This article first appeared on the Securities Arbitration Alert (SAA) Blog, here.
As expected, President Trump on September 26 nominated Judge Amy Coney Barrett of the Seventh Circuit to fill the open seat at the Supreme Court resulting from the passing of Justice Ruth Bader Ginsburg.
We will leave to others reporting on the broad issues; we focus here on the nominee’s views on arbitration based on past decisions. So far, we’ve found five Opinions – four of which she authored – and a unanimous unexplained Order. Based on this very limited sampling, the jury is out on whether Judge Coney Barrett is pro-arbitration, although she certainly seems to lean that way. And the two cases involving FINRA’s arbitration forum resulted in wins for the Authority. We provide below a brief analysis of these arbitration-related cases, all of which we’ve covered previously in the Alert.
“Narrow” FAA Carveout Requires Interstate Movement of Goods or People to Be “Central Part” of Workers Job
At issue in Wallace v. Grubhub Holdings, Inc., Nos. 19-1564 & 19-2156 (7th Cir. Aug. 4, 2020), was whether Federal Arbitration Act (“FAA”) section 1 exempted from the Act Grubhub drivers, who sometimes moved goods in interstate commerce. To review, it is hornbook law that the FAA enforces predispute arbitration agreements (“PDAA”) involving a hint of interstate commerce. Section 1 however, has a carveout providing: “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The unanimous Wallace Court rejected the drivers’ argument that the FAA section 1 carveout covered workers moving goods that had in the past been transported in interstate commerce but who themselves did not regularly move goods or people in interstate commerce.
Says Judge Coney Barrett’s Opinion: “Section 1 of the FAA carves out a narrow exception to the obligation of federal courts to enforce arbitration agreements. To show that they fall within this exception, the plaintiffs had to demonstrate that the interstate movement of goods is a central part of the job description of the class of workers to which they belong. They did not even try do that, so both district courts were right to conclude that the plaintiffs’ contracts with Grubhub do not fall within § 1 of the FAA.” The Court established a “potato chip” test to illustrate the holding: “A package of potato chips, for instance, may travel across several states before landing in a meal prepared by a local restaurant and delivered by a Grubhub driver; likewise, a piece of dessert chocolate may have traveled all the way from Switzerland…. But to fall within the exemption, the workers must be connected not simply to the goods, but to the act of moving those goods across state or national borders.”
(ed: *We view this decision as pro-arbitration because it limits the FAA section 1 carveout. **There’s a clear Circuit split on whether the section 1 exemption embraces only workers actually moving goods or people in interstate commerce or is to be construed broadly to cover those who are part of the “flow” of interstate commerce.)
Evidence that is Not Newly-Discovered Nor Previously Unknown Cannot Be Used in a Motion to Reconsider Decision Finding No Standing to Enforce Arbitration Agreement
When employee Goplin began working at WeConnect, Inc., he signed an employment contract containing a predispute arbitration agreement containing a class/collective action waiver with an entity known as Alternative Entertainment, Inc. or AEI. The agreement in fact referred consistently to AEI and never to WeConnect. When he later brought a collective action against WeConnect under the Fair Labor Standards Act, defendant moved to dismiss and to compel arbitration under the Goplin-AEI PDAA. WeConnect asserted that it was the successor to AEI, and that “WeConnect” was merely AEI’s new corporate name. It supported this argument with an affidavit from its HR Director stating, “I am employed by WeConnect, Inc.-- formerly known as Alternative Entertainment, Inc. or AEI.” Goplin countered that WeConnect’s own Website stated that AEI and WeConnect had been two distinct legal entities prior to September 2016, when they merged to form WeConnect.
The District Court sided with Goplin, and later rejected WeConnect’s Motion to reconsider based on new evidence, “including some corporate-form documents and affidavits from its lawyer and CEO -- to support its claim that AEI had undergone a name change rather than a merger.” Why? Because the new documentation should have been offered in the original proceeding. Says a unanimous Court in Goplin v. WeConnect, Inc., 893 F. 3d 488 (7th Cir. 2018): “WeConnect’s evidence was neither newly discovered nor unknown; moreover, it could easily have produced these documents and affidavits the first time around.... Had WeConnect introduced the strongest evidence of its relationship with AEI from the get-go, it may well have convinced the district court that the two names referred to the same entity. But WeConnect miscalculated and relied on a conclusory sentence in a human resources affidavit to establish the corporate relationship between WeConnect and AEI. Based on the evidence it had before it, the district court’s finding was not clearly erroneous.”
(ed: *We see this one as neither fish nor fowl, since it was a narrow, technical jurisdictional holding. **Judge Coney Barrett’s Opinion also noted that WeConnect placed most of its briefing eggs in the Epic Systems basket, based on the Seventh Circuit’s prior decision reported in 823 F.3d 1147 (2016), banning class/collective action waivers in employment arbitration agreements. That decision was overruled by SCOTUS in May 2018 in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), and as the Court says in a footnote, “WeConnect’s reply focused primarily on enforceability of the agreement under the National Labor Relations Act and whether the agreement is procedurally or substantively unconscionable. Unfortunately, it gave very little attention to the issue now on appeal.”).
