What is Going on With SCOTUS and Arbitration? – They Love FAA, They Love It Not

Lawyers who assume that the arbitration provisions within their carefully drafted agreements will be enforced may have to re-examine these assumptions. Within the space of less than one month, the Justices waded into three civil matters that dealt with the constant re-arrangement of the deck chairs and fine tuning of the parties’ rights and obligations relating to the application of the Federal Arbitration Act leaving those who practice with less than crystal clear guidance about how to proceed.

On May 23, 2022, in Morgan v. Sundance, Inc., SCOTUS, in a unanimous decision, ruled, contrary to the current positions of 9 of the 11 Circuits, that the requirement by the 8th Circuit that a showing that the other side has been prejudiced by a delay is not required for a party that has proceeded with litigation to be deemed to have waived its contractual right to arbitrate.  Although the Opinion was only nine (9) pages, the beginning, middle and end focused on one seeming objective of lesser ultimate important; that Courts may not establish law relating to the enforcement of arbitration agreements solely in order to protect the sanctity of arbitration agreements under the FAA.  To quote:  “… federal courts may not create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s ‘policy favoring arbitration.’ If an ordinary procedural rule – whether of waiver or forfeiture or what-have you – would counsel against enforcement of an arbitration contract, then so be it.  The federal policy is about treating arbitration contracts like others, not about fostering arbitration.”

Shortly after Morgan, the Court, in Southwest Airlines Co. v. Saxon, again narrowed the scope of the FAA by holding that airline workers who load and unload luggage are exempt from the FAA.  In the Opinion, written by Justice Thomas (8-0; Justice Barrett abstaining), the Court concluded that a ramp supervisor’s employment contract was not subject to arbitration because the employee’s duties specifically involved loading cargo to be transported across state lines. As such, the employee was exempt from the FAA’s application because she was part of a class of workers engaged in interstate commerce.

Turning then to the final arbitration proclamation, on June 15, 2022, SCOTUS continued its crusade to deal with another “meaty” arbitration issue in its decision (in an 8 to 1 vote) issued in Viking River Cruises, Inc. v. Moriana concluding that the FAA “preempts a rule of California law that invalidates contractual waivers of the right to assert representative claims under California’s Labor Code Private Attorneys General Act of 2004.”  Judge Alito authored the Court’s Opinion, although there were a number of concurring opinions and joinders by the other Justices.  While there are a number of “moving pieces” in the various opinions and joinders, suffice to say that the ultimate simple question to be decided by the Court for purposes of the application of the FAA was whether aggregation devices such as the PAGA can be imposed on a party to an arbitration agreement.  Under state law, PAGA enabled employees to sue over workplace violations on behalf of the state of California.  Although the California Supreme Court had ruled in 2014 that PAGA circumvented the application of arbitration agreements that permitted cases from being divided into individual and group clams pursuant to an arbitration agreement, SCOTUS concluded that the FAA preempts PAGA to the extent that it precluded division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.  It held that “[T]his Court’s FAA precedents treat bilateral arbitration as the prototype of the individualized and informal form of arbitration protected from undue state interference by the FAA…[T]his Court has never held that the FAA imposes a duty on States to render all forms of representative standing waivable by contract or that such suits deviate from the norm of bilateral arbitration.”

Thus, in a case dealing with complex and convoluted facts, and corresponding law, SCOTUS swept these challenges aside and held in a 22 page Majority Opinion that “PAGA’s actions cannot be divided into individual and non-individual claims was pre-empted. . . ” by the FAA.  

Whereas, the Court in Morgan made short shrift of the FAA and its potential application to what is a commonplace occurrence – ensuring the arbitration of disputes between the parties, where in many instances those parties do not have comparable “bargaining” positions – the Court in Viking went through a complicated analysis involving the application of a state statute and earlier decision, and complicated dispute resolution procedures and – at the end of the day —  protected the integrity of the arbitration process, reversing and remanding the lower court decision.

In light of these decisions, there is a lack of clarity as to whether the court intends to narrow or expand the scope of the FAA, but what is clear is that the Court is open to undercutting the policy in favor of arbitration when there is a technical argument to exempt a matter from its coverage.  Counsel – to be forewarned is to be forearmed!  In the event that your acts, omissions or other conduct in and of itself — which will now be closely scrutinized by the Court – constitutes a waiver of your right to arbitrate, you have no one to blame but yourself.

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Last modified: July 25, 2022

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