Strategic Use of Arbitration Provisions in Nonprofits’ Contracts

In the nonprofit sector, organizations often face unique legal challenges that require efficient and cost-effective dispute resolution mechanisms. Arbitration provisions in contracts can offer nonprofits a strategic advantage by providing a streamlined process for resolving disputes. Below, we explore the benefits and strategic considerations for incorporating arbitration clauses in contracts, drawing on recent developments and case law.

Background and Legal Basis

Arbitration is increasingly favored in the business context for its efficiency, cost-effectiveness, and confidentiality. Unlike traditional litigation, arbitration generally allows parties to resolve disputes more quickly and with less expense, which is particularly beneficial for nonprofits operating on limited budgets. The process is also private, protecting sensitive information related to donors and beneficiaries, avoiding potential adverse publicity and reputational harm, and has less risk of unpredictability like a “run-away” jury verdict.

The Federal Arbitration Act (FAA), enacted in 1925, provides the foundational legal framework for arbitration in the United States. As a result, arbitration agreements involving interstate or foreign commerce are enforceable and binding. The FAA’s core principle is to support a national policy favoring arbitration, overcoming historical resistance in some areas.

The Uniform Arbitration Act and its revised version offer a model statute adopted by most states to ensure the enforceability of arbitration agreements, even in the face of state laws that may be hostile to arbitration.

Under these arbitration statutes, federal or state courts may be involved both before or after arbitration. First, the courts are empowered to order parties to arbitrate where an enforceable arbitration agreement exists. Second, the courts may conduct a substantially limited review of an arbitration award and may enter judgment on the award or, in some cases, vacate the award or order further arbitration proceedings.

Federal Court Jurisdiction

Most trial lawyers prefer federal courts. However, the FAA does not automatically confer federal court jurisdiction over arbitration matters. Federal court jurisdiction requires a federal question or diversity of citizenship between the parties. When one of the arbitrating parties is structured as an LLC or non-corporate entity, determining diversity can be complex because it is based on the citizenship of the individuals or corporations that ultimately own the entity, regardless of how many layers are in the ownership structure. Thus, as a practical matter, many arbitration matters are decided within state courts.

Arbitration Rules

There is no requirement that an arbitration agreement select an arbitration organization to administer the arbitration. Private arbitration, where the parties self-administer the matter, is possible but increasingly rare. Instead, there are two major arbitration organizations in the United States and many smaller ones. The two major organizations are the American Arbitration Association (AAA) and the Judicial Arbitration and Mediation Services (JAMS). Each organization has several sets of arbitration rules focused on the nature of the dispute. For example, there are rules for general commercial disputes, expedited cases, and larger, more complex matters. Selecting the applicable rules is an important consideration when drafting an arbitration provision.

Drafting Arbitration Clauses

When drafting arbitration clauses, clarity and precision are paramount; otherwise, you risk entering into litigation to interpret the clause. At the very least, the arbitration clause should cover the when, where, which, and how details of the arbitration process. Nonprofits should consider whether to use broad or narrow clauses. Broad clauses cover all disputes arising from or relating to the contract, while narrow clauses limit arbitration to specific issues. Sample clauses are available from the AAA and JAMS that provide templates for structuring effective arbitration agreements. These clauses should specify the rules governing arbitration, the number of arbitrators, and the location of proceedings, among other issues.

Deemed Arbitration Clauses

Courts have found other contractual clauses to be arbitration clauses and subjected them to the requirements for arbitration. For example, a real estate contract that included a procedure involving three experts to determine the actual square footage development potential of a property to be sold was deemed an arbitration clause. Thus, when the parties disagreed as to the determination by the experts, the court performed only the substantially limited review used to review arbitration awards, not a broader review that would allow reversal for mistakes or law or fact.

Conclusion

For nonprofits, arbitration provisions offer a strategic tool for managing disputes efficiently and confidentially. However, nonprofits should carefully draft effective arbitration clauses that align with their operational needs and legal obligations. Thoughtful consideration of the scope, rules, and procedural requirements will ensure that arbitration serves as a valuable mechanism for dispute resolution.

Important Considerations for Mediation

“You can’t always get what you want. But if you try sometimes, well, you just might find, you get what you need.” – Mick Jagger and Keith Richards

Successful Mediation. Unlike the regular adjudication of a legal dispute, in mediation there is no “decision-maker” to determine who is “right” or “wrong.” No final order or judgment is issued. Instead, a good mediation will result in a resolution created by both parties that satisfy both parties’ interests or concerns. Mediators are not looking to find fault or assign blame – rather, a mediator works with the parties to problem solve and find creative solutions and proposals.

Selecting a Mediator. In some court programs there is a list of “pre-approved” mediators. The mandatory Alternative Dispute Resolution program in the Western District of Pennsylvania has such a list. In the Allegheny County Court of Common Pleas there will be no such guidance on preferred mediators. Pennsylvania does not have any national or statewide organization that certifies mediators. However, there is training available and basic mediation training is generally a 40-hour course covering problem solving, conflicts, communication skills, ethics and practical skills in role plays and other exercises. Mediators should have attended at least a basic mediation training course as well as have experience in mediating civil cases.

©2022 Strassburger McKenna Gutnick & Gefsky

US Supreme Court Holds That Airline Cargo Loaders Are Exempt From Arbitration

The US Supreme Court has held that airline cargo loaders who load and unload cargo from planes that travel across state lines are exempt from the Federal Arbitration Act (FAA) because they belong to a “class of workers engaged in foreign or interstate commerce” under § 1 of the FAA. Southwest Airlines Co. v. Saxon (June 6, 2020).

