Overview
First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. Of particular interest to us has been the Supreme Court’s ruling on four cases relating to the arbitrability of disputes in the last two years. In this update, we take a look back on these recent rulings as the court seems to have embraced resolving practical open issues in arbitration procedure. Specifically, their review has raised the question of whether arbitrability determinations now have a cache of traffic stops?
The highlights:
- A court must determine arbitrability where two contracts exist between the parties and conflict on the issue of arbitrability. Coinbase v. Suski (2024).
- District court litigation is automatically stayed, pending an appeal of a denial of a motion to compel arbitration. Coinbase, Inc. v. Bielski (2023). See our FTU on this here.
- When a court grants a motion to compel arbitration, if a party requests a stay, the case must be stayed and not dismissed. Smith v. Spizzirri (2024). See our FTU on this here.
- The exemption to arbitration in FAA § 1 for transportation workers is dependent on the work someone does, not the industry in which they work. Bissonnette v. LePage Bakeries Park St., LLC (2024).
The Supreme Court reviewed each of these cases because of a circuit split. These decisions largely reaffirm the policy goals favoring arbitration, and show the court’s predisposition to halting a court case (though not dismissing it, in case judicial intervention is needed at some point) when there are issues of arbitrability for the courts to decide. In addition, these cases also offer a glimpse of where that policy favoring arbitration is perhaps somewhat limited in certain additional circumstances: in a “fourth-level dispute”—where the question is who decides arbitrability when the parties have multiple agreements that conflict on this point—it is for the courts to decide.
Coinbase, Inc. v. Suski, 144 S. Ct. 1186 (2024).
The court recently considered the issue of who decides arbitrability—a court or an arbitrator—where two contracts exist between the parties and the contracts conflict on the issue of arbitrability. On May 23, 2024, in a unanimous opinion written by Justice Jackson, the court held that a court must determine which contract governs.
Coinbase, a company that operates a cryptocurrency exchange platform, requires its users to sign a user agreement. The user agreement includes an arbitration provision with a delegation clause that requires an arbitrator to resolve all disputes arising from the contract, including disputes about arbitrability. Defendants, users of Coinbase, agreed to the terms of the user agreement when creating their Coinbase accounts. Defendants subsequently entered a Coinbase-sponsored sweepstakes to win a cryptocurrency called Dogecoin. The sweepstakes rules contained a forum-selection clause, which provided that California courts shall have sole jurisdiction over controversies regarding the sweepstakes.
Defendants filed a class action in federal court in California alleging that the sweepstakes violated various California laws. Coinbase moved to compel arbitration. The District Court denied Coinbase’s motion on the basis that (1) deciding whether the user agreement or the sweepstakes contract was an issue for the court to decide; and (2) that under California law, the sweepstakes rules superseded the user agreement. The Ninth Circuit affirmed. The Supreme Court granted certiorari to consider if a judge or an arbitrator should decide the issue of “whether a subsequent contract supersedes an earlier arbitration agreement that contains a delegation clause.” Coinbase, Inc. v. Suski, 144 S. Ct. 1186, 1192 (2024).
The court affirmed the Ninth Circuit’s ruling and held that where parties have two valid contracts, one that requires disputes about arbitrability to be resolved via arbitration, and the other that sends arbitrability disputes to the court, a court must determine which contract governs the dispute.
The court walked through the different types of disputes the parties can have in connection with an arbitration agreement. The merits of the dispute are a “first-order disagreement.” Id. at 1193. A “second-order dispute” is “whether [the parties] agreed to arbitrate the merits,” and a “third-order dispute” is whether a court or an arbitrator “should have the primary power to decide” whether the parties agreed to arbitrate the merits of the dispute. Id. At issue here was a fourth-level dispute—when the parties have multiple agreements that conflict as to who decides arbitrability—the arbitrator or the court—which contract governs. Id. In this case, the “fourth order dispute” was whether the delegation clause in the user agreement or the sweepstakes rules controlled the dispute. The court concluded that “[t]he question whether these parties agreed to arbitrate arbitrability can be answered only by determining which contract applies,” a question that “must be answered by a court.” Id.
