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Certiorari has been denied in Grupo Unidos por el Canal, S.A. v. Autoridad del Canal de Panama, 78 F.4th 1252 (11th Cir. 2023), a case we covered in SAA 2023-34 (Sep. 7) and SAA 2024-10 (Mar. 7).

We borrow from our past reporting. Relying on recently-announced Eleventh Circuit precedent — that the grounds set forth in FAA section 10 are the sole basis for challenging “foreign” awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“UN Convention”), where the arbitration took place in the United States – the Grupo Court had found that the Arbitrators’ alleged lack of complete disclosure did not warrant Award vacatur.

Incomplete Disclosure

We quote liberally from the Opinion, starting with the facts and procedural history: “After Grupo Unidos por el Canal, S.A., received two adverse awards amounting to more than a quarter-billion dollars in an arbitration arising out of its construction work on the Panama Canal, Grupo Unidos sought wide-ranging disclosures from each of the three members of the panel pertaining to possible bias. Each arbitrator disclosed for the first time that he had served on panels in other, unrelated arbitrations in which an arbitrator or counsel involved in Grupo Unidos’s arbitration also participated. Following the disclosures of the new information, Grupo Unidos challenged the impartiality of the arbitrators before the International Court of Arbitration (‘ICA’) of the International Chamber of Commerce. The ICA agreed that some arbitrators failed to make a few disclosures but, notably, did not find any basis for removal and rejected Grupo Unidos’s challenges on the merits. Thereafter, Grupo Unidos moved — unsuccessfully — for the vacatur of the awards in the United States District Court for the Southern District of Florida. Autoridad del Canal de Panama, in turn cross-moved for confirmation of the awards, which the district court granted.” And the holding on appeal: “Because we agree with the International Court of Arbitration and the district court that Grupo Unidos has presented nothing that comes near the high threshold required for vacatur, we affirm the denial of vacatur and the confirmation of the awards.”

SCOTUS Review Sought …

The December 2023 Petition in Grupo Unidos por el Canal, S.A. v. Autoridad Del Canal de Panama, No. 23-660, raised these questions: “1. What is the standard for determining whether an arbitrator’s failure to disclose constitutes evident partiality justifying vacatur of the arbitral award under the Federal Arbitration Act, 9 U.S.C. § 10(a)(2)? 2. Whether an arbitrator’s failure to disclose relationships with a party’s counsel or a party-appointed arbitrator constitutes evident partiality.”

… And Denied (As We Predicted)

The Court’s March 25 Order List on page 2 denies Certiorari, as usual without comment. Our editorial comment in no. 10 was spot on: “We don’t see the Court taking up this case. We find that courts are reluctant to second-guess ADR administrators on this issue.”

(ed: No surprise here.)

The FINRA Board met earlier this month and approved rule changes codifying the voluntary program accelerating case processing for elderly or seriously ill parties. As reported in SAA 2024-10 (Mar. 7), the FINRA Board of Governors met in person March 6–7. The Agenda listed a dispute resolution action item: “The Regulatory Policy Committee will review a proposed rule change to the Codes of Arbitration Procedure to accelerate case processing for elderly or seriously ill parties.”

A Brief History
As reported in SAA 2021-46 (Dec. 9), FINRA’s Board of Governors met in December 2021 and among other actions approved a rule change proposal to codify and improve the existing FINRA Dispute Resolution Services special program to expedite administration of arbitration cases involving senior or seriously ill parties. FINRA CEO Robert W. Cook’s post-meeting memo stated: “The Board approved publication of a Regulatory Notice soliciting comment on proposed amendments to the Codes of Arbitration Procedure to accelerate case processing for seriously ill parties and parties who are 75 or older.” In keeping with the “new normal” for rule change proposals, the Board had authorized staff to publish a Regulatory Notice seeking comments, rather than a 19b filing with the SEC. In March 2022 FINRA published Regulatory Notice 22-09, FINRA Requests Comment on a Proposed Rule to Accelerate Arbitration Proceedings for Seriously Ill or Elderly Parties:

“FINRA seeks comment on a proposal to accelerate arbitration case processing when requested by parties who are seriously ill or are at least 75 years old. The proposal would help ensure that these parties are able to participate meaningfully in FINRA arbitration by shortening certain case processing deadlines for parties and arbitrators under the Codes.”