Background

Latrice Saxon worked for Southwest Airlines and was responsible for training and supervising teams of ramp agents who load and unload airplane cargo on Southwest planes that travel across state lines. Saxon brought a collective action alleging failure to pay proper overtime wages FLSA in the Northern District of Illinois. However, Saxon had signed an arbitration agreement requiring her to arbitrate her wage disputes, and Southwest moved to dismiss the lawsuit and to compel arbitration under the FAA.

Saxon opposed the motion, invoking § 1 of the FAA, which exempts “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” She argued that ramp supervisors, like seamen and railroad employees, were an exempt “class of workers engaged in foreign or interstate commerce,” but the district court agreed with Southwest and found that only employees involved in “actual transportation,” not those who merely handle goods, fell within § 1 of the FAA. On appeal, the Seventh Circuit Court of Appeals disagreed with the District Court’s decision, holding that “[t]he act of loading cargo onto a vehicle to be transported interstate is itself commerce.” The Seventh Circuit’s decision conflicted with an earlier decision of the Fifth Circuit, Eastus v. ISS Facility Services, Inc., 960 F. 3d 207 (2020), and the Supreme Court granted certiorari to resolve the conflict between the two circuits.

The Supreme Court’s Decision

In a unanimous decision, the Supreme Court held that loaders who load and unload airplane cargo that travels intrastate play a direct role in the interstate transportation of goods and therefore belong to a “class of workers engaged in foreign or interstate commerce” under § 1 of the FAA. The Court engaged in a two-step analysis. First, it considered how to define the relevant “class of workers.” The Court rejected Saxon’s argument that the “class of workers” should be defined as virtually all airline employees, which would include shift schedulers or those who design Southwest’s website. Rather, the Court held that the inquiry must focus on the job duties of the employees themselves, rather than the employer’s business and that Saxon “belongs to a class of workers who physically load and unload cargo on and off airplanes on a frequent basis.”

Next, the Court considered whether that class of airplane cargo loaders “engaged in foreign or interstate commerce.” It determined that “one who loads cargo on a plane bound for interstate transit is intimately involved with the commerce of that cargo” and that workers like Saxon who load and unload airplane cargo that travels in interstate commerce are exempt from the FAA.

Takeaway for Employers

Though the Court did find a class of workers exempt from the Federal Arbitration Act, it expressly rejected the assertion that this exemption should apply to all employees of an employer engaged in foreign or interstate transportation. It went on to provide examples of positions that would not satisfy the exemption, such as workers engaged in the sale of interstate asphalt or workers who supply janitorial services to a corporation engaged in interstate commerce.

Employers engaged in interstate or foreign transportation commercial should consult legal counsel if they plan to utilize arbitration agreements as part of their dispute resolution process.

© 2022 ArentFox Schiff LLP

Supreme Court Holds That Judges Can’t Invent Rules Governing Arbitration Waiver

Litigators who defend cases brought under the Fair Labor Standards Act (“FLSA”), particularly ‘collective actions” alleging wage-and-hour violations, often have been able to counter, or even sometimes support, allegations that arbitration agreements have been waived where the conduct of a party has caused prejudice to the other side. In the case of Morgan v. Sundance, Inc., a unanimous Supreme Court has now held that the determinant of waiver is solely dependent upon the nature and magnitude of the actions of the party that might be inconsistent with arbitration, without respect to alleged prejudice.

Morgan thus is an important case for any civil litigator, but it is especially significant for those who deal with employment disputes potentially governed by arbitration agreements, and for those who draw up such agreements in the first place. As is well known, the Court has, in recent years, frequently upheld the primacy of arbitration agreements pursuant to the Federal Arbitration Act (FAA). In the Morgan case, a unanimous Court does it again. Ms. Morgan was an hourly employee at a Taco Bell franchise who had signed an arbitration agreement intended to govern employment disputes. Notwithstanding the arbitration agreement, Morgan went to federal court to bring a nationwide “collective action” arguing that her employer had violated the Fair Labor Standards Act. Sundance, a franchisee of Taco Bell, initially defended against the lawsuit as if the arbitration agreement didn’t exist—filing a motion to dismiss (which the District Court denied) and engaging in mediation (which was unsuccessful). Next, Sundance moved to stay the litigation and compel arbitration under the FAA—almost eight months after Morgan filed the suit. Morgan then expectedly opposed on grounds of waiver of the right to arbitrate.

The governing precedent in the Eighth Circuit, where the case was litigated below, conditioned a finding of waiver of an arbitration agreement on whether the party knew of the right, “acted inconsistently with that right,” and—critical here– “prejudiced the other party by its inconsistent actions.” In deciding that issue, the Court below, as had eight other circuits, invoked “the strong federal policy favoring arbitration” to decide the matter of waiver. Two circuits rejected that rule, and the Supreme Court granted cert. to resolve that split. Justice Kagan, writing for all of the Justices, agreed with those two circuits.

Holding that “the FAA’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules,” and deciding no other issue with respect to the merits, the Court remanded the case for further proceedings that focus on the whether the employer relinquished its right to arbitrate by its actions that were inconsistent with it. Whatever an employer might otherwise have preferred (given the prior law in most courts of appeals), given the Supreme Court’s holding that any presumption of arbitration and the fact of prejudice are irrelevant, the Morgan case gives clear guidance in several regards, particularly demanding arbitration, if applicable, at the outset of a formal dispute, and resisting any discovery, to the extent possible, until the issue of arbitrability is decided. A defense against waiver simply based on prejudice is not going to fly.

