Courthouse Steps Decision Webinar: Morgan v. Sundance

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On May 23, 2022, the U.S. Supreme Court decided Morgan v. Sundance. In a rare 9-0 decision, the Court vacated and remanded the judgment of the U.S. Court of the Appeals for the Eighth Circuit, holding that federal courts may not adopt an arbitration-specific rule conditioning a finding of waiver of the right to arbitrate on a showing of prejudice to the other party. Though this had been a relatively common analysis, the Court rejected it, cabining any concept that there is a “policy favoring arbitration.” The Court reinterpreted that to mean only that federal courts may not invent special, arbitration-preferring procedural rules. “[A] court must hold a party to its arbitration contract just as the court would to any other kind.” The Court went on to say that “a court may not devise novel rules to favor arbitration over litigation.” But the Court also left open the role of state law and what rules can apply, including waiver, forfeiture, estoppel, laches, or procedural timeliness.

Justice Kagan delivered the opinion of the Court.


Please join our legal experts to discuss the case, the legal issues involved, and the implications for these parties and other litigation parties going forward.


Featuring:

  • Erika Birg, Partner, Nelson Mullins Riley & Scarborough LLP
  • Richard D. Faulkner, FCIArb.,  Arbitrator, Attorney & Former Professor of ADR Law

 

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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.

Event Transcript

Ryan Lacey:  Hello, and welcome to The Federalist Society’s virtual event. This afternoon, June 1, 2022, we discuss “Courthouse Steps Decision: Morgan v. Sundance.” My name is Ryan Lacey, and I’m an Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of our experts on today’s call.

 

      Today, we are poised to have an excellent discussion with two experts whom I will introduce very briefly. First, we have Erika Birg, a partner at Nelson Mullins Riley & Scarborough LLP. Second is Richard D. Faulkner, arbitrator, attorney, and former professor of ADR law. After our speakers give their remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A feature at the bottom of your screen, and we will handle questions as we can towards the end of today’s program. With that, thank you for being with us today. Erika, floor is yours.

 

Erika C. Birg:  Great. Thank you, Ryan. I’m very pleased to be here with Richard today, who I enjoy talking about arbitration much with. So today, we’re talking about Morgan v. Sundance, which came out last week. It settled a case where there was, basically, an 8-2 split between the circuits as to whether prejudice to the nonmoving party to compel arbitration was an appropriate factor to be considered. Just by way of background, Robyn Morgan was a part-time employee at the Taco Bell franchisee, Sundance. She filed a collective action in federal court. There was a motion to dismiss. She was invited to mediate the case with a similar case that had been filed several years before. Her case did not settle. When they came back to the district court approximately eight months later or so, then Sundance moved to compel arbitration. The district court settled, said, “Yes, you’re going to arbitration,” and the Eighth Circuit said no because there was -- or said yes because there was prejudice.

 

The question that was then presented at the Supreme Court was, “Does the arbitration-specific requirement that the proponent of a contractual waivered offense prove prejudice violate the court’s instruction that lower courts must ‘place arbitration agreements on an equal footing with other contracts—’” quoting AT&T Mobility v. Concepcion. And from there, I mean, we have an interesting briefing and oral argument. I’ll turn it to Richard to talk a little bit about that.

 

Richard D. Faulkner:  Yes. The oral argument in this case was an example of really superb oral argument by very talented litigators. Both sides did a wonderful job. They had one of the hottest courts I’ve ever seen. And listening to the oral argument and reading the transcript indicates that those lawyers really had to be on their toes. The parties’ briefs raised every potential issue under state or federal law for the Court’s consideration. And the Court was having none of it. We got a very rare, unanimous, small, seven-page opinion, in which, frankly, the Court spent a lot of its time saying, “Here’s what we’re not deciding.” And it took almost everything that the lawyers tried to raise and said, “No, we’re not going there.” Instead, the Court focused very, very narrowly and basically said in one line, “The Eighth Circuit erred in conditioning a waiver of the right to arbitrate on a showing of prejudice.”

