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A N 8 8 D 8 B 1 AR SINCE www. NYLJ.com May 9, 2019 ‘Lamps Plus’: The Supreme ’s Latest Limitation on Class

By John Fellas category of arbitration-related is- sues that , rather than arbitra- In its April 24, 2019 decision in tors, are expected to resolve: “They Lamps Plus v. Varela, 2019 WL 1780275, include certain gateway matters, the U.S. Supreme Court held that the such as whether the parties have a rule could not valid arbitration agreement at all or properly be applied to construe an whether a concededly binding arbi- ambiguous arbitration agreement to tration clause applies to a certain permit class arbitration. In doing so, it type of controversy.” Breyer was added to a series of (in most cases) 5-4 careful to stress that “[t]he question decisions making it harder for a party here—whether the forbid to bring an arbitration proceeding on class arbitration—does not fall into behalf of a class. this narrow exception.” Rather, it is for an arbitrator rather than a court The Rise and Fall of Class John Fellas Arbitration to decide the class arbitration ques- tion because “[i]t concerns waiver on grounds of unconsciona- Before getting to the specifics of interpretation and arbitration proce- bility under California state . In Lamps Plus, it is worth putting it in dures. Arbitrators are well situated Discover Bank v. Superior Court, 36 context. The starting point is the to answer that question.” About four Cal. 4th 148 (2005), the California Su- court’s plurality decision in Green months after Bazzle, the American preme Court held waiv- Tree Financial v. Bazzle, 539 U.S. Arbitration Association (AAA) is- ers to be unconscionable under two 444 (2003). While there were rare sued a set of rules designed for class conditions: (1) when found in con- sightings of class arbitration in the arbitration—the Supplementary sumer contracts of adhesion that prior to Bazzle, for a Rules for Class Arbitration. Within a were likely to involve small few years after that decision, it was few years, the AAA was administer- claims; and (2) when the party with all the rage. One striking aspect of ing hundreds of class . the superior bargaining power was Bazzle, in retrospect, is that the Having begotten class arbitration alleged to have carried out a scheme court took it as a given that class in 2003, a few years later, the court deliberately to cheat many consum- arbitration is consistent with the began a two-pronged attack on it. ers out of small sums of money. Federal Arbitration Act (FAA). Ba- The two prongs were driven by a In Concepcion, Justice Antonin Scal- zzle, in fact, addressed a narrow common theme: despite Bazzle, ia, writing for the majority, stated “that question: Given that class arbitration class arbitration is inconsistent with class arbitration, to the extent it is is permissible, who, as between the FAA. manufactured by Discover Bank rather a court and an arbitrator, has the One prong of the court’s attack than consensual, is inconsistent with authority to determine whether an was to uphold the validity of provi- the FAA” primarily on the ground arbitration clause permits class sions in arbitration agreements un- that “the switch from bilateral to arbitration. Justice der which a party waived the right to class arbitration sacrifices the (whose opinion was joined by three pursue a claim on behalf of a class. principal advantage of arbitration—its other Justices) concluded that it is Thus, in AT&T Mobility LLC v. Con- informality—and makes the process for an arbitrator to decide. cepcion, 131 S.Ct. 1740 (2011), the slower, more costly, and more likely to In reaching this conclusion, Brey- court (5-4) rejected a challenge to generate procedural morass than final er noted that there was a narrow the enforceability of a class action judgment.” May 9, 2019

The second prong of the court’s at- held that the FAA requires “more appellate review by a new arbitra- tack targeted the construction of arbi- than ambiguity to ensure that the tion panel. Such a process might be tration clauses. Seven years after Ba- parties actually agreed to arbitrate criticized by some as “undermining zzle, the court held in Stolt-Nielsen SA v. on a classwide basis.” the benefits of arbitration.” But this Animal Feeds, 130 S.Ct. 1758 (2010)—a Underlying the Supreme Court’s does not change the fact that such a 5-3 decision, Justice post-Bazzle decisions, are differing process is covered by the FAA. taking no part—that an arbitration tri- views on the merits of class actions. The majority misses the point by bunal’s decision that class arbitration In Lamps Plus, Chief Justice John focusing on whether the inevitable was authorized by an agreement that Roberts, writing for the majority, ex- procedurally complexity of class ar- was “silent” on the issue was inconsis- pressed solicitude for their targets— bitration undermines the “benefits tent with the FAA. The reason offered noting that a class actions “greatly of arbitration.” What matters is not by Justice , who authored increase[] risks to defendants.” By whether