©2022 Epstein Becker & Green, P.C. All rights reserved.

Are they Worth Price of Paper They're Printed On? – Ubersization of Arbitration Clauses

Arbitration has long been treated as an inferior method of resolving disputes, despite pronouncements to the contrary from the U.S. Supreme Court. However, arbitration does serve a purpose. The process is less formalized, so it moves much faster than the court system. That means less disruption to business. It’s also less expensive than bringing a civil action, making it easier for individuals to assert their rights or air their grievances. For these reasons and more, many businesses have incorporated arbitration provisions into their contracts and handbooks. The Federal Arbitration Act was enacted in 1925, yet these types of contractual agreements to arbitrate still get shot down in certain courts and by certain administrative authorities.more

Drivers v. Uber – The Arbitration Dispute

In Uber’s California litigation, Judge Chen has examined various aspects of the arbitration provisions contained in the various versions of Uber’s agreements with its drivers.  The 2013 Agreement and the 2014 Agreement shared several key features:

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(3) the delegation clause in the provision stated that “disputes arising out of or relating to the interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision” shall be decided by the arbitrator; and,

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

In separate litigation, the Court had Uber revise the opt-out provision to make it more conspicuous and less onerous on the drivers.  Because the 2013 Agreement contained the original opt-out provision, it did not stand a chance of being found enforceable.  In later 2014 and 2015 Agreements,  Uber included the provision in boldface and ALL CAPS with text larger than the provisions around it.  Language also was added to explain the significance of arbitration and the right to opt-out.  Additionally, to exercise that right now, a driver need only send an email to Uber stating his/her name and the desire to opt-out (although he/she could send a letter by regular mail, overnight delivery, or hand-delivery, too).  As a result, when the Court certified a class on September 1, 2015, those drivers who failed to opt-out of the provision were excluded from the class.  However, in December, the Court found the arbitration agreements were unenforceable on California public policy grounds, irrespective of the opt-out provision, thus dramatically increasing the size of the class.

Meanwhile, delegation clauses, like the one set forth under (3) above, seem to cause consternation in courts across the nation.  Even the U.S. Supreme Court has recognized that courts are the typical adjudicators of whether the parties have agreed to arbitrate in the first instance.  Because a delegation clause puts this determination in the hands of the arbitrator instead, it must be clear and unmistakable.  In Uber’s case, the clause was clear, but it was made ambiguous because it conflicted with other clauses contained in the Agreements.  For instance, a separate clause in Uber’s 2013 and 2014 driver agreements stated that the state and federal courts in San Francisco had exclusive jurisdiction over any disputes, actions, or claims arising out of the Agreement.  While Uber argued that the forum selection clause reserving jurisdiction in San Francisco courts was for any disputes found not subject to arbitration, Judge Chen did not buy into that argument.  He felt the clauses conflicted, and since the courts would have to apply rules of construction to resolve the ambiguity created by the competing clauses, that meant that the delegation clause was not clear and unmistakable, and therefore, was unenforceable.

The arbitration provision in Uber’s 2013 and 2014 Agreements also addressed responsibility for payment of the arbitrator’s fees.  It provided that if applicable law did not require Uber to pay for all of the costs and fees of arbitration, then the costs would be apportioned between the parties as required by law.  Judge Chen found that because the delegation clause would force drivers to pay exorbitant fees just to arbitrate whether or not their substantive disputes even belonged before the arbitrator in the first place, when drivers would not have to pay a court to make that determination, such a clause deprived drivers of any forum for their claims.

The arbitration provision contained three additional unfavorable terms which Judge Chen found were not sufficiently highlighted for the drivers’ attention.  For one, the confidentiality clause precluded the parties from disclosing the existence, contents, or results of any arbitration.  For another, the intellectual property carve-out clause excluded intellectual property disputes from arbitration – something the Court found favored Uber.  Finally, the unilateral modification clause permitted Uber to unilaterally modify the terms of the agreement without notice to the drivers.  As a result of all of the foregoing issues, the Court found the agreements to arbitrate were unconscionable.  Thus, Judge Chen refused to enforce them.

Can an enforceable arbitration agreement even be written? 

Arbitration agreements are evaluated on a case-by-case basis.  While many are still disfavored, as I mentioned earlier, they are more likely to be upheld if they are not unconscionable.  The procedural component of the unconscionability analysis usually deals with the formation of the agreement itself.  This includes the characteristics of the parties (e.g., age, literacy, sophistication), the manner and circumstances under which the contract was executed, and whether terms of the agreement are hidden or complex, among other things.  The substantive component looks at the unfairness of the agreement.  Judge Chen, acknowledging that the issue wasn’t fully settled, nevertheless evaluated the arbitration provision through the lens of an employer/employee relationship.  Let me provide some tips that make arbitration agreements more likely to be upheld by courts in the employment context.

  • Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.

  • While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.

  • If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.

  • Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.

  • The remedies available in arbitration should be similar to those available in court.

  • Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

© Steptoe & Johnson PLLC. All Rights Reserved.

