The Circuits woke up in the last three days. While all the cases are important, Bissonnette is essential reading for everyone, and labor litigators and arbitrators should not miss A&D’s take on arbitration and collective actions.
Interstate Commerce Exception to FAA; Stay v. Dismissal; Application of State Arbitration Act
The Second Circuit’s decision on Thursday in Bissonette v. LePage Bakeries Park St., LLC, 2022 U.S. App. LEXIS 12156 (2nd Cir. May 5, 2022) is important – but, in many ways, strange.
The facts are fairly simple. Bissonnette and others in the putative class operate bread delivery routes in Connecticut pursuant to distribution agreements. Under those agreements, the plaintiffs purchase baked goods from defendants’ warehouses, sell them to restaurants and stores, and keep the difference between the purchase and sale prices. In addition to delivering the product, they service the stores by rotating stock and soliciting orders. The distributors acquire their own vehicles and help. In short, they seem to operate their own wholesale businesses.
In this class action, Bissonnette seeks overtime pay and alleges violations of the Fair Labor Standards Act and state law. The parties’ distribution agreements contain an arbitration clause which defendants moved to enforce. Plaintiffs claimed the district court may not use the Federal Arbitration Act as a basis for enforcement, as they are exempt under Section 1 thereof. This set up the now-familiar debate as to the scope of the exemption of transportation workers “engaged in foreign or interstate commerce.” The District Court, holding that the exemption did not apply because of the nature of the tasks which the plaintiffs perform, granted the motion to compel and dismissed the action.
The Second Circuit panel, by a two to one majority, affirms. However, unlike most opinions on the exemption topic, including that of the District Judge below, which focus on the duties performed by the employee (such as an Uber or last-mile delivery driver), Circuit Judge Jacobs, writing the lead opinion in which District Judge Gujarati, sitting by designation, concurs, looks to the nature of the purported employer. Section 1, the majority holds, applies only if “the industry in which the individual works pegs its charges chiefly to the movement of goods or passengers and the industry’s predominant source of commercial revenue is generated by that movement. On this basis, the plaintiffs are in the bakery industry. . . . [T]he stores and restaurants are not buying the movement of the baked goods, so long as they arrive. The charges are for the baked goods themselves, and the movement of those goods is at most a component of total price. The commerce is in breads, buns, rolls and snack cakes – not transportation services.” In support, Judge Jacobs cites Hill v. Rnt-A-Ctr., Inc., 398 F. 2d 1286 (11th Cir. 2005), which he reads as holding that “an account manager at a company that rents and delivers furniture across state lines was subject to the FAA because he was ‘not a transportation worker.’” Because, in the opinion’s view, Defendants are not transportation companies, the Court finds that it need not undertake the analysis used by the District Court and consider the Plaintiff’s own job functions.
In what is essentially a long dictum, Judge Jacobs also writes separately, concurring in his own majority opinion. He addresses the oft-arising issue of whether, having ordered arbitration, a court should stay or dismiss the action. Here, the District Court dismissed the case on Defendants’ motion; Plaintiffs did not move for a stay. Judge Jacobs holds that Section 3 of the FAA requires the District Court to stay the case, rather than dismiss it, even if neither party seeks a stay. “Reading Section 3 to require a stay pending arbitration regardless of whether a stay has been requested is consistent with the FAA’s pro-arbitration posture.” In reaching that conclusion, he calls the Circuit’s earlier precedent in Katz v. Cellco Partnership, 794 F 3d 341 (2nd Cir. 2015) “regrettable.” “Katz can be read to meant that, when no stay is requested, the district court retains discretion to stay the case or dismiss it. That reading is invited by Katz without being compelled by it.” (Emphasis in opinion). Such a reading, Judge Jacobs argues, is simply wrong; even without a motion, the district court must stay the underlying litigation when it compels arbitration. It is important to note that District Judge Gujarati does not sign onto this concurrence, and the majority opinion does not address this issue. Thus, for now, the law in the Second Circuit is still governed by Katz; this opinion merely adds gloss to the interpretation thereof.
