May 21, 2021 - This Week at the Ninth

This Week at the Ninth: Arbitration and Declarations

This week, we take a look at an opinion examining whether the Department of Labor can be held to workers’ arbitration agreements, and a decision considering whether courts have jurisdiction to issue declaratory judgments relating to tax withholding in real estate transactions with foreign entities.

WALSH v. ARIZONA LOGISTICS, INC.
The Court holds that the Department of Labor cannot be held to the arbitration agreements agreed to by the workers it protects.

Panel: Judges W. Fletcher, Miller, and Hunsaker, with Judge Hunsaker writing the opinion for the Court.

Key Highlight: “Although the Secretary, unlike the EEOC, may not recover punitive damages under Section 16(c), the Secretary may still have interests independent of the aggrieved employee when seeking employee-specific relief, including deterring other employers from violating the FLSA and protecting complying employers from unfair wage competition with noncomplying employers. Simply put, recovering monies owed to aggrieved individuals does not necessarily indicate that the Secretary is operating solely for the benefit of those individuals.”

Background: Defendant Larry Browne owned two delivery businesses. The Department of Labor brought an enforcement action, alleging that Browne had violated the Fair Labor Standards Act (FLSA) by classifying his delivery drivers as independent contractors rather than employees. In response, Browne invoked the arbitration agreements signed by these delivery drivers and sought to compel arbitration of the enforcement action. The district court refused.

Result: The Ninth Circuit affirmed. As the Court explained, the Federal Arbitration Act (FAA) generally provides that arbitration agreements are enforceable, but “only as to the parties to the arbitration agreement.”  Nor, the Court continued, did the FAA address “whether a private agreement to arbitrate is enforceable against a government actor that brings an enforcement action to vindicate the rights of a party to the arbitration agreement.” But the Supreme Court, in EEOC v. Waffle House, 543 U.S. 279 (2002), had rejected a very similar argument, holding that the EEOC could not be compelled to arbitrate an anti-discrimination action even if the agency brought that anti-discrimination action on behalf of employees who had signed an arbitration agreement.

The same reasoning, the Ninth Circuit held, applied here: FLSA granted the Department of Labor authority to enforce its terms and to secure relief on behalf of affected individuals, and it nowhere suggested that the agency should be bound by arbitration agreements signed by those individuals. The Court rejected Browne’s argument that the Department was in “privity” with the delivery drivers. It emphasized that the Department could both pursue employee-specific relief (such as lost wages that might be returned to the individual) and also seek to more generally vindicate the public interest, and that the individual delivery drivers had no control over the Department’s conduct of the litigation. Nor could the Court see how any differences between the EEOC and the Department—such as the fact that the EEOC at some points has exclusive jurisdiction over certain discrimination claims—could make any difference as to whether those agencies should be bound by arbitration agreements to which they were not parties.

ERIC GILBERT v. USA
The Court holds that courts lack jurisdiction under the Declaratory Judgment Act to decide whether a purchaser of real estate from a foreign entity must withhold a portion of the purchase price under the Foreign Investment in Real Property Tax Act (FIRPTA) and a portion of interest payments under Fixed, Determinable, Annual, or Periodical income rules (FDAP).

Panel: Judges W. Fletcher, Miller, and Hunsaker, with Judge Hunsaker writing the opinion.

Key Highlight: “[W]ithholding requirements can create tension between a foreign entity that wants full payment under the contract, and the transferee, ‘who does not want to be left ‘holding the bag.’ But this tension is not resolved by filing litigation that interferes with the tax-collection process. It is resolved by parties addressing this issue when they negotiate the terms of their transaction.”

Background: Eric and Audra Gilbert bought real property from foreign entity Namaca Management Limited. A day after executing the contract, the Gilberts discovered a federal tax lien had been recorded against the property. The parties amended their contract to require Namaca to resolve the title issues “as quickly as possible” and for all title defects to be resolved “prior to or at the time of final conveyance.” A year and half later, the federal government recorded another tax lien against the property. The Gilberts told Namaca’s trustee that because Namaca is a foreign entity, they were required to withhold a portion of their agreed purchase price under FIRPTA and a portion of their interest payments under FDAP rules. Namaca’s trustee disagreed, insisting that Namaca was an exempt “‘non-resident non-person,” that the property was not a “US real Property interest” subject to statutory withholding, and that the Gilberts’ withholding breached the contract.

The Gilberts sought declaratory judgment. The district court dismissed for lack of jurisdiction because the requested relief concerned federal taxes.

Result: The Ninth Circuit affirmed. The Court explained that “[u]nder the Declaratory Judgment Act, a federal court may issue a declaration resolving the parties’ competing legal rights ‘[i]n a case of actual controversy within its jurisdiction, except with respect to Federal taxes.’” 28 U.S.C. § 2201(a). That rule reflects “congressional antipathy for premature interference with the assessment or collection of any federal tax” and means that “declaratory judgments and injunctions are rarely, if ever, granted.” This case was no different. It did not matter that FIRPTA and FDAP withholdings are made before the IRS assesses tax liability. The Declaratory Judgment Act’s bar against resolving matters “with respect to Federal taxes” is not conditioned on a determination of ultimate tax liability, the Court pointed out, and the Anti-Injunction Act, with which the Declaratory Judgment Act is coextensive, “applies even where the IRS has yet to make a final determination of the plaintiff’s tax liability.” “[B]y filing this action and asking the court to declare their tax withholding obligation rather than withholding the required funds and paying them to the IRS and then, if necessary, filing suit against Namaca, the Gilberts are interfering with or restraining the collection of taxes.” The Court thus lacked jurisdiction.