Two Unanimous Supreme Court Decisions. Federal Courts Retain Jurisdiction Over Claims Stayed Pending Arbitration.

This morning, the Supreme Court issued two unanimous decisions of interest to employees and employers.  In the first, the Court held that the Federal Aviation Administration Act does not preempt state law negligent hiring claims against truck drivers, trucking companies and brokers where the plaintiff had been injured by a big rig in a traffic accident.   Montgomery v. Caribe Transport II, LLC, No. 24-1238 (5-14-26).   In the second, the Court held that federal courts retain jurisdiction over lawsuits filed alleging federal or diversity questions (like employment discrimination) which were stayed pending arbitration so that the federal court can confirm or vacate the later arbitration decision. Jules v. Balazs Properties, No. 25-83 (5-14-26).   In this case, the arbitrator ruled in favor of the employer and awarded $34.5K in sanctions against the employee.  “[A]federal court that has previously stayed claims in a pending action under §3 of the Federal Arbitration Act (FAA . . .  has jurisdiction to confirm or vacate a resulting arbitral award as to those claims under §9 and §10.  . . .  Because a federal court in this scenario has jurisdiction over the original claims and does not lose that jurisdiction while the case is stayed pending arbitration, it retains jurisdiction to determine whether the arbitral award re solving those claims is valid and should be confirmed.”  In other words, a “court with the power to stay the action under §3 has the further power to confirm [or vacate] any ensuing arbitration award.”

According to the Court’s decision in Jules, the plaintiff worked for the employer hotel and brought a lawsuit alleging employment discrimination under federal and state law after he was fired during the pandemic.  The case was stayed pending arbitration pursuant to an agreement he had previously signed.  The arbitrator ruled in favor of the employer on all claims and issued the employer an award of $34,500 in sanctions (when the plaintiff refused to ultimately participate in the arbitration hearing), which it sought to confirm and enforce in the stayed federal court proceeding.  The plaintiff argued that the federal court no longer had jurisdiction because there was allegedly no longer any federal question or diversity jurisdiction.

After an arbitral award has issued, federal courts may confirm, vacate, or modify such an award under §9, §10, or §11. Un der §9, a court must confirm an award upon request “unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11.” The grounds for vacatur and modification are limited.

 . . .

 . . . For a federal court to have jurisdiction over an arbitral dispute, it is not enough that the dispute implicates the FAA. That is because the FAA is “‘something of an anomaly’ in the realm of federal legislation.”  . . .  Although the FAA is a federal statute that provides federal standards, it “does not itself create [federal] jurisdiction.”  . . .  Instead, given the FAA’s “nonjurisdictional cast,” a federal court must have an “‘independent jurisdictional basis’” for granting FAA relief.  . . . That could come, for example, in the form of diversity jurisdiction if a dispute under the FAA arises between citizens of different States with over $75,000 at issue.  . . . Or a court may have federal-question jurisdiction if an FAA motion implicates a federal issue (other than one under the FAA).

In light of this, the Court will look through the allegations of a petition to compel arbitration to the underlying substantive dispute to determine whether federal jurisdiction exists.  However, when the parties proceeded directly to arbitration (without being ordered to do so by a federal court), the Court will not look through the petitions to vacate or confirm an arbitration award to determine whether federal jurisdiction exists. 

The plaintiff argued that the petition to confirm the award did not meet diversity jurisdiction (because it was less than $75K) and did not raise a federal question.  The Second  Circuit and Supreme Court rejected this argument out of hand.

To start with,  . . , assessing jurisdiction over a §9 or §10 motion in a case originally filed in federal court does not require “looking through” the filed action. Instead, the court may assess its jurisdiction by looking at the suit that is already before it. As Badgerow explained, “[j]urisdiction to decide [a] case includes jurisdiction to decide [a] motion” within that case, and usually “there is no need to ‘look through’ the motion in search of a jurisdictional basis outside the court.”  . . .

Here, the District Court had original jurisdiction, under 28 U. S. C. §1331, over [the plaintiff’s] federal claims. It was this very jurisdiction that authorized the court to adjudicate the arbitrability of [his] claims under the parties’ contract to begin with, before staying litigation pending arbitration. Nothing in the FAA eliminated that jurisdiction while the parties arbitrated.  . . .  So when the parties returned to court after arbitration with §9 and §10 motions, the court had the same “jurisdiction to decide the case,” and thus “jurisdiction to decide th[ose] motion[s],” that it possessed from the start.  . . .  “The court had federal question subject matter jurisdiction and . . . never lost it.” . . .

 . . .

It is true that, by the time the parties filed the §9 and §10 motions here, the arbitrator had issued an award that marked “a contractual resolution of the parties’ dispute.”  . . .  As [plaintiff] argues, that out-of-court resolution functioned like a release, which could serve as an affirmative defense and be used to “resolve the original claim” filed in court.  . . .  The fact that the arbitral award may “resolve” [his] original claims, however, only underscores why the District Court’s original jurisdiction extends to the parties’ §9 and §10 motions. Those motions required the District Court to assess whether there were grounds to vacate the award.  . . .  They were thus integral to determining whether the award would continue to serve as a valid defense to the original claims that had been stayed, but were still pending, in District Court until the court confirmed the award. . . .

 . . . this Court has held that federal courts have the power to incorporate private settlements into orders of the court when resolving claims that are the subject of those settlements. In Kokkonen v. Guardian Life Ins. Co. of America, 511 U. S. 375 (1994), for example, the Court made clear that a federal “court is authorized to embody [a] settlement contract in its dismissal order” and later “enforc[e]” that “settlement agreement.”  . . .  Similarly, the Court has recognized federal courts’ jurisdiction to embody contracts “arrived at by negotiation between the parties” as consent judgments in certain circumstances.  . . . . Federal courts also routinely resolve disputes over private settlements in class actions, which can be settled “only with the court’s approval.”  . . .  In each scenario, as here, the parties reach a contractual resolution of claims filed in federal court, and the federal court has juris diction to resolve disputes over that private settlement and embody the settlement in a court order resolving the case.

 . . .

