FEDERAL ARBITRATION ACT
Which Default Rule Applies When an Arbitration Agreement Does Not Address Class Arbitration?
Which Default Rule Applies When an Arbitration Agreement Does Not Address Class Arbitration?
The Supreme Court has held that a court cannot order arbitration to proceed using class procedures unless there is a “contractual basis” for concluding that the parties “agreed to” class arbitration. Stolt- Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010). In this case, the parties’ agreement was silent as to class arbitration, but the lower courts sent the case to arbitration based on the state-law rule that any ambiguity in an agreement must be construed against the drafter. The Supreme Court must decide whether a state-law rule of contract interpretation can provide the necessary “contractual basis” for concluding that the parties agreed to class arbitration.
Docket No. 17-988
Argument Date: October 29, 2018
From: The Ninth Circuit
by Daniel Thies
Webber & Thies, P.C., Urbana, IL
Can a state-law rule of contract interpretation for resolving ambiguity supply the contractual basis that the Federal Arbitration Act requires before a court may conclude that the parties have authorized class arbitration?
For several decades, the Supreme Court has interpreted the Federal Arbitration Act (the Act) based on the assumption that the Act primarily aims to effectuate the parties’ agreement about how to resolve their disputes. See Hiro N. Aragaki, The Federal Arbitration Act as Procedural Reform, 89 N.Y.U.L. Rev. 1939 (2014). As the Court has repeatedly articulated, “arbitration under the [Act] is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit.” Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468 (1989). Thus, “[t] he central or ‘primary’ purpose of the [Act] is to ensure that private agreements to arbitrate are enforced according to their terms.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) (quotation marks and citation omitted). By applying this “consent principle,” the Court claims to remain neutral as to the substantive question of the best way to resolve the parties’ dispute, and instead merely implements the parties’ prior agreement.
But what is the Court to do when the parties’ agreement is silent on a particular question? This case presents precisely that issue, and thus tests the limits of the consent principle and its ability to resolve disputes under the Act.
Plaintiff Frank Varela entered an arbitration agreement with his employer, Lamps Plus. The agreement did not explicitly address whether it allowed class-action arbitration and instead included only the following provision:
I understand that by entering into this Agreement, I am waiving any right I may have to file a lawsuit or other civil action or proceeding relating to my employment with the Company and am waiving any right I may have to resolve employment disputes through trial by judge or jury. I agree that arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment…
The Company and I mutually consent to the resolution by arbitration of all claims or controversies…, past, present or future that I may have against the Company or against its officers, directors, employees or agents in their capacity as such, or otherwise, or that the Company may have against me.
After Varela entered this agreement, Lamps Plus was the victim of a data breach that compromised the personal information of its current and former employees. Varela brought a putative class action against Lamps Plus in California federal court seeking redress for the data breach. Lamps Plus moved to compel arbitration and further argued that, because the agreement did not explicitly authorize class-wide arbitration, the arbitration should proceed on an individual basis. Varela opposed the motion and argued that if arbitration were appropriate, it should include his class-based claims.
The district court ordered the case to arbitration, but denied Lamps Plus’s request to limit the arbitration to Varela’s individual claims. The district court reasoned that “the language stating that ‘all claims’ arising in connection with Varela’s employment shall be arbitrated is broad enough to encompass class claims as well as individual claims, or is at least ambiguous and should be construed against the drafter.”
Lamps Plus appealed, and a divided panel of the Ninth Circuit affirmed. The panel majority agreed that the arbitration agreement was ambiguous, but held that “the most reasonable interpretation…is that it authorizes class arbitration.” The panel majority also relied on the contra proferentem doctrine from California contract law, which required it to construe any ambiguities against the drafter, Lamps Plus. Lamps Plus petitioned the Supreme Court for review.
The parties’ central dispute is over what default rule to apply when an arbitration agreement does not clearly address class arbitration. Lamps Plus contends the default should be that class arbitration is forbidden unless explicitly endorsed. Varela, in contrast, argues based on state law that ambiguity should always be construed against the drafter, which will favor class arbitration in the typical case (an individual employee or consumer arguing for class arbitration against a large company that drafted the agreement).
