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Supreme Court Nominee Kavanaugh Seems To Be Pro-Arbitration (or so We Think), Part II
Posted on Categories Arbitration, Court Decisions, Federal, News, Non-FINRA, RegulationTags , , , , , ,

Last week, we analyzed the cases involving business and securities arbitration decided by Supreme Court nominee, Judge Brett M. Kavanaugh of the District of Columbia Circuit. This week, we look beyond those areas.

We concluded last week that, based on that very limited sampling, Judge Kavanaugh, who was on the President’s published List of potential nominees, is basically pro-arbitration. This week, we examine arbitration cases involving labor relations, followed by cases involving regulation (including our old friend, the PHH case). Along the way, we again offer our take on what the cases may mean.

Labor Award Upheld

Judge Kavanaugh wrote the majority Opinion in Verizon New England v. NLRB, No. 15-1062 (D.C. Cir. 2016), a labor arbitration matter. The NLRB had overturned an Arbitrator’s decision in Verizon’s favor, but the Court reinstated the Award. Judge Kavanaugh wrote: “We conclude that the Board misapplied its highly deferential standard for reviewing arbitration decisions. Under that standard, the Board should have upheld the arbitration decision in this case. The Board acted unreasonably by overturning the arbitration decision.”

Our Take: More evidence of a view supporting very limited judicial review of Awards.

Another Labor Arbitration, but Award Not Upheld

National Railroad Passenger Corp. v. Fraternal Order of Police, Lodge No. 189, No. 17-7004 (D.C. Cir. 2017), was another labor case involving Judge Kavanaugh, who joined the majority upholding an Award vacatur. But a close reading indicates that the Panel had no issues with how the arbitration was conducted or with the Award per se. The problem was that the Rule in the collective bargaining agreement upon which the Arbitrator relied was deemed illegal and against public policy. Said the majority: “A federal court, reviewing an arbitration award, ‘may refuse to enforce contracts that violate law or public policy’…. Rule 50, as applied to the Amtrak Inspector General, is such a contractual provision and the district court was right in refusing to enforce the arbitrator’s award based on that provision…. We have accepted – as the district court did – the arbitrator’s interpretation that Rule 50 applies to the Amtrak Inspector General. The problem is that Rule 50, as thus applied, amounted to an illegal contractual provision.”

Our Take: Judge Kavanaugh’s concerns were with the underlying rule in the collective bargaining agreement, not the arbitration or the arbitrator’s conduct.

Somewhat Reserved Support for FINRA and SEC Deference

Our database shows that Judge Kavanaugh has also decided several cases involving securities regulation, but not arbitration. We thought one was worth mentioning because to us it shows the Judge believes there are limits to judicial deference to administrative agency action. Saad v. SEC, 873 F.3d 297 (D.C. Cir. 2017), involved the Circuit’s review of FINRA’s permanent bar of a BD who was accused of misappropriating his employer’s funds and then covering up the deed. The SEC upheld the bar, as did the District Court. The Court of Appeals later ruled that the SEC “reasonably grounded its decision in the record, which extensively evidenced Saad's acts of misappropriation, his prolonged efforts to cover his tracks through falsehoods, and his repeated and deliberate obstruction of investigators.” It remanded back to the SEC to consider whether the lifetime ban penalty met the standards recently articulated by SCOTUS in Kokesh v. SEC, 137 S.Ct. 1635 (2017). In a concurring opinion, Judge Kavanaugh said: “If FINRA and the SEC must justify expulsions or suspensions as punitive (as I believe they must after Kokesh), they will have to explain why such penalties are appropriate under the facts of each case. FINRA and the SEC will no longer be able to simply wave the ‘remedial card’ and thereby evade meaningful judicial review of harsh sanctions they impose on specific defendants. Rather, FINRA and the SEC will have to reasonably explain in each individual case why an expulsion or suspension serves the purposes of punishment and is not excessive or oppressive. Over time, a fairer, more equitable, and less arbitrary system of FINRA and SEC sanctions should ensue.”

Recall that in Epic Systems, the majority at SCOTUS rejected the employees’ argument that the NLRB’s ruling on class action waiver use was entitled to deference under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984), holding that the Board’s authority to interpret labor and employment statutes did not extend to the FAA: “Here, though, the Board hasn’t just sought to interpret its statute, the NLRA, in isolation; it has sought to interpret this statute in a way that limits the work of a second statute, the Arbitration Act. And on no account might we agree that Congress implicitly delegated to an agency authority to address the meaning of a second statute it does not administer.”

Our take: Relatively strong but not unlimited support for the regulators, with a hint of concerns about individual rights. One wonders whether the Chevron Doctrine faces further erosion if Judge Kavanaugh is confirmed?

PHH … Again!

Judge Kavanaugh wrote the original PHH Court of Appeals opinion that was later overturned by the Court sitting en banc. We’ve covered extensively PHH Corporation v. Consumer Financial Protection Bureau, 881 F.3d 75 (D.C. Cir. Jan. 31, 2018), where a divided Court upheld the constitutionality of the CFPB’s structure. That decision reversed a case by the same name, reported at 839 F.3d 1 (D.C. Cir. 2016). In that now-vacated Opinion authored by Judge Kavanaugh, a divided D.C. Circuit had held that the CFPB’s structure, which has a single Director with virtually unlimited, unchecked authority, was unconstitutional. The Court had directed that the CFPB be restructured to make the director terminable-at-will by the President. Judge Kavanaugh used some very strong language indicating to us that he will tightly construe statutes: “In this case, the single-Director structure of the CFPB represents a gross departure from settled historical practice. Never before has an independent agency exercising substantial executive authority been headed by just one person. The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.”

Our take: Rough sledding ahead for the CFPB if any of the other pending appeals involving the CFPB’s structure makes it to SCOTUS. On July 9th, the AGs from fourteen States filed an Amicus Brief in one of those cases, CFPB v. All American Check Cashing, Inc., No. 18-60302 (5th Cir.), urging that the Court split with the D.C. Circuit and declare unconstitutional the Bureau’s structure.


Based on all the cases we’ve reviewed, we think a Justice Kavanaugh would be a vote in favor of: 1) limited review of arbitration Awards; 2) correction of egregious ones; 3) deference to reasonable SEC and FINRA regulations; and 4) an SEC-like structure for the CFPB. By all appearances, he will not legislate from the bench. As if to underscore the point, Judge Kavanaugh said during his brief remarks at the July 9th nomination ceremony: “A judge must interpret the law, not make the law. A judge must interpret statutes as written” (ed: see video starting around marker 3:30).

(ed: Again, it’s off to the Senate confirmation hearings races. As we said before, unlike the Gorsuch hearings, which had a fairly heavy emphasis on arbitration, we expect these will not.) (SAC No. 2018-27-01)

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