Burgess v. Lithia Motors, Inc. ( 2020 )

FILE THIS OPINION WAS FILED
FOR RECORD AT 8 A.M. ON
IN CLERK’S OFFICE SEPTEMBER 3, 2020
SUPREME COURT, STATE OF WASHINGTON
SEPTEMBER 3, 2020
SUSAN L. CARLSON
SUPREME COURT CLERK
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
EVETTE BURGESS, )
) No. 98083-7
Petitioner, )
)
v. ) En Banc
)
LITHIA MOTORS, INC.; BMW OF )
SPOKANE d/b/a CAMP AUTOMOTIVE, )
INC. d/b/a BMW OF SPOKANE, )
)
Respondents. )
) Filed: September 3, 2020
JOHNSON, J.—This case involves the availability of judicial review during
ongoing contractual arbitration proceedings conducted under the Federal Arbitration
Act (FAA), 9 U.S.C. §§ 1-16. Evette Burgess and Lithia Motors entered into
arbitration to resolve an employment dispute. During arbitration proceedings,
Burgess filed a motion with the court to terminate arbitration, alleging that Lithia
and the arbitrator breached the arbitration agreement. The superior court denied
Burgess’s motion, citing a lack of jurisdiction, and certified the matter for direct
review, which we granted. We affirm the superior court’s order. Under the FAA, we
Burgess v. Lithia Motors, Inc., No. 98083-7
hold that judicial review is limited to deciding gateway disputes, which concern
enforceability of the arbitration clause, and addressing the award after arbitration.
FACTS
In January 2018, Burgess filed suit in Spokane County Superior Court against
Lithia based on claims of discrimination, harassment, and wrongful termination.
Burgess initiated discovery under the court’s supervision. In early February, Lithia
requested that the parties move to arbitration per the terms of an arbitration clause
that Burgess had signed as a condition to employment. Neither party challenged the
validity of the arbitration clause.1
In July 2018, the parties agreed to arbitration. The parties entered into
arbitration independently, not by court order, per the terms of the earlier arbitration
clause. The arbitration provision stated, “The claims outlined shall be submitted to
and determined exclusively by binding arbitration under the Federal Arbitration Act,
in conformity with the Federal Rules of Civil Procedure [FRCP] and Rules of
Evidence [FRE].” Clerk’s Papers (CP) at 293. Burgess confirmed with the arbitrator
that she “agree[d] to the FRCP and FRE requirements.” CP at 349.
During arbitration, Burgess claims that Lithia failed to respond in a timely
manner to interrogatories. At one point, Lithia provided general objections in
1
The record contains written communications between the two parties where Burgess
indicates some portions of the arbitration agreement may be unconscionable. However, no formal
challenges to the enforceability of the arbitration clause were presented to the court.
2
Burgess v. Lithia Motors, Inc., No. 98083-7
response to Burgess’s first interrogatories and requests for production. Lithia largely
asserted that the discovery requests were privileged and conditioned production on
“a mutually agreed protective order” and noted that a privilege log would be
forthcoming. CP at 120.
In August 2018, Burgess filed a motion with the arbitrator to compel Lithia’s
answers to the first set of discovery. Citing FRCP 34, Burgess alleged that Lithia’s
responses were untimely, inadequate, and made in bad faith. She also argued that
Lithia waived its right to a privilege log. The arbitrator denied Burgess’s motions.
He found that Lithia, although untimely, provided answers to the first set of
discovery, and he ordered a conference to resolve the bad faith allegations. The
arbitrator also found that Lithia did not waive its right to seek a protective order and
directed the parties to confer.
After this ruling, Burgess filed in superior court “Plaintiff’s Motion to Vacate
Arbitrator’s Order Denying Discovery, Terminate Arbitration, and Issue a Case
Scheduling Order.” CP at 48. Burgess alleged that Lithia breached the arbitration
agreement by failing to comply with discovery deadlines under FRCP 34 and the
objection requirements of FRCP 33(b)(4). She also argued that the arbitrator’s ruling
constituted a breach of the agreement by failing to enforce the FRCP.
The superior court denied Burgess’s motion, ruling that
2. The arbitration clause in this case is enforceable.
3
Burgess v. Lithia Motors, Inc., No. 98083-7
....
5. This superior court is therefore prohibited from addressing
Plaintiff’s argument as to alleged breaches by Lithia and the
Arbitrator in the course of arbitration as it does not have jurisdiction
to do so.
