Arbitration a Common Theme in 2022 Supreme Court Decisions

Since Congress passed the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., federal courts generally have been uniform in enforcing parties’ contractual agreements requiring that their disputes be determined via arbitration as opposed to a court of law. The Court’s recent decisions do not deviate from this trend; although, the Court does seem to be interested in drawing clear lines regarding how that policy will play out in specific scenarios.

A basic understanding of these rules is crucial for businesses and individuals looking to streamline the resolution of their disputes and avoid the high costs of formal litigation. What follows are short summary write-ups of each recent decision, with an emphasis placed on the key holding from the Court’s decision.

Badgerow v. Walters et al., No. 20-1143 (decided March 31, 2022).

Although the FAA permits parties subject to an arbitration agreement to seek relief from federal courts to, among other things, compel an arbitration, id. § 4, or confirm or vacate an arbitral award, id. §§ 9 & 10, the statute itself does not create federal court jurisdiction over those petitions. Rather, federal courts must assure themselves of an “independent jurisdictional basis” over those petitions before they may act.

In Vaden v. Discover Bank, 556 U.S. 49 (2009), the Supreme Court held that because the text of FAA Section 4 instructs courts to “look through” the petition to the “underlying substantive controversy” in assessing their jurisdiction, federal court jurisdiction lies over petitions to compel arbitration if the underlying dispute between the parties falls within federal courts’ jurisdiction, regardless of whether an independent jurisdictional basis is apparent on the face of the petition itself.

In Badgerow, the Supreme Court was asked to decide whether the same rule applied to petitions to confirm or vacate arbitral awards under Sections 9 and 10 of the FAA. The Court held that it does not. Rather, there must be an independent basis for federal court jurisdiction on the face of the petition to confirm or vacate.

Badgerow arose out of an arbitration of an employment dispute. Believing that her loss in the arbitration was tainted by fraud on the part of the respondents, the employee brought suit in state court to vacate the arbitral decision, which was later removed to federal court.  The employee sought to remand the case back to state court for lack of federal court jurisdiction.

Writing for the Court, Justice Kagan explained that because FAA Sections 9 and 10 do not include the same statutory language in Section 4, on which the “look through” rule is based, federal courts’ assessment of their jurisdiction over petitions to confirm or vacate arbitral awards must be confined within the four-corners of the petitions, no matter if the “underlying substantive controversy” would fall within federal courts’ diversity or federal-question jurisdiction.

Accordingly, because the enforceability of an arbitral award is no more than a “quarrel” about “the contractual rights provided in the arbitration agreement, generally governed by state law,” the Court held that the petition did not on its face invoke federal court jurisdiction, despite the fact that the underlying employment dispute involved questions of federal law.

Morgan v. Sundance, Inc., No. 21-328 (decided May 23, 2022):

Section 3 of the FAA permits parties to an arbitration agreement to file an application to stay any litigation brought in contravention of those agreements. In some cases, parties will wait months, if not years, before filing such applications, instead engaging in formal litigation—even filing motions to dismiss or answering complaints. In those circumstances, most of the Courts of Appeals had held that parties do not waive their right to compel arbitration in accordance with their contractual agreements unless their decision to sit on their rights and engage in litigation has prejudiced their counterparties. In Morgan, the Supreme Court was asked to decide whether the FAA authorizes federal courts to create such an arbitration-specific waiver rule, when traditional waiver rules do not require a finding of prejudice.

Writing for a unanimous Court, Justice Kagan explained that the prejudice-based waiver rule arose from the Courts of Appeals’ recognition of a “federal policy favoring arbitration.” The typical federal waiver rule, on the other hand, generally does not require an assessment of the waiving party’s actions on the opposing party. In rejecting a “bespoke” rule requiring prejudice before a party waives its right to enforce an arbitration agreement, the Court explained that the FAA’s “policy enforcing arbitration” only seeks to make “arbitration agreements as enforceable as other contracts, but not more so”; and, accordingly, the FAA “does not authorize federal courts to invent special, arbitration-preferring procedural rules.” In fact, the Court recognized that FAA Section 6’s mandate that all applications under the statute “shall be made and heard in the manner provided by law for the making and hearing of motions” necessarily precludes federal courts from creating “custom-made rules” that apply only in the arbitration context.

For those reasons, the Court vacated the judgment below and remanded for further proceedings, including an assessment of whether Sundance had “knowingly relinquished the right to arbitrate by acting inconsistently with that right.”