 

And it did that based on an assumption. And the Court expressly said, “We are assuming without deciding that this is the correct analysis because it is the predominant mechanism by which the federal courts of appeal that require prejudice use in deciding whether or not arbitration has been waived. And the Court looked at it and said no. It came out with a decision that said something that I think caught many of us by surprise, which is it addressed the FAA’s policy favoring arbitration, first articulated in Moses Cone, and said that’s just an acknowledgement of the FAA’s attempt to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate, and it went and focused on the equal treatment principle. And that equal treatment principle is critical because the Court said a court may not favor -- I mean not devise novel rules to favor arbitration over litigation. Basically, it said when the court said equal treatment, it meant equal treatment.

 

And so, now we’re looking at these issues -- and particularly if you read the oral arguments, you will see that Justice Kagan, Justice Sotomayor, Justice Kavanaugh had numerous questions that relate back to state law and what is the role of state law. And all of these questions, the Court said, remain open. Literally, this decision is a roadmap for anybody wanting to challenge arbitration. And Erika, I know you have some thoughts on some aspects of this.

 

Erika C. Birg:  Absolutely. So what caught my eye when I was reading through this was the use of forfeiture—the suggestion in the opinion, several times in the opinion, where they say they’re not deciding this. They say, “I’m not deciding that waiver is the right issue, but it is -- maybe it’s forfeiture.” And as a business litigator and doing business arbitration work, I’m thinking -- I’m scratching my head. I’m like, “Forfeiture?” Forfeiture is not something we see when we talk about breach of contract actions. It’s not something that we talk about. It’s usually left to the criminal context. And here you see this over and over again in the decision, forfeiture. Well, where did they get it? They got it from the briefs. They got it from the amicus briefs where everyone was talking about whether you forfeited the right. In the Sundance brief, for example, they use the two things synonymously and over and over.

 

So what is it? So I went and tracked back a little bit on this talking about this concept of forfeiture. Can we really just say, “No longer are we going to talk about waiver; we’re going to talk about forfeiture?” But we’re then back to your point, Richard—this question of is it a state law question or is there a federal law question here, because, to me, Justice Kagan made, potentially, a little confusion for us when she said it was a procedural issue. So immediately, I thought like, “Is waivers procedural?” I would have thought waiver, doing that Erie doctrine test in my head, would have been a substantive-type question.

 

But it really does go back to the petitioner’s brief where the petitioner raised the question, “Oh, well, it’s different from forfeiture,” and then tracking it back down to the cases. And Justice Scalia actually had a very interesting discussion about the differences between waiver and forfeiture and the Freytag v. Commissioner case in ’91 and then in the -- I think it’s Yucus case -- waiver’s different from forfeiture. Whereas forfeiture’s a failure to make the timely assertion of a right, waiver is the intentional relinquishment or abandon of a known right. So back to my question -- so if it’s procedural, it’s based on time. What is the time in the federal arbitration act for moving to call arbitration? Richard, is there one?

 

Richard D. Faulkner:  There isn’t one. There isn’t one. And what is really interesting is when you look at the questions from the justices, Justice Gorsuch literally presaged what the decision would be by focusing down on questions spoken to Ms. Gilbride and to the attorney for the other side, Paul Clement, and basically said, “Look, what I’m suggesting is why don’t we put all of those things aside?” And lord only knows what Iowa state law defenses mean or any of the rest of that. One thing that Gorsuch said we do know, and it seems to control, is Section 6, and what the Eighth Circuit was relying on was federal procedural law. It seems that’s what everybody else does. And Justice Gorsuch went on to say, “I think with some degree of certainty, waiver, whatever else it requires in federal court, our normal procedure with respect to motions does not require proof of prejudice.”

 

And that seems to be the narrowest possible ground that the Court could agree on unanimously to say, “We’re not deciding this really was a matter of procedure or state law or federal common law”—whatever that is, very interesting colloquy on that—“but what we’re saying is assuming, since that’s the predominate analysis of the eight courts that require prejudice, we’re going to look at this and say no. The federal policy in favor of arbitration does not mean you put your thumb on the scale and make pro-arbitration the default. Instead, it means equal treatment.” And there’s no requirement of prejudice. Therefore, prejudice was not required, and the courts cannot go and create a pro-arbitration standard in any of the federal rules nor in the FAA. I think something that a lot of the commentary has really not focused on is this is a very textualist word-by-word review.

