The arbitration marathon in the U.S. Supreme Court began yesterday with oral argument in Morgan.  Today we take a look at those arguments.

As discussed in last Friday’s “Highlights,” the case raises the question of whether a state’s requirement that a party claiming that its opponent waived a contractual right to compel arbitration must prove that it was prejudiced by the conduct (usually a delay in demanding arbitration) when it need not do so as to any other waiver of a contractual term.

The Chief Justice opened questioning of Karla Gilbride, counsel for Morgan, with a line of questioning that addressed the concern that several Justices later also raised – does adopting the Petitioners’ position that waiver is judged by the state’s generally applicable contract law repeatedly put the federal judiciary in the position of applying what might be vague state law.  As he often does, Justice Breyer condensed the issue into a simple story.

“I used to have nightmares about teaching a class, and in my nightmare, someone in the class would ask me something, and I’d have to go into a long disposition on something I didn’t know. So I’ve written down here laches, in default, forfeiture, waiver, estoppel, and there are probably about six or seven others, which are primarily contract or not entirely, but — and state law questions, and I know very little about them. And suddenly this Court, writing a treatise on that, could get laws in many, many places really mixed up because judges sometimes put the wrong words, if there are wrong words.”

While Attorney Gilbride suggested that the federal court could certify such confusing questions to the state courts, Justice Breyer, later in questioning, returned to this theme, suggesting that, as a practical matter, if the waiver question is “vague,” it makes sense for the trial judge to consider whether there is prejudice.

“On the other hand, if it’s sort of a vague thing, I might begin to think: Hey, nobody’s hurt. Make them go to arbitration. Nobody’s hurt by the contrary.”

He seemed to rapidly discount counsel’s suggestion of state court certification, since it would involve “new judge. . . who know nothing about [the case.]”

The concern regarding the complexity of resolving state law issues was emphasized by the Chief Justice, who, in a second round of questioning, expressed concern about whether developing issues of state law would slow the arbitration process.

“[T]he whole point of the Federal Arbitration Act or at least a significant point was to expedite disputes. Yet you’re, it seems to me, creating a whole new battleground before you even get to arbitration about whether or not there’s been — been waiver under state law. And I wonder if the cost of that — I mean, if that’s what the law requires, it requires, but I — but I think we should take into account that that seems quite contrary to the policy behind the FAA.

Justice Alito, while acknowledging that Attorney Gilbride’s position might be right, emphasized that moving from the federal court’s current almost-uniform imposition of a prejudice requirement as a matter of federal law to a state-law based evaluation would constitute a “sea change.”

At the close of Petitioner’s time, Justice Kavanagh, perhaps looking for a middle position that would answer his colleagues concerns’ regarding the difficulties in determining state law, suggested the position adopted by the D.C. Circuit in Zuckerman Spaeder, LLC v. Auffenberg, 646 F. 3d 919 (D.C. Cir. 2011), that the defendant’s failure to assert the right to arbitration at the “first available opportunity,” generally at the filing of an answer or motion to dismiss, has presumptively forfeited the right to arbitrate, unless it can sustain the burden of establishing the absence of prejudice.  While acknowledging that the approach had some appeal, in that it shifts the burden of proof regarding prejudice, Attorney Gilbride raised the concern, expressed elsewhere in questioning by the Court, that this limited rule would not address what standard should be applied  if the case were decided under Section 4 of the FAA (i.e., a motion to compel), rather than, as here, under Section (application for a stay), or where the case arose in state court.

