SCOTUS Hears Oral Arguments in Morgan and ZF Auto. Two More to Go

The Supreme Court heard oral arguments this week in two of four cases involving arbitration it will review within a fortnight.

We reported in December that the Supreme Court had granted Certiorari in four cases involving arbitration. Then SAA 2022-04 (Feb. 3) advised that the Court calendar released by SCOTUS on January 28 had set the cases for oral argument during the last two weeks of MarchThe Court this week heard oral arguments on March 21 in Morgan v. Sundance Inc., No. 21-328, and on March 23 in ZF Automotive US, Inc. v. Luxshare, Ltd., No. 21-401, and AlixPartners LLP v. The Fund for Protection of Investors’ Rights in Foreign States, No. 21-518. We offer in this squib a brief review of the cases and the arguments presented, and a look ahead to next week’s arguments.

A Brief Review

We covered these cases in detail in SAA 2021-47 (Dec. 16) and in a feature article, After a Lull in 2021, a Busy Year Ahead Arbitration-wise for SCOTUS2021:48 Sec. Arb. Alert 1 (Dec. 23, 2021). We provide below a thumbnail on the issues involved.

Morgan: Case Below and Waiver of Arbitration Rights: Cases involving whether a party has waived its right to compel arbitration typically involve whether that party participated in litigation and waited too long. The basic elements are whether the offending party: 1) had knowledge of its right to demand arbitration; 2) acted inconsistently with that right, and 3) thereby prejudiced the other party. The case below focused on the third element, with the Eighth Circuit majority holding that Sundance did not wait too long to press its arbitration rights and its conduct had not prejudiced Morgan: “The district court found Morgan was prejudiced by having to respond to Sundance’s motion to dismiss over the eight-month span of litigation. We disagree. Four months of the delay entailed the parties waiting for the disposition of Sundance’s motion to dismiss. No discovery was conducted. And, the record lacks any evidence that Morgan would have to duplicate her efforts during the arbitration. Instead, most of Morgan’s work focused on the quasi-jurisdictional issue, not the merits of the case. For these reasons, we hold Morgan was not prejudiced by Sundance’s litigation strategy. [] In the absence of a showing of prejudice to Morgan, we conclude Sundance did not waive its contractual right to invoke arbitration.”

Morgan: Issue Before SCOTUS: The question presented in the August 27 Petition is: “Does the arbitration-specific requirement that the proponent of a contractual waiver defense prove prejudice violate this Court’s instruction that lower courts must ‘place arbitration agreements on an equal footing with other contracts?’ [in] AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011).” The Petition notes that there is a significant split on the issue: “This Court should grant certiorari to resolve a longstanding circuit split on the question whether a party asserting waiver of the right to arbitrate through inconsistent litigation conduct must prove prejudice, and if so, how much. This question not only divides the federal courts of appeals but divides federal courts from geographically co-located state courts of last resort.…”

ZF Automotive – AlixPartners: The September 10 Petition in ZF Automotive asserts that the question before the Court “is substantively identical to the question presented in Servotronics, Inc. v. Rolls-Royce PLC, No. 20-794 (oral argument originally scheduled for Oct. 5, 2021; case removed from oral argument calendar Sept. 8, 2021): Whether 28 U.S.C. § 1782(a), which permits litigants to invoke the authority of United States courts to render assistance in gathering evidence for use in ‘a foreign or international tribunal,’ encompasses private commercial arbitral tribunals, as the U.S. Courts of Appeals for the Fourth and Sixth Circuits have held, or excludes such tribunals, as the U.S. Courts of Appeals for the Second, Fifth, and Seventh Circuits have held.” The October 5 Petition for Certiorari in AlixPartners, which is consolidated with ZF Automotive, states: “Whereas the arbitration in Servotronics was between two private parties, the arbitration here is between a private party and a foreign state — an application of Section 1782 upon which the United States has expressed ‘particular concern.’ The question presented is: Whether an ad hoc arbitration to resolve a commercial dispute between two parties is a ‘foreign or international tribunal’ under 28 U.S.C. § 1782(a) where the arbitral panel does not exercise any governmental or quasi-governmental authority.”

The Oral Arguments

Note: The oral arguments took place as scheduled with eight Justices participating. As revealed in a Press  Release, Justice Thomas was out ill. Chief Justice Roberts announced upfront before both arguments that he would: “participate in consideration and decision of the cases on the basis of the briefs and the transcripts of oral argument.”

Morgan: We had thought the issues were fairly simple as framed in the Petition: is this State rule of law, requiring a finding of prejudice, arbitration-specific and thus preempted by the FAA or does it apply to contracts in general and thus FAA compatible? But, the arguments were anything but simple. The discussion at times was esoteric (ed: not just our view), with the meanings of waiver, estoppel, forfeiture, and laches being debated. The prejudice requirement was not covered until well into the argument. The debates settled down to whether the outcome was governed by FAA section 3 (“ … providing the applicant for the stay [of litigation of an arbitrable matter] is not in default in proceeding with such arbitration”) or section 4 (“… if the jury finds that an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof”). At one point, there was a short colloquy about whether the Petition should be dismissed as improvidently granted – just as happened in Henry Schein, Inc. v. Archer and White Sales, Inc., No. 19-963. Recall that, as reported in SAA 2021-03 (Jan. 28), the Court in January 2021 in a one-line per curiam Order reversed its decision to grant Certiorari in its second look at Henry Schein, despite having just heard the oral argument the previous December. We won’t make any predictions – the Justices’ questions were all over the map and didn’t to us indicate where they might be heading – but we recommend that readers peruse the excellent analysis, Supreme Court Reviews the Role of Prejudice to a Party in Determining Arbitration Waiver, offered in the CPR Blog on March 21.

