The main news in the arbitration world since the last “Highlights” is the argument of two cases – one of them very significant – before the U.S. Supreme Court.  By the end of the Term, we should have some clarity a major issue regarding the Section 1 exceptions to the FAA.  In the meantime, here is some news from the District Courts.

SCOTUS

The Supreme Court heard two arbitration cases, one of which was argued today.  Last week, the Justices heard argument in Bissonnette v. LePage Bakeries Park St., LLC,  Dkt. No 23-51, which raises the question of whether the folks who deliver Defendant’s baked goods to stores are “workers engaged in . . . interstate commerce” within the meaning of Section 1 of the Federal Arbitration Act. If so, that statute does not empower the District Court to enforce the arbitration clause in the Plaintiffs’ distribution agreement; if not, the court may compel arbitration, subject to the usual defenses.  In Coinbase, Inc. v. Suski, Dkt. No. 23-3, which was argued this morning, the narrow issue is whether the delegation clause in the parties’ original contract assigns to the arbitrator issues as to claims under their subsequent agreement.  The case is fact-specific and may involve little more than the interpretation of applicable state law regarding the difference between the novation and the modification of a contract.  However, it may also give the Justices an opportunity to delve, even in dictum, into delegating to arbitrators the resolution of gateway issues that are otherwise left to the court.  The cases are widely covered elsewhere, including a Podcast in which I am participating that will  be posted soon to LinkedIn, so I will not go into more detail here.  To get copies of the briefs and other filings, go to SCOTUSblog.com.  Oral argument, both in audio and transcript, is available on the Supreme Court’s website.

Discovery Subpoenas

One of the common “hits” on arbitration is that discovery is more limited than it would be under the Federal Rules of Civil Procedure or most state practice.  Hörmann, LLC v. Clopay Corporation, 2024 U. S. Dist. LEXIS 32897 (N.D. Ohio, February 27, 2024)(Barker, J.), emphasizes those challenges. In connection with a trade secret arbitration, Clopay subpoenaed records from Hörmann, which was not a party to the proceeding.  However, the production under the subpoena was for purposes of pre-hearing discovery, not as part of a formal hearing before the panel.  The arbitrator issued the subpoena; Judge Barker here grants Hörmann’s motion to quash. Citing authority in the Second, Third, Fourth, Ninth, and Eleventh Circuits, while recognizing that the Eighth Circuit, in a minority view, has held otherwise, the court holds that Section 7 of the FAA only permits arbitrators to subpoena third parties “to attend before them.” (The citations are in the opinion). So, according to Judge Barker and the majority of Circuits considering the issue, absent agreement of parties, the first time that counsel might see or hear the testimony of a third-party, including any bad surprises that arise therefrom, will be on the record at a formal hearing before the panel.  Counsel beware.

Manifest Disregard

JB Exploration I, LLC v. Anthony Matthew Goffi Irrevocable Trust, 2024 U.S. Dist. LEXIS 32696 (N.D. W. Va. February 26, 2024)(Kleeh, C.J.), demonstrates the difficulty in vacating an arbitration award under the “manifest disregard” standard. (Editorial Note: There is a major Circuit split over whether “manifest disregard” is even a basis for vacatur; it is not listed among the statutory grounds set forth in Section 10(a) of the FAA, but has been grafted on by a number of Circuits.  Hopefully, SCOTUS will get the right case to clear up the issue next Term. In the meantime, counsel who have a choice of Circuits should consider the availability of this concept when deciding where to file a petition to vacate).  The parties, who had entered into a series of oil and gas leases, submitted issues as to amounts of payments due thereunder to arbitration.  In his award, the arbitrator relied upon three West Virginia authorities, although none addressed the exact legal issue raised in the proceeding.  He chose to cite to the dissent, rather than the majority opinion, in an arguably more relevant Fourth Circuit decision.  The Trust claimed that, by failing to follow the majority in the federal case, the arbitrator “manifest[ly] disregard[ed]” the law, and it sought to vacate the award.  Chief Judge Kleeh declines to do so, holding that the Fourth Circuit case was not binding on the arbitrator. “The Arbitrator was free to find the [reversed] district court opinion more applicable, and he did so.  Put simply, the Arbitrator did his job.  This Court is not tasked with deciding whether the result was correct.”

ERISA arbitration clauses; effective vindication doctrine

The “effective vindication” defense to a motion to compel arbitration argues that the court should not enforce an arbitration provision which prohibits a party from obtaining relief guaranteed under a federal statute. That defense often arises in the ERISA context, where an arbitration clause in the operating documents may only permit the claimant to enforce his or her individual rights.  Such a limitation, plaintiffs often argue, prohibits participants from asserting derivative claims on behalf of the Plan itself, a procedure which is authorized by ERISA’s section 502(a)(2); as a result, they seek to throw out the entire arbitration clause and proceed in court.  In Harris v. Paredes, 2024 U.S. Dist. LEXIS 32199 (N.D. Ill. February 26, 2024), Judge Johnston holds that, while Plaintiffs are right that a plan may not prohibit such relief, the language of the Plan before him did not do so.  He distinguishes plans which prohibit participants from bringing claims in a “representative capacity” – language which courts have held fails under the “effective vindication” concept – from that at issue here, which only barred claims brought on a “class, collective, or group basis.”   Under the subject language, he holds, a Participant may act as a “representative” of the Plan members and bring what is effectively a derivative action on behalf of the Plan against the Trustees.  So, for drafters of ERISA plans, here is authority under which you can maintain the enforceability of your arbitration clause with the drop of a single word.  Also, note that the Trustees of this plan amended the subject arbitration clause to remove the pre-existing bar on a Participant’s bringing “representative claims,” perhaps in an attempt to save their arbitration rights.

To those of you in the Midwestern U.S., be safe in the potential tornados. To those of you in warmer climes, the winterish Northeast says, “Bah!!!”

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