Under the rule the Court adopts today, this scheme con tinues to work well: The FAA requires a stay, rather than dismissal, so that a court that has granted a §3 stay can superintend the arbitration to the end, including through confirmation or vacatur. On Jules’s theory, however, things would fall apart. Without an independent jurisdictional ba sis (like complete diversity and more than $75,000 at stake) on the face of a §5, §7, §9, or §10 motion, Jules concedes that a court that grants a mandatory §3 stay has little to do but wait until the arbitration concludes and, finally, dismiss the claims. It would be curious for §3 to mandate keeping cases on federal dockets for essentially no reason at all in the cases where federal interests are likely at their highest: those, like this one, involving live federal questions. More plausibly, a court that grants a §3 stay retains jurisdiction to see the case through and provide the FAA’s “procedural protections” along the way.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit Holds EFAA Prohibits Mandatory Arbitration of Entire Case and Not Merely Sexual Harassment Claims

Yesterday, a divided Sith Circuit held that a complaint sufficiently plead a hostile work environment claim and unanimously concluded that the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (the “EFAA”) prohibits the mandatory arbitration of the plaintiff’s entire case, including her ADA claims, and not just her sexual harassment allegations under Title VII.  Bruce v. Adams and Reese LLP, No. 25-5210 (6^th Cir. 2-25-26).   As faithful readers may recall, the EFAA created an exception in the Federal Arbitration Act for sexual assault and harassment claims which otherwise would have been subject to a pre-dispute arbitration agreement.  First, the Court’s majority found that the amended complaint sufficiently alleged a hostile work environment claim under Civil Rule 8 without having to describe every single instance of inappropriate or humiliating comments.  Second, because the EFAA prohibits mandatory enforcement of a pre-dispute arbitration agreement with respect to the entire case, and not just the sexual harassment claims, the entire case, including ADA claims, could not be referred to arbitration.   While the Court acknowledge that this could result in the assertion of specious and frivolous sexual harassment claims to avoid arbitration of genuine claims, it believed that this could be consistent with Congressional intent to avoid piecemeal and more expensive litigation of plaintiff claims. 

According to the Court’s opinion, the plaintiff worked as a legal assistant in the Liquor Control group of a law firm, where one of the attorneys regularly made inappropriate comments and repeatedly extended invitations to her.  She suffered from a number of mental health issues and was afforded a flexible work schedule.   When the group changed law firms, she joined the new, defendant, law firm, was accepted to law school and was promoted to paralegal.  While the attorney was no longer regularly in the office, he still made inappropriate comments when he saw her.  Also, the new law firm insisted on her keeping a regular work schedule.  She was subjected to corrective action for late arrivals, even after she explained it was because of medication, and ultimately fired her while she was attempting to have her physician communicate with the firm.  She filed suit under the ADA and Title VII.  The law firm moved to dismiss the sexual harassment claim and to compel the ADA claim to arbitration under her pre-dispute arbitration agreement.  The trial court denied both motions and the law firm appealed.  A divided Sixth Circuit affirmed.

The Sexual Harassment Claim

The Sixth Circuit agreed that if the sexual harassment claim failed to satisfy Rules 8 and 12(b)(6), it could be dismissed and the ADA claim sent to arbitration.  However, the Court found that the complaint sufficiently alleged an actionable sexual harassment claim.  

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”  . . . “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”  . . . . Under this standard, “a short and plain statement of the claim” sufficient to “give the defendant fair notice of what the . . . claim is and the grounds on which it rests” is enough, and a complaint “does not need detailed factual allegations.”

 . . . .

To invoke the EFAA’s safe harbor, a plaintiff must “allege[] conduct constituting a sexual harassment dispute,” 9 U.S.C. § 402(a), and a sexual harassment dispute is one “relating to conduct that is alleged to constitute sexual harassment under applicable Federal, Tribal, or State law,” id. § 401(4). The EFAA, however, does not itself define what it means for a plaintiff to “allege” such a dispute.

The Court declined to decide whether the EFAA standard of “alleging” a sexual harassment dispute means that the claims must satisfy the Rule 12(b)(6) standard or a lower standard.   The Court’s majority held that the plaintiff was not required to allege facts that would satisfy Title VII’s burden shifting standard. “For our purposes the question is simply whether Bruce’s complaint “allege[s] sufficient ‘factual content’ from which a court, informed by its ‘judicial experience and common sense,’ could ‘draw the reasonable inference’” that Bruce was subjected to a hostile work environment.”

In evaluating whether the complaint sufficiently stated a claim for hostile work environment, the Court did not consider the allegations against the lawyer at the initial law firm and only considered the allegations which involved the defendant law firm.  The defendant law firm employed neither the attorney nor the plaintiff when the earlier alleged harassment occurred and, thus, could not be vicariously liable for it.   That being said, the Court’s majority found the complaint sufficiently alleged a hostile work environment against the defendant employer:

[Her] complaint outlines a consistent pattern of sexualized jokes and comments directed at her by [the attorney] throughout her employment with [defendant]. Although [he] was not always in the office at [defendant], he “continued sexually harassing [her] when he was in the office” by “making sexual comments and jokes to and about [her], as well as making inappropriate comments about [her] appearance, clothing, and private life.” [After giving several explicit examples of his inappropriate comments], [t]his conduct affected [her] ability to work as a member of the Liquor Group, as she “went out of her way to avoid” [him], and “hardly spoke to him” by late 2022. . . .

Viewed in the light most favorable to [her] and drawing all inferences in her favor, these facts plausibly allege conduct “sufficiently severe or pervasive to alter the conditions of [her] employment and create an abusive work environment.”  . . .  We gather and infer from [her] complaint that [he], who was among [her] supervisors and responsible for her employment at [defendant], consistently and continually directed sexualized comments at her in the presence of other employees at [defendant]. Or in Harris’s terms, [he] “frequen[tly]” and regularly “humiliat[ed]” [her], thereby “interfere[ing] with” her ability to perform her job as a member of the Liquor Group. . . . And it is certainly plausible that a young female paralegal would be humiliated and intimidated, and that her performance would be affected, by persistent suggestions from a supervisor that she keep clients happy by visiting them “in a short skirt,” that she is a “[h]oe,” and that it would be “hot” if she had sex on a desk in the office—not to mention his delivery of an unsolicited $750 “bonus” from his personal funds. . . .

To be sure, and as [defendant] is keen to point out, “occasional . . . offensive utterances” that are not “physically threatening or humiliating” do not render a work environment hostile and discriminatory.  . . .  [Defendant] characterizes [her] complaint as setting forth just “two discrete, one-time comments in a one year period.”  . . .  We agree with [Defendant] that such a complaint would be subject to dismissal because a hostile-work-environment claim premised on three or four instances of harassing comments over an extended period of time is likely to fail unless those comments are sufficiently severe to overcome their infrequency. . . .