 

And I went back and looked at GE Power Conversion v. Outokumpu, where the use of state law was used in an international arbitration context to fill in gaps and say that since the New York Convention does not preclude by its language use of state law, it was permissible. And if you go back and look at the US Supreme Court decisions, they are focusing literally on every word and every comma in the FAA. And I think that is going to really open a lot of doors.

 

One thing that I thought was a valiant effort by counsel on both sides was they tried to get away from the analysis the Court ultimately adopted and said, “Wait a second. Let’s look at Section 2, look at Section 3, look at Section 6.” And the Court came back and said, “No, we’re going exactly here and nowhere else but here, and then we’ll send the case back.” I noticed that Mr. Clement, in his argument, seemed to sense things weren’t going well, and he suggested that the Supreme Court should repeat [inaudible 0:11:30] and dismiss the case as improvidently granted. And clearly, the Court was having none of that either.

 

Erika C. Birg:  Right. Right. Well, it is fascinating because to me, what goes next? Right? So we solved this question. It seemed rather simple in its complexity, in some respects, that, no, you can’t add on additional requirements here. But all the things that they didn’t decide—latches, estoppel—where do you go? What do you do when there’s a no waiver clause? And in the state contract situation, you’ve got them all the time, where it says failure to insist upon a right in this contract in a single moment doesn’t mean that I can’t rely on it in the next moment, and there is no intentional waiver of anything.

 

Richard D. Faulkner:  The respondent’s counsel tried to raise that by going back to the American Arbitration Association employment rules and say, “Wait a second. It says in there that you don’t waive any rights because of this provision of the AAA rules.” And unlike the AAA rules granting arbitrability determinations to arbitrators, apparently, the Court was totally unimpressed with this rule.

 

Erika C. Birg:  It was the one time they didn’t take the incorporation doctrine.

 

Richard D. Faulkner:  Exactly.

 

[Crosstalk]

 

Erika C. Birg:  It's [Inaudible 12:57] all over again on our incorporation doctrine.

 

Richard D. Faulkner:  The incorporation doctrine went out the window here. And maybe that presages something we would not have otherwise predicted, saying that Rule 7 is questionable in the commercial context. I think it’s Rule 42 in the employment rules. And that’s nice, AAA, but you’re not the Congress of the United States as the Sixth Circuit once said. We’ll have to see how this develops.

 

Erika C. Birg:  And for those of our listeners who -- one of Richard’s and I prior topics that we’ve talked about in arbitration is this question of does -- if your arbitration clause incorporates the arbitral rules of JAMS or the AAA, does that mean you agree to everything? And that is most courts—most federal courts—believe that if you incorporate the AAA rules, then all of that is part of your agreement, though I’ve never known a party to actually pull the AAA rules and read them. And the Florida Supreme Court recently agreed with that. And I know the Eleventh Circuit follows the incorporation doctrine. So if you hear that in arbitration, that’s what we’re talking about.

 

In this particular instance, what was interesting, though, was neither parties’ brief discussed Section 6, and neither party really anticipated, I don’t think, the Court’s focus on, “You’re making a motion to compel arbitration. It’s a motion like any other motion. And so, the Court should treat it, not necessarily as a contractual issue, but as a procedural issue.” Back to my questions -- so if it is a procedural issue and we don’t have a deadline, what is a district court to measure it by? I mean, are we in a situation now, Richard, where you think that -- many district courts in Georgia—for example in the Northern District of Georgia—have standing orders. So you file your case. The judge issues his or her standing order and says, “You’ve got to do these things by this time.” Will we start seeing, “If you’re going to move to compel arbitration, you need to do it with your answer, or you need to do it within the first 60 days—” so that you get district courts setting that deadline so that they can apply the forfeiture doctrine?

 

Richard D. Faulkner:  And that may well happen.

 

Erika C. Birg:  And they can truly rule procedure.

 

Richard D. Faulkner:  I know several of the chief judges of the federal district courts here—Eastern, Northern District. I know them reasonably well, and I can see them putting in such a rule saying, “If you’re going to move for arbitration, you must do it within X number of days.” And frankly, that would help the federal courts with some of these issues. But let’s face it. In this particular case, the respondent was using a tactic and a technique that, in and of itself, has generated a lot of litigation, particularly litigation over the doctrine of frustration, where the respondent knows—and Justice Kagan alluded to this—you know you have an arbitration agreement. Nevertheless, he decided to take the temperature of the courts. And I get to go do our green switch routine again [inaudible 16:04]. Oh, well.

