California Mediation and Arbitration

Arbitration, Class Actions, Waiver, Construction of Agreement: SCOTUS Rules That Class Arbitration Is Not Allowed When Agreement Is Ambiguous

Majority Rejects State Law Rule That Ambiguous Contracts Are Interpreted Against The Drafter Because . . . 

    Frank Varela, an employee of Petitioner Lamps Plus, Inc., sued Lamps Plus because a hacker tricked Varela's employer into disclosing tax information about 1,300 employees. Mr. Varela was understandably miffed after a fraudulent income tax return was filed in his name. Lamps Plus sought to compel arbitration on an individual basis, relying on an arbitration provision. The District Court rejected the request for individual arbitration, but authorized class arbitration, and the Ninth Circuit affirmed. So Lamps Plus petitioned to the Supreme Court. Lamps Plus, Inc., et al. v. Varela, No. 17-988 (S.Ct.  4/24/19).

    It is established law that classwide arbitration may not be compelled when an agreement is silent about its availability. Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010). However, the Ninth Circuit believed that Stolt-Nielsen was not controlling, because in that case, the parties stipulated the agreement was silent, but here, the agreement was ambiguous. Therefore, the rule of interpreting an agreement against the drafter (contra proferentem) allowed the court to interpret the ambiguity against the draftsman/employer, and in favor of the employee.

    AT&T v. Concepcion, 559 U.S. 333 (2011) allowed for the application of defenses to arbitration when the defenses were neutral and did not uniquely burden arbitration. And it would seem that the contra preferentem rule of contractual interpretation, applied here by the employee to defend against individual arbitration, and to use in favor of class arbitration, would qualify as a neutral rule, since the rule applies to arbitration clauses as well as to other contractual clauses. 

    However, the SCOTUS majority, which is very much in favor of arbitration and specifically, individual arbitration, concluded that under the Federal Arbitration Act, an ambiguous agreement cannot provide a basis for class arbitration.

    Here's the scorecard with a brief summary of the opinions:

    1. Chief Justice Roberts delivered the Court's opinion, in which Thomas, Alito, Gorsuch, and Kavanaugh joined. The majority held that it had jurisdiction to hear the appeal, because even though the District Court compelled arbitration, the fact that it allowed for class arbitration instead of individual arbitration, meant a "fundamental" change, and resulted in a denial of the relief Lamps Plus was requesting. The FAA, rather than the state rule of contract interpretation, provided the default rule for resolving ambiguities in arbitration agreements, and here the majority concluded that ambiguity meant a lack of consent to class arbitration.

    2. Justice Thomas filed a concurring opinion. Thomas remains "skeptical of this Court's implied pre-emption precedents." But he remained comfortable with the majority opinion, because he believed that the contract was silent about class action, and thus Stolt-Nielsen applied, and he believed that California law would also reach the conclusion that the arbitration  provision did not provide a basis for class arbitration.

    3.  Justice Ginsburg, with whom Justices Breyer and Sotomayor joined, dissented, and joined Justice Kagan's dissent in full. The thrust of Ginsburg's dissent is that the FAA was intended "to enable merchants of roughly equal bargaining power to enter into binding agreements to arbitrate commercial disputes" (quoting from her own dissent in Epic Systems Corp.), and current jurisprudence has taken a turn to thwart "effective access to justice" for those who lack power and encounter violations of their rights (to quote another Ginsburg dissent in DIRECTV).

    4. Justice Breyer dissented, believing that there was no jurisdiction, based on Lamps Plus' appeal from an order allowing arbitration. Typically, there is no appeal from an order allowing arbitration, because such an order is interlocutory, rather than final, unlike a district court order refusing to compel arbitration. And because the order granting Lamps Plus' motion to compel was interlocutory, the District Court's dismissal of the case in the very same order was improper, according to Breyer. Lastly, Breyer disagreed with the majority's conclusion that class arbitration is so "fundamental[l]y" different from individual arbitration, that the District Court did not really grant a motion to arbitrate (which would be interlocutory), but rather denied the relief Lamps Plus really wanted. While class arbitration may be different than individual arbitration, Breyer argued that class arbitration was still arbitration, and that an order allowing class arbitration was still interlocutory.

    5. Justice Sotomayor dissented, joining Justice Ginsburg's dissent in full and Part II of Justice Kagan's dissent. She believed "[t]his Court went wrong years ago in concluding that a 'shift from bilateral arbitration to class-action arbitration' imposes such 'fundamental changes,' . . . that class-action arbitration 'is not arbitration as envisioned by the' Federal Arbitration Act. . . " She also disagreed that the FAA could be read "to pre-empt the neutral principle of state contract law on which the court below relied." 