Are they Worth Price of Paper They’re Printed On? – Ubersization of Arbitration Clauses

Arbitration has long been treated as an inferior method of resolving disputes, despite pronouncements to the contrary from the U.S. Supreme Court. However, arbitration does serve a purpose. The process is less formalized, so it moves much faster than the court system. That means less disruption to business. It’s also less expensive than bringing a civil action, making it easier for individuals to assert their rights or air their grievances. For these reasons and more, many businesses have incorporated arbitration provisions into their contracts and handbooks. The Federal Arbitration Act was enacted in 1925, yet these types of contractual agreements to arbitrate still get shot down in certain courts and by certain administrative authorities.more

Drivers v. Uber – The Arbitration Dispute

In Uber’s California litigation, Judge Chen has examined various aspects of the arbitration provisions contained in the various versions of Uber’s agreements with its drivers.  The 2013 Agreement and the 2014 Agreement shared several key features:

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(3) the delegation clause in the provision stated that “disputes arising out of or relating to the interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision” shall be decided by the arbitrator; and,

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

In separate litigation, the Court had Uber revise the opt-out provision to make it more conspicuous and less onerous on the drivers.  Because the 2013 Agreement contained the original opt-out provision, it did not stand a chance of being found enforceable.  In later 2014 and 2015 Agreements,  Uber included the provision in boldface and ALL CAPS with text larger than the provisions around it.  Language also was added to explain the significance of arbitration and the right to opt-out.  Additionally, to exercise that right now, a driver need only send an email to Uber stating his/her name and the desire to opt-out (although he/she could send a letter by regular mail, overnight delivery, or hand-delivery, too).  As a result, when the Court certified a class on September 1, 2015, those drivers who failed to opt-out of the provision were excluded from the class.  However, in December, the Court found the arbitration agreements were unenforceable on California public policy grounds, irrespective of the opt-out provision, thus dramatically increasing the size of the class.

Meanwhile, delegation clauses, like the one set forth under (3) above, seem to cause consternation in courts across the nation.  Even the U.S. Supreme Court has recognized that courts are the typical adjudicators of whether the parties have agreed to arbitrate in the first instance.  Because a delegation clause puts this determination in the hands of the arbitrator instead, it must be clear and unmistakable.  In Uber’s case, the clause was clear, but it was made ambiguous because it conflicted with other clauses contained in the Agreements.  For instance, a separate clause in Uber’s 2013 and 2014 driver agreements stated that the state and federal courts in San Francisco had exclusive jurisdiction over any disputes, actions, or claims arising out of the Agreement.  While Uber argued that the forum selection clause reserving jurisdiction in San Francisco courts was for any disputes found not subject to arbitration, Judge Chen did not buy into that argument.  He felt the clauses conflicted, and since the courts would have to apply rules of construction to resolve the ambiguity created by the competing clauses, that meant that the delegation clause was not clear and unmistakable, and therefore, was unenforceable.

The arbitration provision in Uber’s 2013 and 2014 Agreements also addressed responsibility for payment of the arbitrator’s fees.  It provided that if applicable law did not require Uber to pay for all of the costs and fees of arbitration, then the costs would be apportioned between the parties as required by law.  Judge Chen found that because the delegation clause would force drivers to pay exorbitant fees just to arbitrate whether or not their substantive disputes even belonged before the arbitrator in the first place, when drivers would not have to pay a court to make that determination, such a clause deprived drivers of any forum for their claims.

The arbitration provision contained three additional unfavorable terms which Judge Chen found were not sufficiently highlighted for the drivers’ attention.  For one, the confidentiality clause precluded the parties from disclosing the existence, contents, or results of any arbitration.  For another, the intellectual property carve-out clause excluded intellectual property disputes from arbitration – something the Court found favored Uber.  Finally, the unilateral modification clause permitted Uber to unilaterally modify the terms of the agreement without notice to the drivers.  As a result of all of the foregoing issues, the Court found the agreements to arbitrate were unconscionable.  Thus, Judge Chen refused to enforce them.

Can an enforceable arbitration agreement even be written? 

Arbitration agreements are evaluated on a case-by-case basis.  While many are still disfavored, as I mentioned earlier, they are more likely to be upheld if they are not unconscionable.  The procedural component of the unconscionability analysis usually deals with the formation of the agreement itself.  This includes the characteristics of the parties (e.g., age, literacy, sophistication), the manner and circumstances under which the contract was executed, and whether terms of the agreement are hidden or complex, among other things.  The substantive component looks at the unfairness of the agreement.  Judge Chen, acknowledging that the issue wasn’t fully settled, nevertheless evaluated the arbitration provision through the lens of an employer/employee relationship.  Let me provide some tips that make arbitration agreements more likely to be upheld by courts in the employment context.

  • Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.

  • While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.

  • If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.

  • Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.

  • The remedies available in arbitration should be similar to those available in court.

  • Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

© Steptoe & Johnson PLLC. All Rights Reserved.

Deflategate: A Critique of Judge Berman's Decision

By now, almost everyone is familiar with Judge Berman‘s decision vacating Commissioner Roger Goodell’s award upholding a four-game suspension of New England quarterback Tom Brady in connection with the tampering of air levels in footballs during the 2015 AFC Championship game. Judge Berman found that Commissioner Goodell’s award was deficient in the following respects:

(1) that Brady had no notice that the conduct for which he was suspended — being generally aware of the misconduct of an equipment assistant and locker room attendant who deflated the balls and then refusing to cooperate with the subsequent investigation — was prohibited conduct for which he could be disciplined;

(2) that Brady was denied the opportunity to examine one of the two lead investigators who authored the investigative report upon which Commissioner Goodell relied, namely NFL Executive Vice President and General Counsel Jeff Pash; and

(3) that Brady was denied equal access to investigative files, including witness interview notes.

Judge Berman did not remand to correct these errors, but simply vacated the award.

Did Judge Berman Properly Follow the Standard for Review? How sound was Judge Berman’s decision? 

