Legal Docket - Unraveling an international dispute

MEGAN BASHAM, HOST: It’s Monday morning and a brand new work week for The World and Everything in It. Today is the 24th of February, 2020. Good morning to you, I’m Megan Basham.

NICK EICHER, HOST: And I’m Nick Eicher. Justices of the U.S. Supreme Court are back on the bench today hearing oral arguments after taking a one-month break. 

Mary Reichard is at the Supreme Court this morning, observing arguments first hand. She’ll bring us coverage of some of those next week.  

For today, she’s prepared the two remaining cases argued in January. So after today, you’ll be completely caught up on every argument heard this term.

BASHAM: But before we get to it, I’d like to take a moment to remind you that we’re down to our final week for our free offer to put WORLD Magazine in the mailbox of a friend, or the mailboxes of many friends.

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EICHER: Well, on to oral arguments. 

This first case deals with arbitration. It’s likely arbitration applies to you, because many contracts include an agreement to arbitrate. That’s arbitrate instead of litigate. You often find arbitration clauses in employment contracts and consumer-purchase agreements. 

By agreeing to one, what you’re doing is giving up the right to take your dispute to court, and settling in an arbitration setting, which is usually less expensive than the court system and much faster.

The case before the Supreme Court now concerns another kind of arbitration agreement. But this is about an agreement between two companies from different countries. 

An international treaty governs this arbitration: it’s called the New York Convention. It took effect in the late 1950s and as of today 161 countries have signed on to it. The convention enforces arbitration agreements between businesses and member states.

As we mentioned, Mary’s back in D.C. today doing some reporting at the Supreme Court for another series we’re working on.

But she did explain the rest of this case for us, and left it on tape so we could play it for you.

MARY REICHARD: Digital tape! Nick, you’re so old school.

Well, let’s keep this as simple as possible. And I’ll begin by simplifying terms to describe the three parties here. I’ll just call them “American company,” “French company,” and “subsidiary company.” 

Each one of these is involved in some aspect making stainless steel. So American company and French company signed a contract that included an arbitration clause. 

And here’s the key part: the contract bound subcontractors to the agreement. This would be subsidiary company. But the problem here is, subsidiary company didn’t sign on first. Nobody asked. Everybody assumed. 

So the companies are all getting along, making steel things together, when a production problem cropped up. When it did, guess who got the blame: the subcontractor, subsidiary company.

American company seemingly ignored the arbitration provision and headed straight to court. Subsidiary company pointed to the provision and said, hey, that original contract gives us the right to insist on arbitration.

Chief Justice John Roberts got down to basics.

ROBERTS: I thought it was one of the central propositions of our arbitration precedents that arbitration is based on agreement. And here somebody who never agreed to arbitration is being forced into arbitration, even though he has a clear right to take his dispute to court.

Subsidiary company argues that the New York Convention says nothing about third parties.

So subsidiary lawyer Shay Dvoretzky wants to convince the Supreme Court to analyze this another way. Some lower courts use a legal doctrine called “equitable estoppel” to enforce arbitration agreements like this. Equitable estoppel more or less means what it sounds like: to stop someone from acting in a way that harms another. Here’s Dvoretzky:

DVORETZKY: Other contracting states are close to unanimous that the Convention does not preempt domestic law allowing non-signatory enforcement … . And allowing doctrines like equitable estoppel serves the Convention’s overriding purpose, to overcome widespread resistance to arbitration.

That may be so, but Justice Samuel Alito sounded skeptical. 

So did Justice Elena Kagan, who had her doubts that the New York Convention didn’t say exactly what it meant.

KAGAN: If I say federal courts shall have jurisdiction over federal questions, would this statute also permit those courts to exercise jurisdiction over state questions?

DVORETZKY: No, and Justice Kagan…

KAGAN: I’m going to give you one more. Just to prove the point. (laughter) Shareholders shall appoint two directors to the board. Does that mean shareholders can appoint 20 directors to the board?

DVORETZKY: No …

KAGAN: Because “shall” means “shall only” in many circumstances, right?

DVORETZKY: It depends on context …

So things weren’t going so well for subsidiary company. 

On the other side, Jonathan Hacker. He’s the lawyer for the American company trying to avoid arbitration and go to court instead.

