July 8, 2021 - This Week at the Ninth

This Week at the Ninth: Drug Tests and Foreign Arbitration

This week, the Ninth Circuit considers a challenge to the constitutionality of the FAA’s regulations governing drug and alcohol testing for air-carrier employees, and it wrestles with difficult choice-of-law questions concerning foreign arbitration agreements.

REGENCY AIR, LLC v. DICKSON
The Court holds that FAA regulations requiring drug and alcohol testing for employees performing safety-sensitive functions are not unconstitutionally vague.

The panel: Judges R. Nelson, Lee, and Stein (S.D.N.Y.), with Judge R. Nelson writing the opinion.

Key highlight: “Sections 120.35 and 120.39 do not mention what to do when an employee is concurrently employed. But this silence does not doom the provisions as unconstitutionally vague. Instead, the FAA chose to promulgate a general rule: if an employee works on an air carrier’s planes, the air carrier must enroll the employee in its testing program.”

Background: The Federal Aviation Administration requires drug and alcohol testing for air carrier employees who perform safety-sensitive functions, such as plane maintenance. When an employee begins doing safety-sensitive work for a new employer, that employer must request past testing records from previous FAA-regulated employers within 30 days. Employers who violate these regulations face civil penalties.

Petitioner Regency Air is a private charter company. In 2015, Regency engaged two individuals—Ernest Douglas Long and Gary Geis—to perform safety-sensitive work. Long worked for Regency as a volunteer; he was also separately employed by another air carrier (and subject to its testing program). Initially, Geis worked for a separate air carrier and was contracted out to Regency. He subsequently joined Regency as a direct employee. Regency did not enroll either Long or Geis in its testing program, and it did not request testing results from Geis’s former employer.

In response, the FAA brought an administrative action alleging that Regency had violated the agency’s testing regulations. An ALJ assessed $11,900 in civil penalties, and the FAA Administrator affirmed, increasing the civil penalties to $15,600. Regency petitioned the Ninth Circuit to vacate the Administrator’s order.

Result: The Ninth Circuit denied the petition. First, Regency argued that the FAA violated due process because the FAA complaint called Long a “contractor” but the ALJ found him to be an “employee.” The Court held that “this difference was regulatorily irrelevant.” The Court explained that an agency violates due process when it “change[s] theories in midstream” without giving proper notice. Here, “the FAA did not change theories midstream” because “regardless of Long’s employment status, the FAA’s legal theory remained the same: Regency had to enroll Long in its testing program but failed to do so.”

Next, Regency argued that the FAA’s drug-and-alcohol testing regulations were unconstitutionally vague with respect to Regency’s treatment of Geis, given his concurrent employment with another air carrier. The Court rejected these arguments as well. As it explained, a regulation is not vague when it gives “‘a person of ordinary intelligence adequate notice of the conduct it proscribes.’” Here, the Court concluded, the FAA’s regulations clearly provided that “an employer must test an employee.” Because there was no “exception for concurrent employment,” Geir’s work for Regency brought him within the plain text of the regulation even if he was also employed by another company. Moreover, the regulations made clear that Regency was required to request Geis’s past testing records after he became a direct Regency employee, which it did not do.

Finally, Regency challenged the FAA Administrator decision modifying the ALJ’s penalty determination. The Administrator had concluded that the ALJ departed from FAA policy in mitigating the penalties because Long and Geier were enrolled in other air carriers’ testing programs. The Ninth Circuit concluded that Regency identified no abuse of discretion in the Administrator’s application of the agency’s sanction policy.

SETTY v. SHRINIVAS SUGANDHALAYA LLP
The Court holds that federal law governs the application of equitable estoppel to arbitration agreements subject to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The panel: Judges D.W. Nelson, Rawlinson, and Bea, with Judge D.W. Nelson writing the opinion and Judge Bea dissenting.

Background: Two brothers signed a partnership agreement, in India, agreeing to joint ownership of an Indian incense manufacturing company. The agreement contained an arbitration clause covering any disputed between the brothers. After operating the company jointly for a period of time, the two brothers went their separate ways, each starting his own separate incense manufacturing firm. Both companies used the same trademark as the original, joint company.

Following a dispute, one brother and his company brought suit against the other brother’s company in federal district court, alleging a variety of claims related to the use of the incense trademark in the United States. The defendant moved to dismiss or stay the case in favor of arbitration. The district court denied the motion, reasoning that the defendant was not a party to the agreement containing the arbitration clause and that it was not entitled to invoke the doctrine of equitable estoppel to apply that clause.

The Ninth Circuit initially affirmed on the ground that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (or “New York Convention”), which generally governs foreign arbitration agreements, precluded nonparties from enforcing an arbitration agreement. But the Supreme Court, in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, subsequently reached the opposite conclusion, holding that the Convention did not forbid “the application of domestic equitable estoppel doctrines.” 140 S. Ct. 1637, 1645-46 (2020). The Supreme Court then granted cert, vacated, and remanded the Ninth Circuit’s decision.

Result: On remand, the Ninth Circuit again affirmed. The majority first addressed the threshold question of whether Indian law or federal common law governed the application of equitable estoppel. The Court rejected the contention that the partnership agreement’s Indian choice-of-law provision determined the matter, explaining that the agreement itself expressly applied only as between the brothers who had entered it (and not the defendant company now seeking to invoke it), and that in any event a court does not look to the contract itself to decide this sort of “threshold” question. Rather, the majority held, “[i]n cases involving the New York Convention, in determining the arbitrability of federal claims by or against non-signatories to an arbitration agreement, we apply ‘federal substantive law,’ for which we look to ‘ordinary contract and agency principles.’” For that proposition, the majority cited a number of prior Ninth Circuit and out-of-circuit decisions, as well as “the need for uniformity in the application of international arbitration agreements.”

Applying federal standards, the majority concluded that equitable estoppel was unavailable because, “as a factual matter, the allegations here do not implicate the agreement that contained the arbitration clause.” The Court explained that equitable estoppel “precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes,” but that here the plaintiffs’ trademark claims were not necessarily “intertwined” with any aspect of the original partnership agreement.

Judge Beas dissented. He argued that state contract law should instead govern the equitable estoppel issue. He read GE Energy Power Conversion to hold that arbitration agreements governed by the New York Convention should be treated like other arbitration agreements for purposes of equitable estoppel. And, he continued, under the Federal Arbitration Act (FAA), state law (including state choice-of-law principles, which might compel application of the law of the jurisdiction in which the agreement was made) generally governed the application of equitable estoppel. Judge Bea disagreed with the majority “that the federal nature of a plaintiff’s claims dictates that federal substantive law governs equitable estoppel claims,” reasoning that any decisions reaching that conclusion predated, and were inconsistent with, the Supreme Court’s interpretation of the FAA to require application of state law in determining the “‘validity, revocability, and enforceability of contracts generally.’” As for the majority’s concerns that agreements subject to the New York Convention should be treated uniformly, Judge Bea observed that “this whole enterprise is definitionally governed by parochial doctrines where a certain amount of nonuniformity comes with the territory.” On that basis, Judge Bea would have remanded to the district court to apply the appropriate choice-of-law rule.