From an analysis of his opinion and well-established Supreme Court authority he was supposed to follow, it may have been the Judge himself who overstepped his bounds. It is important to remember that Commissioner Goodell’s role was that of arbitrator; the collective bargaining agreement permitted him to assume that role if he so chose and he did so choose. The level of deference that courts must give an arbitrator is extreme: in essence, as long as the arbitrator is arguably construing or applying the contract, and acting within the scope of his authority, a court cannot overturn his decision. While Judge Berman superficially acknowledged this standard, it does not appear that he actually followed it. Instead, he appeared to apply some type of “common law of the workplace” to find that Brady’s treatment was fundamentally unfair.

The first sign that Judge Berman was straying from his role was his failure to cite or acknowledge any of the leading U.S. Supreme Court cases establishing the basic principles regarding judicial review of labor arbitration awards in the collective bargaining context. The Supreme Court repeatedly has emphasized that a court is not authorized to reconsider the merits of a labor arbitration award even though the parties may allege the award was decided on errors of fact or on a misinterpretation of the contract. The Supreme Court has explained this extreme deference as emanating from the federal policy inherent in Section 301 of the Labor Management Relations Act (LMRA) favoring the settlement of labor disputes by arbitration. In essence, the parties contracted for the settlement of their dispute by an arbitrator of their choice; if dissatisfied with his decision, they are free to select a different arbitrator in the future.

The Supreme Court’s Garvey Decision

In particular, Judge Berman did not cite or deal with the Supreme Court’s decision in Major League Baseball Players Ass’n v. Garvey. This was striking, as that case, like Brady’s, arose in the context of the review of an arbitrator’s award under the collective bargaining agreement of a professional players association. The facts and decision the Garvey case are worth reviewing, as they demonstrate just how deferential the Supreme Court expects courts to be:

Steve Garvey, an All-Star first baseman, alleged that his contract with the San Diego Padres had not been extended in the 1988 and 1989 baseball seasons as part of the owners’ collusion in the market for free agents that an arbitrator had found to have taken place. He sought damages under a framework that had been set up to determine and evaluate individual player’s claims for damages due to that finding of collusion. Garvey’s main piece of evidence was a letter from the Padres’ President, Ballard Smith, admitted to the non-extension of the contract due to the collusion. However, the arbitrator rejected Garvey’s grievance by discrediting the letter because it contradicted the President’s testimony in the earlier arbitration in which the collusion had been found to exist. Bizarrely, however, in that earlier proceeding the same arbitrator specifically had found that testimony to be non-truthful in concluding there had been collusion.

Finding the arbitrator’s decision “completely inexplicable and border[ing] on the irrational,” the Court of Appeals for the Ninth Circuit vacated the award, finding the only justification for the arbitrator’s decision was “his desire to dispense his own brand of industrial justice.” Reversing, however, the Supreme Court claimed to be “baffled” by what the Court of Appeals did in light of the clearly expressed deferential standard for reviewing labor arbitration awards under Section 301. The Supreme Court acknowledged that the arbitrator’s ruling may have appeared to the Court of Appeals as “improvident or even silly,” but even so that did “not provide a basis for a court to refuse to enforce the award.” According to the Supreme Court, even when a federal judge considering the arbitration award is “convinced that the arbitrator committed serious error, it does not suffice to overturn [the arbitrator’s] decision.” This is also true when an arbitrator’s “procedural aberrations rise to the level of affirmative misconduct,” for a federal court may not “interfere with an arbitrator’s decision that the parties [players and owners] bargained for.”

Judge Berman Relied More on the Federal Arbitration Act Than Cases Under Section 301

Had Judge Berman paid closer heed to decisions such as Garvey, he might have been less inclined to wade into the weeds of assessing Commissioner Goodell’s claimed procedural aberrations. Judge Berman instead appeared to rely more heavily on cases applying the Federal Arbitration Act (FAA), which establishes four limited statutory grounds for vacating an arbitration award. Judge Berman zeroed in on the FAA’s exceptions allowing vacatur where the arbitrator is “guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy” or in “exceeding his powers.”

The problem with relying on the FAA, however, is that the FAA has been held not to apply to labor disputes, although to be sure federal courts have often looked to the FAA for guidance in labor arbitration cases. Section 301, which does apply, does not provide statutory grounds for vacating a labor arbitration award, although, as seen, the Supreme Court has made clear what a court may not do. As the body of case law applying Section 301 has developed, the main reasons a court may vacate a labor arbitration award appear to be if (i) the award does not “draw its essence” from the labor agreement, meaning it conflicts with the express terms of the agreement, imposes additional requirements not expressly provided for in the agreement, or is based on “general considerations of fairness and equity” instead of the exact terms of the agreement; or (ii) it violates a well-settled and prevailing public policy.

The Problems With Judge Berman’s Findings

Judge Berman first found fault in Commissioner Goodell’s award because the Judge found that Brady did not have notice that he could receive a four game suspension for general awareness of a scheme to deflate footballs, or for non-cooperation with the NFL’s investigation. He also attacked Commissioner Goodell’s reasoning in looking to penalties for violations of the league’s steroid policy as a justification for upholding a four game suspension. He further found that Brady had no notice he could be suspended rather than fined. Citing decisions by other arbitrators involving NFL players, Judge Berman concluded that Commissioner Goodell violated the “law of the shop” by failing to find there was inadequately notice of prohibited conduct and potential discipline.