 

Erika C. Birg:  Just for all those who were talking about --

 

Richard D. Faulkner:  Thank you, environmentalists.

 

Erika C. Birg:  -- that when the lights go off --.

 

[Crosstalk]

 

Richard D. Faulkner:  Justice Kagan, I believe, alluded to this and said, “Wait a second. You knew what you were doing. You chose to do it, and then you waited for the temperature of the Court to see, ‘Well, now, will I like it or not?’” As I’ve said in an article with Phil Loree, plaintiffs choose where to file suit. There’s an underlying assumption in the Morgan case that employment plaintiffs have agreed to arbitration when the reality is most of them loathe arbitration and try to get out of it. So it’s the respondent, the defendant, that has to decide, “What do we do?”

 

And that ends up involving, “Well, what do you know about the local judge? Will they grant or not grant motions to dismiss?” Most of us have a pretty good read on our local federal judiciary, especially if we’re smart enough to be members of The Federalist Society. And so, there are certain courts, great, you know that you’re probably going to win your motion to dismiss. On the other hand, there are other courts where you go, “Let me file my motion to compel arbitration yesterday.” And that’s something that we all have to decide. But Justice Kagan caught onto that. She knows exactly what this game is, and she called everybody out on it and said, “Look. You’ve got to make your decision; make it promptly.” And that’s why they focused on relinquishment of a known right.

 

Erika C. Birg:  It’s forum shopping, right? We’re all doing it.

 

Richard D. Faulkner:  Of course.

 

Erika C. Birg:  We’re all doing it.

 

Richard D. Faulkner:  Everybody does it.

 

Erika C. Birg:  I relayed a story where one of my colleagues, many years ago at a different firm, had filed a lawsuit—in the days where we were trying to collect debts—against the favorite son in Barrow County, Georgia. And everybody loved him, and he had given probably -- he went to church with the judge. And so, me, as plaintiff, then moved to compel arbitration, even though we had filed the lawsuit, and were able to compel arbitration from the court. And all of those arguments about forum shopping, all of them were made, but because the court put the thumb—and I was able to use all that language—put the thumb in favor of arbitration, we were able to move it. And I think that tide is switching, right? That’s shifting more.

 

Richard D. Faulkner:  I think that that --.

 

Erika C. Birg:  So you’re going to have to do something early. And if you think it’s important enough to have an arbitration clause in your contract, you’re going to have to start thinking it’s important enough to enforce.

 

Richard D. Faulkner:  Well, and then that gets to another point, which is, I think—particularly after seeing Uber’s $91 million bill from the AAA and Postmates and others—a lot of companies are becoming very un-enamored of arbitration. I’ve had a number of clients just pull the AAA clauses out of their contracts. They won’t do it anymore. But I think when you look at what the Court did in the Morgan case, it opens up the door for a return to state court, to state law analysis, but an analysis with no predisposition in favor of arbitration. This equal treatment concept is really important, and that means that arbitration provisions are the same as any others. And so, without that extra pro-arbitration policy, where’s it going to go? And I think it opens up a lot of doors to challenges now.

 

Erika C. Birg:  I think I agree. The issues really are going to be, is it a substantive -- is it a procedural issue? So when you think about it as a waiver issue, which is how all the courts -- everybody thought, “How do you waive this contractual right?” to now being a forfeiture issue, which is exactly what Justice Kagan wants everybody to do. I mean, it’s all over the opinion—“like forfeiture, like forfeiture”—when that’s not a concept we see in civil litigation. It’s not a concept that we ordinarily see, even in the federal procedural rules—that you’re going to have to start -- there’s going to have to be a groundswell where we’re setting deadlines. It’s going to be in scheduling orders. There’s going to be that effort to try to create forfeiture as being the way to move forward. The other thing, though, is, contractually, drafters for arbitration clauses potentially can draft around those, right?

 

Richard D. Faulkner:  Oh, yes.

 

Erika C. Birg:   Is there a way, at this point in time, if you want your cake and eat it, too, how are you going to think about your arbitration clause to say -- not just your ordinary no-waiver, but that you’re going to have a no-waiver? We have the right to institute litigation, and we can choose arbitration at any point in time.