Judge Jacobs’ opinion is also worth reading as it is one of the first, if not the first, to address the broader effects of Badgerow v. Walters, 142 S. Ct. 1310 (2022), which SCOTUS decided on March 31st and which rejects “look-through” federal subject matter jurisdiction over petitions to confirm or vacate an arbitration. In a footnote, Judge Jacobs quotes from Justice Breyers’ Badgerow dissent, in which the Justice suggests a court compelling arbitration based on a “look through” analysis might stay an action, rather than dismiss it, so as to retain the ability to confirm or vacate any subsequent award therein.
In dissent, Judge Pooler retains the focus on the job of the “employee,” rather than the
“employer,” in determining whether the Section 1 exemption applies. “[T]he plaintiffs here are paradigmatic transportation workers.” “And like seamen and railroad employees – against whom a putative transportation worker’s work should be measured – the plaintiffs’ daily work is ‘centered on the transportation of good in interstate or foreign commerce.’” (Internal citation omitted). Judge Pooler makes it crystal clear that her focus is on the employee, not the employer, in applying Section 1. “Because of the movement of goods through interstate commerce is a central part of the plaintiffs’ occupation as truckers,” she holds that the FAA does not apply to their agreements (Emphasis added). In a somewhat aggressive move in the genteel world of the Second Circuit, Judge Pooler actually titles a portion of her opinion “The Majority’s Errors” and addresses over half of her writing to ticking off ways in which “the majority’s contrary conclusion is supported neither by the FAA’s text nor any case interpreting it.”
While the main part of Judge Pooler’s decision focuses on Section 1 of the FAA, she addresses two other important questions. First, she departs from Judge Jacobs’ opinion that a district court must stay an action, rather than dismiss it, even absent a motion to do so. Second, because of the specific language of the parties’ agreement, she would hold that they could not seek to compel arbitration under the Connecticut arbitration act if the FAA were unavailable.
The opinion raises two interesting issues. Since the majority’s opinion that the FAA only applies where “the industry in which the individual works pegs its charges chiefly to the movement of goods or passengers and the industry’s predominant source of commercial revenue is generated by that movement,” has the Circuit now held that all last-mile drivers delivering goods sold by their employer do not fall under Section 1’s “foreign or interstate commerce” exception? Amazon certainly does not make most of its money from delivery. Does the panel really mean that, contrary to authorities elsewhere in the country, such drivers – along with all warehouse drivers – are not subject to the FAA exemption? And, will the Circuit let that major decision from a split panel stand without an en banc hearing?
Second, why decide the case now? The U.S. Supreme Court heard oral argument in Southwest Airlines Co. v. Saxon, Dkt. No. 21-309, on March 28th and will undoubtedly decide that case this term. While Southwest Airlines certainly falls with the majority’s definition of a “transportation company,” SCOTUS’s decision is likely to give guidance as to parameters of Section 1 and the prism through which to examine that provision. Was there a reason the panel did not hold this case for a month or so and await guidance from SCOTUS? Isn’t it likely that, after that Southwest Airlines is decided, there will be a motion from one of these parties to reconsider this opinion or, at a minimum, a petition for cert.? Judicial efficiency and party expense would seem to have called for a short delay. Unfortunately, we will never know the panel’s thinking on why they acted now, but, ah, to have been a fly on the wall at the conference.
Other Circuit Court Decisions
Bissonnette is a major decision that is worth in-depth discussion both here and in your offices. But, on a smaller scale, other Circuits also spoke up over the last couple days.
Notice in Collective Actions to Parties Who May Be Required to Arbitrate
On Wednesday, the Fifth Circuit clarified its earlier decision in In re: JPMorgan Chase & Co., 916 F. 3d 494 (5th Cir. 2019). That case addressed whether the court should give notice of a collective action to potential plaintiffs who signed arbitration agreements. One issue among District Courts after JPMorgan has been whether such notice should be given before the resolution of a motion to compel such arbitrations or only after all challenges thereto have been rejected. In re: A&D Interests Inc., 2022 U.S. App. LEXIS 11979 (5th Cir. May 3, 2022). In a per curiam opinion, with Judges Smith and Willett in the majority and Judge Higginson dissenting, the court holds that the “court’s focus should be on whether those receiving notice will be able to ‘ultimately participate in the collective [action]’” (Brackets in opinion). Since “the district court apparently recognized that the arbitration agreement would prevent the opt-in plaintiffs from ultimately participating in the collective action,” the majority holds that the lower court erred by sending them notice. The Court issues a mandamus, the terms of which are not clear in the opinion, but which apparently prohibits the district court’s issuance of notice of the action to putative class members who signed arbitration agreements.