Originally a Voluntary Program
The thrust of the proposal was to codify the existing voluntary program via which parties could agree to accelerate impacted cases. Under these proceedings, which have been in effect since 2004 (ed: repeated verbatim):

FINRA Dispute Resolution staff (staff) will endeavor to do the following on an expedited basis:

• Complete the arbitrator selection process;
• Schedule the initial pre-hearing conference;
• Serve the final award; and
• Determine whether the parties are interested in mediation.
Arbitrators are encouraged to consider the health and age of a party when:

• Scheduling hearing dates;
• Considering postponement requests; and
• Setting discovery deadlines.
Comments

The proposal garnered 15 comments, which we analyzed in SAA 2022-21 (Jun. 2). The comment letters – including those from PIABA, NASAA, and SIFMA – were almost all supportive, but with most suggesting further improvements. Our editorial comment in no. 2022-21 was: “What’s next? Most likely staff will return to the National Arbitration & Mediation Committee or the Board with changes resulting from the comments received.” It seems we are at that juncture.

Board Authorizes Rule Filing
FINRA posted on its Website these results from the recent Board meeting:

“The Board approved one rule proposal: modifications to proposed amendments to the Codes of Arbitration Procedure previously approved by the Board to accelerate case processing for elderly or seriously ill parties. These modifications were in response to feedback we received on a Request for Comment on the previous proposal, which would lower the age at which parties would qualify for accelerated processing. The proposal will require SEC approval before going into effect.”

(ed: *We’ll have to await the rule filing to see the changes made in response to the comments. **As we’ve said before, this is a welcome change since, when all is said and done, the existing voluntary program does not abrogate the time frames in the Codes. ***The rest of the 2024 FINRA Board schedule is: May 8–9; July 24–25; September 18–19; and December 4–5.)

We cover a recent decision out of California not for the holding, but for the scathing dissent.

Justice John Shepard Wiley Jr.’s dissent in Hohenshelt v. Superior Court, No. B327524 (Calif. Ct. App. 2 Feb. 27, 2024), offers an excellent primer on SCOTUS decisions on Federal Arbitration Act preemption of California law disadvantaging arbitration. We repeat below essentially verbatim its core (brackets and ellipses in original).

Statute in Question

Enacted in 2019, California Code of Civil Procedure sections 1281.97 and 1281.98:

“provide that if a company or business that drafts an arbitration agreement does not pay its share of required arbitration fees or costs within 30 days after they are due, the company or business is in ‘material breach’ of the arbitration agreement. (Code Civ. Proc., §§ 1281.97, subd. (a)(1); 1281.98, subd. (a)(1). In the case of such a material breach, an employee or consumer can, among other things, withdraw his or her claim from arbitration and proceed in court. (§§ 1281.97, subd. (b)(1); 1281.98, subd. (b)(1).)”

Justice Wiley’s Dissent

“By again putting arbitration on the chopping block, this statute invites a seventh reprimand from the Supreme Court of the United States. Recall the past six.

“Over and over again, with determined but unavailing persistence, the Supreme Court of the United States has rebuked California state law that continues to find new ways to disfavor arbitration.

“First, the high court held the Federal Arbitration Act set forth a federal policy favoring arbitration that was clear and in unmistakable conflict with California’s ‘requirement that litigants be provided a judicial forum for resolving wage disputes. Therefore, under the Supremacy Clause, the [California] statute must give way.’ (Perry v. Thomas (1987) 482 U.S. 483, 491 [preempting California law].)

“Second, the high court held the Federal Arbitration Act preempted California state law referring certain disputes initially to an administrative agency. ‘When parties agree to arbitrate all questions arising under a contract, the [Federal Arbitration Act] supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.’ (Preston v. Ferrer (2008) 552 U.S. 346, 359; see also id. at pp. 349–350, 355–356.)

“Third, the high court’s decision in AT&T Mobility v. Concepcion (2011) 563 U.S. 333, 337–338, 352 preempted California’s rule that class-action waivers in arbitration agreements were unconscionable.

“Fourth, in DIRECTV, Inc. v. Imburgia (2015) 577 U.S. 47, the high court pointedly addressed California’s continuing defiance of federal law. The ‘Supremacy Clause forbids state courts to dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source. . . . The Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.’ (Id. at p. 53 [preempting California law].)

“Fifth, the decision in Lamps Plus, Inc. v. Varela (2019) 587 U.S. __ [139 S.Ct. 1407, 1414–1415] reversed the Ninth Circuit for applying a California state law requiring courts to construe ambiguities against the drafter, a rule that applied with peculiar force, said California law, in the case of a contract of adhesion, like the arbitration contract there at issue. The proper approach required the federal Act’s default rule, which is that ‘ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration.’ (Id. at p. 1418.) The Lamps Plus decision thus preempted a California law disfavoring arbitration.

“Sixth, Viking River Cruises, Inc. v. Moriana (2022) 596 U.S. 639, 662 preempted a California arbitration law that invalidated contractual waivers of the right to assert representative claims under California’s Private Attorneys General Act. Federal law established an equal treatment principle: state courts may invalidate an arbitration agreement based on generally applicable contract defenses like fraud or unconscionability, but not on legal rules that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. (Id. at p. 649.)