In all of this, however, Judge Berman was doing what the Supreme Court has stated a judge should not do: second-guessing the arbitrator. For example, the so-called “law of the shop” is not something akin to the common law that a court must follow. Rather, it is up to the labor arbitrator alone to interpret precedent by other arbitrators or, as the Supreme Court has put it, to simply to conclude “that he was not bound by” a prior arbitrator’s decision. Judge Berman relied heavily on decisions by other arbitrators in other high-profile NFL cases — such as “Bounty-Gate” and the Ray Rice and Reggie Langhorne cases — to find that Brady was entitled to the type of notice that Judge Berman thought he was entitled to. But that simply was not Judge Berman’s role to say.

Moreover, Brady’s notice contentions were acknowledged and rejected by Commissioner Goodell in his post-hearing detailed award that was also based on his assessment of the evidence — including Brady’s credibility and the exhaustive Wells investigative report upon which he relied. There can be no question that in so doing the Commissioner was “arguably construing or applying the contract,” which is all it took to require enforcement of his award. In short, the Commissioner was entitled to disbelieve that two equipment employees would take it on their own to deflate the footballs without the knowledge or involvement of the quarterback of the team, and to conclude that Brady’s awareness was conduct detrimental to public confidence in the integrity of the game. He also was entitled to believe that Brady deserved to be penalized for refusing to cooperate with the investigation and then destroying his cell phone rather than turn it over to the investigators, even if there was no specific rule that said he could not do this.

Judge Berman was on similarly weak footing in attacking the punishment meted out (suspension versus fine) because he thought it was error for Commissioner Goodell to uphold the penalty by borrowing from the schedule of penalties for violations of the league’s steroid policy. Again, such judgment calls are quintessentially for the arbitrator, and the suspension penalty echoed the penalty that the Patriots themselves had issued to its equipment employees for their roles.

Relying on the FAA, Judge Berman further justified his decision to vacate Commissioner Goodell’s award based on the latter’s refusal to allow Jeff Pash to testify at the arbitration hearing. Judge Berman found this to be “fundamentally unfair,” because Pash was the co-lead investigator of the investigation, known as the Wells Report. Commissioner Goodell had excluded Pash because Pash had not in fact played substantive role in the investigation, his role having been limited to comments on the draft of the report. Commissioner Goodell moreover regarded any testimony by Pash  as cumulative, as Wells, the report’s architect, was allowed to testify. But Judge Berman determined that Pash would have had valuable insight into the course and outcome of the investigation and into the drafting and content of the Wells Report. Therefore, he found that Brady was prejudiced because he could not explore how truly independent the report was.

Again, Judge Berman appeared to have simply second-guessed Commissioner Goodell, given that Commissioner Goodell had substantial discretion to admit or exclude evidence without having to “follow all the niceties observed by the federal courts.”  Commissioner Goodell had at least a colorable basis for excluding Pash’s testimony. Indeed, his rationale for excluding that testimony was that which a court might have applied. Further, Judge Berman’s conclusion as to how Brady was prejudiced appeared speculative as to whatever additional value Pash’s testimony would have supplied.

Judge Berman came closest to presenting a valid basis for vacating the award in his determination that Commissioner Goodell had improperly denied Brady equal access to Wells’ investigative files and interview notes. Commissioner Goodell had justified his denial of access to those files, including interview notes, because they had played no role in the disciplinary decisions, which were based on the Wells Report itself. But as Judge Berman observed, the Wells Report was based on those notes. Furthermore, compounding the prejudice to Brady was that Wells’ law firm, Paul, Weiss, acted as both independent counsel and as retained counsel to the NFL during the arbitration hearing. NFL counsel therefore had access to the investigate file for direct and cross examination while Brady had no such access.

These observations have some merit. After all, it does not seem fair that Brady had no access to the notes and interviews upon which the report was based, especially when the same law firm that produced the report also represented the NFL at the arbitration hearing. But Article 46 of the collective bargaining agreement expressly limited discovery to the exchange of exhibits upon which the parties intended to rely at the hearing. The Commissioner’s decision to deny additional discovery was based on his interpretation of that provision, such that it at least arguably “drew its essence” from the collective bargaining agreement. Furthermore, as stated, Commissioner Goodell asserted that the investigation notes played no role in his decision on appeal, and other notes had been provided, such as the interview notes from the NFL’s own investigators.

Judge Berman Should Have Remanded

The final error in Judge Berman’s decision is that he did not remand the case. The procedural and due process errors appeared to be correctable. For example, Judge Berman could have instructed Commissioner Goodell to reconvene the hearing to allow Brady to access the Wells investigative files and to call Pash as a witness. In the Garvey case, the Supreme Court expressly criticized the Ninth Circuit for not remanding, because by not remanding the court in essence was deciding the case. Here, too, Judge Berman in essence was resolving the dispute, and without even making any judgment as to whether Brady did or did not have a role in the tampering that took place.

Immediately after Judge Berman issued his decision, the NFL announced it was appealing. Based on Judge Berman’s apparent failure to properly follow the applicable highly deferential standard, the NFL’s chances for success on appeal appear to be good.

Deflategate: A Critique of Judge Berman’s Decision

By now, almost everyone is familiar with Judge Berman‘s decision vacating Commissioner Roger Goodell’s award upholding a four-game suspension of New England quarterback Tom Brady in connection with the tampering of air levels in footballs during the 2015 AFC Championship game. Judge Berman found that Commissioner Goodell’s award was deficient in the following respects:

(1) that Brady had no notice that the conduct for which he was suspended — being generally aware of the misconduct of an equipment assistant and locker room attendant who deflated the balls and then refusing to cooperate with the subsequent investigation — was prohibited conduct for which he could be disciplined;

(2) that Brady was denied the opportunity to examine one of the two lead investigators who authored the investigative report upon which Commissioner Goodell relied, namely NFL Executive Vice President and General Counsel Jeff Pash; and

(3) that Brady was denied equal access to investigative files, including witness interview notes.