But drawing all inferences in [her] favor, [his] conduct was much more frequent. Although [his] office attendance during [her] year at [defendant] was inconsistent, he “continued sexually harassing [her] when he was in the office.”  . . .  His comments were “persistent, ongoing, and continued up until the day  [she] was fired.”  . . .  These allegations are sufficient to allow a plausible inference that Pinson’s comments occurred more than a handful of times.

The majority rejected the argument that plaintiffs need to allege all or most of the incidents of humiliating comments supporting a hostile work environment claim:

[A] demand for a detailed telling of each offensive utterance, however, is more than Rule 8 requires. First, such a standard is “incongruous” insofar as it would “require [[her]], in order to survive a motion to dismiss, to plead more facts than [s]he may ultimately need to prove to succeed on the merits” at summary judgment or at trial.  . . .  Second, the  . . .  argument that the specific contents of each harassing statement are necessary for us to “independently determine” whether they add up to a hostile-work-environment claim,  . . .  would all-but-eliminate any room for “reasonable inference.”  . . .  In so doing, it would impose on hostile-work-environment plaintiffs a heightened pleading standard not unlike Rule 9’s fraud pleading standard.

The EFAA Standard

The Court observed that the majority of courts to have faced the issue have denied to refer entire cases – and not merely the sexual harassment claims – to arbitration based on the language of the EFAA (bolding added for emphasis):

IN GENERAL.—Notwithstanding any other provision of this title, at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute, or the named representative of a class or in a collective action alleging such conduct, no predispute arbitration agreement or predispute joint action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.

 . . .

The operative word here is “case.” That is because it is “with respect to a case” that an otherwise-valid arbitration agreement is invalid and unenforceable. 9 U.S.C. § 402(a). All data point clearly in the direction of “case” encompassing a plaintiff’s entire suit.. . . We need look no further than the FAA to find a use of the word “case” in accordance with these definitions, as Section 7 provides for the ability to call witnesses “in [a] case” in arbitration. 9 U.S.C. § 7. The use in Section 7 of the preposition “in” means that “case” makes sense only if read to refer to a proceeding. . . .

With this understanding of the meaning of “case” in mind, the EFAA’s text renders an arbitration agreement “[un]enforceable with respect to” a plaintiff’s entire case, or action, and not only with respect to certain claims therein. 9 U.S.C. § 402(a). And the cases the EFAA shields are those that “relate[] to the sexual assault dispute or the sexual harassment dispute.” “Relate” means “[t]o have some connection to; to stand in relation to.” . . . When a plaintiff files a case that includes a sexual harassment claim, that case certainly has “a connection with” and “reference to” the claim. Thus, we hold that a plaintiff’s case, such as Bruce’s, that contains a plausibly alleged claim of sexual harassment, therefore “relates to” a “sexual harassment dispute,” and arbitration may not be compelled under the FAA. 9 U.S.C. § 402(a).

The Court rejected the employer’s argument that FAA has traditionally resolved arbitrability on a claim-by-claim basis because of this “case” language from the EFAA.   It also rejected “the practical concern that plaintiffs will abuse the EFAA to avoid arbitration of non-sexual-harassment/abuse claims.”  “[T]he sole function of the courts—at least where the disposition required by [a statute’s] text is not absurd—is to enforce it according to its terms.”

Congress might indeed view the rule we adopt here as advancing its intent because a construction of the EFAA that required plaintiffs with both sexual-harassment and other claims to proceed separately in arbitration and court would discourage such plaintiffs from accessing the court system, on the pain of the increased costs and time-commitment in bringing two parallel actions in different fora. Because A&R has not demonstrated that the effects of our holding will contravene Congressional policy, much less sufficiently so that we could disregard the law’s plain text, we are not swayed.

The dissent pointed out, while acknowledging that the complaint also alleged that comments were continuous,  that only three discrete instances of inappropriate comments were made while the attorney and plaintiff worked for the defendant employer and this was insufficient to allege a hostile work environment claim.  He would not have drawn an inference that these were indicative of a “consistent pattern.”  He described her allegations as conclusory and “threadbare.”

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Supreme Court: FAA Requires Cases to be Stayed Pending Arbitration and May Not Be Dismissed

This morning, a unanimous Supreme Court held that a court may not dismiss (even without prejudice) a case which is subject to mandatory arbitration under the Federal Arbitration Act.  Smith v. Spizzirri, No. 22-1218 (5-16-24).   Rather, the FAA provides that such proceedings shall be “stayed” -- or held in abeyance -- pending arbitration.   Therefore, when a party (in this case an employer) moves to compel arbitration of the underlying employment claims and stay the proceedings, it was an error for the court to compel arbitration and then dismiss the case without prejudice.  The court’s inherent authority to dismiss a case is subject to the FAA’s statutory requirement to stay the proceedings. 

Supreme Court Finds FAA Exemption Depends on the Work Performed and Not the Industry.

Last week, the unanimous Supreme Court held that a worker need not work in the transportation industry to qualify for the Federal Arbitration Act exemption for the “class of workers engaged in foreign or interstate commerce.”  Bissonette v. LePage Bakeries Start St. LLC, No. 23-51 (4-12-24).  The statutory language providing the exemption focuses on the worker and not the industry.  “A transportation worker need not work in the transportation industry to fall within the exemption from the FAA provided by §1 of the Act.”

According to the Court’s opinion, the plaintiffs filed suit alleging that they had been misclassified as independent contractors by the defendant baking company and were entitled to minimum and overtime wages.  The plaintiffs’ work included delivering and marketing the defendant’s baked goods within the state of Connecticut.  They had signed franchise/distributor agreements giving them rights to distribute the defendant’s baked goods within Connecticut.  The defendant moved to compel arbitration pursuant to arbitration clauses in their distributor agreements.  The plaintiffs argued that they were exempt from the FAA as members of “class of workers engaged in foreign or interstate commerce.” The District Court found that they were not transportation workers because their duties involved more than merely driving trucks.  The Second Circuit affirmed on the grounds that they were not employed in the transportation industry.

Section 1 of the FAA contains an exemption for certain employees:  “ . . . . 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.”  The Court had previously held that a “class of workers” is properly defined based on what a worker does for an employer, “not what [the employer] does generally.”  