“So, the federal arbitration preemption rule is simple. The Federal Arbitration Act preempts a state rule that ‘singles out arbitration agreements for disfavored treatment.’ (Kindred Nursing Centers L.P. v. Clark (2017) 581 U.S. 246, 248.)

“This California statute ‘singles out arbitration agreements for disfavored treatment.’ No other contracts are voided on a hair-trigger basis due to tardy performance. Only arbitration contracts face this firing squad. This statute thus is preempted.

“California cannot create a rule specific to the arbitration context that contravenes the arbitration on which the parties agreed. After six epistles, we should get the message.”

(ed: *Well said! **An Alert h/t to Editorial Board member Peter R. Boutin, Esq., of Keesal, Young & Logan, for alerting us to this decision.)

The Supreme Court heard oral argument February 28 in Coinbase v. Suski, No. 23-3, the second case involving arbitration heard this month. The other case is Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51, which was heard February 20 (ed: see our February 21 blog post). The Suski audio is here and the transcript can be found here.

Certiorari Petition

Recall that we reported in SAA 2023-25 (Jun. 29) and blogged in June 2023 that the Supreme Court had decided Coinbase, Inc. v. Bielski, No. 22-105, ruling mostly along ideological lines that courts must stay underlying litigation while an appeal of a denial of a motion to compel arbitration is pending. The 5-4 decision, which was released on June 23, was authored by Justice Kavanaugh. He was joined outright by Chief Justice Roberts, and Justices Alito, Barrett, and Gorsuch. Justice Jackson wrote a dissenting opinion, in which Justices Kagan and Sotomayor joined in full, and in which Justice Thomas joined for the most part. Buried in a footnote was this landmine: “The Court’s judgment today pertains to respondent Abraham Bielski. The writ of certiorari as to respondents David Suski et al. is dismissed as improvidently granted.”

We further reported that back with a June 2023 Certiorari Petition was Coinbase, which raised this issue: “Whether, where parties enter into an arbitration agreement with a delegation clause, an arbitrator or a court should decide whether that arbitration agreement is narrowed by a later contract that is silent as to arbitration and delegation.” In a three-item Miscellaneous Order released November 3, 2023, SCOTUS granted Certiorari. As usual, there was no explanation. Several amicus briefs were filed. Noteworthy briefs in Suski were filed by the American Bankers Association, the American Tort Reform Association, the Atlantic Legal Foundation Cato Institute, and the Chamber of Commerce of the United States.

The Oral Argument

With a full complement of Justices, the oral argument in this case was audio livestreamed via the SCOTUS Website. The discussion focused squarely on the limits of delegation under the Federal Arbitration Act. Petitioner Coinbase’s counsel Jessica Lynn Ellsworth stated:

“The Federal Arbitration Act requires courts to enforce arbitration agreements according to their terms. Respondents and Coinbase agreed to arbitrate any disputes about Coinbase services and to delegate to an arbitrator any threshold disputes about whether specific claims were subject to arbitration. Despite this delegation clause, the parties have spent nearly three years disputing this threshold issue. That’s because, instead of enforcing the delegation clause, the courts below came up with rationales to evade it and to instead answer the question of arbitrability for themselves.”

Respondents’ counsel David John Harris Jr. led with:

“I’m going to abandon what I planned to talk about and try to answer Justice Gorsuch’s question. Why are they fighting this so hard? And that only occurred to me within the last week or so. And the answer is there’s a strategic reason. They want the Court — they don’t care who decides arbitrability. All they care about is how arbitrability gets decided because that’s what goes to liability at the end of the day. And so the plan is we need the Supreme Court to overrule.”

Questions were posed by all of the Justices, with the bulk of the questions coming from Justices Jackson, Sotomayor, and Thomas. Several Justices on both sides struggled with what instructions should be given to the Ninth Circuit in the event of a remand from SCOTUS. For a comprehensive “chapter-and-verse” analysis, we recommend that readers peruse these February 28 blog posts: SCOTUS Frustration: How to Move the Coinbase Arbitrability Case Forward, CPR Speaks Blog; Supreme Court Hears Coinbase Dogecoin Sweepstakes Case, UPI; and Supreme Court Likely to Side With Coinbase on Arbitration, Bloomberg.