CP at 612. The court granted Burgess’s request to certify the matter for review under
RAP 2.3(b)(4). The court also certified the following question:
Does the superior court have jurisdiction to address an
employee’s contractual breach argument based upon acts alleged in
the course of binding arbitration, or is the superior court’s jurisdiction
in a contractual arbitration limited to issues occurring before and
after—but not during—the proceeding. Specifically, is the superior
court’s jurisdiction limited to ruling on whether there is an
enforceable arbitration clause at the inception of arbitration and
addressing the arbitration award at its conclusion?
CP at 613. The Court of Appeals granted discretionary review and certified the
case to this court pursuant to RCW 2.06.030 and RAP 4.4.
ANALYSIS
The parties elected to resolve this dispute through binding arbitration under
the FAA. We are asked whether and to what extent the FAA authorizes a court to
review a challenge to the arbitration agreement once the claims have been submitted
to arbitration. Burgess contends that section 2 of the FAA authorizes the court to
resolve a breach of the arbitration agreement challenge during ongoing arbitration
proceedings. Lithia argues that the FAA limits court involvement to the “bookends”
of arbitration: initial enforceability and review of the final arbitration award.
4
Burgess v. Lithia Motors, Inc., No. 98083-7
The majority of federal circuits that have reviewed this issue determined that
the FAA generally restricts judicial involvement to the bookends of arbitration and
precludes any judicial intervention once arbitration begins. In re Sussex, 781 F.3d
1065, 1073 (9th Cir. 2015); see also Savers Prop. & Cas. Ins. Co. v. Nat’l Union
Fire Ins. Co. of Pittsburg, PA, 748 F.3d 708, 716 (6th Cir. 2014) (“Parties to an
arbitration generally may not challenge the fairness of the proceedings or the
partiality of the arbitrators until the conclusion of the arbitration and the rendition of
a final award.”); Blue Cross Blue Shield of Mass., Inc. v. BCS Ins. Co., 671 F.3d
635, 638 (7th Cir. 2011) (“Review comes at the beginning or the end, but not in the
middle.”); Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476, 487
(5th Cir. 2002) (“The FAA does not provide therefore for any court intervention
prior to issuance of an arbitral award beyond the determination as to whether an
agreement to arbitrate exists and enforcement of that agreement by compelled
arbitration of claims that fall within the scope of the agreement even after the court
determines some default has occurred.”); Michaels v. Mariforum Shipping, S.A., 624
F.2d 411, 414 (2nd Cir. 1980).
The interplay between judicial and arbitration proceedings under the FAA are
defined by several statutory provisions. Section 2 of the FAA states that a written
agreement to submit an existing controversy to arbitration “shall be valid,
irrevocable, and enforceable, save upon such grounds as exist at law or in equity for
5
Burgess v. Lithia Motors, Inc., No. 98083-7
the revocation of any contract.” 9 U.S.C. § 2. Section 4 of the FAA directs that
“upon being satisfied that the making of the agreement for arbitration or the failure
to comply therewith is not in issue, the court shall make an order directing the
parties to proceed to arbitration in accordance with the terms of the agreement.” 9
U.S.C. § 4. Section 3 of the FAA authorizes courts to “stay the trial of the action
until such arbitration has been had in accordance with the terms of the agreement.” 9
U.S.C. § 3. Section 9 of the FAA states that “any party to the arbitration may apply
to the court so specified for an order confirming the award, and thereupon the court
must grant such an order unless the award is vacated, modified, or corrected.” 9
U.S.C. § 9. Sections 10 and 11 of the FAA specify the limited grounds for which a
court may vacate, modify, or correct an arbitration award. Taken together, these
provisions indicate that arbitration is conducted primarily with the arbitrator except
for the circumstances discussed above, where a court’s authority is expressly
delineated.
Under a similar set of facts, the Sixth Circuit concluded that “[b]ased upon the
text, structure, and purpose of the FAA, which all foster a speedy and less formal
method of dispute resolution,” courts may not entertain an interlocutory challenge to
an ongoing arbitration proceeding.2 Savers, 748 F.3d at 716. In Savers, the parties
2
The Savers court analyzed the dispute under the Michigan Arbitration Act, but noted that
the Michigan laws were “‘almost identical to the FAA in all relevant respects.’” Savers, 748 F.3d
6
Burgess v. Lithia Motors, Inc., No. 98083-7
completed an arbitration hearing and the arbitration panel issued an “interim final
award” that resolved liability issues but did not calculate or issue a final damages
award. One of the parties requested that the court stay the arbitration proceedings
and challenged the fundamental fairness of the proceeding, including whether the
arbitrators exceeded their authority, displayed impartiality, and violated ex parte
prohibitions. The trial court framed the issue as a breach of contract dispute and
ruled on the matter, enjoining the ongoing arbitration proceedings.
