Varela v. Lamps Plus, Inc., No. 16-56085 (9th Cir. Aug. 3, 2017) (unpublished), involved a class action brought by Lamps Plus employees, who alleged that their personal data was breached when their employer was victimized by a phishing scam. Lamps Plus moved to compel individual, bilateral arbitrations, per the pre-dispute arbitration agreement (“PDAA”) in the employment agreements (ed: which called for arbitration at either the AAA or JAMS under the institution’s employment rules). The employees countered that any arbitrations should be conducted on a class basis, while Lamps Plus contended that nothing in the PDAA authorized class arbitrations. Although the PDAA did not state expressly that class arbitrations were permitted, the District Court had inferred this from other language in the arbitration agreement and the Ninth Circuit agreed. Finding these inferences created ambiguity and construing the ambiguity against the drafter, the District Court ordered classwide arbitration; a divided Ninth Circuit affirmed in an unpublished Memorandum decision.
On April 30th, SCOTUS granted Certiorari in Lamps Plus v. Varela, No. 17-988. As described in the Petition, the issue presented is: “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.” (see SAA 2018-17). Andrew J. Pincus, Mayer Brown, Washington, DC, appeared on behalf of Petitioner Lamps Plus and Michelle M. Vercoski, McCune Wright, LLP, Ontario, CA, appeared on behalf of Respondent Frank Varela. We again offer below just a few representative questions posed by the Justices in the transcript, using the same page: line number convention in parenthesis.
Mr. Pincus (3:11) began the argument by positioning the case from Petitioner's perspective: "This Court has repeatedly recognized that the changes brought about by the shift from bilateral arbitration to class action arbitration are fundamental.... The question in this case is what standard a court should apply in determining whether an arbitration agreement authorizes class arbitration." Petitioner was proposing that something more must appear in the contract, besides the general contract language commonly used in pre-dispute arbitration agreements, for class arbitration to be viewed as contemplated by the parties.
Justice Sotomayor (4:3) wanted to know why that was so. “But don't you make that determination under state law?” she asked. The FAA does not undo state law. The FAA only intervenes when the state law is directed at arbitration and that's "not the case here," she said. Mr. Pincus countered that federal law, as applied in prior Supreme Court decisions, imposes a "clear and unmistakable requirement before ... an arbitration agreement may be construed to delegate gateway issues to the arbitrator." He first cited Stolt-Nielsen v. AnimalFeeds Intl., 561 U.S. 662 (2010), because it dealt with the subject of class arbitration, but Justice Sotomayor viewed the Opinion's discussion of a standard as dicta. Mr. Pincus reminded her that the standard made a solid appearance in First Options v. Chicago, 514 U.S. 938 (1995), where it anchored the Court's decision.
Our take? First round, Mr. Pincus, as Justice Sotomayor retreated to a subsidiary issue that also concerned Justice Breyer (7:11): Why was Lamps Plus permitted, given the constraints on interlocutory issues in Section 16(a)(3) of the FAA, to appeal an order granting arbitration? Both Justices worried that the federal appellate courts could be inundated with appeals of arbitration orders. Mr. Pincus explained that the action below had not been stayed by the trial court, but dismissed (albeit, without prejudice). That dismissal, under Ninth Circuit case law, established a "final judgment' making the decision below immediately appealable. Further, Ninth Circuit precedent permits the District Courts to decide the immediate appealability of a motion relating to arbitration by following an arbitration-granting order either with a stay (no immediate appeal) or a dismissal (final judgment subject to immediate appeal) of the case.
A Question of Jurisdiction
At the heart of this sidebar was the Court's jurisdiction; both Justices implied that, perhaps, they should not be deciding this case. Mr. Pincus (7:7) hastened to point out that the matter decided in Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000), came to the Court in the same posture. The Court acknowledged there that the issue of appealability was not among the questions presented. Similarly, Mr. Pincus insisted, the issue of appealability had not been briefed here and he urged that many cases below might be selected to properly present the appealability issue to the Court at a later date.
Justice Kagan (8:1) returned the exchange to the substantive side, asking why, in a general and broadly phrased clause, it was appropriate to single out class suits for special treatment. Were they not included in such broad terms as cases, controversies and disputes? To create a special exception for class arbitration, she cautioned, would write federal common law, a practice eschewed by the Court. From what corner of the FAA does Petitioner find support for imposing a federal overlay on contract interpretation conducted under state law? Section 4 came the answer, where not only Stolt-Nielsen, but First Options and other modern arbitration decisions by the Court have reasoned that significant gateway issues require a clear statement of party intent for judicial enforcement to follow.
