Arbitration / Court Decisions

The First Circuit Court of Appeals has followed up on its recent jurisprudence outlining the standards for the Federal Arbitration Act’s “transportation worker exception,” as we previously posted, by applying its recently delineated standards to hold that individuals who purportedly spent at least 50 hours a week driving goods within a single state were within the scope of the exception.

Margarito Canales and Benjamin Bardzik contracted with a subsidiary of Flowers Foods Inc. Under that contract, Canales and Bardzik owned the rights to three routes in Massachusetts along which they delivered baked goods to stores.

Canales and Bardzik claimed that they were improperly classified as independent contractors and thereby wrongly denied wages and overtime. Flowers Foods and its subsidiaries sought to compel arbitration under the FAA in response to Canales’ and Bardzik’s claims. The district court held that Canales and Bardzik were within the transportation worker exception and thus declined to compel arbitration. Flowers Foods appealed.

The First Circuit affirmed. It rejected the arguments that (1) Canales and Bardzik could not invoke the exception because they were not in the transportation industry and (2) the facts established that Canales and Bardzik were business owners. The court concluded that both arguments were precluded by its recent decision in Fraga v. Premium Retail Services Inc., which noted that the inquiry for determining whether the exception applies is focused on what the worker does, not in which industry the worker is engaged, and recognized that workers who frequently engage in transportation activities can fall within the scope of the exception even if they perform other responsibilities. In this case, the record established that Canales and Bardzik spent a minimum of 50 hours per week driving their delivery routes to deliver goods. They were therefore within the scope of the exception and arbitration could not be compelled under the FAA.

Canales v. CK Sales Co., No. 22-1268 (1st Cir. May 5, 2023).

The Second Circuit Court of Appeals recently clarified its process for determining whether a court can apply a presumption of arbitrability. The court noted that its traditional process for making that determination does not comport with the U.S. Supreme Court’s 2010 decision in Granite Rock Co. v. International Brotherhood of Teamsters and thus outlined a new process.

Niagara Mohawk Power Corp., doing business as National Grid, entered into a collective bargaining agreement with a local electrical workers union. The agreement required arbitration for any dispute regarding the meaning, application, or operation of the agreement.

The union’s business representative initiated the grievance and arbitration process on behalf of the union. He claimed that National Grid violated the agreement by requiring retired members to pay higher health insurance premiums than active employees. National Grid declined to process the grievance, claiming that it was not arbitrable under the agreement.

The union filed a complaint in district court and moved to compel arbitration. The district court granted the union’s motion and National Grid appealed.

The Second Circuit affirmed but held that the district court reached the correct conclusion through the wrong analysis because the district court applied the Second Circuit’s pre-Granite Rock precedent even though that precedent was inconsistent with Granite Rock.

The Second Circuit explained that the U.S. Supreme Court’s decision in Granite Rock establishes that courts may invoke a presumption of arbitrability only where the parties’ dispute concerns a valid and enforceable agreement to arbitrate that is ambiguous as to its scope.

In contrast, the Second Circuit’s pre-Granite Rock case law, which the district court applied, directed courts to first classify the particular arbitration clause as either broad or narrow and then apply a presumption of arbitrability to broad clauses. The Second Circuit explained that that process was inconsistent with Granite Rock to the extent it directs courts to prioritize deciding whether a presumption of arbitrability applies before determining whether, under ordinary principles of contract interpretation, a particular dispute is covered by the language to which the parties agreed. The district court’s utilization of that process was improper because, rather than finding that the agreement’s arbitration clause was ambiguous in scope before applying the presumption of arbitrability, as dictated by Granite Rock, the district court started by characterizing the arbitration clause itself and held that the presumption of arbitrability applied, without determining whether the agreement covered the parties’ dispute.

Nevertheless, the Second Circuit concluded that the district court’s decision that the dispute was subject to arbitration was correct under the proper standard. The Second Circuit held that the agreement unambiguously covered the grievance. Two conditions had to be met for the grievance to be covered by the arbitration clause: (1) the union had to claim that a dispute had arisen; and (2) the dispute had to concern a provision of the agreement. Both of those provisions were met, as the union raised the grievance, which concerned a clause in the agreement.

Local Union 97, International Brotherhood of Electrical Workers, AFL-CIO v. Niagara Mohawk Power Corp., No. 21-2443 (May 3, 2023).

The Eleventh Circuit Court of Appeals has overruled long-standing precedent and joined the Second, Third, Fifth, and Seventh Circuits to hold that the grounds for vacatur of an arbitral award are set out in domestic law (specifically Chapter 1 of the Federal Arbitration Act), not the New York Convention, where the United States is the primary jurisdiction under the New York Convention.

Since 1998, the Eleventh Circuit had held that a party seeking vacatur of an arbitral award issued under the New York Convention could only rely on the grounds for vacatur set out in Article V of the New York Convention. But that decision and a subsequent Eleventh Circuit ruling following it were “wrong” and “outliers” according to the Eleventh Circuit. The Eleventh Circuit explained that its prior decisions failed to properly analyze the text of the New York Convention or the FAA. “[N]either Article V of the [New York] Convention nor § 207 of the FAA provides the grounds on which a court in the primary jurisdiction can vacate an arbitral award.” Instead, “the primary jurisdiction’s domestic law acts as a gap-filler and provides the vacatur grounds for an arbitral award.” When the United States is the primary jurisdiction under the New York Convention, Chapter 1 of the FAA is that gap-filler. Thus, a party seeking to vacate an award subject to the New York Convention can rely on Chapter 1 of the FAA rather than Article V of the New York Convention when the United States is the primary jurisdiction.

In the case at bar, the district court had correctly followed the Eleventh Circuit’s prior, binding precedent and therefore not considered a challenge to the arbitration award at issue that was based on Chapter 1 of the FAA. The Eleventh Circuit therefore vacated the district court’s award and remanded for consideration of that challenge in light of its new precedent.

Corporación AIC, S.A. v. Hidroeléctrica Santa Rita S.A., No. 20-13039 (11th Cir. Apr. 13, 2023).