The Savers court determined that the language of the FAA contemplated two
stages where courts are authorized to review disputes regarding arbitration
proceedings. First, sections 2, 3, and 4 of the FAA authorize courts to decide
“gateway disputes” regarding the validity or applicability of arbitration agreements.
Section 2 of the FAA “preserves ‘generally applicable contract defenses’ to
arbitration agreements” and allows courts to rescind or invalidate arbitration
contracts where the contract contains an underlying defect. Savers, 748 F.3d at 719;
see 9 U.S.C. § 2. Once the court determines a valid arbitration agreement exists, the
court must enforce it. The following sections, sections 3 and 4 of the FAA, authorize
courts to stay trial and order the parties to proceed with arbitration per the terms of
their binding agreement. 9 U.S.C. §§ 3-4.
at 716 (quoting Uhl v. Komatsu Forklift Co., 512 F.3d 294, 303 (6th Cir. 2008)). Accordingly, the
court relied on cases applying the FAA and resolved the case by interpreting the FAA.
7
Burgess v. Lithia Motors, Inc., No. 98083-7
Second, at the conclusion of arbitration proceedings, courts may review the
final arbitration award. Section 9 of the FAA allows parties to seek an order from the
court to confirm the arbitration award. Sections 10 and 11 of the FAA define the
limited circumstances where courts may vacate, modify, or correct an arbitration
award.
In evaluating these provisions, the Savers court found it significant that the
FAA is silent regarding judicial review between gateway disputes and review of the
final award. It recognized that other circuit courts have interpreted this silence as
precluding interlocutory review. Savers, 748 F.3d at 717-18 (citing Blue Cross, 671
F.3d at 638; Gulf, 304 F.3d at 488; Hooters of Am., Inc. v. Phillips, 173 F.3d 933,
941 (4th Cir. 1999); LaPrade v. Kidder Peabody & Co., 330 U.S. App. D.C. 386,
146 F.3d 899, 903 (1988); Michaels, 624 F.2d at 414). The Savers court concluded
that under the FAA’s framework, the trial court is not authorized to intervene in the
ongoing arbitration proceedings between resolution of gateway disputes and review
of the final arbitration award. We agree.
Burgess argues that judicial relief for a breach of the agreement is warranted
under the language of section 2 of the FAA. Section 2 of the FAA states, “[A]n
agreement in writing to submit to arbitration an existing controversy arising out of
such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in equity for the revocation of any
8
Burgess v. Lithia Motors, Inc., No. 98083-7
contract.” 9 U.S.C. § 2. Burgess contends that section 2 of the FAA authorizes mid-
arbitration breach challenges because rescission is an equitable remedy for a
material breach of contract. This argument misinterprets the import of section 2 of
the FAA.
The United States Supreme Court has recognized that “[s]ection 2 is a
congressional declaration of a liberal federal policy favoring arbitration agreements,
notwithstanding any state substantive or procedural policies to the contrary. The
effect of the section is to create a body of federal substantive law of arbitrability.”
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S. Ct.
927, 74 L. Ed. 2d 765 (1983). Under this provision, courts may determine “gateway
disputes” where the question is whether the parties have submitted a particular
dispute to arbitration. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123
S. Ct. 588, 154 L. Ed. 2d 491 (2002). Common gateway disputes concern
enforceability of the agreement, such as unconscionability challenges or disputes
over which parties are bound by the agreement. These are all questions for the judge.
Burgess cites no case where a court provided relief, let alone rescission, once
arbitration commenced. The Savers court rejected the notion that section 2 of the
FAA authorizes interlocutory judicial review during arbitration proceedings. The
court noted that section 2 exists to place arbitration agreements on the same footing
as any other contract, subjecting the agreements “to rescission or invalidation if
9
Burgess v. Lithia Motors, Inc., No. 98083-7
there is a defect in the underlying contract.” Savers, 748 F.3d at 719. However,
“[n]othing in the text or history of the FAA suggests that § 2 was intended to
displace § 10’s limitation on judicial review of non-final awards.” Savers, 748 F.3d
at 720.