 

Richard D. Faulkner:  And the drafting is going to be critically important. I say that as one who has been bitten repeatedly by my brilliant drafting of the original agreement that became Rent-A-Center v. Jackson, and that’s why there are so many peculiar French terms in that agreement because that’s where I come from—Louisiana. It metastasized into things I never, ever expected. I was simply trying to avoid the Ninth Circuit, which was hostile in those days and enforced by arbitration agreement. And now, we have this entire doctrine of law relating to delegation clauses, and I didn’t predict that. So be careful, drafters. You may find out you’re opening the law of unintended consequences, which always works sort of like gravity.

 

Erika C. Birg:  That’s right. The other question, too, is -- and I think this is really an important one, too, because I think the context of this particular case and -- so a lot of consumer arbitrations we see and the mass arbitrations—the Uber and the Postmates—and then the employment arbitrations that we got the issues now with the Fair Act and so forth, that what we’re really going to see is, “How does this play, at least in my world, in the business-to-business arbitration situation?” I think you can more easily draft in those situations where you’ve got two sophisticated parties at an arm’s length transaction. We still call them midnight clauses, but --

 

Richard D. Faulkner:  Oh, yeah.

 

Erika C. Birg:  -- nonetheless, they are supposedly negotiated versus being in a situation where you’re going to have questions regarding procedural unconscionability if you can invoke arbitration at any stage --

 

Richard D. Faulkner:  Interestingly enough, particularly when you look at some of the consumer laws say, a consumer in Texas includes small- and medium-sized businesses with net assets of less than $25 million. It is Texas.

 

Erika C. Birg:  Everything’s bigger in Texas. That’s right.

 

Richard D. Faulkner:  We address these issues. And I’ve represented hundreds of automobile dealers. We became so disenchanted with arbitration, we got Congress to change the law. We failed on changing the FAA, so we hid the Automobile Dealer’s Fairness Act in the Department of Justice Appropriations Act, and that had to be passed. So auto dealers are the only businesses in America that do not have to arbitrate except when disputes arise, and you don’t have to agree to arbitrate until after the dispute has arisen. And so, we put that in there because it was presumed that business-to-business negotiations were arm’s length. But that’s not really true when you represent small- or mid-sized businesses, and the cost of a single arbitration has driven some of my small business clients into bankruptcy. It is expensive to do this. It’s great when we represent billion-dollar corporations. But if you’re smaller—that $25-million-and-under category of business—arbitration is something you really have to think about.

 

Erika C. Birg:  Yeah. It can be very, very expensive and not more efficient unless the arbitrator or arbitrators make it so. So it is very, very challenging. So I think what I take away --.

 

[Crosstalk]

 

Richard D. Faulkner:  At least what I’m sharing is efficient—11 months start to finish.

 

Erika C. Birg:  Yeah. I mean, given what you can get in state court, 11 months from start to finish is very efficient. Right?

 

Richard D. Faulkner:  We have lots of options.

 

Erika C. Birg:  That doesn’t mean it’s necessarily less expensive. It’s just on more condensed schedule. From a takeaway perspective, for me, it really is looking at how are we going to balance the procedural versus substantive? Right? So back to the oral argument, back to your points on the oral argument, there isn’t necessarily a procedural component built in to the federal rules of civil procedure that would allow us to say, “Your deadline to move to compel arbitration is X.” So we don’t have necessarily that. So to me, it’s a substantive issue on the contract, and then you can contract around it. We will have as many decisions and applications as there is the ingenuity of a lawyer in drafting --

 

Richard D. Faulkner:  Oh, yeah.

 

Erika C. Birg:  -- to determine what this is going to be. And I think we’re going to see some potentially bad law made on bad facts on some of that. But that’s the tension, and I don’t think it can be resolved very easily without seeing what happens in the trenches in our district courts as they start to [inaudible 25:49].

 

[Crosstalk]

 

Richard D. Faulkner:  That’s going to be something that we’ll be dealing with for probably the next 10 or 15 years because I know I’ve had cases in which the contracts were entered into in the 1970s, 1980s, 1990s. And so, we’re looking at arbitration language that nobody has dusted off or examined for decades. And people are going, “Oh, my God. I didn’t know that was agreed to.” And so, we will have those arbitration archives that almost no one puts a freezing clause in that says, “The rules as of X date.” So it’s going to be very problematic and particularly for international arbitration. When you look at what the Court has done, when you look at the constant references back to issues of state law that it refused to decide, now what do we do as counsel for corporations when we’re faced with these issues of, “What state law?”

