Tag: federal arbitration act

The Power of Incorporation Compels You: Surety Succeeds in Compelling Contractor to Arbitrate Bond Claims Pursuant to Arbitration Clause in Subcontract

In Swinerton Builders, Inc. v. Argonaut Insurance Co., Swinerton Builders, a contractor, sued a surety on bond claims arising from defaults by its subcontractor on a series of work orders. The owner of Swinerton’s mechanical subcontractor on three projects passed away unexpectedly, and the subcontractor was unable to complete its remaining work on the projects.

Swinerton filed a complaint in August 2023 against Argonaut, the subcontractor’s surety, seeking to recover on the payment and performance bonds issued by Argonaut. The complaint also included claims for breach of the covenant of good faith and fraud. Argonaut responded by moving to dismiss based on the arbitration clause in Swinerton’s subcontract. The bonds at issue incorporated by reference the subcontract, including the arbitration provision. The federal district court converted the motion to dismiss to a motion to stay and compel arbitration based on the requirements of the Federal Arbitration Act.

To compel arbitration, the court noted that Argonaut must show that there was an agreement to arbitrate with Swinerton and that the disputes at issue fell under that agreement. Swinerton argued that it only agreed to arbitrate disputes between Swinerton and the subcontractor and that the arbitration provision did not apply to Argonaut, a non-signatory to the subcontract agreement.

The court disagreed with Swinerton and granted Argonaut’s motion. Relying on precedent holding that a surety may be bound by an arbitration provision where the bond incorporates the underlying contract containing the arbitration clause, the court ruled that the same rationale supported the surety’s motion to compel in this instance. The court also did not find persuasive Swinerton’s argument that it should not be compelled to arbitrate where the bonded subcontractor’s default was not disputed. The court determined the alleged breaches of the subcontract would have to be arbitrated.

It is not clear why Argonaut elected to pursue arbitration as opposed to litigating the bond claims. The surety may have been concerned with the bad faith and fraud claims asserted by Swinerton and concluded that arbitrating such disputes would be preferable to a jury trial on those issues. However, the court did note that the arbitrator would retain authority to determine which of Swinerton’s claims were arbitrable under the arbitration agreement, so there remains a risk that some of the claims will be referred back to the court by the arbitrator. Regardless, for parties choosing whether to arbitrate or litigate under their construction contracts, the expansive application of the arbitration provision by the court in Swinerton Builders is another factor to be considered, especially where performance is secured by third-party bonds, guarantees, and other instruments.

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© 2024 Bradley Arant Boult Cummings LLP
For more on Contractors, visit the NLR Construction Law section

The Power of Incorporation Compels You: Surety Succeeds in Compelling Contractor to Arbitrate Bond Claims Pursuant to Arbitration Clause in Subcontract

In Swinerton Builders, Inc. v. Argonaut Insurance Co., Swinerton Builders, a contractor, sued a surety on bond claims arising from defaults by its subcontractor on a series of work orders. The owner of Swinerton’s mechanical subcontractor on three projects passed away unexpectedly, and the subcontractor was unable to complete its remaining work on the projects.

Swinerton filed a complaint in August 2023 against Argonaut, the subcontractor’s surety, seeking to recover on the payment and performance bonds issued by Argonaut. The complaint also included claims for breach of the covenant of good faith and fraud. Argonaut responded by moving to dismiss based on the arbitration clause in Swinerton’s subcontract. The bonds at issue incorporated by reference the subcontract, including the arbitration provision. The federal district court converted the motion to dismiss to a motion to stay and compel arbitration based on the requirements of the Federal Arbitration Act.

To compel arbitration, the court noted that Argonaut must show that there was an agreement to arbitrate with Swinerton and that the disputes at issue fell under that agreement. Swinerton argued that it only agreed to arbitrate disputes between Swinerton and the subcontractor and that the arbitration provision did not apply to Argonaut, a non-signatory to the subcontract agreement.

The court disagreed with Swinerton and granted Argonaut’s motion. Relying on precedent holding that a surety may be bound by an arbitration provision where the bond incorporates the underlying contract containing the arbitration clause, the court ruled that the same rationale supported the surety’s motion to compel in this instance. The court also did not find persuasive Swinerton’s argument that it should not be compelled to arbitrate where the bonded subcontractor’s default was not disputed. The court determined the alleged breaches of the subcontract would have to be arbitrated.