Two Down, One to Go

With Bissonnette and Suski having been heard, one more arbitration-centric case remains to be argued. As reported in SAA 2024-08 (Feb. 22), the Court has set Monday April 22 for the oral argument in Smith v. Spizzirri, No. 22-1218. SCOTUS agreed in a January 12 Miscellaneous Order to take on the case. As reported in SAA 2023-36 (Sep. 21), the June 14, 2023 Petition for Certiorari states:

“This case presents a clear and intractable conflict regarding an important statutory question under the Federal Arbitration Act (FAA), 9 U.S.C. 1-16.[] The FAA establishes procedures for enforcing arbitration agreements in federal court. Under Section 3 of the Act, when a court finds a dispute subject to arbitration, the court ‘shall on application of one of the parties stay the trial of the action until [the] arbitration’ has concluded. 9 U.S.C. 3 (emphasis added)…. The question presented is: Whether Section 3 of the FAA requires district courts to stay a lawsuit pending arbitration, or whether district courts have discretion to dismiss when all claims are subject to arbitration.”

(ed: *We think Coinbase will prevail. One clue? Justice Sotomayor said to Respondents’ counsel Mr. Harris: “I think you just gave away your case. [repeats] I think you just gave away your case.” Added Justice Gorsuch: “I’m struggling. I certainly see the argument that the second agreement modifies where this thing should go and should be resolved and by whom ultimately. But I think you’ve just conceded over and over again that the first agreement says those questions go to the arbitrator and it’s broad in scope and it covers everything, all relationships with Coinbase.” Although, Mr. Harris countered the Justices’ assertions, the colloquy in our view was telling.)

The Supreme Court heard oral argument this week in Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51, one of two cases involving arbitration being heard this month.

As reported in SAA 2024-05 (Feb. 15), the Supreme Court on February 20 heard the oral argument in Bissonnette. The audio is here and the transcript can be found here.

Certiorari Petition

The July 2023 Petition states:

“The Federal Arbitration Act exempts the ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’ 9 U.S.C. § 1. The First and Seventh Circuits have held that this exemption applies to any member of a class of workers that is engaged in foreign or interstate commerce in the same way as seamen and railroad employees—that is, any worker ‘actively engaged’ in the interstate transportation of goods. The Second and Eleventh Circuits have added an additional requirement: The worker’s employer must also be in the ‘transportation industry.’ The question presented is: To be exempt from the Federal Arbitration Act, must a class of workers that is actively engaged in interstate transportation also be employed by a company in the transportation industry?”

Several amicus briefs were filed. Noteworthy briefs were filed by Amazon.com, the California Employment Law Council, and the Chamber of Commerce of the United States.

The Oral Argument

With a full complement of Justices, the oral argument in this case was audio livestreamed via the SCOTUS Website. The discussion focused squarely on Congress’ intent on the scope of the  FAA section 1 exemption, with several references to the situation when the FAA was enacted in 1925. (ed: who knew that a coal strike caused a famine in Chicago in 1903?) Bissonnette’s counsel Jennifer Dale Bennett urged that the Court reject an additional requirement that a company be part of the transportation industry:

“Less than two years ago, in Southwest versus Saxon, this Court carefully examined the text and history of the Federal Arbitration Act’s worker exemption, and it held that the exemption applies to ‘any class of workers directly involved in transporting goods across state or international borders.’”

Traci L. Lovitt, Counsel for the Respondent, led with:

“[i]n Circuit City, this Court said that the Section 1 exemption should be read narrowly and should be interpreted with reference to the ejusdem canon, context, and history, all three of which demonstrate that the exemption is limited to transportation industry workers. After all, in 1925 … seamen and railroad employees were defined by the industry in which they work. And that commonality should carry through to the residual clause. Context and history tell you why this line makes sense.”

The Court’s pro-arbitration wing was relatively quiet, with the bulk of the questions coming from Justices Kagan, Jackson, and Sotomayor (although Justice Thomas was atypically active). Several Justices on both sides struggled with additional complications posed by defining the “transportation industry.” For a comprehensive “chapter-and-verse” analysis, we recommend that readers peruse these February 21 posts: Justices Debate Arbitration Exemption for Transportation Workers (SCOTUSBlog); Tuesday’s Supreme Court Federal Arbitration Act Exemption Arguments (CPR Speaks); and US Supreme Court Seems Unlikely to Limit FAA Exemption to Transportation Companies (Reuters).

(ed: *We’re with Reuters. **We had to look up “ejusdem,” too. It means: “of the same kind or class.” ***The Court also granted certiorari in another arbitration-related case, Coinbase v. Suski, No. 23-3, which will be heard Wednesday February 28.)

A California appellate court rules that the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (“Act” or “EFASASHA”) can be applied retroactively, where the employee’s claim was asserted after the law’s effective date.

As we have reported many times, President Biden on March 3, 2022, signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, which expressly amended the Federal Arbitration Act (“FAA”) to make this class of predispute arbitration agreements (“PDAAs”) voidable at the option of the victim. The new law was codified as FAA Chapter 4 and consists of § 401 (definitions) and § 402 (no validity or enforceability).

