“Arcane” Questions of Arbitrability Resolved by the Courts, Not Arbitrators

There are still arenas where common sense prevails in the changing world of litigation concerned with the enforcement of contractual arbitration provisions.

The beginning for all discussions on this subject is the axiom that arbitration “is a matter of contract and a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit.” Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960).

However clear that principal may appear, if the underlying contract is silent or ambiguous with respect to the particular matter in dispute, it is not at all obvious how it should be applied.

In addressing such disputes over the years, the courts have delineated two “interpretive rules” to bridge the gap in the contract. Howsam v. Dean Witter Reynolds, 537 U.S. 79, 83 (U.S. 2002).

Where the dispute arises out of “any doubts concerning the scope of arbitrable issues [it] should be resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 (U.S. 1983).

However, the presumption is reversed where the dispute arises out of the question of who should decide arbitrability. First Options v. Kaplan, 514 U.S. 938, 944-945 (U.S. 1995) (“In this manner the law treats silence or ambiguity about the question ‘who (primarily) should decide arbitrability’ differently from the way it treats silence or ambiguity about the question ‘whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement.’”).

Those disputes are resolved by the courts rather than in arbitration. The reason for the different treatment is understandable:

The [former] question arises when the parties have a contract that provides for arbitration of some issues. In such circumstances, the parties likely gave at least some thought to the scope of arbitration. And, given the law’s permissive policies in respect to arbitration, one can understand why the law would insist upon clarity before concluding that the parties did not want to arbitrate a related matter. On the other hand, the [latter] question — the “who (primarily) should decide arbitrability” question — is rather arcane. A party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers.

Id. The question of arbitrability is simply, in the view of the Supreme Court of the United States, too “arcane” an issue to assume the parties have considered it.

For that very sensible reason, in the absence of “clear and unmistakable” evidence of the parties’ intent to the contrary, the courts decide questions of arbitrability. Id. at 944 (“Courts should not assume that the parties agreed to arbitrate arbitrability unless there is “clea[r] and unmistakabl[e]” evidence that they did so.”) (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986)).

Although the liberal federal policy favoring arbitration has been elevated above state law and perhaps even the mandates of other federal statutes, important limitations remain. It is important for litigators and, in particular, class action litigators, to keep the presumptions described above in mind.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

Are You an Employee?

Recently the National Labor Relations Board (NLRB) has taken steps to protect the rights of employees, including those without a union, when they act collectively for mutual aid or protection.  As we reported in past posts the Board has determined that non-union employees have the right to bring class and collective actions to improve working conditions, even if their employer forced them to sign agreements that establish individual arbitration as the only method of resolving disputes about working conditions:  NLRB Finds Class Action Litigation Protected Activity Under NLRA and Chipping Away at Employees’ Right to Bring Class Actions.  The Board has also found that employers violate the National Labor Relations Act (NLRA) when they retaliate against employees who engage in social media discussions of job conditions with co-workers:  Employers Are Not Free to “Dis-Like.”

Wonderful as these protections sound you cannot be protected by these and other Board decisions if you are not an employee as defined by the NLRA.  The Act provides no protection to employees whom it defines to be supervisors, even if these individuals are protected by the FLSA because they spend only ten percent of their time performing supervisory functions or have no power to reward or discipline the employees whom they “supervise.”  Conversely the NLRA explicitly protects professional employees even if they are exempt from the overtime requirements of the FLSA.

Under the NLRA individuals are supervisors, and therefore unprotected, if they have the authority to perform any one of twelve functions, even if performing these functions is a very minor part of their job duties.  These functions, listed in section 2(11) are authority “to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees, or responsibly to direct them, or to adjust their grievances, or effectively to recommend such action.”  As a result of the Supreme Court’s ruling on the interpretation of two of these functions – “assign” and “responsibly to direct” – in NLRB v. Kentucky River Community Care, Inc., 532 U.S. 706 (2001) and the NLRB’s subsequent decisions in a three related cases in 2006, Oakwood Healthcare Inc., 348 NLRB No. 37, Croft Metals, 348 NLRB No. 38, and Golden Crest Healthcare Center, 348 NLRB No. 39, many individuals are statutorily classified as supervisors merely because they have the authority to assign particular tasks even though they have no power to hire, fire, reward or discipline.

