United States: Supreme Court Decision Alert - June 21, 2010

Originally published June 21, 2010

Keywords: Carmack amendment, Kawasaki, carriage of goods, national environmental policy, Monsanto, Federal Arbitration Act, FAA

Today the Supreme Court issued three decisions, described below, of interest to the business community.

• Intermodal Shipping—The Carmack Amendment—Carriage of Goods by Sea Act
• National Environmental Policy Act—Injunctive Relief—Evidence of Irreparable Harm
• Federal Arbitration Act—Enforceability of Agreements to Arbitrate

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Intermodal Shipping—The Carmack Amendment—Carriage of Goods by Sea Act

Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp., No. 08-1553 (previously discussed in the October 20, 2009 Docket Report).

Cargo traveling by rail in interstate commerce is often handled by numerous, independent carriers. The Carmack Amendment to the Interstate Commerce Act ("Carmack") requires the "receiving rail carrier"—the initial carrier in the interstate supply chain—to issue a bill of lading to the cargo owner that serves as the contract governing the entire shipment, from origin to destination. 49 U.S.C. § 11706(a). Carmack constrains carriers' ability to limit their liability through the contract and, by requiring lawsuits against carriers to be brought in specified United States courts, prevents carriers from adopting forum-selection clauses.

A separate federal statute, the Carriage of Goods by Sea Act ("COGSA"), requires an ocean carrier shipping goods from a foreign port to a U.S. port to issue a bill of lading to the cargo owner. 46 U.S.C. § 30701 note. COGSA allows the parties, in a so-called "through bill of lading," to extend the statute's provisions to cover the entire shipment, including a period of inland transport. Unlike Carmack, COGSA does not constrain parties' ability to adopt forum-selection clauses. 

Today, in Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp., No. 08-1553, the Supreme Court held that the inland rail portion of a shipment of cargo that originated overseas was governed by COGSA, not Carmack, and that the forum-selection clause in the through bill of lading, which provided for resolution of disputes in a Japanese court, was therefore valid. Given the differences between COGSA and Carmack, the Court's decision will be important to all businesses involved in intermodal shipping, whether as carriers, customers, or insurers.

In Kawasaki, two American companies contracted with "K" Line to arrange the shipment of goods from China to the midwestern United States. "K" Line issued a through bill of lading to cover the ocean and inland portions of the shipment and, for the latter portion, contracted with Union Pacific Railroad for transport of the cargo to its final destination in the Midwest. "K" Line's bill of lading provided that any civil action relating to the shipment would be governed by Japanese law and had to be brought in a Japanese court. When the cargo at issue was damaged in a train derailment, the cargo owners sued "K" Line and Union Pacific in federal district court in California. "K" Line and Union Pacific moved to dismiss, contending that, under COGSA, the forum-selection clause in the through bill of lading governed the dispute. The district court granted the motion, but the Ninth Circuit reversed, holding that Carmack applied and that it trumped the parties' forum-selection clause. In a 6-3 decision, the Supreme Court reversed, holding that Carmack does not govern a shipment originating overseas under a through bill of lading.

Writing for the Court, Justice Kennedy explained that a "receiving rail carrier" under Carmack does not refer to "any rail carrier that in a colloquial sense 'received' [cargo] from another carrier." Slip op. 10. Rather, for Carmack to apply, "the journey must begin with a receiving rail carrier." Id. at 12 (emphasis added). If Carmack applied not only to the initial rail carrier, but to any rail carrier taking part in a multimodal, international shipment, the Court reasoned, "then every carrier during the shipment would have to issue its own separate bill." Id. at 10. This would contravene Carmack's purpose of having a single bill of lading govern an entire shipment of goods. The Court also found that its reading promoted consistency between Carmack and COGSA. Relying on the principle that congressional enactments should be construed harmoniously where possible, the Court was concerned that allowing Carmack to control in this situation would result in "[a]pplying two different bill of lading regimes to the same through shipment," thus "undermin[ing] COGSA and international, container-based multimodal transport." Id. at 17.

Justice Sotomayor, joined by Justices Stevens and Ginsburg, dissented. She would have held that Carmack provides the default legal regime for rail transportation of cargo within the United States, regardless of whether the shipment originated abroad, and that Union Pacific was not free to opt out of Carmack.

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National Environmental Policy Act—Injunctive Relief—Evidence of Irreparable Harm

Monsanto Co. v. Geertson Seed Farms, No. 09-475 (previously discussed in the January 15, 2010 Docket Report).

To obtain a permanent injunction in federal court a plaintiff must show: (1) that it will suffer irreparable injury absent the injunction; (2) that remedies at law, including monetary damages, are inadequate; (3) that an injunction is warranted given the balance of hardships; and (4) that the public interest is not disserved by an injunction. Today, in Monsanto Co. v. Geertson Seed Farms, No. 09-475, the Supreme Court vacated an injunction which had prohibited the Department of Agriculture from partially deregulating the use of a genetically engineered plant because the Court found that the parties seeking the injunction failed to demonstrate irreparable injury.

Under regulations issued pursuant to the Plant Protection Act, 7 U.S.C. § 7711, genetically engineered plants are presumptively subject to regulation by the Department of Agriculture. Persons may, however, petition the Animal and Plant Health Inspection Service (APHIS) to deregulate a particular genetically engineered plant. The National Environmental Policy Act (NEPA), 42 U.S.C. § 4332, requires that APHIS prepare a full-blown Environmental Impact Statement (EIS) before granting such a petition, unless APHIS issues an Environmental Assessment (EA) finding that the proposed deregulation will not have a significant environmental impact.