The Rookie Justices Weigh In
Both new Justices, Kavanaugh and Gorsuch, were present on the Bench and both asked questions. Justice Kavanaugh's first attempt to join the vigorous debate led to a short "Alphonse and Gaston" exchange with Justice Kagan (29:19) and his first question delivered a basic restatement of Petitioner's point: where ambiguity about class arbitration is concerned, the usual rule of finding against the drafter is not enough; federal law requires more for "the ship to sail." Correct, Mr. Pincus agreed: from Moses Cone (460 U.S. 1 (1983)) forward, this Court has looked to Section 4 to assure that the delegation of extraordinarily strong powers to arbitrators comports with the terms of the agreement.
Justice Kavanaugh (60:61) performed more or less the same facilitative role when Ms. Vercoski (32:10) rose to speak for the Respondent, asking her what points she might make to distinguish Respondent's case from the holding in Stolt-Nielsen. Justice Gorsuch (44:1) raised the tantalizing prospect that, perhaps, the District Court should have stopped short of ordering class arbitration versus individual arbitration and just compelled the parties to arbitrate? During Respondent's presentation, he probed behind the arbitration curtains to ask whether arbitration rules bind the arbitrator or whether the arbitrator might designate the dispute for individual arbitration?
Justice Gorsuch (38:17) also worried about the due process implications for absent members of the class. Justice Alito (39:22) followed, asking Ms. Vercoski: "But do you think that absent class members who didn't agree to arbitration could be bound by the decision of the arbitrator?" Other practical difficulties with class arbitration began to surface. The possibility that the District Court would remain involved and partner with the arbitrator(s) to assure appropriate procedural protections seemed less than ideal to some Justices. Without judicial supervision, though, what would assure procedural protections? Mr. Pincus had painted a picture of class arbitration as a Hobson's Choice. He reminded the Court that it has worried before about the crushing impact of class certification on settlement dynamics; imagine the defense accepting "bet-the-company" risk in class arbitration, where virtually no judicial review would be available.
Chief Justice Roberts (32:19) labeled this a "poison pill" choice, while Justice Breyer mused that arbitration forums, like AAA, would not have class action arbitration rules, were it nothing but a poison pill. Clearly, though, the Court saw, as a result of oral argument, the procedural complexities and potential unfairness that proceeding with class actions in arbitration will represent. Justice Sotomayor (56:17) seemed to question whether class actions can even exist outside the courts. She asked Ms. Vercoski: "My problem [is] ...[e]verything's different procedurally.... Why are you thinking that class action proceedings are -- are a special proceeding that you're entitled to bring somewhere else?"
Petitioner reserved four minutes for rebuttal argument. The Justices having exhausted themselves on the issues and possibilities, listened quietly and with only a single question as Mr. Pincus (62:9) rounded off his argument with statistics, due process concerns, procedural conundrums, and informational responses that counseled against affirmance.
Blast from the Past
SICA arrived at the "no class arbitration" rule that appears in today's FINRA Arbitration Codes, after experimenting with the mechanism. The industry was using arbitration agreements to defeat class actions in court, but, when those actions then sought class status in arbitration, the industry was confronted with unpredictable and unrestricted discovery rulings and class definitions that were huge and unwieldy. The compromise arose at SICA to ban class arbitration at the SROs, while simultaneously protecting individuals who choose to participate in class litigation.
The stakes are high here! Imagine a regime where class arbitration may be ordered by a court, without an immediate appeal, and arbitration panels proceeding to class certification wield tremendous power without judicial review. While re-drafting clauses to add class action waivers and specific provision for individual arbitration, as Justice Ginsburg (34:17) observed, will moot these concerns, those companies caught in such a web face grave financial risk.
(ed: *The oral argument audio recordings for both cases can be found in several formats at https://www.supremecourt.gov/oral_arguments/argument_audio/2018 (Schein here and Lamps Plus here). **See our analysis of the cases in SAA 2018-25(Jun. 27). ***We will of course track these cases and keep our readers and followers informed.)
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