Nor does construing §1 to cover transportation workers render “seamen” and “railroad employees” superfluous, as [the employer] contends.  . . .  That argument gets ejusdem generis exactly backwards. It is the specific terms “seamen” and “railroad employees” that limit the residual clause, not the residual clause that swallows up these narrower terms.

The Court also rejected the argument that virtually all workers are essentially engaged in internet commerce, making the exemption swallow the general rule:

a transportation worker is one who is “actively” “‘engaged in transportation’ of . . . goods across borders via the channels of foreign or interstate commerce.”  . . . .  In other words, any exempt worker “must at least play a direct and ‘necessary role in the free flow of goods’ across borders.” . . . . These requirements “undermine[] any attempt to give the provision a sweeping, open-ended construction,” instead limiting §1 to its appropriately “narrow” scope.

The Court remanded the matter back to the Court of Appeals.  Reversal did not resolve whether the plaintiffs were covered by the exemption since a question remained whether they were involved in interstate commerce. 

We express no opinion on any alternative grounds in favor of arbitration raised below, including that petitioners are not transportation workers and that petitioners are not “engaged in foreign or interstate commerce” within the meaning of §1 because they deliver baked goods only in Connecticut.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit Refused to Enforce Arbitration e-form Agreement Which Employee Denied Seeing

Last week, the Sixth Circuit reversed an order to compel an employee’s FLSA claim to arbitration on the grounds that there was a factual dispute as to whether the plaintiff employee had actually seen and, thus, agreed to the arbitration agreement.  Bazemore v. Papa John’s USA, Inc., No. 22-6133 (6^th Cir. 7/20/23).  The employer utilized eforms and electronic signatures during employee orientation.    The Court found that the plaintiff’s sworn denial of having ever seen the agreement was sufficient to require a trial on the issue of whether he had ever agreed to it even if he continued to work after being presented with the agreement.  While “[a]n electronic signature can show a party’s assent,” such “signature is legally valid only when “made by the action of the person the signature purports to represent”—which is itself a question of fact.”

According to the Court’s opinion, the plaintiff brought an FLSA action claiming that the failure to reimburse him for travel expenses reduced his wages below the minimum wage.  The employer moved to compel arbitration based on an arbitration agreement which it claimed that he had electronically signed when hired.  The process involved him signing in using his assigned user id and own password, scrolling through the document and then checking boxes to indicate agreement.  Employees cannot begin work until they complete the forms.  The employee responded that he had never seen such an agreement, thus, impliedly denying that the electronic signature was his.  He indicated that this manager had been observed logging in and completing training materials for employees and sought targeted materials about the document in discovery.  There is no indication that he denied having ever seen or signed any other documents during his orientation.   The trial court enforced the arbitration agreement and disregarded the plaintiff’s “convenient lapse of memory,” but the Sixth Circuit reversed.

The Court found that the employer bore the burden of proving the existing of a binding agreement.  “If a genuine issue of material fact arises as to whether such an agreement exists, the court ‘shall proceed summarily to the trial thereof.”’  While “[a]n electronic signature can show a party’s assent,” such “signature is legally valid only when “made by the action of the person the signature purports to represent”—which is itself a question of fact.”

Here, the parties presented conflicting evidence on that point. Papa John’s pointed to an e-Form record of the arbitration agreement. That record has Bazemore’s name typed at the bottom with an electronic signature “By UserID: 467073”—which Greene says is Bazemore’s user ID. Yet Bazemore submitted a sworn declaration in which he repeatedly said that he never saw the arbitration agreement—even though, as Greene said, the e-Form would have required him to scroll through the entire agreement before signing it. We see no reason whatever that would prevent a reasonable factfinder from believing Bazemore’s testimony—which means that his testimony created a genuine issue of material fact.

The Court found that the trial court improperly put the burden of proof on the plaintiff and failed to credit his denial of ever seeing the document, finding instead that the lack of a clear denial that he had signed it was insufficient to disprove the electronic signature.

The Court rejected the employer’s alternative argument that the plaintiff’s continued employment was sufficient manifestation of assent to the terms of the arbitration agreement. 

Kentucky courts have held that the “conduct of a party is not effective as a manifestation of his assent” unless the party has “reason to know that the other party may infer from his conduct that he assents.” Furtula, 438 S.W.3d at 309. And Bazemore had no reason to think that his continued employment could indicate that he has agreed to arbitrate his claims—given that he was, at the same time, arguing in court that he never agreed to arbitration. Indeed, to hold otherwise would force Bazemore to give up either his job or his day in court.

The Court seemed unaware that courts have found that no signature is required under the Federal Arbitration Act and employers may require arbitration agreements as a term and condition of continued employment, assuming, of course, that the employee was given notice of the terms of the agreement, which the plaintiff here denied.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Supreme Court: Court Decides FAA Exemptions for Workers in Interstate Commerce, Not Arbitrator

This morning, the Supreme Court affirmed a Federal Arbitration Act decision and held that a court – not the arbitrator --  should decide whether a §1 exemption for “contracts of employment of . . . workers engaged in foreign or interstate commerce” applied to negate FAA enforcement of the arbitration clause in the plaintiff trucker’s independent contractor agreement.   New Prime, Inc. v. Oliveira, No. 17-340 (1-15-19).   Further, the Court held that the common meaning of “worker” and “contract of employment” at the time the FAA was enacted in 1925 would control its interpretation of those terms instead of the contemporary understanding of those terms in order to protect the reasonable reliance of the public.  In 1925, “employment” was broadly understood to encompass workers and independent contractors and not just employees. 

According to the Court’s opinion, the plaintiff was hired under an “operating agreement” to work as an independent contractor truck driver for the defendant interstate trucking firm.  The operating agreement contained an arbitration clause which provided that the arbitrator should decide questions of arbitrability. The plaintiff filed a class action claiming that he and his fellow drivers had been misclassified as independent contractors and were entitled to minimum and overtime wages.   The defendant company moved to compel arbitration.  The plaintiff argued that he and his fellow drivers were exempt from FAA enforcement under §1, but the company argued that this decision should be made by the arbitrator and, if not, “contracts of employment” referred to common law and statutory employees, not independent contractors like the plaintiff and his fellow drivers.

The Court observed that the FAA only compels arbitration of disputes when the FAA applies.  Among other things, the FAA requires an “agreement in writing” between the parties and applies to disputes which arise from a “written provision in any maritime transaction or a contract evidencing a transaction involving commerce.”  The FAA also specifically exempts certain agreements from enforcement.  Section 1 of the FAA defines the terms “maritime transactions” and commerce,” and then provides:

but 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.

