09/26/2024 | Press release | Distributed by Public on 09/26/2024 11:08
Nearly 100 years ago, the Federal Arbitration Act (FAA) was enacted on the straightforward principle that "arbitration agreements are enforceable." Since its enactment, the meaning and scope of the FAA continues to evolve. Fortunately for parties and practitioners who regularly find themselves compelled to arbitrate, the U.S. Supreme Court issued a trio of helpful opinions in its 2023-24 Term.
These opinions were all unanimous and short (10 pages or fewer). The common thread among them was the Supreme Court's focus on the plain text of the FAA and its rejection of legal tests regarding arbitration that are not based in statutory language.
In Bissonnette v. LePage Bakeries Park Street, LLC, two distributors for a nationwide bakery sued the bakery, claiming violations of state and federal wage laws. The distributors were franchisees, both of whom purchased the rights to distribute the bakery's products in specific geographic territories. The franchising agreements contained arbitration provisions.
When the distributors filed suit, the bakery moved to dismiss the distributors' lawsuit and compel arbitration. Under Section 1 of the FAA, however, "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce" are exempt from the FAA. The Supreme Court has interpreted this exemption as applying to "transportation workers." The distributors argued that they fell within this exemption and thus should not be compelled to arbitrate.
Citing authority from the U.S. Court of Appeals for the Second Circuit, the bakery argued that the distributors were not covered by the exemption because they were not "transportation workers" engaged in the "transportation industry." The bakery relied on the "much broader scope of responsibility" contemplated under the distributor agreements, which required the distributors not only to collect and distribute the bakery items, but also to identify new retail outlets, advertise the goods, set up promotional displays, stock shelves, replace expired products, and maintain customers' inventories through new orders. Citing these additional duties, the district court agreed with the bakery and compelled arbitration; the Second Circuit affirmed, holding that the distributors were "in the bakery industry" and so were not exempt under Section 1.
In a unanimous opinion authored by Chief Justice Roberts, the Supreme Court reversed, holding that Section 1 requires only that employees be "transportation workers," not that they work in the "transportation industry." The Court relied on its recent opinion in Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022), where it held that for purposes of Section 1, workers are defined "based on what a worker does for an employer, 'not what [the employer] does generally.'"
In doing so, the Supreme Court rejected the Second Circuit's focus on the nature of the industry itself. In the Court's view, this test had been "fashioned …without any guide in the text of§ 1 or [Supreme Court] precedents," and "would often turn on arcane riddles about the nature of a company's services." The Supreme Court also noted that the practical implication of adding an "industry" requirement would be to require extensive discovery and even a mini-trial for every motion to compel arbitration. Attaching such a complex hurdle to motions to compel would conflict with the FAA's stated purpose of avoiding litigation
In Smith v. Spizziri, delivery drivers sued their former employer in state court for violations of federal and state employment laws. After removing the case to federal court, the employer moved to compel arbitration and dismiss the suit without prejudice. The delivery drivers conceded that their claims were arbitrable but requested the district court to stay the suit rather than dismiss it entirely. The district court chose to dismiss the suit without prejudice, citing Ninth Circuit precedent. The Ninth Circuit affirmed, relying on the court's inherent power to dismiss inactive suits without prejudice.
In a unanimous opinion authored by Justice Sotomayor, the Supreme Court reversed. Under Section 3 of the FAA,when a suit is subject to arbitration, a court "shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement[.]" Relying on Section 3's mandatory language, the Supreme Court held that the use of the word "shall" created an "obligation impervious to judicial discretion," and thus a stay, rather than dismissal, is required.
The Supreme Court reasoned that the plain meaning of the statute's language expressly "overrides any discretion a district court might otherwise have had to dismiss a suit when the parties have agreed to arbitration." The imposition of a stay rather than dismissal also "comports with the supervisory role that the FAA envisions for the courts," allowing for the parties to return to court for assistance with arbitration-related matters, such as appointing an arbitrator, issuing subpoenas, and enforcing an arbitration award.
In Coinbase Inc. v. Suski, users of a cryptocurrency exchange, Coinbase, sued the exchange for issuing an unlawful cryptocurrency sweepstakes. A group of users filed a class-action complaint, alleging that the sweepstakes violated state and federal consumer-protection laws.