Southwest Airlines Co. v. Saxon, No. 21-309 (decided June 6, 2022):

Section 1 of the FAA excludes from the statute’s reach a “class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. In Saxon, the Court was asked to determine whether a ramp supervisor for Southwest Airlines, who trains and supervises teams of ramp agents who physically load and unload cargo on and off airplanes that travel across the country, falls within that “class of workers.” Justice Thomas, writing for the Court, found that she did, holding that “any class of workers directly involved in transporting goods across state or international boarders,” including airplane cargo loaders, “falls within § 1’s exception.”

In rejecting Southwest’s arguments that the FAA’s statutory purpose required the Court to draw Section 1’s exception narrowly, the Justice Thomas explained that the federal policy in favor of arbitration has limits, insofar as federal courts are not “free to pave over bumpy statutory texts in the name of more expeditiously advancing a policy goal.”

Viking River Cruises, Inc. v. Angie Moriana, No. 20-1573 (decided June 15, 2022):

The Supreme Court has made clear that the FAA “preempts any state rule discriminating on its face against arbitration—for example, a law prohibiting outright the arbitration of a particular type of claim.” In Viking River Cruises, Inc. v. Moriana, the Supreme Court was asked to determine whether a rule of California law that invalidates contractual waivers of the right to assert representatives claims under the California Labor Code Private Attorneys General Act of 2004 (PAGA) was that type of state rule preempted by the FAA.

PAGA permits individual employees to act as private attorneys general to enforce California labor laws. Accordingly, any “aggrieved employee” may bring suit against a former employer “on behalf of himself or herself and other current or former employees” and seek civil penalties that typically could be recovered only by the State in an administrative enforcement action.

Moriana filed a PAGA action in California state court against her former employer, Viking River Cruises, Inc. (Viking), alleging violations of California labor law on behalf of herself and other Viking employees. But Moriana’s employment contract contained a mandatory arbitration agreement and a “Class Action Waiver,” which prohibited her from bringing any dispute as a class, collective, or representative action under PAGA. Viking moved to compel arbitration on Moriana’s individual PAGA claim and to dismiss her other PAGA claims based on other Viking employees. The California courts denied that motion, holding that categorical waivers of PAGA standing were contrary to California policy and that PAGA claims cannot be split into arbitrable “individual” claims and non-arbitrable “representative” claims.

The Supreme Court reversed the California court below, holding that the FAA preempts California law insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate. Writing for the Court, Justice Alito explained that the California rule prohibiting parties from contractually agreeing to divide PAGA actions into individual versus representative claims “unduly circumscribes the freedom of parties to determine the issues subject to arbitration and the rules by which they will arbitrate,” which infringes upon “the fundamental principle that arbitration is a matter of consent.” Because “a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration,” “state law cannot condition the enforceability of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the arbitration by introducing claims that the parties did not jointly agree to arbitrate.” Because PAGA’s mandatory joinder rule required all disputes arising out of a particular “transaction” or “common nucleus of facts” to be arbitrated together, it violated that core principle. As a result, the Court held that the FAA preempted the PAGA, holding that although Moriana is free to arbitrate her claim against Viking, she cannot force Viking to arbitrate all the other claims PAGA would otherwise permit her to bring without Viking’s consent.

ZF Automotive US, Inc. v. Luxahare, Ltd., No. 21-401 (decided June 13, 2022):

28 U.S.C. § 1782 permits federal district courts to order testimony or the production of evidence “for use in a proceeding in a foreign or international tribunal.” In ZF Automotive US, Inc. v. Luxahare, Ltd., the Supreme Court held that private adjudicatory bodies—like foreign arbitration proceedings—do not constitute “foreign or international tribunals,” and, thus, are outside the scope of Section 1782’s reach.

Writing for a unanimous Court, Justice Barrett explained that a “foreign tribunal” is “one that exercises governmental authority conferred by a single nation,” and “international tribunal” is “one that exercises governmental authority conferred by two or more nations.” “Private adjudicatory bodies,” like the foreign arbitrations at issue, do not qualify under either definition and thus are outside the scope of Section 1782’s reach.

If you have any questions or would like to discuss how these decisions may impact your interests, please do not hesitate to contact Ryan Moore or another member of the litigation team at Klehr Harrison.

Author Ryan Moore is a partner in the Litigation Department at Klehr Harrison.