Today's decision involves a genetically engineered variety of alfalfa. The petitioners, who own and license the intellectual property rights to the plant, had petitioned for its deregulation. APHIS granted the petition after issuing an EA finding that deregulation would not have a significant environmental impact. Various farmers and environmental groups sued, challenging the agency's decision to deregulate the plant. Finding that APHIS had violated NEPA, the district court vacated the agency's decision and issued an injunction that barred the agency from even partially deregulating the plant prior to the completion of an EIS. The petitioners appealed, arguing that a far less restrictive injunction, which would have allowed APHIS to partially deregulate the plant subject to certain conditions, was sufficient to prevent any conceivable injury to plaintiffs. The Ninth Circuit affirmed the injunction as issued.

In a 7-1 opinion authored by Justice Alito, the Supreme Court vacated that injunction. The Court assumed that vacatur of the agency's decision to completely deregulate the plant was correct, but nevertheless held that the injunction was improper because it prevented APHIS from exercising its statutory authority to partially deregulate the plant even if the agency were to issue an EA finding that such partial deregulation would not have a significant environmental impact. The Court determined that the parties seeking the injunction had not demonstrated irreparable injury because they were able to challenge an APHIS decision to partially deregulate the plant, were such a decision taken, and because a partial deregulation would not necessarily cause them any actual harm. 

Justice Stevens dissented and would have held that the district court did not abuse its discretion in issuing the permanent injunction. Justice Breyer did not participate in the case.

Mayer Brown filed an amicus brief on behalf of various organizations in support of petitioners.

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Federal Arbitration Act—Enforceability of Agreements to Arbitrate

Rent-A-Center West, Inc. v. Jackson, No. 09-497 (previously discussed in the January 15, 2010, Docket Report).

The Court today addressed whether a "delegation provision"—a clause in an arbitration agreement explicitly assigning to the arbitrator determinations of whether an arbitration clause is unconscionable—is enforceable under the Federal Arbitration Act ("FAA"). The Supreme Court's holding was narrow: a court must decide challenges to a delegation provision if a party challenges that provision as unconscionable, but if the party instead argues generally that the arbitration agreement as a whole is unconscionable—and does not specifically challenge the delegation provision—the delegation provision must be enforced and an unconscionability challenge therefore should determined by the arbitrator. 

In an opinion by Justice Scalia (joined by Chief Justice Roberts and Justices Kennedy, Thomas, and Alito), the Court applied earlier precedents holding that, under Section 2 of the FAA, an arbitration agreement is severable from the underlying contract. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967); Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 444-47 (2006). Thus, under Prima Paint and Buckeye, if a party challenges the validity of the contract as a whole, the arbitration agreement should be separately enforced, and the challenge to the underlying contract should be determined by the arbitrator. But if a party specifically challenges the validity of the arbitration agreement, a court must decide that "gateway" issue.   

In determining whether to enforce the delegation provision within Rent-A-Center's arbitration agreement, the Court concluded that in such a case, there are two arbitration agreements that are separable from one another. The first is the underlying agreement to arbitrate claims arising out of the plaintiff's employment, and the other is the separate delegation provision, which the Court described as "an agreement to arbitrate threshold issues concerning the arbitration agreement." Slip op. 5. The Court held that Prima Paint's rule of severability applies. "Unless [the plaintiff] challenged the delegation provision specifically, we must treat it as valid under §2 [of the Federal Arbitration Act], . . . leaving any challenge to the validity of the Agreement as a whole for the arbitrator." Id. at 8-9. 

After a fact-specific inquiry, the Court held that the plaintiff had challenged only the arbitration agreement as a whole, and had failed to raise any specific challenge to the delegation agreement until his briefing in the Supreme Court—thus waiving any challenge to the delegation provision in particular. Accordingly, the Court held that the plaintiff's argument that the entirety of his arbitration agreement is unconscionable must be decided by the arbitrator. 

In dissent, Justice Stevens (joined by Justices Ginsburg, Breyer, and Sotomayor) would have held that—notwithstanding the express language of an arbitration agreement—parties to such an agreement do not evidence a "clear and unmistakable agreement" (First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)) to delegate the question of arbitrability to an arbitrator so long as a party raises a "good-faith validity challenge" to the arbitration agreement itself. Thus, in the dissent's view, a court cannot find clear and unmistakable evidence of a valid agreement to arbitrate the gateway issue unless it first resolves a plaintiff's unconscionability challenge.

Some may argue that the majority's decision makes it more difficult for parties to challenge their arbitration agreement in court. That contention appears overstated. In fact, it is far more likely that plaintiffs who seek to challenge arbitration clauses containing delegation provisions will follow the path suggested in today's decision. By framing their unconscionability arguments as challenges to the delegation provision itself, plaintiffs will be able to secure a judicial determination of whether the arbitration clause at issue is unconscionable and therefore unenforceable. So long as the plaintiff's challenge is directed specifically to the validity of the "delegation provision," the issue must be determined by the courts. 

As a consequence, the Court's decision in Rent-A-Center is likely to have only a limited impact. First, most consumer and employment arbitration agreements do not include a delegation provision, and thus leave issues of arbitrability to be decided by the courts. Second, because the decision leaves open the ability of parties to challenge arbitration agreements containing delegation provisions in court as unconscionable, it is unlikely to spur businesses to engage in the wholesale adoption of such delegation provisions. 

Mayer Brown filed an amicus brief in support of the petitioner.

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