parties agree to a process the majority opinion, aligned with the contrast, Justice Ruth Bader Gins- that secures the typical benefits of ar- one later given in Concepcion: “the dif- burg, in dissent, expressed concern bitration, but whether they agree to a ferences between bilateral arbitration for those who might bring them, process that entitles them to the ben- and class arbitration are too great for noting that, through its post-Bazzle efits of the FAA. This is because, when arbitrators to presume, consistent decisions, “the Court has hobbled an arbitration agreement falls under with their limited powers under the the of employees and the FAA, the parties to it are entitled FAA, that the parties’ mere silence on consumers to band together in a to certain benefits, most notably, the the issue of class-action arbitration judicial or arbitral forum.” right to go to court to enforce their ar- constitutes to resolve their Regardless of one’s view of the bitration agreement and any ensuing disputes in class proceedings.” Lamps merits of class arbitration, in the award. Since the FAA’s cardinal prin- Plus took Stolt-Nielsen a step further: opinion of this author, the majority’s ciple is that “arbitration agreements where Stolt-Nielsen held that a silent reasoning in Lamps Plus is flawed. should be enforced according to their contract could not, consistent with terms,” it follows that an arbitration the FAA, authorize class arbitration, The Majority’s Reasoning agreement must be enforced even if Lamps Plus held that an ambiguous There were two main bases for the process it contemplates does not contract could not either. the majority’s decision. The first secure the benefits of speed and cost- is a theme common to many of effectiveness typical of many arbitra- ‘Lamps Plus’ the court’s post-Bazzle decisions: tion proceedings. This is not to say In Lamps Plus, Frank Varela sought class arbitration is inconsistent that just any process agreed to by the to bring a class action against with the FAA because it makes the parties is covered by the FAA. Imagine his employer on behalf of 1,300 em- “process slower, more costly, and two parties agree to resolve their dis- ployees affected by an allegedly negli- more likely to generate procedural putes by appointing an arbitrator to gent data breach. Lamps Plus moved morass than final judgment” and, flip a coin. Even though that process to compel individual (rather than thus, “undermine[s] the central would be quick, cheap and simple, it class) arbitration based upon the ar- benefits of arbitration itself.” But would surely be inconsistent with, bitration clause in Varela’s employ- this confuses the practices typical and denied the benefits of, the FAA be- ment agreement. The Ninth Circuit of arbitration for those essential cause it is arbitrary and unreasoned. affirmed the district court’s decision to it. While arbitration typically is But if parties to a bilateral arbitra- to compel class arbitration. Central quicker, cheaper and procedurally tion agreement who agree to costly to the Ninth Circuit’s decision was simpler than litigation in the U.S. and slow, reasoned procedures a finding that the arbitration clause courts, nothing mandates that it must be accorded the benefits of was ambiguous. Applying the contra must be. Nothing in the FAA states the FAA, there is no logical reason proferentem rule—that ambiguities that it applies solely to efficient why parties who agree to class ar- are construed against the drafter of a and procedurally straightforward bitration should be denied them. contract—the Ninth Circuit resolved arbitration. Rather, as the court It is important to note in this con- the ambiguity against Lamps Plus. affirmed in Lamps Plus, the core prin- text that the Lamps Plus majority On appeal, the Supreme Court ma- ciple of the FAA “requires courts to accepts that an explicit agreement jority framed the issue before it as enforce covered arbitration agree- to class arbitration isconsistent “whether, consistent with the FAA, ments according to their terms.” with the FAA. As Roberts noted an ambiguous agreement can pro- Parties could theoretically enter into (quoting Concepcion): “[C]lass ar- vide the necessary ‘contractual ba- a bilateral arbitration agreement bitration, to the extent it is manu- sis’ for compelling class arbitration.” that contemplated a lengthy, com- factured by [state law] rather than Relying on Stolt Nielsen, the court plex and costly process, including consen[t], is inconsistent with the May 9, 2019

