Reviewing Silence: SCOTUS Grants Certiorari to a 9th Circuit Case on State-Law Interpretation of Arbitration Clauses
On April 30, 2018, the Supreme Court granted certiorari to Lamps Plus, Inc.’s petition to determine whether arbitration clauses that are silent about class arbitration can nevertheless be interpreted to permit class arbitration. Because standard arbitration clauses are typically silent on class arbitration, the Supreme Court’s decision could have enormous implications for companies that have arbitration clauses in their agreements.
The Supreme Court granted certiorari to review the Ninth Circuit’s decision on whether the “Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.” Lamps Plus, Inc. v. Varela, No. 17-988 2018 WL 3987496 (U.S. Apr. 30, 2018). However, the clause at issue in Lamps Plus did not expressly mention class arbitration. Varela v. Lamps Plus, Inc., 701 Fed. Appx. 670, 672 (9th Cir. 2017). Nevertheless, the Ninth Circuit found that the silence in the clause did not necessary foreclose class arbitration, and the Ninth Circuit upheld the District Court’s application of state law to interpret the clause as permitting class arbitration. Id. This decision was made despite the Supreme Court’s explanation in Stolt-Nielsen: in interpreting an arbitration agreement, the interpreter must “give effect to the intent of the parties” as the arbitrator “derives his or her powers from the parties’ agreement to forgo the legal process and submit their disputes to private dispute resolution.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 682. As a result, “parties cannot be compelled to submit their dispute to class arbitration” unless “there is a contractual basis for concluding that the party agreed to do so.” Id. at 687, 684 (emphasis in original).
With the Supreme Court’s decision in Stolt-Nielsen, only 8 years before, it had appeared that this issue had been resolved. Stolt-Nielsen, 559 U.S. at 662. The parties in Stolt-Nielsen used a standard contract to arrange Stolt-Nielsen’s shipment of AnimalFeeds’ goods. Id. at 662. This standard contract contained an arbitration clause, which the parties stipulated was “silent” on whether class arbitration was permitted under the contract. Id. The arbitration panel found that the contract allowed class arbitration merely because the contract did not expressly forbid it and because class arbitration was sound public policy. Id. at 669. The Southern District of New York disagreed and found that the arbitrators’ decision was made in “manifest disregard of the law insofar as the arbitrators failed to conduct a choice-of-law analysis.” Id. at 669. The Second Circuit reversed and remanded the Southern District’s decision, and the Supreme Court granted certiorari to Stolt-Nielsen. Id. The Supreme Court ultimately sided with the Southern District, concluding that the arbitrators had exceed their powers under the Federal Arbitration Act in using public policy to conclude that class arbitration was allowed under the clause. Id. at 671. The Supreme Court noted that arbitration was a matter of consent, not coercion, and found that because the parties had “no agreement” on the issue, the parties could not be compelled to engage in class arbitration. Id. at 685. The Court acknowledged that “[a]n implicit agreement to authorize class-action arbitration, however, is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.” Id.
But, in 2013, the Supreme Court concluded that the arbitrator had correctly interpreted an arbitration clause to conclude that class arbitration was allowed under the contract. Oxford Health Plans, LLC v. Sutter, 569 U.S. 564 (2013). In deciding this, the arbitrator applied standard contract interpretation rules by looking to the text and intent of the clause to conclude that the clause required all disputes which could be brought as civil actions be sent to arbitration. Id. at 567. In its appeal to the Supreme Court, the petitioner argued that the arbitrator exceeded his powers under § 10(a)(4) of the Federal Arbitration Act in making this decision. Id. at 569. The Court disagreed. Id. Unlike Stolt-Nielsen, the arbitrator in Oxford Health Plans focused on the clause’s text in making his decision and did not engage in a policy analysis. Id. at 570. The Supreme Court clarified Stolt-Nielsen: the Court “overturned the arbitral decision there because it lacked any contractual basis for ordering class procedures…not a ‘sufficient’ one.” Id. at 571. Because the arbitrator actually engaged in an exercise to interpret the parties’ contract, and because of the deference given to arbitrators’ decisions, the Court upheld the arbitrator’s decision to compel class arbitration. Id. at 573.
In Lamps Plus, the case presently before the Supreme Court, Frank Varela filed a class action complaint in federal court against his employer, Lamps Plus, for the release of his and other employees’ personal identifying information. Lamps Plus, 701 Fed. Appx. at 671. In response, Lamps Plus moved to compel arbitration, only between Varela and itself pursuant to the arbitration agreement that was included with Varela’s employment contract. Id. The District Court interpreted the contract, finding that the clause in Varela’s contract allowed class arbitration. Id.