It is not clear why Argonaut elected to pursue arbitration as opposed to litigating the bond claims. The surety may have been concerned with the bad faith and fraud claims asserted by Swinerton and concluded that arbitrating such disputes would be preferable to a jury trial on those issues. However, the court did note that the arbitrator would retain authority to determine which of Swinerton’s claims were arbitrable under the arbitration agreement, so there remains a risk that some of the claims will be referred back to the court by the arbitrator. Regardless, for parties choosing whether to arbitrate or litigate under their construction contracts, the expansive application of the arbitration provision by the court in Swinerton Builders is another factor to be considered, especially where performance is secured by third-party bonds, guarantees, and other instruments.

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© 2024 Bradley Arant Boult Cummings LLP
For more on Contractors, visit the NLR Construction Law section

In Trio of Decisions, Supreme Court Resolves Circuit Splits on Arbitration

Three recent Supreme Court Decisions—Coinbase v. Suski, Smith v. Spizzirri, and Bissonnette v. LePage Bakeries—based on consumer and employment disputes have resolved significant circuit splits over arbitration. These cases were all decided by a unanimous Court, with Justices Jackson, Sotomayor, and Roberts authoring the three opinions.

Supreme Court Considers Arbitrability Based on Conflicting Contracts

In Coinbase v. Suski (May 23, 2024), the Supreme Court held that where there is a conflict between one or more contracts between same parties regarding the arbitrability of a dispute, a court alone (and not the arbitrator) must decide which contract governs. The appeal arose from a sweepstakes dispute wherein the official rules of the sweepstakes conflicted with the defendant’s user agreement.

After the plaintiff consumers brought a class action in California federal court, the defendant sought a motion to dismiss based on an arbitration provision in the user agreement. The district court denied the defendant’s motion based on the forum selection clause in a contract detailing the sweepstakes’ rules. The Ninth Circuit affirmed, agreeing that the forum selection clause, which gave sole jurisdiction over sweepstakes-related disputes to California courts, superseded the arbitration provision in the user agreement.

In a unanimous decision, the Supreme Court agreed with the Ninth Circuit that courts, not arbitrators, must decide the threshold question of whether a subsequent agreement supersedes an arbitration provision, dismissing concerns that the holding would invite challenges to delegation clauses that empower arbitrators to decide disputes concerning arbitrability.

Prior to the decision in Suski, there was no precedent in the First Circuit addressing the question of who resolves conflicting dispute resolution clauses. However, the Court’s decision accords with the approach of the First Circuit to related questions.

In Biller v. S-H OpCo Greenwich Bay Manor, LLC (2020), the First Circuit held that for parties to agree to have an arbitrator decide gateway questions of arbitrability, they must do by “clear and unmistakable evidence,” safeguarding a court’s jurisdiction to decide questions of arbitrability. Similarly, in McKenzie v. Brennan (2021), the First Circuit held that the court holds the decision-making power to decide whether parties intend to arbitrate a dispute when a new contract between the parties does not contain a broad arbitration clause, but an earlier contract does.

District Courts May Not Dismiss Cases Referred to Arbitration Upon a Request to Stay

In Smith v. Spizzirri (May 16, 2024), the Supreme Court interpreted 9 U.S.C. § 3 to mean that when a district court finds that a contract compels arbitration and a party has requested a stay of court proceedings pending arbitration, the court lacks jurisdiction to dismiss the suit. Instead, the Supreme Court determined that a lower court must stay the proceedings until the dispute is resolved in arbitration or the dispute is brought back before the court.

The decision arose from a California class action alleging delivery drivers had been misclassified as independent contractors and denied required wages and paid leave. While the Ninth Circuit affirmed the lower court’s discretion to dismiss the action referred to arbitration on a motion by the defendant, the Supreme Court unanimously reversed and remanded. Spizzirri may be understood as the complement to an earlier decision also involving Coinbase, Coinbase v. Bielski (June 23, 2023) (see our prior alert here), which held that a district court must stay its proceedings while an interlocutory appeal on the question of arbitrability is ongoing.

The First Circuit (as well as the Fifth, Eighth, and Ninth Circuits) had previously held that a district court has discretion to either dismiss litigation without prejudice or stay the proceedings. Dismissal following a referral to arbitration provided plaintiffs with an opportunity to appeal that final, adverse ruling, with the Supreme Court’s decision now requiring plaintiffs to wait until the arbitration has been completed.

While the First Circuit has not yet passed a decision under following Spizzirri, a recent decision by the Rhode Island District Court may indicate how post-Spizzirri questions will be decided. In De Simone v. Citizens Bank (June 17, 2024) the court directly cited to Spizzirri to conclude that the proceedings in that case must be stayed pending arbitration. At the appellate level, the Ninth Circuit (which previously, like the First Circuit, held that courts have discretion to stay or dismiss) amended its opinion in Herrera v. Cathay Pacific Airways Ltd. (March 11, 2024; amended June, 24, 2024) to reflect the decision in Spizzirri, writing that “Spizzirri made clear that a district court does not have discretion to dismiss the action when granting a motion to compel arbitration under 9 U.S.C. § 3.”