 

California is very protective of parties in many instances. But even there, you have infinite arbitration clauses, which effectively -- if you believe the language as the clause is drafted, everybody since creation and until the end of the universe has agreed to arbitrate with XYZ company. And you got cases like Revitch and some others where the courts go, “No.” You have to look at who you were agreeing a contract with and an arbitration with at the time of the contract and not people 5 years, 10 years, 20 years down the road or who buy a right to arbitrate. And these things are going to come up because we’ve got very inventive lawyers.

 

Erika C. Birg:  Thank goodness.

 

Richard D. Faulkner:  Oh, yes.

 

Erika C. Birg:  It keeps up busy. It keeps us interesting. So, yeah, for a seven-page decision, I think it goes back to what you said before. It’s less about what they said, which seemed sort of like the low-hanging fruit there, and more about what they didn’t say, and this grafting on of the idea that forfeiture, which is not a civil concept, is potentially the appropriate way to go, even though there’s no timeline, latches, and estoppel, which are mostly -- at least in Georgia, latches is a principle that can only be invoked in equitable situations.

 

Richard D. Faulkner:  Right.

 

Erika C. Birg:  So where does the concept of equity come into play in a federal statutory case, like this one was, with an overlay of contractual rights?

 

Richard D. Faulkner:  Well, throw in the fun of Howsam, the Howsam case—which I believe in one exchange, Paul Clement and Justice Breyer got into a discussion of Howsam—many of those issues are ones that the Howsam Court set up the arbitrator. So what do you do with that? I mean, look, arbitrators are going to find jurisdiction. They’re paid by the hour. I hate to be unduly cynical, but I come out of a French culture. We are cynical by nature. I mean, the simple fact is an arbitrator who can make a few hundred thousand dollars or a million dollars, of course, not going to fight, “I don’t have jurisdiction.”

 

Erika C. Birg:  I’m not going to agree to that. I’m not going to agree to that. I can’t. I can’t agree to that. I’m an arbitrator. We got to look at all our jurisdictional issues appropriately.

 

Richard D. Faulkner:  Well, I know. And in the international context, it may take us 200 pages to discuss our jurisdiction.

 

Erika C. Birg:  Well, that’s true. But anyway, I will go with the arbitrator will be fair. But I understand the cynical point. I’ll understand the cynical point of view that you provide that says arbitrators will always find that they have jurisdiction because I don’t believe that to be true.

 

Richard D. Faulkner:  I’ve raised it a hundred times and gotten it on one.

 

Erika C. Birg:  Whether you would be able to convince the court to send it to arbitration for the arbitrator to figure it out whether he had jurisdiction -- we have seen that in Georgia, where the court sent it to the arbitrator for the arbitrator to determine jurisdiction and the arbitrator determined he didn’t have jurisdiction and sent it [inaudible 29:50].

 

Richard D. Faulkner:  Wow. Now I know of two of those cases.

 

Erika C. Birg:  There you go. There you go. This is great. I love talking about arbitration with you, Richard.

 

Richard D. Faulkner:  Oh, I do, too. It’s so much fun.

 

[Crosstalk]

 

Erika C. Birg:  I love talking about Morgan v. Sundance. I don’t know, Ryan, if there are any questions.

 

Ryan Lacey:  Yeah, and I’ll start off with a question of my own while we allow our audience to put questions in the Q&A feature if they would like to. How do you see this case affecting future cases both at lower courts and if an issue like this comes to the Supreme Court again? How does this look as precedent?

 

Erika C. Birg:  It’s fabulous because it’s simple.

 

Richard D. Faulkner:  Yes.

 

Erika C. Birg:  It’s simple, right? It says arbitration clauses get treated just like every other contract clause. It’s beautiful in its simplicity. You really can’t mess around with that. The question then becomes, “What do you do with the contract law?” What state are you in? We now have potentially 50 different ways you address that contract. So contract law’s generally the same, but rules and interpretation -- like the contract rules of interpretation of Delaware are different than those in Georgia. Ours are statutory. They’re laid out. You go here. Then you go here. Then you go here. And this one goes first; this one goes second. Not every state has that. So you’re going to get into those types of issues.

