While there are no Court of Appeals cases today, the District Courts gave us some good meat. Two cases address the issues raised by the Supreme Court in Morgan regarding the elements of litigation waiver of an arbitration clause. The opinions language hint that there may be even more complications to come. Two other cases provide lessons in drafting scope clauses and definitions in arbitration agreements. Finally, we get a good explanation of the difference in the vacatur processes under the Federal Arbitration Act and the Labor Management Relations Act.
Waiver after Morgan
The nice thing about being a Supreme Court Justice is that you pronounce the law; lower courts have to implement it. Two post-Morgan cases demonstrate the difficulties which courts face in applying new precedent from on high.
In Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022), the U.S. Supreme Court invalidated the Eighth Circuit’s requirement that a party must demonstrate prejudice in order to establish that its opponent’s participation in litigation waived any requirement for arbitration. Since there is no such prejudice requirement to establish the waiver of other rights, SCOTUS held that imposing that barrier only in arbitration cases violated the Federal Arbitration Act’s requirement that courts treat arbitration clauses like any other contract provision. It reversed and remanded the case, with this Delphic direction to the court below.
“Stripped of its prejudice requirement, the Eighth Circuit’s current waiver inquiry would focus on Sundance’s conduct. Did Sundance, as the rest of the Eighth Circuit’s test asks, knowingly relinquish the right to arbitrate by acting inconsistently with that right? See supra, at 3. On remand, the Court of Appeals may resolve that question, or (as indicated above) determine that a different procedural framework (such as forfeiture) is appropriate. . . . Our sole holding today is that it may not make up a new procedural rule based on the FAA’s “policy favoring arbitration.”
Two recent cases have tried to determine what SCOTUS meant.
In Vollmering v. Assaggio Honolulu, LLC, 2022 U.S. Dist. 184938 (S.D. Tex. September 19, 2022), adopted without opinion, 2022 U.S. Dist. 183918 (S.D. Tex. Oct. 7, 2022)(Ramos, J.), Magistrate Judge Neurock addresses the post-Morgan world in the Fifth Circuit, which has not yet set out its revised waiver standard. Even “stripped” of its pre-Morgan prejudice requirement, the Circuit’s authority requires that one arguing waiver must establish that the party moving to compel arbitration “substantially invok[ed] the litigation process,” Forby v. One Technologies, LP, 13 F. 4th 460 (5th Cir. 2021)(Emphasis added). Magistrate Judge Neurock questions the continued vitality of both that elevated standard and the Circuit’s “’strong presumption’ against a finding of waiver, attributed to the ‘policy favoring arbitration.’” (citations omitted). He reasons that after Morgan any presumption against waiver or a “heavy burden of proof” may be “suspect,” “because such presumptions or proof burdens appear to be precisely what Morgan forbids; special procedural rules favoring arbitration.” Rather, after Morgan, “the Court perceives that this burden is no heavier than that required to prove waiver of any other type of contractual right, and that the measuring scale is no longer weighted on one side with a presumption against a finding of waiver.” However, despite this dictum, the court holds that defendant’s litigation conduct did not constitute a waiver under either this new test or the existing heightened standard.
Soriano v. Experian Information Solutions, Inc., 2022 U.S. Dist. LEXIS 185783 (M.D. Fla. Oct. 11, 2022)(Dudek, M.J.), questions the requirement that there be “substantial participation” in the litigation by the allegedly waiving party. Eleventh Circuit authority, the court opines, even after dropping the prejudice requirement, holds that “waiver of the right to arbitration occurs ‘when a party . . . substantially participates in litigation to a point inconsistent with an intent to arbitrate,’” citing Morewitz. v. West of England Ship Owners Mutual Protection and Indemnity Association (Luxembourg), 62 F. 3d 1356 (11th Cir. 1995)(Emphasis in opinion). The court opines that in other actions, such as the right to appraisal, there is a lower bar for finding litigation waiver; “mere active participation” may be enough to establish waiver, citing CMR Construction and Roofing, LLC v. Empire Indemnity Insurance Co., 843 F. App’x 189 (11th Cir. 2021)(Emphasis added). However, the court writes, “what remains of the Eleventh Circuit’s waiver test is best left for another day.” Applying either test, the court rules that, by waiting six months to raise its arbitration claim, defendant “drag[ged] the plaintiff (and the Court) through months of needless litigation.” Thus, it holds that Experian waived any right to compel arbitration.
So, how far will the lower courts extend Morgan? What does SCOTUS’s rationale really mean? Presumptions in favor of arbitration appear throughout the subject’s caselaw, affecting even such basic concepts the scope of arbitration agreements. Will courts now apply ordinary rules of contract interpretation – such as inferences against the drafter and expressio unius est exclusio alterius – to arbitration clauses?  In short, will we be entirely rewriting arbitration jurisprudence? Hopefully, if this is not SCOTUS’s intent, the Justices will soon find a case to turn back the flood. Meanwhile, if any law students are looking for a topic for their review note, the impact of cases like these is a great place to start.
Enforcement and Third-Party Beneficiaries
Two cases show the importance of carefully defining the parties covered by the arbitration provisions. Both decisions involve employees of staffing firms who were assigned to work for third parties. In each case, the employee signed an agreement with the staffing company, including an arbitration provision, but did not have a direct contract with the company where she was working.