After suit was filed, Coinbase moved to compel arbitration under its Coinbase User Agreement, which all users were required to agree to upon joining the exchange. The User Agreement included an arbitration agreement, which also included a delegation clause stating that an arbitrator, not the court, must determine whether a given dispute is subject to arbitration under the User Agreement's arbitration agreement. The users, however, sought to remain in court by relying on the Official Rules of the sweepstakes, which did not include an arbitration agreement but instead included a forum-selection clause, granting jurisdiction to California courts for disputes related to the sweepstakes.
The district court denied Coinbase's motion to compel, reasoning that the court must decide which contract-the User Agreement with an arbitration and delegation agreement or the Official Rules with a forum-selection clause-governed the users' dispute. The Ninth Circuit affirmed.
In an opinion authored by Justice Jackson, the (once again) unanimous Supreme Court affirmed, holding that the question of whether a subsequent contract between the same parties supersedes an earlier arbitration agreement containing a delegation clause is a question for the court, not the arbitrator. Recognizing the fundamental principle that arbitration is a matter of consent, the Court stated that the first question in every arbitration dispute is "what have these parties agreed to?" In answering that question, the Court recognized that parties could enter two types of agreements concerning arbitration.
The parties may enter into an arbitration agreement, proper, which is an agreement to send the merits of certain disputes to arbitration, i.e., disputes arising out of a certain contract. The parties may also enter into an "antecedent" delegation agreement, which is another type of arbitration agreement. Under an antecedent agreement, an arbitrator, rather than a court, must determine whether a dispute goes to arbitration in the first place, i.e., an arbitrator must determine whether a certain dispute is governed by the arbitration agreement itself.
Based on these two types of arbitration agreements, the Court recognized that parties usually have three types of arbitration-related contests. First, the parties could have a contest over the merits of the underlying dispute, e.g., whether one party breached a contract. Second, the parties could have a contest over whether the parties agreed to arbitrate the merits of that dispute (a so-called "arbitrability" contest), e.g., whether the breach-of-contract claim is governed by the arbitration agreement. And third, the parties could have a contest over who decides the second question, e.g., whether the court or an arbitrator decides whether the breach-of-contract claim is governed by the arbitration agreement.
In Coinbase, the Court was presented with a new, fourth dispute: who decides the third contest when the parties entered into multiple agreements that conflict on the answer of who decides arbitrability. The Court held that the only way to resolve this fourth dispute is by determining which contract-and accompanying arbitration-related agreements or lack thereof-applies. By homing in on the conflict between the delegation clause in the User Agreement and forum-selection clause in the Official Rules, the Court concluded that the fourth-level dispute reverts to the original question of whether the parties agreed to send the dispute to arbitration in the first place-with the dispute being whether the court or an arbitrator decides that a dispute is subject to arbitration.
The Court ruled that this question has always gone to the court because arbitration-including arbitration merely to determine arbitrability-has always been a matter of the parties' consent, which the court must determine. The Court recognized that the FAA does not allow courts to presume that parties entered into an arbitration agreement, including a delegation agreement. So, where the parties had entered two contracts, with only the first including a delegation agreement that sends arbitrability disputes to an arbitrator, the court must decide whether the parties intended that delegation agreement to continue governing after the second contract. Framed that way, the dispute in Coinbase was not merely over whether the underlying sweepstakes claims were subject to arbitration-which would send the question to the arbitrator under the User Agreement's delegation clause-but, in light of the Official Rule's forum-selection clause, whether the parties agreed to delegate that question at all-which must be determined by a court.
This does not mean that parties will always end up in court. In his concurrence, Justice Gorsuch noted that―despite the Court's ruling here―parties could still craft a "master contract" that all disputes arising out of that master contract "or future agreements," including the question of arbitrability, "shall be decided by an arbitrator." Thus, without some later amendment, such a provision would "seem to require a court to step aside."
Frost Brown Todd's appellate advocates have a proven track record of success in appeals involving questions of first impression, bet-the-company judgments, and decisions that shape the rules under which our clients will operate well into the future. For more information, please contact the authors or any attorney with the firm's Appellate Practice Group.
Explore our full wrap-up and analysis of the most consequential rulings for businesses and industries during the 2023-2024 U.S. Supreme Court term.