September 12, 2019 Dispute Resolution Magazine

Case Law Update - Summer 2019

Andrea Moore

Under FAA, Ambiguous Arbitration Provision Cannot Serve as Basis for Class Arbitration

In Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019), the Supreme Court considered whether under the Federal Arbitration Act (FAA) an ambiguous arbitration clause in an employment agreement can serve as the basis to compel class arbitration. Frank Varela, an employee of Lamps Plus, Inc., brought a claim alleging that the company failed to protect personal tax information from hackers. Lamps Plus moved to compel individual arbitration, citing the employment agreement. The district court allowed arbitration but compelled class arbitration instead of individual arbitration, and the Ninth Circuit affirmed.

The Court reversed the Ninth Circuit, holding that ambiguity, like silence, is an insufficient basis for compelling class arbitration. In Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 684 (2010), the Court held that a party may not be compelled to class arbitration when an agreement is ‘silent’ on that form of arbitration. It considered – and ultimately rejected – the argument that California’s contra proferentum doctrine should compel an outcome against the employer who drafted the contract. Instead, the Court reasoned that federal preemption doctrine, as outlined in AT&T Mobility LLC v. Concepcion, 563 U.S. 333,(2011), prohibits even indirect interference “with fundamental attributes of arbitration.” It concluded, therefore, that ambiguity must be treated the same as silence when it comes to class arbitration.

Mere Presence of a Mediator Does Not Rule Out Collusion between parties

In Sharp Farms v. Speaks, 917 F.3d 276 (4th Cir. 2019), the Fourth Circuit considered objections to a proposed class action settlement. The settlement would have had an effect on two partially overlapping sets of parties, the Fisher-Lewis class and the Speaks class. The attorney who represented the Speaks class, Gary Shipman, had previously represented some but not all of the Fisher-Lewis plaintiffs. The Speaks class reached a settlement through mediation, while the Fisher-Lewis plaintiffs were in the midst of litigation. Just days before the final fairness hearing for the Speaks settlement, the trial court in Fisher-Lewis granted class certification, called the proposed Speaks settlement unfair, and held that there was “ample evidence of collusion” in its creation. In the Speaks settlement fairness hearing, counsel defended against the collusion accusation by pointing to the presence of an experienced and esteemed mediator during settlement. The Speaks trial court rejected the challenge, and regarding the collusion claim went to great lengths to praise the character and background of the mediator (a former judge) who assisted in the settlement.

On appeal, the Fourth Circuit held that the presence of a mediator – even an outstanding mediator – could not rule out the possibility of collusion between parties. The alleged collusion related to a set of incentives between a lawyer, Shipman, and a class, Fisher-Lewis, whose rights might be extinguished by the Speaks settlement. Evidence of such incentives would not have been before the mediator, and the Fisher-Lewis court specifically found “ample” evidence that collusion existed. Instead, the fourth circuit held that “the district court acknowledged the state court’s order but did not meaningfully grapple with the court’s extensive findings or its conclusions that the Speaks parties had engaged in collusive conduct to the detriment of the Fisher-Lewis class members and violated” state ethics rules regarding multiple representations. The Court reversed the approval of the Speaks settlement and remanded the case for further proceedings.

Special Administrator May Participate in Nevada’s Foreclosure Mediation Program

In Pascua v. Bayview Loan Servicing, LLC, 434 P.3d 287 (Nev. 2019), the Nevada Supreme Court considered whether a decedent’s spouse could participate in the Foreclosure Mediation Program (FMP) for the decedent’s residential property. “During her marriage to … Ricardo P. Pascua, Myrna Pascua purchased a home in her name only.” Myrna and Ricardo Pascua lived in the house together before Myrna Pascua’s death in 2010, and Ricardo Pascua was appointed special administrator for Myrna Pascua’s estate in 2011. In 2016, the bank servicing Myrna Pascua’s mortgage commenced foreclosure proceedings, and Ricardo Pascua sought to participate in Nevada’s FMP.  However, the mediator concluded that Ricardo Pascua, because he was not himself the homeowner, could not participate in the FMP under the terms of the relevant statute. The Nevada Supreme Court reversed, holding that because Ricardo Pascua occupied the property as his primary residence and retained ownership interest via intestate succession laws, he met the requirements to participate in the FMP.

California Supreme Court Clarifies Application of Cost-shifting Offer-of-judgment Procedures

California Code of Civil Procedure section 998 places arbitration parties on the same footing as litigation parties, with respect to offer-of-judgment cost-shifting. In the case underlying Heimlich v. Shivji, 441 P.3d 857 (Cal. 2019), a client and his former attorney filed claims against each other related to fees. The client made a section 998 offer of judgment of $30,001, and the attorney rejected it. The dispute proceeded to arbitration, where the arbitrator awarded $0 to both parties and declared the matter resolved. The client subsequently sought to receive the costs he believed he was entitled to under section 998 because he had obtained an outcome more favorable than the rejected offer. The arbitrator refused to reopen the matter, claiming that he lacked the jurisdiction to do so because the question of 998 costs was not raised during the arbitration itself. The trial court, on motion to confirm the arbitrator’s award, affirmed the award without costs. However, the court of appeals reversed, holding that 998 petitions can be heard only after the conclusion of the arbitration and that the arbitrator made a mistake of law by precluding the introduction of evidence about a qualifying 998 offer.

The California Supreme Court held that the arbitrator had, indeed, erred in the application of section 998. Noting that California law does not specify a time frame for cost requests, the court held that California Court Rules govern. Under those rules, a party may submit a cost request before or after an arbitrator’s final award. Drawing a parallel to the policy underlying the introduction of evidence regarding offers of judgment, the court noted that parties might reasonably elect to introduce the evidence only after a determination on the merits is made. But the court noted that a party could introduce such evidence and make such a request at any point, provided it occurs within fifteen days of issuance of a final award.

The California Supreme Court further held, however, that the arbitrator’s error in this case did not provide grounds for relief from an arbitral award. The arbitrator’s error was, according to the Court, plainly erroneous, but mere mistake of law does not provide grounds for relief. In the words of the Court, the client “chose to wait until shortly after the arbitrator’s merits award to raise the issue. While [he] was entitled to do so, he ran the risk that the arbitrator would erroneously refuse to award costs, leaving him without recourse under the narrow grounds for vacation or correction contained in the statutory scheme. … When parties opt for the forum of arbitration they agree to be bound be the decision of that forum knowing that arbitrators, like judges, are fallible.”

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Andrea Moore

Andrea Moore, a second-year law student at the University of Oregon School of Law, serves as a law student editor for Dispute Resolution Magazine.