ZF Automotive – AlixPartners: As reported in SAA 2022-09 (Mar. 10), the Court’s February 28 Order List addressed oral argument time allocation: “the joint motion of the parties for divided argument and for enlargement of time for oral argument is granted. The motion of the Solicitor General for leave to participate in oral argument as amicus curiae, for divided argument, and for enlargement of time for oral argument is granted” (links added by the Alert). What were the specifics? The now-granted joint motion says: “[T]he parties believe that the overall argument time should be expanded to 80 minutes, with each side receiving 40 minutes. In that scenario, the ZF and AlixPartners petitioners agree that ZF should receive 15 minutes of argument time, AlixPartners should receive 10 minutes of argument time, and the United States should receive 15 minutes of argument time. And the ZF and AlixPartners respondents agree that Luxshare and the Fund should each receive 20 minutes of argument time.” The discussion here, with five attorneys presenting, consumed nearly two hours. This one to us was not nearly as esoteric – although the terms “comity” and “foreign tribunal” stole the spotlight – but the Court seems to be leaning against a more expansive application of section 1782 (just as asserted by the United States). For a comprehensive “chapter-and-verse” analysis, we recommend that readers peruse the March 23 posts: 1) Supreme Court Hears Arguments on Whether Section 1782 Allows Discovery for Use Before International Arbitration Tribunals, offered in the CPR Blog on March 23; and 2) High Court Debates U.S. Discovery for Private Arbitration Abroadappearing in Bloomberg Law.

The Week Ahead: Two More Arguments

On tap for next week are: Southwest Airlines Co. v. SaxonNo. 21-309 on March 28, and Viking River Cruises, Inc. v. MorianaNo. 20-1573 on March 30. We provide below a thumbnail on the issues involved and refer readers to an excellent post in the March 22 CPR Blog.

Southwest AirlinesFederal Arbitration Act (“FAA”) section 1 exempts from the Act: “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” As we have reported many times, there is a clear Circuit Court split on whether the FAA section 1 exemption embraces only workers actually moving goods or people in interstate commerce (Fifth, Seventh, and Eleventh Circuits) or is to be construed more broadly to cover those who are part of the “flow” or “stream” of interstate commerce (First and Ninth Circuits). The question presented in the August 23 Petition is: “Whether workers who load or unload goods from vehicles that travel in interstate commerce, but do not physically transport such goods themselves, are interstate ‘transportation workers’ exempt from the Federal Arbitration Act.”

Viking RiverWe have reported many times on Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348, 327 P.3d 129 (Calif. 2014), Cert. den., 135 S.Ct. 1155 (2015), where a divided 4-3 California Supreme Court – complete with partial concurrences and dissents – held that an employee could pursue claims against their employer under the California Private Attorneys General Act (“PAGA”), despite the existence of an arbitration agreement waiving such claims (see, for example, SAA 2015-01 and SAAs 2014-41 & -24). But did the U.S. Supreme Court’s subsequent decision in Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018), holding that class or collective action waivers are enforceable under the FAA, implicitly overrule Iskanian? The May 10 Petition in Viking River asks: “Whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA.”

A Handy Chart on All Four Cases

The chart below has information on the “Arbitration Final Four” cases. Oral arguments are audio live-streamed via the SCOTUS Website. The Court’s Website posts audio recordings and transcripts the same day as arguments.

March 21Morgan v. Sundance Inc., No. 21-328: prejudice requirement for waiver of arbitration rights. The transcript is here; the audio recording is here.

March 23: ZF Automotive US, Inc. v. Luxshare, Ltd., No. 21-401, and AlixPartners LLP v. The Fund for Protection of Investors’ Rights in Foreign States, No. 21-518; 18 USC 1782: discovery in foreign arbitration. The transcript is here; the audio recording is here.

March 28: Southwest Airlines Co. v. Saxon, No. 21-309: FAA section 1 preemption scope – is it limited to workers actually moving goods or people over state lines or is part of the “flow” or “stream” enough?

March 30Viking River Cruises, Inc. v. Moriana, No. 20-1573: FAA preemption of California’s PAGA.

(ed: *Our bottom line prediction? Both cases are too close to call. **Amicus Briefs aplenty were filed in all four cases and can be found by clicking on the link to each case. ***As we’ve said before, one wonders if SCOTUS is setting up another “Steelworkers Trilogy” scenario when the Court six decades ago simultaneously decided three landmark arbitration cases involving the United Steelworkers. The three cases, United Steelworkers v. American Manufacturing Co., 363 U.S. 564 (1960); United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593 (1960); and United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574 (1960), were all heard the same week (April 27-28, 1960), and the decisions were all announced seriatim on the same day (June 20, 1960). Is SCOTUS planning a redux with the “Arbitration Quartet”? Time will tell.) 

This article first appeared on the Securities Arbitration Alert Blog, here.

author

George Friedman

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…

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