Judge Berman did not remand to correct these errors, but simply vacated the award.

Did Judge Berman Properly Follow the Standard for Review? How sound was Judge Berman’s decision? 

From an analysis of his opinion and well-established Supreme Court authority he was supposed to follow, it may have been the Judge himself who overstepped his bounds. It is important to remember that Commissioner Goodell’s role was that of arbitrator; the collective bargaining agreement permitted him to assume that role if he so chose and he did so choose. The level of deference that courts must give an arbitrator is extreme: in essence, as long as the arbitrator is arguably construing or applying the contract, and acting within the scope of his authority, a court cannot overturn his decision. While Judge Berman superficially acknowledged this standard, it does not appear that he actually followed it. Instead, he appeared to apply some type of “common law of the workplace” to find that Brady’s treatment was fundamentally unfair.

The first sign that Judge Berman was straying from his role was his failure to cite or acknowledge any of the leading U.S. Supreme Court cases establishing the basic principles regarding judicial review of labor arbitration awards in the collective bargaining context. The Supreme Court repeatedly has emphasized that a court is not authorized to reconsider the merits of a labor arbitration award even though the parties may allege the award was decided on errors of fact or on a misinterpretation of the contract. The Supreme Court has explained this extreme deference as emanating from the federal policy inherent in Section 301 of the Labor Management Relations Act (LMRA) favoring the settlement of labor disputes by arbitration. In essence, the parties contracted for the settlement of their dispute by an arbitrator of their choice; if dissatisfied with his decision, they are free to select a different arbitrator in the future.

The Supreme Court’s Garvey Decision

In particular, Judge Berman did not cite or deal with the Supreme Court’s decision in Major League Baseball Players Ass’n v. Garvey. This was striking, as that case, like Brady’s, arose in the context of the review of an arbitrator’s award under the collective bargaining agreement of a professional players association. The facts and decision the Garvey case are worth reviewing, as they demonstrate just how deferential the Supreme Court expects courts to be:

Steve Garvey, an All-Star first baseman, alleged that his contract with the San Diego Padres had not been extended in the 1988 and 1989 baseball seasons as part of the owners’ collusion in the market for free agents that an arbitrator had found to have taken place. He sought damages under a framework that had been set up to determine and evaluate individual player’s claims for damages due to that finding of collusion. Garvey’s main piece of evidence was a letter from the Padres’ President, Ballard Smith, admitted to the non-extension of the contract due to the collusion. However, the arbitrator rejected Garvey’s grievance by discrediting the letter because it contradicted the President’s testimony in the earlier arbitration in which the collusion had been found to exist. Bizarrely, however, in that earlier proceeding the same arbitrator specifically had found that testimony to be non-truthful in concluding there had been collusion.

Finding the arbitrator’s decision “completely inexplicable and border[ing] on the irrational,” the Court of Appeals for the Ninth Circuit vacated the award, finding the only justification for the arbitrator’s decision was “his desire to dispense his own brand of industrial justice.” Reversing, however, the Supreme Court claimed to be “baffled” by what the Court of Appeals did in light of the clearly expressed deferential standard for reviewing labor arbitration awards under Section 301. The Supreme Court acknowledged that the arbitrator’s ruling may have appeared to the Court of Appeals as “improvident or even silly,” but even so that did “not provide a basis for a court to refuse to enforce the award.” According to the Supreme Court, even when a federal judge considering the arbitration award is “convinced that the arbitrator committed serious error, it does not suffice to overturn [the arbitrator’s] decision.” This is also true when an arbitrator’s “procedural aberrations rise to the level of affirmative misconduct,” for a federal court may not “interfere with an arbitrator’s decision that the parties [players and owners] bargained for.”

Judge Berman Relied More on the Federal Arbitration Act Than Cases Under Section 301

Had Judge Berman paid closer heed to decisions such as Garvey, he might have been less inclined to wade into the weeds of assessing Commissioner Goodell’s claimed procedural aberrations. Judge Berman instead appeared to rely more heavily on cases applying the Federal Arbitration Act (FAA), which establishes four limited statutory grounds for vacating an arbitration award. Judge Berman zeroed in on the FAA’s exceptions allowing vacatur where the arbitrator is “guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy” or in “exceeding his powers.”

The problem with relying on the FAA, however, is that the FAA has been held not to apply to labor disputes, although to be sure federal courts have often looked to the FAA for guidance in labor arbitration cases. Section 301, which does apply, does not provide statutory grounds for vacating a labor arbitration award, although, as seen, the Supreme Court has made clear what a court may not do. As the body of case law applying Section 301 has developed, the main reasons a court may vacate a labor arbitration award appear to be if (i) the award does not “draw its essence” from the labor agreement, meaning it conflicts with the express terms of the agreement, imposes additional requirements not expressly provided for in the agreement, or is based on “general considerations of fairness and equity” instead of the exact terms of the agreement; or (ii) it violates a well-settled and prevailing public policy.