Cases do exist where courts ruled on rescission challenges, but such cases
involve rulings made before arbitration commenced. Burgess relies on Hooters, 173
F.3d at 938-41, to establish that courts may rescind arbitration agreements during
arbitration. In Hooters, the Fourth Circuit permitted judicial inquiry and rescinded
the arbitration agreement. In that case, a party materially breached the agreement by
promulgating unfair and one-sided rules for arbitration when it had a contractual
obligation to draft rules in good faith. The court clarified, “[W]e only reach the
content of the arbitration rules because their promulgation was the duty of one party
under the contract. The material breach of this duty warranting rescission is an issue
of substantive arbitrability and thus is reviewable before arbitration.” Hooters, 173
F.3d at 938-41 (emphasis added) (resolving the challenge on review of a motion to
compel arbitration). The outcome in Hooters is inapplicable here because Burgess is
challenging the agreement during arbitration.
The Ninth Circuit also reviewed a breach of contract challenge under section
2 of the FAA where an employer initially refused to arbitrate per the terms of its
own arbitration agreement, forcing the employee to file a lawsuit. Brown v.
10
Burgess v. Lithia Motors, Inc., No. 98083-7
Dillard’s, Inc., 430 F.3d 1004, 1010 (9th Cir. 2005). There, the employer moved to
compel arbitration, which the court denied. The court held that the employer’s
refusal to arbitrate constituted a breach of the agreement, rendering the agreement
unenforceable. Brown also does not control because in that case, the breach of
contract challenge was raised before—not during—arbitration. Accordingly, we hold
section 2 of the FAA does not authorize the court to resolve a breach of the
arbitration agreement challenge during ongoing arbitration.
Further, limiting judicial involvement during ongoing arbitration proceedings
is consistent with the underlying intent of the FAA. Arbitration agreements are
contracts that establish the parties’ agreement to resolve their dispute in arbitration,
instead of in court. In AT&T Mobility LLC v. Concepcion, the United States
Supreme Court recognized that the “‘principal purpose’ of the FAA is to ‘ensur[e]
that private arbitration agreements are enforced according to their terms.’” 563 U.S.
333, 344, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011) (alteration in original) (quoting
Volt Info. Scis., Inc. v. Bd. of Trustees, 489 U.S. 468, 478, 109 S. Ct. 1248, 103 L.
Ed. 2d 488 (1989)). The FAA provisions afford parties discretion to design
arbitration processes “to allow for efficient, streamlined procedures tailored to the
type of dispute.” AT&T, 563 U.S. at 344. “If parties could take ‘full-bore legal and
evidentiary appeals,’ arbitration would become ‘merely a prelude to a more
cumbersome and time-consuming judicial review process.’” Oxford Health Plans
11
Burgess v. Lithia Motors, Inc., No. 98083-7
LLC v. Sutter, 569 U.S. 564, 568-69, 133 S. Ct. 2064, 186 L. Ed. 2d 113 (2013)
(quoting Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576, 588, 128 S. Ct. 1396, 170
L. Ed. 2d 254 (2008)). Various circuit courts have opined that permitting
interlocutory judicial review prior to the conclusion of arbitration would undermine
the benefits of arbitration. See Savers, 748 F.3d at 718 (citing the Seventh, Fifth, and
Second Circuits). If judicial review were allowed, the trial court would sit in an
appellate capacity regarding any arbitral decision, resulting in significant delays and
increased costs for parties.
Once arbitration begins under the FAA, the court’s authority to resolve the
dispute is transferred to the arbitrator. Judicial intervention is generally precluded
during arbitration proceedings. The language, framework, and underlying intent
behind the FAA confirm that generally courts are limited to ruling on gateway
disputes, such as whether the arbitration clause is enforceable, and addressing the
award at the conclusion of arbitration.
This case falls squarely within the circumstances where judicial review is
precluded under the FAA. Burgess and Lithia are engaged in ongoing arbitration.
Neither party challenged the validity of the arbitration agreement beforehand and the
final arbitration award has not yet been issued. The court may not intervene and
rescind the arbitration agreement when the case is between those two stages.
Burgess essentially challenges the arbitrator’s interlocutory discovery ruling and
12
Burgess v. Lithia Motors, Inc., No. 98083-7
asks us to determine whether the ruling comports with the FRCP. This is the very
type of review that the FAA aims to prevent. Because Burgess seeks to terminate
and rescind the ongoing arbitration based on those grounds and an alleged breach of
the arbitration agreement that occurred during arbitration, the superior court is
precluded from reviewing her challenge.
CONCLUSION
We affirm the superior court’s order, denying Burgess’s motion to terminate
arbitration. When the parties elect to resolve their dispute through arbitration under
the FAA, courts are generally limited to determining enforceability disputes before
arbitration begins and reviewing arbitration awards when arbitration is complete.
The trial court properly determined that it was without authority to resolve Burgess’s
challenge. We affirm and remand for further proceedings consistent with this
opinion.
13