Coinbase, Inc. v. Bielski, 599 U.S. 736 (2023)
Last year, the court resolved a second Coinbase case regarding arbitration procedure. On June 23, 2023, in a 5-4 decision written by Justice Kavanaugh, the Supreme Court ruled that litigation in a district court is automatically stayed pending appeal of a denial of a motion to compel arbitration. Section 16(a) of the Federal Arbitration Act does not explicitly require district courts to stay proceedings while an appellate court considers the issue of arbitrability. The court concluded that not only is the common practice to stay proceedings, but without a stay, benefits of arbitration such as reducing litigation costs and more efficient proceedings, would be lost. See our more detailed analysis of this case here.
Smith v. Spizzirri, 144 S. Ct. 1173 (2024)
In our June 2024 First Tuesday Update here, we covered the court’s unanimous ruling in Smith v. Spizzirri, which held that pursuant to Section 3 of the FAA, when a court grants a motion to compel arbitration, if a party asks for a stay of the case, the court must stay the case, and is not permitted to dismiss it.
Justice Sotomayor, writing for the court, reasoned that a stay makes sense because “[t]he FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, . . . enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, see § 7 and facilitating recovery on an arbitral award, see § 9.” Smith v. Spizzirri, 144 S. Ct. 1173, 1178 (2024). “Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections.” Id.
The practical impact of this decision is that the district court’s order staying a case and compelling arbitration are not appealable, and thus the court’s decision forecloses one of the avenues litigants used immediately to challenge court decisions compelling arbitration. In our June update, we noted that this decision could also facilitate third party discovery in arbitration and potentially additional judicial oversight of the arbitration.
Bissonnette v. LePage Bakeries Park St., LLC, 601 U.S. 246 (2024)
On April 12, 2024, in Bissonnette v. LePage Bakeries Park St. LLC, the court addressed whether the transportation worker exemption under Section 1 of the Federal Arbitration Act (“FAA”) applies to workers who are not employed by a company in the transportation industry. In a unanimous decision written by Chief Justice Roberts, the court held that to be an exempt “transportation worker” under Section 1 of the FAA, the individual does not have to be employed by the transportation industry. Bissonnette v. LePage Bakeries Park St. LLC, 601 U.S. 246 (2024). The applicability of the exemption turns on “what [the employees] do, not for whom they do it.” Id. at 10.
Petitioners in this case are franchisees and commercial truck drivers who owned the rights to distribute defendants’ baked goods in certain markets. The parties entered a Distributor Agreement, which in relevant part, required that disputes be resolved through arbitration under the FAA. Section 1 of the FAA, however, exempts from arbitration “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”
Petitioners filed a class action lawsuit against respondents, alleging that respondents underpaid petitioners. Id. The District Court held that petitioners were not “transportation workers” under Section 1 of the FAA because petitioners had more responsibility under the Distributor Agreement than being a “transportation worker” and therefore the exception did not apply. The Second Circuit affirmed on the basis that petitioners “are in the baking industry.”
The Supreme Court granted certiorari to resolve a circuit split regarding whether a “transportation worker” must work in the transportation industry for the Section 1 exemption to apply. The court, vacating the Second Circuit’s ruling, held that a transportation worker does not have to be in the transportation industry for the exemption under Section 1 to apply. The court characterized its holding as “limiting §1 to its appropriately ‘narrow’ scope.” Id. at 9.
What’s Next?
We hope this look back is helpful to navigating questions of arbitrability, including who decides those questions. We do not see any other arbitrability questions looming in the upcoming Supreme Court docket, but note that the court has been active in this area and has reached out to decide other arbitration adjacent issues, particularly where there are circuit splits. For example, in 2023, the court in Yegiazaryan v. Smagin held a party, including whether non-US residents could assert a RICO claim to enforce a foreign arbitral award. We covered this case in our July 2023 FTU here. One year earlier, in 2022, the court in ZF Auto US, Inc. v. Luxshare, Ltd. held that 28 U.S.C. § 1782 applies only to “governmental” or “intergovernmental” adjudicative bodies and therefore does not apply to international commercial arbitration. We covered ZF Auto US, Inc. here.
Steptoe litigators have extensive experience in domestic and international arbitration, including enforcing arbitral awards as judgments in courts throughout the world. Please do not hesitate to contact us if there is anything you wish to discuss or if we can be of any assistance.