Troublesome Language

The law was effective immediately for: “any dispute or claim that arises or accrues on or after the date of enactment of this Act.” From the start, we’ve been concerned about this aspect of the Act. For example, assuming the employment agreement is governed by a PDAA signed before March 3, 2022: 1) When exactly does a claim “accrue”? 2) What if a case is filed after March 3, 2022, but the acts giving rise to the claim happened before that date? What if the events are ongoing and straddle March 3, 2022? As we’ve said before, SCOTUS has ruled several times that arbitration agreements are separate contracts. Does a law allowing retroactive nullification of existing PDAAs invite legal challenges based on the Constitution’s Takings Clause?

A Case in Point

Some of these issues were front and center Kader v. Southern California Medical Center, Inc., No. B326830 (Calif. Ct. App. 2 (Jan. 29, 2024). What happened? “An employee signed an arbitration agreement with his employer in the regular course of his employment, without disclosing that he was being subjected to sexual harassment and assault…. Following the effective date of the Act, the employee sued the employer and other defendants for claims arising from the alleged sexual conduct. The defendants filed a motion to compel arbitration, which the trial court denied based on the Act. On appeal, the defendants contend the Act does not invalidate the arbitration agreement in this case because the alleged sexual conduct constituted a ‘dispute,’ which preexisted the parties’ arbitration agreement and the effective date of the Act.”

EFASASHA Can Be Applied Retroactively Here

The Court holds that, based on the facts of the case, EFASASHA can invalidate the PDAA because the “dispute” arose after the Act’s effective date:

“We conclude the date that a dispute has arisen for purposes of the Act depends on the unique facts of each case, but a dispute does not arise merely from the fact of injury. For a dispute to arise, a party must first assert a right, claim, or demand. There is no evidence of a disagreement or controversy in this case until after the date of the arbitration agreement and the effective date of the Act, when the employee filed charges with the Department of Fair Employment and Housing (DFEH) in May 2022. Therefore, the predispute arbitration agreement is invalid, and the order denying the motion to compel arbitration is affirmed.”

(ed: *We have covered similar cases in the past with mixed results. See Zuluaga v. Altice USA, No. A-2265-21 (N.J. App. Div. 2022) (per curiam), in SAA 2022-47 (Dec. 15). Also, Barnes v. Festival Fun Parks, LLC, No. 3:22-cv-00165 (W.D. Pa. Jun. 27, 2023) in SAA 2023-28 (Jul. 27). **The core question in our mind remains to be decided by SCOTUS: can EFASASHA be applied to retroactively invalidate an existing PDAA where the claim clearly arises after March 3, 2022?)

FINRA has published a regulatory notice implementing on March 4 the Authority’s rule change proposal to implement recommendations resulting from the outside investigation of allegations that the arbitrator selection process was rigged.

Regulatory Notice 24-03, Amendments to the Arbitration Codes to Make Various Clarifying and Technical Changes, was published on February 6. It states: “FINRA has amended its Codes of Arbitration Procedure (Codes) to make: (1) changes to the arbitrator list selection process in response to recommendations in the report of independent counsel Lowenstein Sandler LLP (Report) and (2) clarifying and technical changes to requirements in the Codes for holding prehearing conferences and hearing sessions, initiating and responding to claims, motion practice, claim and case dismissals, and providing a hearing record. The amendments are effective for arbitration cases filed on or after March 4, 2024.” We covered the subject in detail in a September 2023 blog post, which we update below.

Brief History: Award Vacated by Trial Court

To review succinctly, Fulton County Superior Court Judge Belinda E. Edwards in Leggett v. Wells Fargo Clearing Services, LLC, No. 2019CV328949 (Ga. Super. 2022), vacated the Award that sparked the debate in what might be considered a primer on the basic Federal Arbitration Act grounds for vacating an award (i.e., fraud, arbitrator bias, arbitrator misconduct in not hearing relevant or material evidence or failing to grant a reasonable postponement request; or the panel exceeding its authority). Although the Trial Court found all of these bases for vacating the Award, Judge Edwards weighed in on alleged interference with the Neutral List Selection System with some scathing verbiage:

The Court’s factual review of the record evidence leads to its finding that Wells Fargo and its counsel manipulated the FINRA arbitrator selection process in violation of the FINRA Code of Arbitration Procedure, denying the Investors’ their contractual right to a neutral, computer-generated list of potential arbitrators. Wells Fargo and its counsel, Terry Weiss, admit that FINRA provides any client Terry Weiss represents with a subset of arbitrators in which certain arbitrators (at least three, but perhaps more) are removed from the list Wells Fargo agreed, by contract, to provide to the Investors in the event of a dispute. Permitting one lawyer to secretly red line the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum.