This exemption existed because:

Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers.  And it seems Congress “did not wish to unsettle” those arrangements in favor of whatever arbitration procedures the parties’ private contracts might happen to contemplate.

Clearly, a court could not apply the FAA and compel arbitration before deciding for itself whether the FAA even applied:

The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.

This is not a new concept. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 402 (1967).

The Court then rejected the defendant company’s argument that “contracts of employment” covered only agreements with common law and statutory employees and not to contacts of employment with workers (like the plaintiff) who might be independent contractors.   The parties agreed that the plaintiff was a worker engaged in interstate commerce and the plaintiff was willing to assume – only for this issue – that he was an independent contractor.   

In deciding whether “contracts of employment” included independent contractor agreements, the Court observed:

“[I]t’s a ‘fundamental canon of statutory construction’ that words generally should be ‘interpreted as taking their ordinary . . . meaning . . . at the time Congress enacted the statute.’” . . . After all, if judges could freely invest old statutory terms with new meanings, we would risk amending legislation outside the “single, finely wrought and exhaustively considered, procedure” the Constitution commands. INS v. Chadha, 462 U. S. 919, 951 (1983).  We would risk, too, upsetting reliance interests in the settled meaning of a statute. . . .

That, we think, holds the key to the case.  To many lawyerly ears today, the term “contracts of employment” might call to mind only agreements between employers and employees (or what the common law sometimes called masters and servants).  Suggestively, at least one recently published law dictionary defines the word “employment” to mean “the relationship between master and servant.” Black’s Law Dictionary 641 (10th ed. 2014).  But this modern intuition isn’t easily squared with evidence of the term’s meaning at the time of the Act’s adoption in 1925.  At that time, a “contract of employment” usually meant nothing more than an agreement to perform work.  As a result, most people then would have understood §1 to exclude not only agreements between employers and employees but also agreements that require independent contractors to perform work.

The Court examined prior law dictionaries and found that “contracts of employment” was not even a term of art or defined term in 1925:

It turns out, too, that the dictionaries of the era consistently afforded the word “employment” a broad construction, broader than may be often found in dictionaries today.  Back then, dictionaries tended to treat “employment” more or less as a synonym for “work.”  Nor did they distinguish between different kinds of work or workers: All work was treated as employment, whether or not the common law criteria for a master-servant relationship happened to be satisfied.

 . . . This Court’s early 20th-century cases used the phrase “contract of employment” to describe work agreements involving independent contractors.  Many state court cases did the same.  So did a variety of federal statutes. . . . We see here no evidence that a “contract of employment” necessarily signaled a formal employer-employee or master-servant relationship.

Further, the §1 of the FAA itself refers to “contracts of employment” with “workers.”  Workers, then as now, refers to a broader class of individual which includes both employees and independent contractors.

The Court rejected the defendant company’s argument that “contracts of employment” must necessarily only cover employees because the words “employment” and “employee,” while derived from a common root did not develop simultaneously and have different understandings and legal meaning with “employment” traditionally having a broader meaning than employee.  While “contracts of employment” clearly included contracts with employees, they could also include contracts with workers or independent contractors who were not employees.

The  Court refused to enforce the purpose of the FAA over the statutory mandates or to utilize the Court’s inherent authority to compel alternative dispute resolution.

Justice Ginsburg agreed with the  Court’s decision and rationale, but not surprisingly, also asserted that Congress could design legislation that should change with the times: sometimes, “[w]ords in statutes can enlarge or contract their scope as other changes, in law or in the world, require their application to new instances or make old applications anachronistic.”

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Unanimous Supreme Court Rejects Another Non-Statutory Exception to FAA Enforcement

Yesterday, the Supreme Court unanimously reversed  an arbitration decision that will affect non-competition litigation between employees and employers who have incorporated arbitration clauses into their agreements.  The Court ruled that the Federal Arbitration Act requires the arbitrability of a dispute to be resolved by the arbitrator even if the trial court finds the request for arbitration to be “wholly groundless” if the parties’ agreement reserved questions of arbitrability to the arbitrator.  Henry Schein, Inc. v. Archer & White Sales, Inc., No 17-1272 (1-9-19).  In that case, the parties’ contract provided for arbitration of disputes, except when the party was seeking injunctive relief.  While the contract did not specifically address the question of arbitrability, its brief two-sentence arbitration clause referred to the AAA rules, which provides that arbitrators can decide arbitrability.  The plaintiff filed suit seeking damages and injunctive relief and the defendant sought to have the entire matter referred to arbitration.  The plaintiff objected on the grounds that the defendant’s request was “wholly groundless” (because of the contract’s exception for injunction requests) so that the trial court could resolve the arbitrability question.  The trial and appellate court agreed, but the Supreme Court reversed and found that the FAA does not contain an exception for “wholly groundless” arguments as to arbitrability.  However, because the contract was silent about the question of arbitrability, the Court remanded the matter to determine if the parties’ contract reserved the question of arbitrability to be decided by the arbitrator or the trial court.

The Court rejected the defendant’s argument that Sections 3 and 4 of the FAA only require a court to stay litigation pending arbitration and to refer a matter to arbitration after an initial evaluation of arbitrability.

This Court has consistently held that parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by “clear and unmistakable” evidence. First Options, 514 U. S., at 944 (alterations omitted); see also Rent-A-Center, 561 U. S., at 69, n. 1.  To be sure, before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists. See 9 U. S. C. §2.  But if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.

The Court also refused to impose a common law exception into the FAA to prevent a waste of the parties’ resources.   Moreover, it was doubtful that systematic resources would be spared when there was likely to be collateral litigation over arbitrability regardless of whether the arbitrator or trial court decided the issue.

Under the Act, arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms. Rent-A-Center, 561 U. S., at 67.  Applying the Act, we have held that parties may agree to have an arbitrator decide not only the merits of a particular dispute but also “‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.”  Id., at 68–69; see also First Options, 514 U. S., at 943.  We have explained that an “agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other.”  Rent-A-Center, 561 U. S., at 70.

                 . . .

We must interpret the Act as written, and the Act in turn requires that we interpret the contract as written. When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue.  That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.