 

But I think that, for me, I’m on a little tirade in my own state for the Georgia Supreme Court to start reading our arbitration statute just the way you read every other statute. So I find this decision very helpful in moving to that direction, that you don’t treat arbitration, the statute or the clauses, differently than anything else. And if we can get that mantra, I think it’s going to be very, very helpful. So this gives us that grounding.

 

Richard D. Faulkner:  Right. I agree with that, but I think you have to take it a little bit further, which is the equal treatment principle is clearly applicable. But what is equally treated? Because I do a fair number of cases in the insurance and reinsurance area, I used to be on the board of directors of a reinsurance company, and so insurance law is highly regulated. It varies state by state. And then you have the McCarran-Ferguson Act thrown in. But when you look at it, does equal treatment mean equal treatment with all insurance? Does it mean in the context of adhesion clauses, only equal treatment with adhesion clauses or equal treatment with all contracts? These are things—to steal a well-known phrase—inquiring minds will want to know. And we can all litigate these. But unfortunately, representing business clients, this is expensive. It’s a fascinating exercise when I was a law professor, but somebody pays for this. And I have yet to meet the businessperson who wanted to pay for the esoteric discussions.

 

Erika C. Birg:  That’s right. That’s true. That’s true.

 

Ryan Lacey:  Well, we have one question from our audience from Kent Sinclair. And again, if you would like to ask a question of panelists, please put it in the Q&A section. In light of this decision, how do you suggest modifying arbitration clauses to address the waiver/forfeiture issue, particularly for commercial disputes?

 

Erika C. Birg:  Since Kent’s my former law partner, I’ll go ahead and —hi, Kent -- I’ll go ahead and take that one, and thanks for asking the question. I think you absolutely have to take a look at your clause. Right? So operating agreements, for example, you need to be taking a look at what the arbitration clause says right now. But I think I would probably say in there that initiating -- if you really want to be in arbitration, you’re certain at the outset you want to be arbitration, say in there, “Initiating litigation is forfeiture of the right of this clause.” Right? I mean, you can flat out say, “If you file suit or you defend, you answer, and do not raise this as an affirmative offense, you forfeited your right to arbitration.”

 

Or if you really want to make sure it’s there -- “Even if I answer and I do not assert compelling arbitration or existence of an arbitration clause as an affirmative offense or in defense of your claim, I reserve the right to proceed to litigation.” On the latter, I think the courts are going to lose patience if you say, “Any point in time, I can assert arbitration,” because you’re going to have some questions of whether there was truly meeting minds. The consideration going back, mutuality of the obligation, those issues will come up on a contract. I think you can do it if you really put your mind to it in your particular contract.

 

Richard D. Faulkner:  I think you can do it by adept drafting, but it’s going to present a particular problem in international arbitration because quite often, what we encounter are contracts drafted by European lawyers who come out of unitary systems where they do not have state law such as we have. And so, you will see in contracts the laws of the United States. Well, what does that mean in our context? And unfortunately, the drafting is sometimes questionable—not to say that we can’t badly draft in this country, too—but it causes all kinds of issues because now you have to figure out choice of law issues and other such that just cause a lot of problems. I think you can draft, but wow. Be careful. I mean, I see what happened with Rent-A-Center, and I wish I had phrased things differently. And unfortunately, I’ve had to look at that for the last 20-odd years. So careful with your drafting because you may not be dealing with it today, but you may be dealing with it tomorrow or a decade from now.

 

Erika C. Birg:  That’s fair enough.

 

Richard D. Faulkner:  Now, Erika, you raised something that I think is also potentially fascinating, and that is the federal policy in favor of arbitration has been trumpeted by the courts for effectively the last three to four decades. And so, this decision upends a lot of that rhetoric and a lot of those decisions in jurisprudence. And so, I’m already talking with my colleagues at the University of North Texas College of Law to see -- maybe some law students would like to write good law review article on this, or perhaps, Ryan, we can get something in The Federalist so that we can look at this and see, “Wow, what does this do? What does Morgan do to the Texas Supreme Court case law or the Louisiana Supreme Court jurisprudence?” Because it’s going to have an effect. If there’s no preference for arbitration, if it’s the same as any other contract clause, wow, that opens a lot of doors.