Supreme Court Holds Workers in Any Industry May Benefit from Arbitration Exemption

In Bissonnette v. LePage Bakeries Park St. LLC (May 14, 2024), the Supreme Court unanimously held that the Federal Arbitration Act’s exemption for transportation workers at 9 U.S.C. § 1, which protects workers in foreign or interstate transportation from having their employment claims referred to mandatory arbitration, may apply to workers in any industry.

In LePage Bakeries, the defendant companies argued that baked goods delivery drivers were not protected from the exemption because they were not transportation industry employees. The district court and Second Circuit agreed, compelling arbitration of the parties’ dispute. The Supreme Court reversed, noting that the Second Circuit has created a transportation-industry requirement without any basis in the text of the statute.

The decision resolves a split among the First and Second Circuits in favor of workers seeking to bring class action claims. In two 2023 cases, Canales v. CK Sales Co. and Fraga v. Premium Retail Servs., Inc., the First Circuit explicitly rejected the Second Circuit’s reading of the Federal Arbitration Act that a worker must be employed in the transportation industry to benefit from the exemption to mandatory arbitration. Instead, the First Circuit focused on the worker’s role instead of the employer’s business, a test that the Supreme Court has now embraced. The Court’s decision follows New Prime, Inc. v. Oliveira (2019) and Southwest Airlines Co. v. Saxon (2023) wherein the Court held the exemption applies to independent contractors and airplane cargo loaders.

Recent Decisions Reflect Critical Questions on Jurisdiction Over Arbitration Disputes

The Supreme Court’s trio of unanimous arbitration decisions outline three areas in which district courts retain jurisdiction over arbitration disputes. The rulings reflect the outer limits of a multi-decade trend in which the Supreme Court has consistently issued arbitration-friendly decisions, encouraging the resolution of arbitrable matters without involving the courts.

It is likely that challenges to arbitrability based on conflicting contracts and transportation work will remain flashpoints in federal court litigation for years to come, with federal courts retaining jurisdiction over disputes referred to arbitration, hearing fewer appeals of orders compelling arbitration, and resolving matters that arise during those proceedings. The decisions serve as reminders to businesses that they should work with experienced counsel to draft and regularly review dispute resolution clauses in consumer and employment contracts to ensure that, if disputes do ultimately arise, they will be resolved via the intended procedure.

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Thank you to firm summer associate Jonathan Tucker for his contribution to this post.

©2024 Pierce Atwood LLP. All rights reserved.
For more on Arbitration, visit the NLR ADR Arbitration Mediation section.

Non-Negotiable Arbitration Agreements May Be Required as a Condition of Employment

On February 15, 2023, the Ninth Circuit struck down AB 51, a California statute that imposed criminal and civil penalties against employers who required employees to enter into an arbitration agreement as a condition of employment, finding the statute to be an “unacceptable obstacle to the accomplishment and execution of the full purposes and objectives” of the Federal Arbitration Act (“FAA”).  Chamber of Commerce of the United States of America, et al. v. Bonta, et al., No. 20-15291 (9th Cir. 2023).

As discussed in our prior post and articles (link here), in August 2022 the Ninth Circuit withdrew its prior decision, which had upheld portions of AB 51, following the United States Supreme Court’s June 2022 decision in Viking River Cruises v. Moriana.

AB 51, embodied in California Labor Code §432.6 effective January 1, 2020, prohibited an employer from entering into a non-negotiable agreement that required the employee to waive “any right, forum, or procedure” for a violation of the Fair Employment and Housing Act or the California Labor Code, including “the right to file and pursue a civil action.”  Further, AB 51 imposed harsh penalties for employers who violated the statute, including a fine of up to $1,000 and up to six months’ imprisonment, as well as the potential for civil litigation by the State of California or by private individuals.  In an effort to avoid Supreme Court decisions striking down state laws that improperly targeted arbitration agreements, the California legislature also created the confusing outcome that potentially criminalized the formation of non-negotiable arbitration agreements, but permitted their enforcement once executed.

Noting that arbitration agreements by their very nature require parties to waive their rights to bring disputes in court, and crediting the plaintiffs’ evidence that the possible imposition of civil and criminal penalties deterred employers from attempting to enter into non-negotiable agreements with employees, the court affirmed the district court’s preliminary injunction in favor of several trade associations and business groups who sought to block the implementation of the statute.  Relying on principles of preemption and judicial precedent striking down similar state laws or judge-made rules that singled out executed arbitration agreements, the Court found AB 51 improperly “burden[s]” the formation of arbitration agreements in violation of the FAA.