To support its view, Lamps Plus hitches its wagon to the Court’s decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., which held that “a party may not be compelled under the [Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so” and that a court thus cannot conclude that “the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.” Lamps Plus reads these pronouncements to impose a default rule that an agreement does not authorize class arbitration unless it includes “clear and unmistakable” language providing otherwise. The language at issue here, which Lamps Plus characterizes as nothing more than “general language commonly used in arbitration agreements,” is insufficient.
Varela distinguishes Stolt-Nielsen on the ground that the parties there stipulated that their agreement was silent on class arbitration. By contrast, the agreement here can plausibly be read to authorize class arbitration, particularly the provision agreeing to arbitration “in lieu of any and all lawsuits or other civil legal proceedings” (emphasis added). That language is at least ambiguous, Varela argues, and so provides the “contractual basis” for class arbitration that Stolt-Nielsen requires, at least when combined with the background assumption of California state contract law that ambiguities should be construed against the drafter (here, Lamps Plus).
Varela contends that this approach is mandated by longstanding precedent providing that arbitration agreements must be construed using state contract law. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938 (1995). Indeed, Section 2 of the Act explicitly recognizes that arbitration agreements may be enforced “upon such grounds as exist at law or in equity for the revocation of any contract”—language that plainly encompasses general state law contract principles. 9 U.S.C. § 2. That is why the Court has previously referenced a state-law contra proferentem doctrine when interpreting an arbitration agreement (albeit, as Lamps Plus points out, as dictum that provided additional support for the conclusion the Court otherwise would have reached under the Act). See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995).
Lamps Plus replies that the Supreme Court has also long recognized that the Act trumps various principles of state contract law. For example, in DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015), the Court interpreted the phrase “law of your state” in a consumer contract. The Court explained that although “California courts are the ultimate authority on [California] law,” it was for this Court to decide whether “that state law is consistent with the [Act].” Lamps Plus argues that the rule that class arbitration is not allowed unless explicitly authorized similarly trumps any contrary rule of state contract law.
Lamps Plus also counters Varela’s textual argument by suggesting that any ambiguity is resolved by the agreement’s limitation of the claims subject to arbitration to “claims or controversies” that “I may have against the Company…or that the Company…may have against me (emphasis added).” According to Lamps Plus, this language clearly excludes class arbitration.
Each side also seeks to justify its proposed default rule by appealing to the well-entrenched consent principle. Lamps Plus contends that its default rule requiring an explicit agreement to class arbitration in the contract itself “follows naturally from the Act’s rule of fundamental importance that arbitration is a matter of consent, not coercion” (quotation marks and alterations omitted). According to Lamps Plus, this overriding requirement that the parties consent to any arbitration procedure preempts any “state-law interpretive canon” that would artificially “manufacture the contractual basis for class arbitration.”
Varela, by contrast, contends that the state contract-law rules he favors are designed precisely “to ascertain the intent of contracting parties as objectively manifested in their agreement.” Applying those state-law rules thus does not contradict the Act, but is instead the only way to carry out the Act’s mandate of ascertaining and enforcing the parties’ arbitration agreements. Varela argues that “[s]uch generally applicable interpretive principles are not preempted by the Act because they comply with its fundamental requirement of equal treatment of arbitration agreements and other contracts.”
Lurking behind all of these arguments is a jurisdictional argument that Varela raised for the first time in its opposition to Lamps Plus’s certiorari petition. The Act permits appeals from denials of motions to order arbitration, Section 16(a)(1)(B), but prohibits appeals from orders directing arbitration to proceed, Section 16(b) (2). Because the district court here ordered the parties to proceed to class arbitration, Varela argues that Lamps Plus cannot appeal. Lamps Plus counters that appellate jurisdiction is conferred by a separate provision—Section 16(a)(3)—which allows a party to appeal from “a final decision with respect to an arbitration.” Because the district court dismissed Varela’s claims in total (albeit without prejudice), Lamps Plus contends that the decision is final and appealable under Section 16(a)(3). Lamps Plus also asserts that at least a portion of the final decision was adverse to it—the portion ordering class arbitration—which is sufficient to confer on it the right to appeal.