 

Erika C. Birg:  We were talking about that before. And I think the question then comes to, for me -- questions of statutory construction are often approached the same way you would approach a contract construction. And statutory construction in Georgia, for example, under a Georgia arbitration code -- every opinion starts out, “Well, the purpose of this statute….” Right? We have this deference to policy-favoring arbitration, finality, the purpose. Well, I’ll tell you, in every other case, our Georgia Supreme Court is saying, “Well, we don’t follow a purposivist approach. We are going to read the statue for its language, except when it comes to arbitration.”

 

Richard D. Faulkner:  Exactly.

 

Erika C. Birg:  Arbitration is treated with its own little silo where the courts don’t touch it—I don't know—because they don’t want to work on them. I don't know. But there’s going to be that point—and I think this is a good jumping-off point—where we’re going to take it from not just how do you read the contract, how do you approach these questions, but how do you interpret the statute itself? So as Justice Kagan said, “We’re all textualists now,” and looking at that then. And so, in your state cases—and particularly your post award cases—looking at how they apply the statue and applying it as written and not with the favoritism of confirmation of the award, and that’s where I see this as potentially going to be very helpful.

 

Richard D. Faulkner:  I think the Supreme Court gave us some guidance in that GE Power Conversion case because they were reiterating what the rules were for the interpretation of treaties, and they analogized those to statutory construction. And so, you have a guideline from the US Supreme Court itself on how to interpret these contracts, how to interpret the Federal Arbitration Act itself, because again, they went through, literally, sentence by sentence in Section 200 et al of the Federal Arbitration Act. And the Court was very careful in analyzing each provision. So I think if counsels the other inferior federal courts and state courts to look very, very carefully at exactly what the arbitration acts say. And I say acts, plural, because remember that the FAA only preempts state law where it is inconsistent or negative or hostile to arbitration. So you have more ethics, a la California. You can have greater facilitation of arbitration. What does any of that mean? I don't know, but we’re sure going to have fun finding out.

 

Erika C. Birg:  That’s right. That’s right. I couldn’t agree more.

 

Richard D. Faulkner:  Well, Ryan, have any more --?

 

Ryan Lacey:  I don’t have any more questions from our audience. Do either of you have any closing thoughts on the case?

 

Erika C. Birg:  I think it’s -- one, I think it’s remarkable that it’s 9-0, but that was because there was some low-hanging fruit, I think. But I’m still just perplexed. I just threw it out there on this grafting of this criminal, in the criminal procedure ideas onto arbitration clauses of forfeiture when there is no corresponding deadline in the Federal Rules of Civil Procedure to actually file a motion to compel arbitration. So there are no guidelines, so I don’t know how you forfeit something when you don’t have a deadline to do it.

 

Richard D. Faulkner:  Having been a trial judge with civil and criminal jurisdiction, I’m not that concerned about forfeiture. But you’re correct, Erika, in that the Court basically looked at forfeiture, considered it, but then they went right back and said, “Look, here’s how we define waiver. And if you know you have a right and you don’t exercise it, then you’ve waived it.” And I think that’s pretty clear. I mean, I think we need to tell our clients, “Look, if you really want to arbitrate, don’t delay. Move and move expeditiously.” Don’t try and play games that, frankly, most of us have played on the defense side.

 

Erika C. Birg:  Play a side.

 

Richard D. Faulkner:  That particular—and sometimes I’ll play them—but that particular approach is so dangerous now I don’t think we can do it. And I think, effectively, we’re going to see decades of future litigation in this field because this decision has effectively said what we all thought we knew: the federal policy in favor of arbitration was, isn’t. It means equal treatment. And that’s not what virtually any of the courts have assumed, with a couple of outliers. And now, those two courts seem to be the ones who had it right.

 

Erika C. Birg:  That’s right.

 

Ryan Lacey:  Well, on behalf of The Federalist Society, I want to thank Erika and Richard for the benefit of their valuable time and expertise today. And I would like to thank our audience for joining us and for participating. We welcome listener feedback by email at [email protected]. And as always, keep an eye on our website and your emails for announcements about upcoming webinars and other programming. Thank you all for joining us today. We are adjourned.