That conclusion follows not only from the text of the Act but also from precedent. We have held that a court may not “rule on the potential merits of the underlying” claim that is assigned by contract to an arbitrator, “even if it appears to the court to be frivolous.”  AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 649–650 (1986). A court has “‘no business weighing the merits of the grievance’” because the “‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’” Id., at 650 (quoting Steelworkers v. American Mfg. Co., 363 U. S. 564, 568 (1960)).

                 . . . .

The [wholly groundless] exception is inconsistent with the statutory text and with our precedent. It confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.  When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract

 Ultimately, however, the Court expressed

no view about whether the contract at issue in this case in fact delegated the arbitrability question to an arbitrator. The Court of Appeals did not decide that issue.  Under our cases, courts “should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.”  First Options, 514 U. S., at 944 (alterations omitted).  On remand, the Court of Appeals may address that issue . . .

This decision will affect employers because many employment agreements contain non-competition and non-solicitation clauses as well as arbitration clauses that similarly carve out exceptions for when the employer seeks injunctive relief.  The reason for such carve-outs is so that the employer can obtain speedy preliminary injunctive relief when damages will be inadequate for the harm caused by the improper competition or solicitation.  However, if the employee seeks to have the entire matter referred to arbitration, resolution of the dispute could be delayed while the parties select an arbitrator, etc. to resolve the arbitrability issue.   

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney. 

Sixth Circuit Rejects Another Attack on Arbitration Agreements Involving FLSA Claims

This morning, the Sixth Circuit unsurprisingly granted the appeal of an employment services firm whose arbitration agreement was denied enforcement by the trial court in a collective FLSA action.  Gaffers v. Kelly Services, Inc., No. 16-2210 (6^th Cir. 8-15-18).  The Supreme Court’s decision earlier this year in Epic Systems rejected one of the legal arguments relied upon by the trial court: that arbitration agreements violate the NLRA when they preclude collective lawsuits.  This morning, the Sixth Circuit also reiterated that arbitration agreements are not precluded by the Fair Labor Standards Act either even though that statute also permits class action lawsuits. 

The plaintiff provided “virtual” call center support from home for the defendant employer.  He filed a lawsuit on behalf of himself and 1600 similar co-workers that he was not properly compensated under the FLSA for logging in and out of the employer’s computer network and during computer glitches.   Although he had never signed an arbitration agreement, about half of his co-workers had and the employer moved to refer those cases to individual arbitrations.  The trial court refused to enforce the arbitration agreements and the employer appealed.

The Supreme Court long ago held that the Federal Arbitration Act supported the enforcement of arbitration clauses in cases brought under the ADEA, which shares the exact same statutory enforcement  provisions with the FLSA.  Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 27 (1991).  In other words, when Congress adopted the ADEA, it incorporated the FLSA’s enforcement provisions.  Therefore, it is pretty clear that the FLSA does not preclude arbitration.

The Sixth Circuit refused to deny enforcement on policy grounds because Congress is supposed to set policy, not courts.   Court’s interpret statutes, not Congressional intent.   It also rejected the argument – rejected earlier this year by the Supreme Court – that the arbitration agreement should not be enforced on grounds of illegality.   It also refused to treat the arbitration agreement as an illegal waiver under the FLSA because FAA endorsed arbitration as lawful.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.  

Unlike Central Ohio Weather, NLRB Ends 2014 With Flurry of Activity

Another NLRB initiative was resurrected on December 15 when a final regulation was published shortening the time to conduct union elections in the private sector after April 14, 2015.  Management literature has referred to this as the “ambush rule’ or “quickie election” rule because of its potential to significantly shorten the period during which election and educational communications are shared with employees by employers about the pitfalls union representation.  (Unions generally start their electioneering and education about the benefits of union representation far in advance).  While a union election generally is now held approximately 42 days after a petition is filed, the new regulation contemplates an election could be held as early as 13-22 days after a Petition (for union recognition, unit clarification or decertification) is filed.  Accordingly, unless this regulation is delayed or voided through litigation, employers will need to be better prepared before a Petition is filed because there will not be much time to respond accurately or appropriately under the new rules otherwise.   The new regulation also imposes new obligations on employers to post and distribute notices, to assemble and serve alphabetized lists of employees, and to provide unions with employees’ personal cell phone numbers and email addresses.  On other fronts, the NLRB also changed this month its rules concerning deferring unfair labor practice charges which are also the subject of arbitration or grievance settlements and how it will address union organizational efforts among faculty at religious colleges and universities.

After a Petition is filed with the NLRB (which must be done electronically and served simultaneously on the employer under the new rule), the NLRB Regional Director then serves on the parties a Notice of Hearing.  This pre-election hearing will generally be held within 8 days of service of this notice.  (Because this Notice could be served the same day as when the Petition is filed, the employer’s obligations conceptually begin almost immediately).

One of the significant new requirements in this regulation is that employers will now be required to post (and to distribute electronically if that is the employer’s custom), a Notice of Petition within 2 days of when the Regional Director serves the employer with a Notice of Hearing (which will also contain a copy of the Notice of Petition).  Violation of this rule could result in the election being set aside, even if the employer ultimately wins the election:

Within 2 business days after service of the notice of hearing, the employer shall post the Notice of Petition for Election in conspicuous places, including all places where notices to employees are customarily posted, and shall also distribute it electronically if the employer customarily communicates with its employees electronically. The Notice of Petition for Election shall indicate that no final decisions have been made yet regarding the appropriateness of the petitioned-for bargaining unit and whether an election shall be conducted. The employer shall maintain the posting until the petition is dismissed or withdrawn or the Notice of Petition for Election is replaced by the Notice of Election. The employer’s failure properly to post or distribute the Notice of Petition for Election may be grounds for setting aside the election whenever proper and timely objections are filed under the provisions of § 102.69(a). A party shall be estopped from objecting to the nonposting of notices if it is responsible for the nonposting,  . . . .

Employer will also be required to produce a written list of objections to the petitioned election (regarding, for instance, the proposed scope of the bargaining unit, the improper inclusion of supervisors, the improper exclusion of other employees, etc.) by noon the day before the pre-election hearing.    Depending on when the Regional Director serves the Notice of Petition, this Statement of Position might be due as early as seven days after the Petition is filed.   Under the new procedures in the regulation, employers may not be entitled to file post-hearing briefs following the pre-election hearing.  Indeed, the pre-election hearing may not even determine voter eligibility or supervisory status before the election.   In fact, an evidentiary hearing on the employer’s objections may not be not held until after the election.  While the NLRB’s majority thinks this will save time (especially if the employer ultimately wins the election anyway), this ambiguity will create significant problems for employers in determining supervisory status of certain employees in order to avoid unfair labor practice charges and to effectively communicate with employees during the election period.