Assuming the Court does not dismiss the case on jurisdictional grounds (which seems unlikely, given that the Court granted the certiorari petition over Varela’s jurisdictional argument), the Court’s decision in this case will test the limits of the consent principle to resolve disputes under the Act. The parties’ efforts to tease meaning out of their arbitration agreement with respect to the class arbitration issue are admirable, but ultimately futile and even a bit disingenuous. The agreement ultimately is silent on the issue, and so an appeal to enforce simply “what the parties agreed” is insufficient. The dispute instead must be resolved through an appeal to background principles or policy arguments that determine the outcome when the agreement itself is silent.
Lamps Plus hints at the need to reference such background principles. Although it couches its arguments in terms of the consent principle, for example, Lamps Plus explicitly references “the numerous benefits of traditional, bilateral arbitration that this Court has repeatedly recognized” and seeks to enforce “the strong federal policy favoring the type of arbitration envisioned by the [Act],” which is “traditional, bilateral arbitration” rather than class arbitration. Varela, by contrast, doubles down on the consent principle, arguing that “uncritical acceptance of arguments that individual arbitration is better for employees should not figure into any decision in this case” and that “Lamps Plus’s dubious empirical assertions have nothing to do with what this Court has held to be the dispositive question: The meaning of the parties’ contract.”
The Court’s resolution of these various arguments will shed light on the adequacy of the consent principle as an interpretive lens when applying the Act. That is, is it possible to resolve disputes such as this merely by appeals to the parties’ agreement, as Varela contends? Or will the Court find it necessary to apply a more substantive jurisprudence based on the goals that it perceives Congress to have been advancing when it passed the Act, as Lamps Plus suggests? The answer to these questions, in turn, will help future litigants predict how the Court will likely resolve other disputes under the Act.
On a practical level, this case will also determine whether the gradual spread of class arbitration waivers in response to the Court’s jurisprudence will continue. Since the Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), which held that the Act preempts state law holding class arbitration waivers unconscionable and unenforceable, consumer contracts have increasingly contained explicit class arbitration waivers. Such waivers are likely to become more common in employment contracts as well following the Court’s decision last term in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), which held such waivers enforceable over the argument that the National Labor Relations Act renders them illegal. But there are nonetheless a large number of contracts predating these decisions that, like Varela’s agreement with Lamps Plus, do not explicitly address the issue. This case will determine the rights of parties seeking to bring class claims under such agreements.
Daniel Thies is a shareholder at Webber & Thies, P.C., in Champaign-Urbana, Illinois, and a member of the Council of the American Bar Association Section of Legal Education and Admissions to the Bar. His practice focuses on commercial litigation, ERISA, insurance, and reinsurance litigation; class action defense; business representation; and estate planning. Previously, Daniel was a litigation associate at Sidley Austin LLP. Daniel has served as a law clerk for Chief Judge James F. Holderman of the United States District Court for the Northern District of Illinois and Judge Jerry E. Smith of the United States Court of Appeals for the Fifth Circuit. He is a 2010 graduate of Harvard Law School, where he served as the Deputy Editor-in-Chief of the Harvard Journal of Law and Public Policy. He can be reached at danielthies@webberthies. com or 217.365.5327.
PREVIEW of United States Supreme Court Cases 46, no. 2 (October 29, 2018): 7–9. © 2018 American Bar Association
For Petitioner Lamps Plus, Inc. (Andrew J. Pincus, 202.263.3220)
For Respondent Frank Varela (Michele M. Vercoski, 909.557.1250)
Center for Workplace Compliance (John Richard Annand, 202.629.5617)
Chamber of Commerce of the United States of America (Thomas Ryan McCarthy, 703.243.9423)
DRI–The Voice of the Defense Bar (Mary Massaron, 313.983.4801)
New England Legal Foundation (Benjamin G. Robbins, 857.772.7620)
Retail Litigation Center, Inc. (Adam G. Unikowsky, 202.639.6041)
American Association for Justice (Deepak Gupta, 202.888.1741)
Contract Law Scholars (Matthew Adam Seligman, 212.790.0349)