Judge Higginson dissents, taking the view that, until it is faced with and resolves a motion to compel arbitration, “the district court has not addressed whether Petitioners [A&D] waived their right to do so or whether the arbitration agreements are enforceable.” Therefore, including all employees as recipients of the first notice of the action is not inconsistent with any arbitration obligation.
Electronic Signatures During On-Boarding
In a short opinion, Soni v. Solera Holdings, L.L.C., 2022 U.S. App. LEXIS 12079 (5th Cir. May 4, 2022)(Barksdale, J.; Steward, J.; and Dennis, J, per curiam), the Court reenforces the concept that an employee’s mere statements that he or she does not remember signing an arbitration agreement are insufficient to create a question of fact related to contract formation. While the case does not add anything new to the jurisprudence, it is worth keeping as a citation within the Circuit.
United States ex rel Dorsa v. Miraca Life Sciences, Inc., 2022 U.S. App. LEXIS 12056 (6th Cir. May 4, 2022)(Cole, J., writing for himself and Judges Gibbons and Larsen), is a reminder of the risks of changing trial strategy mid-stream. Dorsa sued under the False Claims Act (“FCA”), alleging that Miraca fired him because he brought a qui tam claim. In 2019, Defendant moved dismiss the claim, arguing that the court should hold that the plaintiff’s claim fell within the scope of an arbitration clause included in his employment agreement. Only in its reply brief did it argue that the arbitrator, not the court, should resolve this gateway question. The district court ruled in favor of Dorsa, holding that the FCA claim had nothing to do with Dorsa’s employment. Miraca appealed; the appeal was dismissed for lack of jurisdiction. On remand, Miraca moved to stay the proceedings and compel arbitration, arguing that an arbitrator, not the court, should decide the arbitrability claim upon which it based its initial motion to dismiss. The Court of Appeals affirms the District Court’s holding that, by not raising the delegation issue in the motion to dismiss, Miraca waived any right it may have had to refer threshold questions to the arbitrator. By initially asking the District Court to resolve the issue, Miraca took steps “inconsistent with any reliance on the arbitration agreement” and caused Dorsa to incur duplicative expenses.
Moral – I do not second guess counsel who are on the ground, who know the case better than I ever will, and there may well have been good reason for the change in position. But, as a general matter, Dorsa is a reminder of the importance of thinking through a case from the beginning and keeping a consistent strategy. Waiving a potentially good claim is hard to explain to the client.
Appointing an Arbitrator Who Does Not Qualify
Public Risk Innovations, Solutions, and Management v. Amtrust Financial Services, Inc. 2022 U.S. App. LEXIS 12104 (9th Cir. May 4, 2022)(Circuit Judges Bybee and R. Nelson and District Judge Rakoff, sitting by designation), addresses whether the appointment of an arbitrator who does not qualify constitutes the “fail[ure]” to appoint. The parties’ dispute resolution agreement provided that, if a party did not “appoint” its arbitrator within thirty days, the other party would make the appointment. PRISM made a timely appointment, but the court found that the nominee, because of previous relationships, did not satisfy the contract’s requirements for a qualified arbitrator. However, the district judge allowed PRISM to make a new appointment. The Ninth Circuit affirms, holding that “an arbitrator was appointed within the appropriate time. It just so happens that the appointed individual was unqualified. The question is simply whether that appointment amounts to a total failure to appoint an arbitrator, such that PRISM must surrender its rights under the contract. We think not.” The court rejects AmTrust’s parade of horribles in which a party delays arbitration by “nominating one unqualified arbitrator after another.” “[A]ny such strategy would fail for a lack of good faith – and we find so such lack in this case.”
I am sitting as an arbitrator on Monday and Tuesday and attending the Connecticut Bar Litigation Section’s retreat (where I am presenting on “Arbitration Is Not Litigation Sitting Down”) on Wednesday through Friday. So, there will be no Highlights next week. See you on the 17th.
David A. Reif, FCIArb