Another new requirement in the regulation is that the employer is also required to file at the same time (i.e., the day before the pre-election hearing) a list of employees:

The Statement of Position shall include a list of the full names, work locations, shifts, and job classifications of all individuals in the proposed unit as of the payroll period preceding the filing of the petition who remain employed at the time of filing, and if the employer contends that the proposed unit is inappropriate, the employer shall separately list the full names, work locations, shifts, and job classifications of all individuals that the employer contends must be added to the proposed unit to make it an appropriate unit. The employer shall also indicate those individuals, if any, whom it believes must be excluded from the proposed unit to make it an appropriate unit. The list(s) of names shall be alphabetized (overall or by department) . . .

Having such an employee list creates an advantage for the union if it wants to dismiss the Petition and attempt to organize larger group of employees.  At present, unions only need  30% of employees to sign cards expressing interest in an election before filing a Petition, but will need a majority of the eligible employees to vote in favor of the union in order to win.    As a strategic matter, a union could identify an inappropriately small unit for its initial petition, but then dismiss the petition and organize a larger group after the employer produces the new employee list for the entire (and larger) appropriate unit.

After the pre-election hearing, the Regional Director will then issue a Directive and Notice of Election.  (Conceptually, this could be issued the same day as or even the day after the day of the pre-election hearing).  At this point, the employer must file within 2 days an Excelsior list, which has been expanded under the new regulation to include the employees’ personal email and cell phone numbers.   This alphabetized Excelsior list  must contain “the full names, work locations, shifts, job classifications, and contact information (including home addresses, available personal email addresses, and available home and personal cellular (‘‘cell’’) telephone numbers) of all eligible voters.” There are no privacy protections or opt-out provisions for employees to avoid distribution of their personal email and cell phone numbers.   On the other hand, if the employer does not collect that information, it need not obtain it just to include in the Excelsior list.   The dissenting NLRB members note that this requirement is inconsistent with the NLRB’s recent decision in Purple Communications (where the Board ruled that employers must presumptively grant email access to employees for union and other section 7 communications because personal cell phones and emails were found to be insufficient).

The Federal Register explanation for the new rule is 184 pages long and obviously contains many details which are not mentioned in this summary.   Notably, an employer will not have time to read all of those pages after receiving a Petition because it will have a lot of other work to do. 

On December 16, the NLRB adopted new standards for determining when to exercise jurisdiction over self-identified religious colleges and universities and how to determine whether faculty are managerial employees who lack rights under the NLRA in Pacific Lutheran University.

A day earlier, in Babcock & Wilcox Construction Co., 361 NLRB 132, the NLRB changed its practice of automatically deferring unfair labor practice charges to the results of labor arbitrations and grievance settlements. 
 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

A Tale of Two Courts and Two Arbitration Disputes

In the past week, both the Franklin County Court of Appeals and the Sixth Circuit Court of Appeals have issued decisions concerning the arbitration of employment-related disputes.  In the Franklin County case, the  Court held that the defendant employee could not enforce an arbitration agreement against the plaintiff dual employer which had not agreed to arbitrate disputes even though the other dual employer (which was not a party to the lawsuit) was a party to the arbitration agreement.  Fifth Third Bank v. Rowlette, 2013-Ohio-5777.    In the federal court case, the Sixth Circuit held that the trustees of an employee benefit plan could not appeal an error of law by the arbitrator in their indemnification claim against the parent employer because arbitration decisions are supposed to be final. The Court suggested that even an arbitrator’s manifest disregard of the law might be an insufficient basis to vacate an arbitration award under the FAA. Indeed, “the arbitrator is not necessarily bound by legal holdings of this court.”   Schafer v. Multiband Corp., No. 13-1316 (6^th Cir. 1-6-14).

According to the Court’s opinion in Rowlette, the defendant employee was jointly employed by the plaintiff bank and a securities firm in a “dual employment agreement.”  He sold registered securities on behalf of the securities firm to members of the public and to the bank’s customers.  The plaintiff bank referred customers to the defendant and he signed stock option agreements with the bank’s parent company which contained non-competition clauses.  He then resigned his employment and became associated with a different securities firm.  The bank and its parent company filed suit against the employee, his company and the new securities firm for, among other thing, breach of contract, unfair competition, theft, etc. 

The defendants asserted that the plaintiffs were required to arbitrate their claims under the rules of the Financial Industry Regulatory Authority (FINRA):

FINRA Rule 13200 provides that a dispute must be arbitrated under the FINRA Code of Arbitration Procedure for Industry Disputes ("FINRA Code") if the dispute arises out of the business activities of a member or an associated person and is between or among members, members and associated persons, or associated persons.1 Under FINRA Rule 13100(o), "member" is defined as any broker or dealer admitted to membership in FINRA, and under FINRA Rule 13100(a), "associated person" is defined as a person associated with a member. Rowlette also signed a Uniform Application for Securities Industry Regulation or Transfer form ("Form U4") while employed with Fifth Third Securities, which contains a clause requiring arbitration of claims. Appellants claim that Form U4 also compels arbitration of the claims in this case.

Problem was, the plaintiffs were not members of FINRA, were not bound by FINRA rules and had never signed the U4 form or otherwise agreed to arbitrate any disputes with any of the defendants.  While the plaintiff’s other dual employer (i.e., the securities firm which shared the plaintiff bank’s name) was a FINRA member and obligated to arbitrate disputes, it was not a party to the lawsuit.

Appellants also claim that, if this case proceeds in the court below, Fifth Third Bank will be unable to prove any damages. They assert that Rowlette only did work involving securities for Fifth Third Securities and did not perform any banking transactions for Fifth Third Bank. Appellants argue that Fifth Third Securities is the real party in interest in this case and that any damages arising from Rowlette's change of employment would accrue to Fifth Third Securities, not Fifth Third Bank. However, Fifth Third Bank and Fifth Third Bancorp are distinct entities from Fifth Third Securities. The claims in appellees' complaint rely solely on the stock agreements Rowlette signed with Fifth Third Bank and Fifth Third Bancorp. Further, appellants concede that Rowlette was a dual employee of both Fifth Third Bank and Fifth Third Securities, although they argue that his employment with Fifth Third Bank was merely pro forma. Thus, it appears that appellees are asserting their own independent claims, not seeking to recover damages owing to Fifth Third Securities. Moreover, to the extent that appellees asserted claims seeking to recover damages owing to another entity, such claims could be addressed through a motion for summary judgment.