In Vollmering v. Assaggio Honolulu, Inc., LLC, 2022 U.S. Dist. 184938 (S.D. Tex. September 19, 2022), adopted without opinion, 2022 U.S. Dist. 183918 (S.D. Tex. Oct. 7, 2022)(Ramos, J.)(also discussed above), Plaintiffs were employed by CSI, who assigned them to work at a restaurant owned by Assaggio. Their contract with CSI included an arbitration clause which covered disputes with “CSI and/or your assigned client company.” The court holds that Plaintiffs must arbitrate their wage claim with Assaggio because it was their “assigned client company,” and, therefore, a third-party beneficiary of the dispute resolution provision. However, the court holds that claims against their “supervisor” at the restaurant need not be arbitrated, as she is not named in the contract and Texas law “presumes that noncontracting parties are not third-party beneficiaries.” “[W]here third-party beneficiary status is doubtful, that status must be denied.” (Citations omitted).
In Hatch v. Optum Services, Inc., 2022 U.S. Dist. LEXIS 185839 (E.D. Ark. October 11, 2022)(Rudofsky, J.), Plaintiff worked for Maxim Health Care as a temporary Community Health Worker. Maxim sent her to work at its client, defendant Optum. She claims that Optum agreed to hire her full-time, but failed to do so because of her race. In her employment contract, Hatch agreed to arbitrate claims with “Maxim,” which is defined as “MAXIM HEALTHCARE SERVICES, INC, or any affiliated company and/or any of its parents, subsidiaries, affiliates, agents, officers, directors, successors, agents, assigns, [and] employees.” Although that language is broad, unlike the provision in Vollmering, it does not specifically reference claims against a client company like Optum. Nor, Judge Rudofsky holds, is such a client an “affiliate” of CIS. Therefore, Optum is not a third-party beneficiary of the arbitration mandate. Finding that the doctrine of equitable estoppel does not apply, the court denies Defendant’s application to compel arbitration.
LMRA v. FAA Statutes of Limitations on Applications to Vacate; Final Award
Cascade Steel Rolling Mills, Inc. v. United Steelworkers International Union, Local 8378 2022 U.S. Dist. LEXIS 184982 (D. Ore. August 12, 2022)(You, M.J.), discusses in detail the difference between vacatur of an award under the Federal Arbitration Act and under the Labor Management Relations Act. It is an indispensable case for labor litigators and is valuable for all arbitration practitioners.
Cascade sought to vacate a grievance arbitration award in favor of the Union. The arbitrator had entered both an interim and final award. In the interim award, dated January 14, 2021, he resolved the merits of the grievances in favor of the employees, but ordered the parties to “meet and agree on appropriate remedies” and retained jurisdiction “solely to deal with issues raised regarding the above remedy. . . . “ Cascade brought this action on July 23, 2021, before the issuance of the final award, and seeks to vacate the interim award. However, the court holds that the January interim award is not a “final award,” despite the arbitrator’s statement that he was functus officio after the interim award. An award, the court opines, is only final when it is “intended by the arbitrator to be [a] complete determination of every issue submitted.” (Citation omitted; brackets in original; emphasis added). Here, the arbitrator left open “specific contours of a remedy for the parties to determine.” Since the FAA gives a court jurisdiction to vacate only “final awards,” the court holds that it cannot consider the merits of the arbitration award – which were contained in the interim award – unless it obtains jurisdiction elsewhere. That qualifier raises the issue of the timeliness of Cascade’s challenge to the final award, which the arbitrator issued in September 2021.
The complaint challenged only the January, interim award, since Cascade brought the case before the arbitrator issued the final award. However, the Union counterclaimed to confirm the September final award. Cascade responded with a special defense seeking to vacate that latter award. The court holds that, although the request to vacate is not timely under the FAA, it is ripe under the Labor Management Relations Act. The statutes differ in both the time frame under which a party challenging the award must seek vacatur and the method for raising such a challenge. Under the FAA, “notice of a motion to vacate, modify or correct an award” must be “served . . . within three months after the award is filed or delivered,” 9 U.S.C. § 12. (Emphasis added in opinion). The court holds that, since the FAA refers to a “motion to vacate,” Cascade could not seek the relief through a pleading, such as its affirmative defense. Because more than three months had already passed from the date of the final award without Cascade’s filing of a “motion” to vacate, the challenge was untimely under the FAA. However, the LMRA provided Cascade with a life raft. That statute has no self-contained time limit in which to seek vacatur; under UAW v. Hoosier Cardinal Corp., 383 U.S. 696 (1966), the court determines the timeliness of such a challenge by looking to the “appropriate state statute of limitations.” Washington law, which applies in the case, provides that the time for asserting vacatur does not start to run until the “petitioner is served with a petition for confirmation of an award.” The Seventh Circuit views counterclaims as “affirmative actions,” citing Chauffeurs, Teamsters, Warehousemen & Helpers, Local 135 v. Jefferson Trucking Co. 628 F. 2d 1023 (7th Cir. 1980). Therefore, the court holds that a defense which seeks “the vacation of the arbitration award” is the equivalent of a complaint. Since a complaint for vacatur filed on the date when Cascade asserted its affirmative defense would be timely under Washington law, the court finds it can resolve Cascade’s challenge via the LMRA, despite the bar to consideration under the FAA,.
From Cascade’s viewpoint, however, the victory is Pyrrhic; the Magistrate Judge holds that the award draws its essence from the collective bargaining agreement and, therefore, recommends that the District Judge confirm it on the merits.
Have a good weekend. To those of you who still have teams in the baseball playoffs, good luck. My Pirates were toast by Memorial Day. Oh, well, “wait until next decade.”
David A. Reif