Award “Unvacated”

Wells appealed, and, in a unanimous decision, the Georgia Court of Appeals reinstated the Award in Wells Fargo Clearing Services, LLC v. Leggett, No. A22A1149 (Ga. Ct. App. 2022). The unanimous decision rejected all bases upon which Judge Edwards vacated the Award. As reported in SAA 2022-42 (Nov. 10), Leggett on August 22, 2022 filed a Petition for Certiorari, seeking review by the Georgia Supreme Court.

Independent Investigator’s Report

As summarized in SAA 2022-38 (Oct. 13), FINRA in June 2022 released a 37-page Report of the Independent Review of FINRA’s Dispute Resolution Services – Arbitrator Selection Process, which was announced in a corporate Press Release and a separate statement from the Audit Committee. The investigation was directed by Christopher Gerold, a partner in Lowenstein Sandler LLP’s Securities Litigation and Corporate Investigations & Integrity Practice Groups.

Recommended Changes

After discussing methodology and the operation of the Neutral List Selection System, the Report concluded that there were no irregularities, and it closed with recommendations for improvement. The core recommendations were (ed: presented verbatim from the Release):

• Implementing ongoing, mandatory training for staff;
• Requiring written explanations, upon a party’s request, of approval or denial of a causal challenge to the selection of an arbitrator or an arbitrator removal by the DRS Director for cause;
• Conducting an updated external procedural review of the arbitrator selection algorithm to determine if it is still the most effective means for creating random, computer-generated arbitrator lists; and
• Updating the DRS Manual and rules to clarify staff roles and procedures, and to ensure consistency and transparency.

FINRA’s management accepted all recommendations, added other improvements, and now posts on its Website a live progress report on implementation. Status Report on Lowenstein Sandler LLP Recommendations shows that all items have been implemented.

Late 2022 Rule Filing

On December 23, 2022, FINRA filed with the SEC SR-FINRA-2022-033, Proposed Rule Change to Amend the Codes of Arbitration Procedure. The filing describes it as:

“a proposed rule change to amend the Code of Arbitration Procedure for Customer Disputes (‘Customer Code’) and the Code of Arbitration Procedure for Industry Disputes (‘Industry Code’) (together, ‘Codes’) to make changes to provisions relating to the arbitrator list selection process in response to recommendations in the report of independent counsel Lowenstein Sandler LLP. The proposed rule change also makes clarifying and technical changes to requirements in the Codes for holding prehearing conferences and hearing sessions, initiating and responding to claims, motion practice, claim and case dismissals, and providing a hearing record.”

We referred readers to published analyses of the 96-page rule filing: Finra Proposes Tweaks to Arbitrator Selection, AdvisorHub (Jan. 3, 2023); Finra Moves to Make Arbitrator Selection Process More Transparent, Financial Advisor (Jan. 5, 2023); and Finra Floats Revamped Arbitrator-Selection Process, Financial Advisor IQ (Jan. 6, 2023).

Post-Rule Filing Activity

We present below in bullet format the several events that took place since the rule change proposal was filed in December 2022. All dates in the bullets are in 2023:

• The proposed rule was published in the Federal Register on January 12 (Vol. 88, No. 8, P. 2144), making comments due February 9.
• We analyzed in SAA 2023-07 (Feb. 16) the handful of comments received from PIABA and three law school clinics posted on the SEC’s Website, describing them as generally supportive but recommending improvements.
• FINRA by a February 14 letter extended to April 12 the SEC’s time to act.
• On April 4 a unanimous Georgia Supreme Court declined to review the underlying case, stating: “Certiorari – Writ denied …. All the Justices concur, except Boggs, C. J., not participating.”
• FINRA on April 11, filed its response to comments, and Amendment No. 1 to Proposed Rule Change.
• The SEC on April 18 published in the Federal Register (Vol. 88, No. 74, P. 23720 ) Order Instituting Proceedings To Determine Whether To Approve or Disapprove. The Order requested comments by May 9, with rebuttal comments to be submitted on or before May 23. No comments are posted on the SEC’s Website.
• FINRA by a July 3 letter extended to September 8 the SEC’s time to act.