The Problems With Judge Berman’s Findings

Judge Berman first found fault in Commissioner Goodell’s award because the Judge found that Brady did not have notice that he could receive a four game suspension for general awareness of a scheme to deflate footballs, or for non-cooperation with the NFL’s investigation. He also attacked Commissioner Goodell’s reasoning in looking to penalties for violations of the league’s steroid policy as a justification for upholding a four game suspension. He further found that Brady had no notice he could be suspended rather than fined. Citing decisions by other arbitrators involving NFL players, Judge Berman concluded that Commissioner Goodell violated the “law of the shop” by failing to find there was inadequately notice of prohibited conduct and potential discipline.

In all of this, however, Judge Berman was doing what the Supreme Court has stated a judge should not do: second-guessing the arbitrator. For example, the so-called “law of the shop” is not something akin to the common law that a court must follow. Rather, it is up to the labor arbitrator alone to interpret precedent by other arbitrators or, as the Supreme Court has put it, to simply to conclude “that he was not bound by” a prior arbitrator’s decision. Judge Berman relied heavily on decisions by other arbitrators in other high-profile NFL cases — such as “Bounty-Gate” and the Ray Rice and Reggie Langhorne cases — to find that Brady was entitled to the type of notice that Judge Berman thought he was entitled to. But that simply was not Judge Berman’s role to say.

Moreover, Brady’s notice contentions were acknowledged and rejected by Commissioner Goodell in his post-hearing detailed award that was also based on his assessment of the evidence — including Brady’s credibility and the exhaustive Wells investigative report upon which he relied. There can be no question that in so doing the Commissioner was “arguably construing or applying the contract,” which is all it took to require enforcement of his award. In short, the Commissioner was entitled to disbelieve that two equipment employees would take it on their own to deflate the footballs without the knowledge or involvement of the quarterback of the team, and to conclude that Brady’s awareness was conduct detrimental to public confidence in the integrity of the game. He also was entitled to believe that Brady deserved to be penalized for refusing to cooperate with the investigation and then destroying his cell phone rather than turn it over to the investigators, even if there was no specific rule that said he could not do this.

Judge Berman was on similarly weak footing in attacking the punishment meted out (suspension versus fine) because he thought it was error for Commissioner Goodell to uphold the penalty by borrowing from the schedule of penalties for violations of the league’s steroid policy. Again, such judgment calls are quintessentially for the arbitrator, and the suspension penalty echoed the penalty that the Patriots themselves had issued to its equipment employees for their roles.

Relying on the FAA, Judge Berman further justified his decision to vacate Commissioner Goodell’s award based on the latter’s refusal to allow Jeff Pash to testify at the arbitration hearing. Judge Berman found this to be “fundamentally unfair,” because Pash was the co-lead investigator of the investigation, known as the Wells Report. Commissioner Goodell had excluded Pash because Pash had not in fact played substantive role in the investigation, his role having been limited to comments on the draft of the report. Commissioner Goodell moreover regarded any testimony by Pash  as cumulative, as Wells, the report’s architect, was allowed to testify. But Judge Berman determined that Pash would have had valuable insight into the course and outcome of the investigation and into the drafting and content of the Wells Report. Therefore, he found that Brady was prejudiced because he could not explore how truly independent the report was.

Again, Judge Berman appeared to have simply second-guessed Commissioner Goodell, given that Commissioner Goodell had substantial discretion to admit or exclude evidence without having to “follow all the niceties observed by the federal courts.”  Commissioner Goodell had at least a colorable basis for excluding Pash’s testimony. Indeed, his rationale for excluding that testimony was that which a court might have applied. Further, Judge Berman’s conclusion as to how Brady was prejudiced appeared speculative as to whatever additional value Pash’s testimony would have supplied.

Judge Berman came closest to presenting a valid basis for vacating the award in his determination that Commissioner Goodell had improperly denied Brady equal access to Wells’ investigative files and interview notes. Commissioner Goodell had justified his denial of access to those files, including interview notes, because they had played no role in the disciplinary decisions, which were based on the Wells Report itself. But as Judge Berman observed, the Wells Report was based on those notes. Furthermore, compounding the prejudice to Brady was that Wells’ law firm, Paul, Weiss, acted as both independent counsel and as retained counsel to the NFL during the arbitration hearing. NFL counsel therefore had access to the investigate file for direct and cross examination while Brady had no such access.

These observations have some merit. After all, it does not seem fair that Brady had no access to the notes and interviews upon which the report was based, especially when the same law firm that produced the report also represented the NFL at the arbitration hearing. But Article 46 of the collective bargaining agreement expressly limited discovery to the exchange of exhibits upon which the parties intended to rely at the hearing. The Commissioner’s decision to deny additional discovery was based on his interpretation of that provision, such that it at least arguably “drew its essence” from the collective bargaining agreement. Furthermore, as stated, Commissioner Goodell asserted that the investigation notes played no role in his decision on appeal, and other notes had been provided, such as the interview notes from the NFL’s own investigators.

Judge Berman Should Have Remanded

The final error in Judge Berman’s decision is that he did not remand the case. The procedural and due process errors appeared to be correctable. For example, Judge Berman could have instructed Commissioner Goodell to reconvene the hearing to allow Brady to access the Wells investigative files and to call Pash as a witness. In the Garvey case, the Supreme Court expressly criticized the Ninth Circuit for not remanding, because by not remanding the court in essence was deciding the case. Here, too, Judge Berman in essence was resolving the dispute, and without even making any judgment as to whether Brady did or did not have a role in the tampering that took place.

Immediately after Judge Berman issued his decision, the NFL announced it was appealing. Based on Judge Berman’s apparent failure to properly follow the applicable highly deferential standard, the NFL’s chances for success on appeal appear to be good.