In response, Paul Clement, for Respondent, seemed to bring the focus of the argument to this specific case, rather than making arguments aimed at establishing a broader rule.  In discussing the suggestion by Justice Kavanagh above, Attorney Clement referred to the effect of a particular ruling “on my client;” he argued that the reason for delay in seeking arbitration in this case was that the specific litigation sought a nationwide collective action; and, most importantly, he sought to keep the focus on the fact that the motion below was asserted under Section 3 of the FAA.  Section 3, he argued on several occasions, requires the court to stay pending litigation in favor of arbitration “upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration. . . providing the applicant for the stay is not in default in the proceeding with such arbitration.”  Here, he argued, the record is clear that the parties had an arbitration agreement and that there was no default in proceeding with the arbitration itself.  Therefore, all of the requirements of a stay under Section 3 are satisfied, and prejudice, if any, should be determined by the arbitrator.

The Chief Justice, in his opening questioning, raised the question as to what should happen if the delay was excessive, e.g., the defendant waited until the case was resolved and a petition for cert. was denied before raising arbitration. Would the limited “no default” inquiry still apply? Without setting a specific time frame, Attorney Clement agreed that there might be too much of a delay in certain circumstances.  He posited that the proper test, however, should be that applied to a delayed motion to amend under Fed. R. Civ. P. 15 or motions to intervene under Rule 24, both of which require a showing of prejudice.

Justice Gorsuch addressed a failure by the courts to distinguish between waiver and forfeiture, an issue also raised in Zuckerman Spaeder.  If the true standard is one of forfeiture, he asked, why not simply remand the case to the Eighth Circuit with instructions to apply the law of waiver, i.e., the “intentional relinquishment of a known right, val non.  Nothing more.”  After suggesting that the court, instead DIP the case, dismiss the petition as improvidently granted – bait which Judge Gorsuch did not  take – Attorney Clement returned to the record, arguing it was devoid of any indication that the case had ever been viewed as an intentional relinquishment, making such an inquiry unnecessary.

As he had in the questioning of Petitioner’s counsel, Justice Kavanagh raised the appropriateness of the Zuckerman and Spaeder,  After arguing that any such change in standards, unless applied only prospectively, would be unfair to his client, Attorney Clement suggested a different point at which the presumption would attach – the commencement of discovery. Motion practice, he argued, may be necessary before the question of arbitration is raised. In this case specifically, he argued, plaintiff sought a nationwide collective class; the scope of that class was appropriately addressed before deciding whether there should be arbitration.

In closing, Attorney Clement and Justice Kagan had a long colloquy on whether requiring prejudice in order to establish a waiver defense to arbitration was “like two bites at the apple. There’s no incentive for anybody to go to arbitration fast, or there’s no incentive for the defendant. The defendant says, I have, like, this free pass to litigate for a while and then only then go to arbitration.”  In response, Attorney Clement argued that there are circumstances under which delay is understandable because of the nature of issues raised. Meanwhile, the unpredictability of a prejudice finding will impel a party to seek arbitration at an early date. “The prejudice inquiry is not so clear that you know you’re going to get a free pass.”

Attorney Gilbride’s rebuttal centered on the policy argument that adding a requirement of prejudice, with the legal and factual issues attendant thereto, would slow arbitrations in direct conflict with the FAA’s purpose to bring about a speedy resolution.

Because of his hospitalization on Friday, Justice Thomas did not participate in argument.  Chief Justice Roberts announced that the absent Justice would participate in the decision, based upon the transcript and audio of the argument.

On Wednesday, the court will hear two consolidated cases, ZF Automotive U.S., Inc. v. Luxshare, Ltd. and AlixPartners, LLP v. The Fund for Protection of Investors’ Rights in Foreign States, addressing whether 28 U.S.C. 1782, which authorizes U.S. courts to issue subpoenas to gather evidence in connection with proceedings before foreign “tribunals” authorizes “discovery” in connection with foreign, commercial arbitrations.  The issues raised have already been addressed extensively by the arbitration bar in both these cases and ­in the well-known Servotronics case, which was withdrawn after the Court scheduled argument.  So, I’ll hold off on case details until I report tomorrow or Thursday on the arguments.  If you want to pre-game the case, though, there is a great summary in this morning’s Scotusblog, Scotusblog.com.

David A. Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com