Professors usually take a sabbatical in order to write; over the last six months, after two years of sharing thoughts in this blog, I, effectively, took a sabbatical from writing.  With that break done and a fresh view of the project, it’s time to reboot “ADR Highlights.”  Fortunately, the Courts of Appeals have helped ease the reentry with several relevant – and, in one case, important – opinions.

Badgerow and Motions to Confirm in Stayed Cases

Two years ago, SCOTUS held that, under the language of Sections 9 and 10 of the Federal Arbitration Act, courts may not “look through” the allegations of an application to confirm or vacate an arbitration award in order to determine whether there may be federal question jurisdiction, Badgerow v. Walters, 596 U.S. 1 (2022).   Since then, the lower courts have been working out the effects of that holding.

In Badgerow, the Plaintiff, the loser in the subject arbitration, had filed a free-standing petition to vacate the award, and defendant counterclaimed to confirm.  But, what if the District Court, after compelling arbitration, simply stays the case? Does Badgerow still apply?  Since SCOTUS may mandate the stay of cases during the pendency of arbitration, rather than their dismissal, see Smith v. Spizzirri, Dkt. No. 22-1218 (argued April 22, 2024), the issue of “look-through” jurisdiction in stayed litigation will become central to arbitration jurisprudence.

Earlier this year, the Fourth Circuit applied the Badgerow doctrine to cases in which arbitration was ordered, but which remained on the District Court docket, SmartSky Networks, LLC. v. DAR Wireless, LTD, 93 F. 4^th 175 (4^th Cir. 2024).  Absent some other jurisdictional hook, the Court held, there is no subject matter jurisdiction to confirm the award.    So, how does the winner of the arbitration, in a case in which there is no diversity jurisdiction, confirm the award? Must it dismiss the pending litigation and bring a confirmation proceeding in state court, with the attendant costs and attorneys’ fees to draft and file a separate action? What if the winner is the defendant and, therefore, cannot simply dismiss the stayed, pending case on its own accord?  Must it incur the additional costs of a motion to dismiss in the federal case and, if it does not, will it run the risk that any state court action will be dismissed under the prior pending action doctrine?  In White v. Titlemax of Virginia, Inc., 2024 U.S. App. LEXIS 10593 (4^th Cir. May 1, 2024), Judges King, Thacker, and Harris, writing per curiam, suggest a solution.  While applying the SmartSky Networks doctrine as law of the Circuit and vacating the District Court’s confirmation of an award in which it applied the “look through” doctrine, the panel, in dictum, suggests that the lower court may retain subject matter jurisdiction under the doctrine of supplemental jurisdiction, 28 U.S.C.§ 1367, and, therefore, authority to confirm the award,

So, for those seeking to confirm in a case in which diversity jurisdiction, see 28 U.S.C. § 1332, is absent, there may still be an out – take the White court’s suggestion and rely on supplemental jurisdiction, arguing that the arbitration is “so related to claims in the action within [the court’s] original jurisdiction that they form a part of the same case or controversy. . . ,” 28 U.S.C. § 1367(a).  Also, since the SmartSky court holds that “all Section 9 and 10 applications must have an independent jurisdictional basis clear on the fact of the application,” 91 F. 4^th at 184 (Emphasis added), would a carefully drafted motion to confirm, which lays out in detail the federal statute upon which the arbitrator relied, invoke federal question jurisdiction? Imaginative lawyers are asking.

Manifest Disregard; Public Policy

Jeffries, LLC v. Decker, 2024 U.S. App. LEXIS 10423 (9^th Cir. April 30, 2024)(Circuit Judges Berzon and Mendoza and District Judge Liburdi, sitting by designation), joins the cases warning that counsel has almost no chance of setting aside a standard, non-reasoned award under the manifest disregard doctrine. Absent a look into the arbitrator’s thought process, the reviewing court cannot tell whether he or she ignored “well-defined, explicit, and clearly applicable” law, as required in order to vacate the award.  In dictum, the Court also raises the question of whether the ‘’public policy” basis for vacating an award survives the Supreme Court’s decision in Hall Street Associates, LLC. v. Mattel, Inc., 552 U.S. 576 (2008), though it opines that it is bound by the Ninth Circuit’s decision in CoreCivic, Inc. v. Candide Group, LLC, 46 F. 4^th 1136 (9^th Cir. 2022), holding that the doctrine is still viable.   However, for those defending against a “public policy” (or, by extension, manifest disregard) objection to an award, the argument as to the effect of Hall Street Associates could be a standard part of your trial notebook.