FAA” (emphasis added). If that is arbitrate—that, after all, was the ba- it comes to clause construction, true of an explicit agreement to class sis of Lamps Plus’s motion to com- Lamps Plus still leaves open two arbitration, then surely the same pel. Thus, the question raised there important questions. The first is result follows when an ambiguous was not “whether the parties have whether parties may delegate to an agreement, properly construed in a valid arbitration agreement at all.” arbitrator the authority to decide accordance its governing state law Rather, the question raised in Lamps whether an arbitration clause that applies equally to all contracts, Plus arose out of the ambiguity that permits class arbitration. The is read to require class arbitration. the majority accepted characterized second is whether rules of contract The majority tries to avoid this the arbitration agreement, i.e., interpretation other than the contra conclusion by claiming that it is im- “whether a concededly binding proferentem rule can be relied upon proper to use the contra proferentem arbitration agreement applies to a to construe a clause to permit class rule to construe an ambiguous ar- certain type of controversy.” But, arbitration. bitration clause because it is a rule as Roberts acknowledged, there is a Regardless of whether Lamps Plus of public policy rather than one well-established rule to address an is read broadly or narrowly, it is clear for ascertaining contractual intent. ambiguity about whether a clause that the court’s post-Bazzle decisions But as Justice points applies to a particular controversy have limited the ability of consumers out in dissent, the rule is relevant (e.g., does an arbitration clause ap- and employees to seek relief in small to ascertaining contractual intent ply only to an individual claim or ex- value cases. As Justice Breyer put it since it “encourages the drafter to tend to claims on behalf of a class?): in his dissent in Concepcion, “[t]he set out its intent in clear contractual “we have repeatedly held that ambi- realisticalternative to a class action language, for the other party then guities about the scope of an arbitra- is not 17 million individual suits, but to see and agree to.” Moreover, the tion agreement must be resolved in zero individual suits, as only a lunatic rule is so well-established in each favor of arbitration.” Yet the court or a fanatic sues for $30” (emphasis in of the 50 states that it gives rise to never addressed the application of original). reasonable expectations as to how a that rule to the question before it. It is, likely, therefore, that there will contract will be interpreted and, as In her dissent, Kagan criticized be continued attempts to address this Kagan notes, “enables an interpreter the majority’s decision because issue through , such as the to resolve any remaining uncertainty “the FAA does not empower a court proposed Arbitration Fairness Act of in line with the parties’ likely expec- to halt the operation of such a gar- 2017, which would have invalidated tations.” And if parties to a contract den-variety principle of state law” pre-dispute arbitration agreements do not wish that rule to apply, they as California’s contra proferentem for certain types of disputes, includ- are free to exclude it. rule. Kagan pointedly asked “[h] ing those involving employment and The second basis for the major- ow, then, could the majority go so consumers. In fact, Ginsburg ends ity’s decision is that it “aligns with wrong?” She went on to answer her her dissent in Lamps Plus by stating: our refusal to infer consent when it own question by suggesting that “Congressional correction of the comes to other fundamental arbi- the majority was driven more by Court’s elevation of the FAA over the tration questions.” Roberts quotes the desire for a particular outcome rights of employees and consumers Breyer’s opinion in Bazzle to identify than the requirements of the FAA: to act in concert remains urgently “fundamental arbitration questions”: the majority’s decision “would nev- in order.” Regardless of one’s views “we presume that parties have not er have graced the pages of the U.S. on the merits of such legislation, authorized arbitrators to resolve Reports save that this case involves there is a concern that, if it comes, certain ‘gateway’ questions such … class proceedings” (ellipsis in it might be so vaguely drafted (like as ‘whether the parties have a original). the prior proposed legislation) that valid arbitration agreement at all The Future of Class Arbitration it can be read to apply not just to or whether a concededly binding agreements involving employees arbitration agreement applies to a On a broad reading of Lamps Plus, or consumers, but also to domestic certain type of controversy.” But if, as its net effect is that class arbitration business-to-business agreements Roberts’s suggests, class arbitration is permitted only under two condi- and international agreements, as to raises a “fundamental arbitration tions: (1) the arbitration clause ex- which there are compelling reasons question[],” it is important to be plicitly authorizes it; and (2) there in favor of arbitration. clear precisely what that question is. is no class action waiver in the ar- In Lamps Plus, it was undisput- bitration agreement. However, there John Fellas is a partner at Hughes ed that the parties had agreed to is a narrower reading. At least when Hubbard & Reed in New York.

Reprinted with permission from the May 9, 2019 edition of the NEW YORK LAW JOURNAL © 2019 ALM Media , LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 or [email protected]. # 070-05-19-13