Recently Senators Richard Blumenthal, D-Conn., Tom Harkin, D-Iowa, and Dick Durbin, D-Ill., introduced legislation to protect those individuals without real supervisory power.  The bill, entitled the Re-Empowerment of Skilled and Professional Employees and Construction Tradeworkers Act, or RESPECT Act, would remove “assign” and “responsibly to direct,” the two supervisory functions that do not involve actual managerial authority over co-workers from section 2(11) of the NLRA.  In addition individuals who spend less than half their time performing supervisory functions would not be defined as supervisors.  Thus the RESPECT Act would extend the protections of the NLRA to workers who need the protection because they have no real supervisory power in the workplace.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

SEC Releases Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Exchange Act

This is an update to our November 30, 2010 and April 26, 2011 blog posts relating to the SEC’s Study on Extraterritorial Private Rights of Action.  The study was a result of the Supreme Court’s decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), which abandoned nearly 50 years worth of legal precedents, limiting the ability of Americans to invoke the protections of the U.S. securities laws against transnational securities fraud.  Specifically, the Supreme Court rejected the U.S. Second Circuit Court of Appeal’s “conducts and effects” test and established a transaction based test focusing on the location of the purchase or sale of the securities. The new bright line test limits Section 10(b) claims to the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.

Shortly after Morrison was decided, the Dodd-Frank Act was enacted, which restored the ability of the SEC and DOJ to bring enforcement actions for securities fraud if the matter involves: “(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”  Although the Act did not provide the same protections for private citizens, Section 929Y directed the SEC to conduct a study to determine whether private rights of action should be extended to the same extent as that provided to the SEC and DOJ.

On April 11, 2012, the SEC released its “Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934.”  A copy of the 73 page report can be found here.  In response to the SEC’s request for public comments, the SEC received 72 comment letters (30 from institutional investors; 19 from law firms and accounting firms; 8 from foreign governments; 7 from public companies and associations representing them; 7 from academics; and 1 from an individual investor). Of these, 44 supported enactment of the conduct and effects tests or some modified version of the tests, while 23 supported retention of the Morrison transactional test.

In the study, the SEC does not take any position on the question of whether or not Congress should pass legislation to overturn Morrison.  Instead, the SEC presents several options for Congress to consider, including (1) enactment of the “conduct and effects” tests; (2) narrowing the conduct test’s scope to require the plaintiff to demonstrate that his/her injury resulted directly from conduct within the United States; (3) enacting the conduct and effects tests only for U.S. resident investors; (4) clarifying the transaction test by permitting investors to pursue a Section 10(b) claim for the purchase or sale of any security that is of the same class of securities registered in the United States, irrespective of the actual location of the transaction; (5) authorizing Section 10(b) private actions against securities intermediaries such as broker-dealers and investment advisers that engage in securities fraud while purchasing or selling securities overseas for U.S. investors or providing other services related to overseas securities transactions to U.S. investors; (6) permitting investors to pursue a Section 10(b) private action if they can demonstrate that they were fraudulently induced while in the United States to engage in the transaction, irrespective of where the actual transaction takes place; and (7) clarifying that an off-exchange transaction takes place in the United States if either party made the offer to sell or purchase, or accepted the offer to sell or purchase, while in the United States.

In connection with the release of the study, Commissioner Luis A. Aguilar issued a harsh dissenting statement relating to the SEC’s report. As part of a press release entitled, “Defrauded Investors Deserve Their Day in Court,” Mr. Aguilar recommended that Congress enact for private litigants a standard that is identical to the standard set forth in Section 929P of the Dodd-Frank Act — the standard for SEC and DOJ actions:

Today the Commission has authorized that a Study be sent to Congress expressing the views of the Staff on the cross-border scope of the private right of action under Section 10(b) of the Securities Exchange Act of 1934. However, my conscience compels me to write separately to record my views on the Study. I write to convey my strong disappointment that the Study fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that has resulted, and will continue to result, due to Morrison v. National Australia Bank, Ltd

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If American investors are defrauded by a company that they have invested in – and that company is listed on a foreign exchange – investors may be unable to have their day in court and seek redress against this company for its lies and misrepresentations. Thus, investors have been stripped of a traditional American right.

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The answer to the Congressional query about whether to re-establish extraterritorial private rights of action under Section 10(b) of the Exchange Act through the application of the pre-Morrison tests of conduct and effect is an unequivocal yes.

The Study is incomplete in many ways, but I will just highlight the following:

  • It Fails to Adequately Explain how Private Rights of Action are a Vital Complement to SEC Actions and Essential to Investor Protection;
  • It Overstates the International Comity Concerns Associated with Restoring Investors’ Rights to Assert Private Claims Under Section 10(b);
  • It Does Not Accurately Portray Investor Harm Resulting from Morrison and Fails to Convey a Sense of Urgency as to the Harm Being Suffered; and
  • It Provides as an Option That Congress Take No Action at All Despite the Continuing Harm to Investors.

The Study should have recommended that Congress enact for private litigants a standard that is identical to the standard set forth in Section 929P of the Dodd-Frank Act – the standard for SEC and DOJ actions. The harm that has resulted and continues to result to investors is significant, and Congress should act to rectify this with haste.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.