Rule Approved and Published

We reported in SAA 2023-35 (Sep. 14) that the Commission approved the rule filing a day early on September 7, 2023¸via Release No. 34-98317. The Summary to the 57-page Approval Order reads: “The proposed rule change, as modified by Amendment No. 1 …, would amend provisions of the Codes governing the arbitrator list selection process to: (1) exclude arbitrators from the arbitrator ranking lists based on certain conflicts of interest; (2) permit the removal of an arbitrator for cause at any point after receipt of the arbitrator ranking lists until the first hearing session begins; and (3) provide parties with a written explanation of the decision by the Director of FINRA Dispute Resolution Services … to grant or deny a request to remove an arbitrator. In addition, the proposed rule change, as modified by Amendment No. 1, would amend procedural rules in the Codes, such as those pertaining to holding prehearing conferences and hearing sessions, initiating and responding to claims, motion practice, claim and case dismissals, and providing a hearing record” (footnotes omitted). As we reported in SAA 2024-38 (Oct. 5), the Approval Order was published in the Federal Register on September 13 (Vol. 88, No. 176, P. 62835).

Reg Notice Issued

We closed # 2024-38 with: “What’s next? FINRA will publish a Regulatory Notice setting the effective date(s). Along the way there will be staff and arbitrator training.” Mission accomplished.

(ed:*Kudos to FINRA and the SEC. **Again, the amendments are effective for arbitration cases filed on or after March 4, 2024.)

With oral arguments just weeks away, the amicus briefs have been piling up.

We reported in SAa 2024-03 (Jan. 18) that the Supreme Court had set February oral arguments in Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51 and Coinbase v. Suski, No. 23-3, two cases involving arbitration in which Certiorari was previously granted. The February calendar shows that Bissonette will be heard Tuesday February 20 and Suski on Wednesday February 28. We recap below, borrowing heavily from our past coverage.

Bissonnette

As reported in SAA 2023-38 (Oct. 5), the Court granted Certiorari in Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51, where the July 17 Petition states:

“The Federal Arbitration Act exempts the ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’ 9 U.S.C. § 1. The First and Seventh Circuits have held that this exemption applies to any member of a class of workers that is engaged in foreign or interstate commerce in the same way as seamen and railroad employees—that is, any worker ‘actively engaged’ in the interstate transportation of goods. The Second and Eleventh Circuits have added an additional requirement: The worker’s employer must also be in the ‘transportation industry.’ The question presented is: To be exempt from the Federal Arbitration Act, must a class of workers that is actively engaged in interstate transportation also be employed by a company in the transportation industry?”

Suski

Recall that we reported in SAA 2023-25 (Jun. 29) and blogged in June 2023 that the Supreme Court had decided Coinbase, Inc. v. Bielski, No. 22-105, ruling mostly along ideological lines that courts must stay underlying litigation while an appeal of a denial of a motion to compel arbitration is pending. The 5-4 decision, which was released on June 23, was authored by Justice Kavanaugh. He was joined outright by Chief Justice Roberts, and Justices Alito, Barrett, and Gorsuch. Justice Jackson wrote a dissenting opinion, in which Justices Kagan and Sotomayor joined in full, and in which Justice Thomas joined for the most part. Buried in a footnote was this landmine: “The Court’s judgment today pertains to respondent Abraham Bielski. The writ of certiorari as to respondents David Suski et al. is dismissed as improvidently granted.”

We further reported that back with a June 2023 Certiorari Petition were the Suski parties, who raised this issue:

“Whether, where parties enter into an arbitration agreement with a delegation clause, an arbitrator or a court should decide whether that arbitration agreement is narrowed by a later contract that is silent as to arbitration and delegation.”

In a three-item Miscellaneous Order released November 3, 2023, SCOTUS granted Certiorari in Suski. As usual, there was no explanation.

Amicus Briefs

Several briefs for both cases have already been filed. Noteworthy briefs in Bissonnette were filed by Amazon.com, the California Employment Law Council, and the Chamber of Commerce of the United States. Noteworthy briefs in Suski were filed by the American Bankers Association, the American Tort Reform Association, the Atlantic Legal Foundation Cato Institute, and the Chamber of Commerce of the United States.

(ed: *We’re sure more briefs will be filed. **The oral argument audio will be livestreamed at www.supremecourt.gov. Transcripts will be found here, and audio files here.***See our blog post, First Monday in October Coming Soon: Some Arbitration-Centric Cases Worth Following.) 

The Court in Jane Doe #1 (I.G.) v. Massage Envy Franchising, LLC, 2023 WL 8801517 (Cal. Ct. App. Dec. 20, 2023), enforces an online “clickwrap” agreement containing a predispute arbitration agreement (“PDAA”) with a delegation provision, and rules that the arbitrator is to decide unconscionability issues.

Online PDAA in Massage Scheduling App’s TOS

First, the facts:

“Plaintiff Jane Doe #1 (I.G.) alleges that she was sexually assaulted by a massage therapist at a location franchised by Defendants Massage Envy Franchising, LLC, and ME SPE Franchising, LLC, (collectively, Massage Envy) and operated by Chaoju Investment, LLC.” Next, the issues and contentions: “Contending that Doe accepted an arbitration agreement while using its website to create an online profile for scheduling a massage and again while checking in at the franchised location, Massage Envy moved to compel arbitration.”