Courts, Not Arbitrators, Decide Whether Arbitration Agreement Authorizes Class or Collectible Arbitrations
Joining the Fourth, Sixth, Eighth, Ninth, and Eleventh Circuits, the Seventh Circuit holds unanimously that it is for the court to decide whether a PDAA provides for class or collective arbitration. The facts in Herrington v. Waterstone Mortgage Corp., No. 17-3609 (7th Cir. 2018), are relatively straight-forward. The District Court had compelled class arbitration of plaintiff Herrington’s wage and hour class and collective actions against her former employer, striking as unlawful the PDAA’s class/collective arbitration waiver provision. The dispute thereafter went to arbitration at the AAA, where the Arbitrator – based on the AAA’s Employment Arbitration Rules and its Supplementary Rules for Class Arbitrations – ordered a collective arbitration. Herrington and the 174 similarly-situated plaintiffs ultimately won a $10 million Award, and the District Court later confirmed it. On appeal, a unanimous Seventh Circuit vacates the Award, finding that the class/collective action waiver was valid and thus taints the Award resulting from a collective action. Says Judge Coney Barrett’s Opinion: “The lawfulness of the waiver is the easy part of this appeal. The hard part is a question that Epic Systems does not address: what happens next? Epic Systems makes clear that a waiver of the right to proceed in a class or collective arbitration is valid. But someone has to interpret the arbitration agreement – this time, including the waiver – to determine whether it authorized the collective arbitration that occurred.” The Court concludes that “the availability of class or collective arbitration is a threshold question of arbitrability. On remand, the district court, rather than the arbitrator, must evaluate Herrington’s contract with Waterstone to determine whether it permits class or collective arbitration.”
(ed: *We view this as a somewhat anti-arbitration holding, since it vacated an Award in favor of employees. **The case was initially a class arbitration but was converted to a collective one. ***We’re a bit confused. The law to us is well-settled that arbitrability questions are presumptively for courts to decide absent “clear and unmistakable evidence” that the parties intended to delegate. The Court here skirts the threshold question of whether the AAA’s Rules constitute sufficient evidence that the parties intended to delegate arbitrability issues to the arbitrator.)
Federal Jurisdiction Rejected in Suit Against FINRA By Dissatisfied Clients (Majority Holding)
Two securities brokers, Nicholas Webb and Thad Beversdorf, initiated an arbitration against their former employer, Jefferies & Co., but withdrew their claim without a hearing. Unhappy with FINRA’s handling of their arbitration, they then filed a suit against the Authority in state court. FINRA removed the case to federal court, citing diversity jurisdiction, and successfully moved to dismiss on arbitral immunity grounds. Plaintiffs appealed. Although both plaintiffs and FINRA agreed that the federal court had jurisdiction over the suit, a majority of the Panel hearing the case disagrees in Webb v. FINRA, No. 17-2526 (7th Cir. 2018). The primary issue was whether plaintiffs, who seek to recover their attorneys’ fees for both the suit against FINRA and the underlying arbitration, meet the $75,000 threshold for diversity of citizenship jurisdiction; that, in turn, depends on whether it is “legally impossible” for them to recover attorneys’ fees. The American Rule, Judge Coney Barrett’s majority Opinion holds, precludes plaintiffs’ recovery of their attorneys’ fees in the suit. Nor are plaintiffs entitled to the attorneys’ fees they incurred from the arbitration. Thus, the attorneys’ fees incurred by plaintiffs do not provide grounds for diversity jurisdiction. FINRA (but not the plaintiffs) argues alternatively that plaintiffs’ state-law claim confers federal question jurisdiction, because a federal issue is “necessarily raised” by the state-law claim and will be “actually disputed.” Judge Coney Barrett’s majority Opinion states that the fact that FINRA’s Code of Arbitration Procedure is approved by the SEC does not mean plaintiffs’ breach of contract claim will require interpretation of the federal securities laws. Therefore, it vacates the district court’s dismissal order and remands the matter back to the state court.
(ed: *Another neither “fish nor fowl” decision in our view, since it involved a federal jurisdiction question and not a core arbitration issue. **The dissenting judge disagreed that it was “legally impossible” for plaintiffs to recover their attorney fees incurred in the underlying jurisdiction, and would therefore find diversity of citizenship jurisdiction over the suit.)
Part of Unanimous Seventh Circuit Panel Outlining Framework for Providing Collective Action Notices to Parties Subject to PDAAs.
At issue in Bigger v. Facebook, Inc., No. 19-1944 (7th Cir. Jan. 24, 2020), was “whether a court may authorize notice to individuals who, according to the defendant, entered valid arbitration agreements waiving their right to join the action.” The case involved a putative Fair Labor Standards Act collective action, with the Defendant asserting that notices to potential participants should not be sent to individuals covered by a PDAA. In a case of first impression, the unanimous Court that included Judge Coney Barrett holds that: “a court may not authorize notice to individuals whom the court has been shown entered mutual arbitration agreements waiving their right to join the action. And the court must give the defendant an opportunity to make that showing.” The Court then articulates what a reviewing court should do in these instances: “We hold that when a defendant opposing the issuance of notice alleges that proposed recipients entered arbitration agreements waiving the right to participate in the action, a court may authorize notice to those individuals unless (1) no plaintiff contests the existence or validity of the alleged arbitration agreements, or (2) after the court allows discovery on the alleged agreements’ existence and validity, the defendant establishes by a preponderance of the evidence the existence of a valid arbitration agreement for each employee it seeks to exclude from receiving notice.”