In its unpublished decision, the Ninth Circuit upheld the District Court’s decision and distinguished Stolt-Nielsen in the process. Id. at 672. The Court explained that clause’s silence on class arbitration meant the absence of agreement, not merely the absence of language expressly referring to class arbitration. Id. Because of this, the Court felt emboldened to use state law contract principles to interpret the arbitration clause to determine if class arbitration was allowed. Id. Under California contract law, ambiguity is construed against the drafter. Id. The Court considered the clause “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment” as authorizing class arbitration as a form of civil proceeding. Id. The Court construed the contract against the drafter, Lamps Plus, and found that according to California contract law, the arbitration clause permitted class arbitration. Id. However, what the Ninth Circuit failed to acknowledge from Stolt-Nielsen was that “[w]hile the interpretation of an arbitration agreement is generally a matter of state law…the FAA imposes certain rules of fundamental importance including the basic precept that arbitration is a matter of consent, not coercion.” Stolt-Nielsen, 559 U.S. at 681.
Importantly, this case differs from both Stolt-Nielsen and Oxford Health, in that it was the District Court, and not the arbitrator, who interpreted the contract to conclude that class arbitration was permitted. As explained above, a decision of an arbitrator can be vacated under very limited circumstances, including if the arbitrator exceeded his powers or manifestly disregarded the law. An arbitration award cannot be vacated if the arbitrator merely committed an error of law. See Stolt-Nielsen, 559 U.S. at 671. In Lamps Plus, it was the District Court’s decision to use state law to interpret the arbitration agreement. Lamps Plus, 701 Fed. Appx. at 673. As such, the Supreme Court will not have to clear as high of a hurdle in overturning the 9th Circuit’s decision.
Regardless, this case may have far-reaching implications on the interpretation and drafting of arbitration agreements. “[C]lass-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by agreeing to submit their disputes to an arbitrator.” Stolt-Nielsen, 559 U.S. at 685. In arbitrating disputes between two parties, the benefits of private dispute resolution are numerous: “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” Id. These benefits are not necessarily felt in class arbitration. For example, class arbitration, with its large number of parties, is less likely to benefit from the greater efficiency and speed that bilateral arbitration benefits from. Second, the presumption of privacy and confidentiality would not apply in class arbitrations. Id. at 686. Third, the award applies not only to the parties under the arbitration agreement, but also “adjudicates the rights of absent parties as well.” Id. Most importantly, although the “commercial stakes are comparable to those of class-action litigation…the scope of judicial review is much more limited.” Id.
The more limited judicial review of class arbitration means the risks of arbitrating against a class are much higher than litigating against a class in court. Under Rule 23 of the Federal Rule of Civil Procedure, federal courts apply established standards to determine whether to certify a class. For example, under Rule 23(b)(3), a class can be certified only if common issues “predominate” over individual issues. Fed. R. Civ. P. 23(b)(3). An arbitrator, however, would not be bound by Rule 23. While the American Arbitration Association has published Supplementary Rules for Class Arbitrations that are similar to Rule 23, arbitrations under other governing rules may not have any standards at all. In addition, in federal court, the party losing class certification can seek judicial review, either to petition for interlocutory review under Rule 23(f) or as part of the final judgment. The appeal is reviewed for an abuse discretion, including for legal error. In contrast, an arbitrator’s decision is reviewed under a much higher standard and cannot be set aside for mere legal error. Thus, a respondent in a class arbitration has significantly fewer procedural protections for review of a class certification decision.
The decision from the Supreme Court on Lamps Plus could have far-reaching implications for parties under arbitration clauses. First, if the Supreme Court determines that the Federal Arbitration Act does not foreclose state-law interpretation of arbitration agreements, then existing arbitration agreements could be interpreted as permitting class arbitration. Even worse, the same clause could be interpreted differently, state to state, absent a choice of law provision. Second, companies can protect themselves by including class waivers in their arbitration clauses. The Supreme Court has previously held that waivers of class arbitration are enforceable in commercial agreements, American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), retail consumer agreements, AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), and very recently employment agreements, Epic Systems Corp. v. Lewis, No. 16-285 (May 21, 2018). Thus, a company can avoid the risks of class arbitration by including an express waiver in its arbitration clauses, and it may be prudent to do so now to minimize the risks that pre-existing arbitration agreements may be interpreted to allow class arbitration.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.