Arbitration of ERISA Claims; Effective Vindication

In Cedeno v. Sasson, 2024 U.S. App. LEXIS 10567 (2^nd Cir. May 1, 2024), the Second Circuit, in an opinion by Judge Robinson for himself and Judge Lohier, joins the Third, Seventh, and Tenth Circuits in holding that an ERISA plan’s requirement that a claimant may “bring their claims solely in their ‘individual capacity and not in a representative capacity’ and which prohibits them from seeking or receiving “any remedy that has the purpose or effect of providing additional benefits or monetary or other relieve to any Employee, Participant or Beneficiary other than the Claimant’” is unenforceable where he or she asserts that the Trustees’ alleged breach of fiduciary duty affects the Plan as a whole, see Henry v Wilmington Trust, NA, 72 F. 4^th 499 (3^rd Cir. 2023); Smith v. Board of Directors of Triad Manufacturing, Inc., 13 F. 4^th 613 (7^th Cir. 2021);  Harrison v. Envision Management Holding, Inc., 59 F. 4^th 1090 (10^th Cir. 2023). That requirement, the majority holds, would prohibit “effective vindication” of the Plan beneficiaries’ rights under ERISA, since Section 502(a)(2) thereof allows a beneficiary to assert claims to recover losses to the Plan as a whole from mismanagement. In effect, the court opines, the claimant is acting as an agent for the Plan, seeking recovery of funds which will inure to the benefit of the Plan itself and the removal of the Trustee.

Unlike the unanimous courts in Smith, Henry, and Harrison, the Cedeno opinion draws a dissent.  Judge Menashi opines that arbitration does not deny the claimant any rights to which he or she might be entitled under ERISA, but merely changes the mechanism for enforcing those rights from litigation to arbitration.  All the relief available under ERISA, Judge Menashi asserts, can be obtained by Claimant on an individual basis. The dissent also calls into question, while not deciding, the viability of the “effective vindication” theory.  In support of this position, however, Judge Menashi relies upon a dissent and a concurrence in the Supreme Court – hardly a ringing endorsement of his concerns.

Sign-in Wrap Agreements to Arbitrate; the Effect of Unenforceable Terms on Conscionability

Sign-in wrap agreements are one of the many variations of the ways in which on-line retailers attempt to obtain consent to terms of service, including arbitration, associated with the use of their site.  In Keebaugh v. Warner Bros. Entertainment, Inc., 2024 U.S. App. LEXIS 10170 (9^th Cir. April 26, 2024), Plaintiff alleged that Defendant’s “Game of Thrones: Conquest” contained false and misleading advertising.  Warner moved to compel arbitration under the Terms of Service referenced in its application.  As is typical of sign-in wrap agreements, Warner claimed that plaintiffs agreed to the terms and conditions of the site by tapping a “Play” link, thus gaining access to the game itself.  The District Court held that the reference to the site’s terms of service was insufficiently conspicuous and denied the motion. The Ninth Circuit, with Judge Bennett writing for himself and Circuit Judge Tallman and District Judge Lasnik, sitting by designation, reverses, holding that “because the notice provided by Warner Bros. is sufficiently conspicuous, a valid arbitration agreement exists between Warner Bros. and the non-minor plaintiffs.” (The Court of Appeals leaves to the District Court on remand the question of whether the agreement is binding on the minor plaintiffs and any claims of unconscionability. However, it strongly hints that those issues should be delegated to the arbitrator for resolution).  The decision breaks no new ground on the issue, but is useful to anyone creating the graphics of a sign-in page with links to terms of service, as it contains color graphics showing the relevant pages, rather than just a description thereof – a suggestion to other judges considering the issue.

The decision also addresses the effect on an arbitration clause which contains an unenforceable provision. As framed by the court, the arbitration clause “require[s] disputes to go to arbitration, thus barring consideration of a public injunctive claim in court, while also limiting the arbitrator’s ability to award remedies to only ‘that party’s individual claim.’” Such a limitation, the court holds, is unenforceable under California’s Private Attorney General Act (“PAGA”), see McGill v. Citibank, N.A., 2 Cal. 5^th 945 (2017).  However, the Court of Appeals holds, that unenforceability of a bar on PAGA relief does not render the entire arbitration clause unconscionable, because there are circumstances, such as attempts to bring class action claims, in which a bar on non-individualized relief is permissible.  Rather, the correct approach is to treat the specific limitation on PAGA relief as invalid and move the arbitration forward from there.

It’s good to be back at the keyboard.  Have a good weekend.

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