Having written the previous 2-1 decision upholding AB 51, Judge Lucero now found himself dissenting.  Arguing that the majority “misconstrue[d] the jurisprudence” of the Supreme Court, the dissent claimed that arbitration was permissible only if consensual and that AB 51 only applied to conduct occurring prior to the formation of the contract and thus was not an obstacle to the objectives of the FAA.

Employers may require their California employees to sign non-negotiable arbitration agreements to obtain or maintain their employment.  Arbitration agreements may still be unenforceable however if they are procedurally and substantively unconscionable, if the agreement lacks mutual consent because a party was forced to sign by threats or physical coercion or “upon such grounds as exist at law or in equity for the revocation of any contract.”  Thus, employers should review their agreements to ensure they are in compliance with other California requirements, that the terms are not unfair or one-sided, and, the agreement presented is not unfair, surprising or oppressive.

Article By Sheryl L. Skibbe of Vedder Price

For more arbitration legal news, click here to visit the National Law Review.

© 2023 Vedder Price

Congress Passes Speak Out Act, Banning Certain Prospective Non-Disclosure Agreements (US)

Earlier this year, we reported that Congress amended the Federal Arbitration Act to preclude compulsory binding arbitration of sexual assault and sexual harassment claims. This past week, Congress went a step further, passing the Speak Out Act, S. 4524, which is aimed at prohibiting prospective, pre-dispute non-disclosure and non-disparagement agreements that prevent employees from discussing sexual harassment or sexual assault. The Senate passed the bill unanimously on September 29, 2022 and the House of Representatives voted in favor of the measure, 315-109, on November 17, 2022. President Biden has expressed his intention to sign the bill into law, and it will become effective immediately upon his signature.

The bipartisan federal legislation – the latest federal bill inspired by the #metoo movement and one that has been slowly gaining support over the past five years – applies only to pre-dispute nondisclosure and non-disparagement agreements and similar clauses in employment agreements, rendering them null and void in instances in which sexual harassment or sexual assault is alleged in violation of federal, state, or tribal law. The goal of the bill is to prevent the use of pre-dispute agreements aimed at silencing employees from reporting sexual impropriety in the workplace. Similar measures have been passed at the state level in some jurisdictions (see, for example, our prior reporting regarding analogous California, Illinois, Maryland, and Vermont here, here, and here, to name just a few), but when President Biden signs the Speak Out Act, as he has indicated he will do, the law becomes immediately effective nationwide.

Earlier versions of the Speak Out Act included language precluding non-disclosure clauses as applied to claims of race, age, national origin, and similar equal employment opportunity claims, but the bill was stripped back to apply only to claims of sexual harassment and sexual assault in its final form. President Biden’s administration urges further legislation to address the use of non-disclosure agreements used to prevent discussion of other types of labor violations, but as a practical matter, the National Labor Relations Act already protects the right of covered employees to engage in protected, concerted activity – such as discussing workplace discrimination, assault, and harassment – and existing EEO laws protect employees engaged in conduct aimed at asserting their own rights or cooperating with other employees in protecting their rights.

Furthermore, the Speak Out Act only precludes the use of pre-dispute non-disclosure and non-disparagement agreements, meaning those signed before the unlawful conduct begins. It does not prevent employers and employees from agreeing to confidential settlements after alleged sexual harassment or abuse occurs. Parties remain free to enter into such arrangements, provided that employers still cannot preclude employees from reporting violations of EEO laws to agencies entrusted with enforcing such laws, like the Equal Employment Opportunity Commission. Employers may still require non-disclosure agreements to protect trade secrets and confidential business information, and may still include confidentiality provisions in severance agreements. Consequently, the Speak Out Act is not as much a sea change itself as a recommitment by Congress and the Administration to expanding measures aimed at transparency around sexual misconduct in the workplace. Employers should review existing handbook policies and standard non-disclosure agreements to ensure compliance with the Speak Out Act, but that should be just one small step in a comprehensive audit of sexual harassment policies, reporting mechanisms, and investigation procedures.

For more Labor and Employment Law news, click here to visit the National Law Review.

© Copyright 2022 Squire Patton Boggs (US) LLP

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.

Article By John P. Zaimes and Natalie C. Kreeger of ArentFox Schiff LLP

For more arbitration legal news, click here to visit the National Law Review.

© 2022 ArentFox Schiff LLP