Argument analysis: The familiar divide in arbitration cases re-emerges

The Supreme Court’s conservative majority has been consistently skeptical of arguments that individual consumers or employees who have agreed to bring their legal claims in arbitration have a right to do so on an aggregated basis, such as in a class action. At the same time, arbitration is a function of contract, meaning parties can agree to aggregated arbitrations. The main question in Lamps Plus Inc. v. Varela, which involves contract language that arguably allows aggregated arbitrations, is how to reconcile these two ideas. After argument, it appears that the Supreme Court is divided on this question, but likely to hold that the language in the Lamps Plus arbitration contract was not clear enough to give rise to an obligation to arbitrate on a class basis.

In the decision under review, the U.S. Court of Appeals for the 9th Circuit construed Lamps Plus’ arbitration contract to allow respondent Frank Varela to arbitrate on a class basis against his employer, rather than limiting him to individual arbitration. The lower court reached that result by applying California law to construe against Lamps Plus ambiguous contract language about whether employees could aggregate their claims. However, Lamps Plus argues that federal law demands clearer language before a party can be required to arbitrate on an aggregated basis.

The more liberal justices dominated questioning during attorney Andrew Pincus’ argument for Lamps Plus, focusing mainly on whether the contract language was ambiguous, and whether state law was the appropriate place to look in order to resolve ambiguities. As to the substance of the contract, Justice Elena Kagan focused on contract language that called for the parties to use arbitration “in lieu of any and all lawsuits or other civil legal proceedings,” asking Pincus whether he was arguing that the court should read in an exception for class actions. Pincus responded in part by citing different contract language that repeatedly used the first person singular to describe the signatory employee’s commitment to arbitrate, adding that “we think the agreement is actually quite clear.” This prompted Kagan to observe that “it seems to me … there’s language that’s in favor of each side’s position.”

Taking up the role of state law in resolving these potential ambiguities, which she characterized as “very clear,” Justice Sonia Sotomayor expressed skepticism about “creating a federal common law” of arbitration agreements – “something we’re loath to do in virtually every other context.” In response, Pincus made two connected arguments about why ambiguous contract language – indeed, any contract language that does not contain a “clear and unmistakable” statement to the contrary – should be resolved in favor of individual arbitration. First, he cited the Supreme Court’s decisions in cases such as Stolt-Nielsen S.A. v. AnimalFeeds International Corp., which held that parties couldn’t be compelled to arbitrate on a class basis absent an agreement to do so, arguing that both these cases and the Federal Arbitration Act itself imply federal limits on the role of state law in construing arbitration contracts. Second, he suggested that companies would be unlikely to agree to class arbitration because of the risks it poses – specifically, that losing a class action in front of an arbitrator could yield a substantial damages order, but limited appeal rights. However, both Kagan and Justice Ruth Bader Ginsburg indicated that they saw a smaller role for federal law, limited to cases in which state law discriminated against arbitration agreements.

The more conservative justices became more animated during Michele Vercoski’s argument on behalf of Varela. Chief Justice John Roberts began by questioning whether the application of state law in this case was really “neutral” in light of the result, which he characterized as “authoriz[ing] a type of arbitration that is … like a poison pill that [we] basically said in prior cases is fundamentally inconsistent with arbitration.” Later, Roberts returned to this theme in even starker language, paraphrasing Justice Robert Jackson: “[T]he FAA is not a suicide pact. So, if the FAA says enforce the contract according to its terms, but one of the terms … is fundamentally inconsistent with arbitration itself, then, presumably, the FAA would preclude that term.” Varela responded by emphasizing that the contract language is key under Supreme Court precedent, with Ginsburg adding that “many adhesion [arbitration] contracts[] do put in explicit class action waivers,” and Justice Stephen Breyer observing that organizations of arbitrators “must not see class arbitration as a poison pill,” because they have established rules and procedures for class arbitrations.

Justice Neil Gorsuch then asked whether class arbitrations present due process problems to the extent an arbitration binds absent class members, with Justice Samuel Alito later raising the prospect of an arbitrator purporting to bind class members who did not agree to arbitration at all. Vercoski urged that this question was at least premature and might never arise, depending on how and whether the arbitrator eventually decided to certify a class and conduct the arbitration. Vercoski’s last point – that an arbitrator might ultimately decide the case was inappropriate for class arbitration despite the lower court’s order – was amplified during an exchange with Gorsuch and Sotomayor, with both justices suggesting that decisions about how arbitrations should proceed ought to be left to arbitrators.

Much of the remainder of Vercoski’s argument was occupied with a discussion of the appropriate role for federal law in interpreting arbitration agreements. By means of a hypothetical in which a court read a nonexistent arbitration clause into a contract, Alito solicited Vercoski’s agreement that there was some role for federal law in construing and enforcing arbitration agreements. Breyer and Sotomayor followed up, wondering whether the relevant language in the arbitration contract was really enough to support a conclusion that Lamps Plus had agreed to class arbitration. This exchange offered Vercoski the chance to make her most full-throated argument in support of the lower court’s understanding of the arbitration agreement, which emphasized the “in lieu of any and all lawsuits or other civil legal proceedings” language that Kagan also cited earlier in the argument.

The Supreme Court could decide it lacks jurisdiction over the case, although few justices seemed inclined to do so. In part, the jurisdictional issue focuses on whether the text of the FAA permits a party to appeal an order that compels arbitration, but not in the manner the party prefers. Additionally, there is a question about the propriety of the district court’s decision to dismiss Varela’s lawsuit when it ordered the parties to arbitrate their dispute, instead of placing the case on hold by issuing a stay; that is important because dismissals are final orders, which are generally appealable, whereas the opposite is generally true of stays.

Early in the argument, Sotomayor asked Pincus whether a holding that a decision ordering class arbitration was appealable by a party that sought individual arbitration could also be deployed by a party seeking aggregated arbitration. Pincus agreed that it could be, prompting Sotomayor to express concern that “we’re going to be filled with all of these interim orders denying or granting class arbitration.” Breyer echoed that concern, adding that “it’s … contrary to a very basic principle of … how to run courts” to allow appellate courts to review orders issued before a case becomes final. Returning to the issue later in Pincus’ argument, Breyer proposed that the court should dismiss the case as improvidently granted if it could not address the propriety of the district court’s decision to dismiss the case instead of staying it. Pincus responded that the court had previously reviewed a case involving a similar procedural history, adding that “[i]t may be that the court should take a case to decide the question whether district courts have the power to dismiss rather than stay, but the issue is not presented here and hasn’t been briefed here.” He also urged the court to reach the merits because of the likelihood that this case and future cases would settle in lieu of going forward with class arbitration (which would eventually yield a final appealable order), because of the attendant risks for companies.

October is bookended with arbitration cases, with argument in New Prime Inc. v. Oliveira at the beginning of the month and both Henry Schein Inc. v. Archer and White Sales Inc. and Lamps Plus near the end. In his argument analysis of New Prime, Ronald Mann predicted a victory for the workers in that case, who argue that the FAA’s exception for interstate transportation workers applies to them even if they are independent contractors instead of employees. But the Supreme Court has issued a series of pro-arbitration decisions in recent years – the Lamps Plus argument suggests we should anticipate a return to form.