Therefore, the Court affirmed the denial of the motions to dismiss and compel arbitration.

In the Schafer case, the trustees of an ESOP sought indemnification from the parent companies for the settlement of a lawsuit alleging breach of fiduciary duties.  The arbitrator found that the indemnification agreement was void under ERISA.  The trustees then appealed the arbitrator’s decision to federal court on the grounds that the arbitrator’s legal reasoning was erroneous  under Sixth Circuit precedent.  The trial court vacated the award and the parent corporation appealed.  The Court of Appeals agreed that if a judge had made the same mistake as the arbitrator, the decision would have been reversed.   

But the arbitrator’s decision reasoned from the statute and the contract, and not in clear disregard of them, such that the arbitrator’s decision should not have been vacated by the district court because of the legal error of the arbitrator. Absent extraordinary circumstances, arbitration is supposed to resolve, with finality, legal as well as factual disputes.

Section 10 of the Federal Arbitration Act only permits arbitration decisions to be vacated in the following situations:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made

The best argument that could be made for vacating the arbitration decision was that the arbitrator exceeded his authority by manifestly disregarding the law.  The Court was not certain that this constitutes a valid basis under the FAA to vacate an arbitration award.  However, the Court side-stepped that issue because it did not think the arbitrator’s error in interpreting ERISA rose to that level.  “Because the arbitrator, notwithstanding his apparent error of law, did not manifestly disregard the law so as to warrant vacatur of the award, we need not decide whether a manifest disregard of the law legitimately forms a basis for vacatur in the first place, either as an interpretation of the fourth statutory basis for vacatur, or as a fifth, inferred, basis for vacatur.”

 

While the arbitrator may have misinterpreted ERISA, his decision was based on a plausible interpretation of the statute. 

Legal error by the arbitrator—even clear legal error—is however not by itself sufficient for vacatur of an arbitration agreement. One of the advantages of arbitration is the avoidance of the expense of appeals, and the avoidance of such costs would be undermined by permitting appeals based on clear error of law. . . . Even assuming that manifest disregard of the law is a basis for vacatur of an arbitral decision, the scope of the basis has to be very narrow. Manifest disregard of the law is not just manifest error of law. If the arbitrator expressed disagreement with the law, rather than interpretation of the law, that might suggest “disregard.” But there is little evidence of that in the arbitrator’s decision. Instead, the arbitrator relied on a very broad “plain” reading of the ERISA provision invalidating contractual provisions that relieve a fiduciary of liability, and relied on a narrow and formal meaning of the insurance exception to that provision. The arbitrator also relied on precedents that we can distinguish. Even together, however, this is not enough to show a manifest (as opposed to possible, or even likely) disregard (as opposed to questionable reading) of the law.

Moreover, the very idea that an arbitral decision is not appealable for legal error leads to the conclusion that the arbitrator is not necessarily bound by legal holdings of this court. If an arbitrator relies on a colorable meaning of the words of the statute—as the arbitrator did here—the fact that there is Sixth Circuit precedent to the contrary is not necessarily determinative.  Sixth Circuit holdings are binding in courts and on agencies whose decisions are appealable to the Sixth Circuit, ultimately because of that appealability. An arbitrator cannot reject the law, but can disagree with nonbinding precedent without disregarding the law.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Supreme Court: Arbitrator’s Decision Holds “However Good, Bad or Ugly”

This morning, a unanimous United States Supreme Court affirmed the denial of a motion to vacate an arbitration ruling that physicians could proceed in a class action arbitration challenging allegedly low payments by an insurance company under a fee-for-service contact that contained an arbitration clause.  Oxford Health Plans v. Sutter, No. 12-135 (6-10-13).  While this case is not an employment case, the ruling under the Federal Arbitration Act would apply equally in the employment context.   

The arbitrator ruled that the fee-for-service arbitration clause authorized class action arbitration.  Following that ruling – and while the arbitration was still pending, the Supreme Court ruled in  Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010), “that an arbitrator may employ class procedures only if the parties have authorized them” in the arbitration agreement.  Asked to reconsider his ruling, the arbitrator re-affirmed that the contact authorized class action arbitrations.  Unlike the Stolt-Nielsen case where the parties had stipulated that the contract did not contemplate class arbitrations and the arbitrator there had simply imposed his view of sound public policy and exceeded his contractual authority to merely interpret the contract, the arbitrator in Sutter limited his opinion to his legal interpretation of the contract.  Even if the Sutter arbitrator committed serious errors of law or fact, that is not a basis to vacate an arbitration ruling under the FAA.   “Only if ‘the arbitrator act[s] outside the scope of his contractually delegated authority’—issuing an award that ‘simply reflect[s] [his] own notions of [economic] justice’ rather than ‘draw[ing] its essence from the con­tract’—may a court overturn his determination.  . . .  So the sole question for us is whether the arbitra­tor (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”  In other words, "[t]he arbitrator’s construction holds, however good, bad, or ugly.”  Otherwise, if courts could review the legal correctness of every arbitration decision, arbitration would cease to be a more expedient alternative to regular civil litigation.

 The  Court also indicated that it would have faced  

   a different issue if Oxford had argued below that the availability of class arbitration is a so-called “question of arbitrability.” Those questions—which “include certain gateway matters, such as whether parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy”—are presumptively for courts to decide.  . . .  A court may therefore review an arbitrator’s determination of such a matter de novo absent “clear[] and unmistakabl[e]” evidence that the parties wanted an arbitrator to resolve the dispute.  . . .  Stolt-Nielsen made clear that this Court has not yet decided whether the availability of class arbitration is a question of arbitrability. . . . . But this case gives us no opportunity to do so because Oxford agreed that the arbitrator should determine whether its con­tract with Sutter authorized class procedures.

The insurance company moved to compel arbitration after the physician filed his complaint in state court.  The court enforced the arbitration clause.  All the contract provides is that an arbitrator will decide the dispute.  Therefore, the parties cannot return to court merely because they disagree with the arbitrator.

Under §10(a)(4), the question for a judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all. Because he did, and therefore did not “exceed his powers,” we cannot give Oxford the relief it wants.  

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.