Hacker argued the New York Convention rule absolutely requires written consent between the two parties. No legal fiction can cancel that out. 

So, he argued, his client can’t be forced to arbitrate here.

But Justice Neil Gorsuch pushed back. 

I want to explain a term you’ll hear Justice Gorsuch use: “privity.” That just means parties in a legal dispute who are entitled to the same powers. Here he is.

GORSUCH: You’ve admitted that there are other doctrines that allow third parties to be brought in as privities who may not have strictly consented. Alter-ego theory, veil-piercing theory.  It’s a fiction to call that consent.

HACKER: I disagree, Your Honor …

The justices are clearly divided on this matter. On one hand, it’s a simple matter of two parties who didn’t come to an agreement. On the other hand, a desire to encourage arbitration as a very good thing to do.

However the court decides, it’ll have wide application for subcontractors doing business with international companies.

This last case today is another battle over a federal law called ERISA. That’s an acronym for the Employee Retirement Income Security Act of 1974. 

ERISA disputes are frequent flyers at the Supreme Court. 

This one arises out of a split in the circuit courts of appeal: one appeals court ruling one way, another ruling the other. This is a classic “split in the circuits” that almost always requires the Supreme Court to intervene.

Here are the facts of this ERISA dispute. 

I’ll start with the main players: James Thole and Sherry Smith. Both of them are retired from U.S. Bank, another player in the dispute. Thole and Smith alleged U.S. Bank mismanaged their defined-benefit pension plan. 

Now, another player: the fiduciaries. These are the financial experts who make investments to try to grow the value of the pension plan.

The alleged mismanagement comes down to this: Against other professional advice, the fiduciaries invested plan assets in high-risk equities. When the financial crisis hit the stock market in 2008, the plan lost over a billion dollars in value.

Here’s another key fact: U.S. Bank eventually replenished those funds, and the retirees wound up with the money they’d been promised. You might think, that’s the end of it.

But a legal question remains: Even though they didn’t lose any money, do Thole and Smith still have standing to sue for breach of fiduciary duty?

Chief Justice Roberts had this question for their lawyer, Peter Stris.

ROBERTS: But what did your clients lose? I mean, your friend on the other side says they get nothing. They’re in the same position if you win or if you lose.

STRIS: Well, so I mean I couldn’t disagree with that more. There’s always risk. Pension plans fail. Businesses fail. In 2008, AIG had $100 billion until they didn’t.

And so, Stris pointed to multiple concrete injuries his clients endured: risking their pensions in the first place and reckless investing in general.

STRIS: Your property interest has been impaired. I want to be very clear about this. This has been the case since the 15th century …. To have an equitable interest in trust assets, a beneficiary has never had to show that she’s likely to receive the trust assets. As long as she has the possibility of benefiting from the assets, she has a present property right to prevent others from damaging them. That’s the lesson …

Justice Stephen Breyer couldn’t resist following up with this:

BREYER: I don’t remember the 15th century, surprisingly, but, nonetheless — (Laughter.) We did look up some things. And … at least a quick research suggests that … there are different duties, fiduciary duties. One is the duty of loyalty. Another is the duty of prudence. 

KAVANAUGH: Those duties do exist, yet the lower courts had found that Thole and Smith suffered no individual financial harm. So they had no standing to sue.  

Finally, Justice Kavanaugh voiced the competing interests in the case in this comment to another lawyer arguing in support of the retirees:

KAVANAUGH: The tension in this case as I see it, and I think it’s a close case, is the history is strong but the answer to the question — it’s 99.99 percent certain that the benefits promised are going to be there. And how do we resolve what I see as that tension? Because it would be odd for us to grant standing in a case where the chances are so small. 

On the other hand, you’re right about the history. I mean, you make a good point about the history.

This sounds like another divided bench, with conservative justices not really seeing how standing to sue exists here, and the liberal justices going the other direction. 

Either way, clarity is needed. Millions of Americans have pensions held in defined-benefit plans. The right to sue for mismanaging assets hangs in the balance, as does tolerance for risk versus reward.

And that’s this week’s Legal Docket.

BASHAM: All right! Mary, I know you’re listening. Safe travels!

(AP Photo/J. Scott Applewhite) In this June 17, 2019 file photo, The Supreme Court in Washington. 

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