S&C Critical Insights – Supreme Court Business Review: ZF Automotive v. Luxshare, Badgerow v. Walters and Morgan v. Sundance

August 22, 2022

In the third episode of S&C’s Supreme Court Business Review series, hosts Judd Littleton, Julia Malkina and Morgan Ratner are joined by partner Andrew Finn, the coordinator of S&C’s International Arbitration and Global Dispute Resolution Group, to discuss three arbitration cases that the Supreme Court decided last Term and the key takeaways from those decisions for businesses. From a broader perspective, Andrew explains how these three cases reflect that, unlike in the past when the Supreme Court frequently was required to grant certiorari to reverse lower court decisions hostile to arbitration, the Court now appears to be at a point where it is approaching arbitration cases in the same way it decides any other contractual questions.
 
In ZF Automotive v. Luxshare, the Court resolved two cases that presented the question of whether discovery under Section 1782, which allows federal district courts to grant discovery for use in certain proceedings in foreign or international tribunals, applies to proceedings before international arbitral tribunals. One case was before a private arbitration institution and the other was heard by an ad hoc arbitration panel convened pursuant to a bilateral investment treaty between Russia and Lithuania. The Supreme Court unanimously held that Section 1782 only applies to proceedings by governmental or intergovernmental bodies and did not authorize domestic discovery for use in either of the arbitration proceedings under review. Andrew explained that the decision eliminates the use of the statute for discovery in private international arbitration and is likely to narrow the use in some investor-state arbitrations, although it remains to be seen how lower courts will apply this decision to investment treaties with different terms.
 
In Badgerow v. Walters, the Court explained the inquiry federal courts should conduct when determining whether they have jurisdiction over requests to confirm or vacate a domestic arbitration award under the Federal Arbitration Act. In a prior decision, the Court had instructed courts considering a petition to compel arbitration to “look through” the petition to the underlying dispute between the parties to determine whether the federal court would have jurisdiction over that underlying dispute.  But in Badgerow, the Court held that approach does not apply to a motion to confirm or vacate an arbitral award.  Instead, the federal court must determine whether the motion itself establishes a basis for subject matter jurisdiction. Andrew explained that this likely means fewer domestic arbitral awards will now be enforceable in federal court and many parties will have to rely on state courts to apply the FAA unless diversity jurisdiction exists. He noted that this decision should not impact most international arbitral awards, which can be enforced or vacated under a separate section of the FAA.
 
Lastly, in Morgan v. Sundance, the Court addressed the circumstances in which a party waives its right to compel arbitration. The plaintiff, who had signed an arbitration agreement when she was hired, filed a nationwide collective action in federal court seeking to recover wages and overtime pay. Sundance actively litigated the case for eight months in federal court, then changed course and moved to compel arbitration under the FAA.  Applying a heightened waiver rule some courts had developed in the arbitration context, the Eighth Circuit held that Sundance had not waived its right to compel arbitration because the plaintiff did not show she had been prejudiced by Sundance’s delay in seeking to compel arbitration.  In a unanimous decision, the Supreme Court rejected this heightened prejudice requirement applicable only to arbitration agreements, holding that courts should apply the same waiver rules to arbitration provisions as they do in other contexts.  Andrew noted that the decision may result in federal courts being more inclined to find that a litigant has waived the contractual right to arbitrate, but noted that several other issues would need to be resolved before actually applying waiver in this or any other case. In any event, similarly situated parties should think carefully before engaging in any litigation in court rather than immediately seeking to compel arbitration.  
 
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