Plaintiff’s Consent to TOS …

And the holding:

“Based on the uncontradicted evidence presented in the trial court, Doe expressly assented to Massage Envy’s Terms of Use Agreement when she created a profile on Massage Envy’s website to access its scheduling service and affirmatively indicated her acceptance of the agreement, the terms of which included an arbitration clause. Because the arbitration agreement contains a clear and unmistakable delegation clause, Doe’s unconscionability and scoping arguments are properly directed to the arbitrator. Accordingly, the trial court should have granted the motion to compel arbitration.”

… Manifested by Actions

Last, the Court’s reasoning:

“Here, Doe assented to the Terms of Use Agreement when she created a profile on Massage Envy’s website to use Massage Envy’s appointment booking service. Doe created her profile on a single page. To create a profile, Doe had to click a box manifesting her assent to the Terms of Service Agreement, which were provided by a hyperlink in the text adjacent to the box, which was indicated by a different color and underlining. In short, there was a clear and straightforward process by which Doe, with ready access the full text of the Terms of Use Agreement, expressly manifested her assent.”

(ed: *Seems right, although we’re sometimes surprised to see this outcome from a California court. **See to the same effect: Tamburo v. Hyundai, No. 23-cv-00282, 2024 WL 22230 (N.D. Ill. Jan. 2, 2024)).

The Supreme Court has set February oral arguments in Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51 and Coinbase v. Suski, No. 23-3, two cases involving arbitration in which Certiorari was previously granted. The February calendar shows that Bissonette will be heard Tuesday February 20 and Suski on Wednesday February 28. The Court also granted certiorari in another arbitration-related case.

Bissonnette

As reported in SAA 2023-38 (Oct. 5), the Court granted Certiorari in Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51, where the July 17 Petition states:

“The Federal Arbitration Act exempts the ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’ 9 U.S.C. § 1. The First and Seventh Circuits have held that this exemption applies to any member of a class of workers that is engaged in foreign or interstate commerce in the same way as seamen and railroad employees—that is, any worker ‘actively engaged’ in the interstate transportation of goods. The Second and Eleventh Circuits have added an additional requirement: The worker’s employer must also be in the ‘transportation industry.’ The question presented is: To be exempt from the Federal Arbitration Act, must a class of workers that is actively engaged in interstate transportation also be employed by a company in the transportation industry?”

Suski

Recall that we reported in SAA 2023-25 (Jun. 29) and blogged in June 2023 that the Supreme Court had decided Coinbase, Inc. v. Bielski, No. 22-105, ruling mostly along ideological lines that courts must stay underlying litigation while an appeal of a denial of a motion to compel arbitration is pending. The 5-4 decision, which was released on June 23, was authored by Justice Kavanaugh. He was joined outright by Chief Justice Roberts, and Justices Alito, Barrett, and Gorsuch. Justice Jackson wrote a dissenting opinion, in which Justices Kagan and Sotomayor joined in full, and in which Justice Thomas joined for the most part. Buried in a footnote was this landmine: “The Court’s judgment today pertains to respondent Abraham Bielski. The writ of certiorari as to respondents David Suski et al. is dismissed as improvidently granted.”

We further reported that back with a June 2023 Certiorari Petition were the Suski parties, who raised this issue:

“Whether, where parties enter into an arbitration agreement with a delegation clause, an arbitrator or a court should decide whether that arbitration agreement is narrowed by a later contract that is silent as to arbitration and delegation.”

In a three-item Miscellaneous Order released November 3, 2023, SCOTUS granted Certiorari in Suski. As usual, there was no explanation.

A New Cert. Grant

SCOTUS agreed in a January 12 Miscellaneous Order to take on Smith v. Spizzirri, No. 22-1218. As reported in SAA 2023-36 (Sep. 21), the June 14, 2023 Petition for Certiorari states:

“This case presents a clear and intractable conflict regarding an important statutory question under the Federal Arbitration Act (FAA), 9 U.S.C. 1-16.[] The FAA establishes procedures for enforcing arbitration agreements in federal court. Under Section 3 of the Act, when a court finds a dispute subject to arbitration, the court ‘shall on application of one of the parties stay the trial of the action until [the] arbitration’ has concluded. 9 U.S.C. 3 (emphasis added)…. The question presented is: Whether Section 3 of the FAA requires district courts to stay a lawsuit pending arbitration, or whether district courts have discretion to dismiss when all claims are subject to arbitration.”

(ed: See our blog post, First Monday in October Coming Soon: Some Arbitration-Centric Cases Worth Following.)