(ed: *Although a procedural ruling, we put this one in the pro-arbitration camp. **The Opinion in footnote 1 indicates the ruling applies also to class actions. ***Query what would happen in a case governed by the FINRA rules, where a PDAA is present, but plaintiff-employees could show that FINRA Rule 13204 gives them the right to individual arbitration or class/collective action participation?)
Another Pro-FINRA Decision Upholding Arbitrators’ Scheduling Zoom Hearing Over A Party’s Objection (Part of Unanimous Panel)
We reported last summer on Legaspy v. FINRA, No. 1:20-cv-04700, which was filed August 11 in the U.S. District Court for the Northern District of Illinois, alleging breach of contract because the FINRA Code of Arbitration Procedure doesn’t expressly authorize hearings to be held by videoconference absent party agreement. We monitored the telephonic argument held August 12, that included as participants counsel for FINRA, Legaspy, and the other parties in the underlying arbitration. In a thorough 10-page decision issued August 14, District Judge Lefkow goes through each of the plaintiff’s assertions and rejects them. Legaspy appealed on August 14 to the Seventh Circuit, which in a one-page Order posted the same day declined to issue either a temporary or preliminary injunction or to expedite briefing. Judge Coney Barrett was part of the Panel.
(ed: *This is a nominally pro-arbitration decision since the Court declined to stay the arbitration hearing. **Email us at Help@SecArbAlert.com for a copy of the Seventh Circuit’s Order.)
Jury is Still Out
Based on this very limited sampling, we can’t draw firm conclusions about whether Judge Barrett is pro-arbitration. She, does, however, seem to lean pro-arbitration and be a literalist on jurisdictional issues. And FINRA Dispute Resolution Services went two-for-two on decisions challenging actions taken by arbitrators or the forum.
(ed: We’ll keep looking for other arbitration-centric decisions, and invite readers to alert us if they know of any others by emailing George@SecArbAlert.com.
George H. Friedman is the publisher and Editor-in-Chief of the Securities Arbitration Alert, a weekly online publication covering the latest developments in financial services arbitration and mediation. He is also the principal of George H. Friedman Consulting, LLC, providing expert advice on arbitration and mediation in general and the FINRA dispute resolution forum in particular.
He is former Executive Vice President - Dispute Resolution of the Financial Industry Regulatory Authority (“FINRA”), a position he held through January 2013. He held the same title at NASD, which consolidated with NYSE Member Regulation to form FINRA in 2007. In this capacity, he was in overall charge of FINRA's dispute resolution program, carried out by the company's four regional offices and 72 hearing locations in the United States and abroad, 200 employees, and an annual budget of $50 million. He also served as Secretary of the Securities Industry Conference on Arbitration. He has been referred to by the U.S. Court of Appeals—4th Circuit as a “leading arbitration expert.” He is a member of the American Arbitration Association's National Roster of Neutrals.
Mr.Friedman is an Adjunct Professor of Law at Fordham Law School, where he has taught a course on alternative dispute resolution since 1996. He is Chairman of the Board of Directors of Arbitration Resolution Services, Inc. of Coral Springs, Florida. Arbitration Resolution Services is an innovative online arbitration services company facilitating an affordable alternative to costly courtroom litigation and in-person arbitration for resolving Business-to-Business, Business-to-Individual, and Vehicle and Property Damage disputes. ARS is unique in that its entire process can be completed online through the company website.
In his extensive dispute resolution career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He joined NASD in 1998 as Senior Vice President of NASD's Dispute Resolution Division, and was named Executive Vice President in 2002.
Mr. Friedman received a B.A. in Political Science from Queens College, and a Juris Doctor from Rutgers Law School - Newark, where he was an editor of the Law Review. He is admitted to the New York and New Jersey Bars and the United States Supreme Court, and is a Certified Regulatory and Compliance Professional. Mr. Friedman is a member of the Securities Experts Roundtable, and of several bar associations. He is past chair of the Committee on Alternative Dispute Resolution of the New York County Lawyers Association. He is a member of the Banking Advisory Committee of Bergen (NJ) Community College.
Mr. Friedman has lectured extensively on the subject of alternative dispute resolution, and has the distinction of being one of the architects of the American Arbitration Association’s Due Process Fairness Protocols for both employment arbitration and health care dispute resolution, and assisted in creating the Consumer Due Process Protocol. He has published often, with articles appearing in the Securities Arbitration Commentator, the ABA's Dispute Resolution Magazine, the New York Law Journal, the Rutgers Law Review, and the National Law Journal. He has blogs at Arbitration Resolution Services, Inc., the Securities Arbitration Commentator, and the World Future Society, among others.