-reply. However, “the first few [sur-reply] pages disclose[d] confidential settlement communications in an attempt to argue that the named Plaintiffs [were] not adequate class representatives.” As a result of this [inappropriate] disclosure, the settlement judge withdrew as facilitator.
FINA attempted to justify the offending sur-reply pages as being consistent with FRE 408, Compromise and Offers of Negotiations, which relates to the inadmissibility of settlement negotiations and positions. The court was quick to distinguish between the above rule and the court’s own local rules, which every member of the bar was expected to know and adhere to. As to the proper course of action, the court wrote:
The Local Rules do not provide that an attorney in his discretion may unilaterally decide not to follow certain rules, which is what FINA essentially asserts here. FINA should have gone to the settlement judge to raise the issue of possible disclosure. Or it should have asked for permission from this Court to do so. What it did not have the right to do was unilaterally violate the local rules and breach the sanctity of the settlement proceedings just because it decided it was in its interest to do so.
The court in Shields also addressed FINA’s claim that Plaintiff was using confidentiality to shield unethical conduct. The court dismissed this argument as “disingenuous.” In so ruling, the court turned to “the mediation companion” to its settlement conference rules. (ADR L.R. 6-12.) The commentaries to this rule provided limited exceptions for reporting improper conduct in mediation, such as death threats or threats of “substantial bodily injury,” “use of mediation to commit a felony,” the “duty to report lawyer misconduct,” and, as a sort of catch-all provision, “to prevent manifest injustice.” However, “[n]othing in this commentary is intended to imply that, absent truly exigent circumstances, confidential matters may be disclosed without prior approval by the court.
The court granted plaintiff’s motion for sanctions, and struck the offending portions of the sur-reply. District Judge Jacqueline Scott Corley concluded:
This Court has conducted more than 1000 settlement conferences over the past 10 years. During that time, it has never witnessed a violation of ADR Local Rule 7-4 as egregious as FINA’s here. Not only did that violation damage Plaintiffs by requiring them to file a motion to strike and reply, it led to the loss of a settlement magistrate judge who had been working with the parties for over 22 months. FINA’s insistence that it can unilaterally decide what settlement communications can be disclosed has thus wasted precious public resources in addition to the settlement judge’s heroic efforts at facilitating settlement. Further, FINA’s conduct has damaged the entire ADR program of the Northern District of California and thus the administration of justice. The success of settlement negotiations depends largely on the willingness of the parties to freely disclose their intentions, desires, and the strengths and weaknesses of their case; and upon the ability of the third party to maintain a neutral position while carefully preserving the confidences that have been revealed. Sadly, as a result of FINA’s breach, parties will have reason to question whether the promise of confidentiality will actually be honored.
Shields is a rather extreme example of the tension that may exist between mediation confidentiality and alleged mediation misconduct. While FINA’s argument that it was reporting misconduct was found unpersuasive, the decision provides valuable guidance.