    6. Justice Kagan, dissenting, is joined by Justices Ginsburg and Breyer, and as to Part II, by Justice Sotomayor. Part I of Kagan's dissent explains why she believes the arbitration provision authorizes class arbitration, and Part II explains why, even if the provision is ambiguous, California law provides a clear answer by construing ambiguities against the drafter. Justice Kagan explains that the FAA does not federalize basic contract law, except when state contract law discriminates against arbitration agreements. She happens to interpret the arbitration clause as allowing for class arbitration, and even if it doesn't unambiguously do so, then "a plain-vanilla rule of contract interpretation" applied in California and all other states, requires interpretation against the drafter. In effect, the majority has made a policy decision that class arbitration "undermine[s] the central benefits of arbitration itself" -- a policy decision with which Kagan disagrees, and that in she believes does not justify displacing applicable state law regarding the interpretation of ambiguous contracts.

    COMMENT. Back in December 2016, I wrote an article entitled "The Politics of Arbitration," describing how arbitration had become one more "hot button" issue for the Supreme Court, dividing the Justices along political lines. Notwithstanding the six different opinions described above in Lamps Plus, the fault line is along predictable political lines: Justices Roberts, Thomas, Alito, Gorsuch and Kavanaugh, all appointed by Republican presidents, formed the majority, while the dissenters, Justices Ginsburg, Breyer, Sotomayor, and Kagan, were all appointed by Democratic presidents.

    The majority's opinion brought to mind the title of David Lodge's satirical novel, How Far Can You Go? (1980). If the majority's policy decision that class arbitration is (fundamentally) not arbitration means it will not countenance a state rule of contract interpretation leading to a different result, just how far will it go to discard other background principles of contract law in arbitration cases?

 

    

Celebrities: ADR And Peace Comes To Westeros In Game Of Thrones

Alternative Dispute Resolution And Alternative Facts, As Peace Comes To Westeros.

    Elmo of Sesame Street has provided us with a model for dispute resolution between Queen Cersei and Tyrion Lannaster in Game of Thrones:

 

    The best alternative to a negotiated agreement (BATNA) is never a pretty picture in Game of Thrones.

Employment, Unconscionability: Arbitration Clause Used To Bypass Berman Hearing, Without Providing Low Cost Alternative, Supports Finding Of Unconscionability

First District, Division Two Affirms Trial Court's Order Denying Petition To Compel Arbitration And Stay Proceedings.

    In many ways, the next case fits the template of a typical case in which unconscionability is found to be a defense to enforcement of an arbitration clause. The Court of Appeal noted that the parties agreed, for purposes of appeal, that the arbitration clause was procedurally unconscionable. And several factors resulted in substantive unconscionability: the parties were required to share costs, posing a barrier to the individual wage earner, who could not take advantage of a relatively inexpensive remedy of a hearing before the Labor Commissioner, and the arbitration clause barred  representative and PAGA claims. The agreement also barred recovery of punitive damages, statutory penalties, equitable relief, and attorney's fees. The trial court denied the petition to compel arbitration, and the Court of Appeal affirmed. Subcontracting Concepts (CT), LLC, et al., Plaintiffs and Appellants v. De Melo, Defendant and Respondent, and Department of Industrial Relations, Intervener and Respondent, A152205 (1/2  4/10/19) (Kline, Richman, Stewart).

    So why did the Court bother to publish? We hazard two guesses.

    First,  we note that the matter began as a Berman hearing, allowing for the administrative resolution of wage claims. The corporation filed the court proceeding to petition for arbitration, explaining why the corporation is a plaintiff and appellant. And the California Supreme Court has held that an otherwise valid arbitration agreement may not be deemed substantively unconscionable merely merely because it requires waiver of the right to a Berman hearing -- the relatively inexpensive process available to resolve wage claims. Here, however, the employer did not provide the wage earner with an affordable arbitral forum, and that lack of access factored into the Court's analysis as an element of substantive unconscionability. 

    Second, the appellant argued that a true employer-employee relationship did not exist, because the agreement stated that respondent was an independent contractor, though appellant did dispute that he was an independent contractor. In the absence of  an employment relationship, the appellant argued that California law regarding unconscionability did not apply. Not so, said the Court of Appeal, because the key to California unconscionability analysis is not the employer-employee relationship, but rather the disparity in power between the parties.

    COMMENT: This is also one of those cases in which someone with limited English skills  (his native language was Portuguese) is asked to sign a contract on the spot, pointing to power imbalance. The employer (or contractor's) ability to preclude the worker's access to an inexpensive forum also points to power imbalance. The language problem might be addressed by translating documents into a foreign language or having someone who is bilingual explain the documents, admittedly something that may be more difficult when the foreign language is Portuguese. And an employer willing to assume the costs of arbitration is going to find it easier to enforce an arbitration provision.

Arbitration, Employment, Standard Of Review: Employee Who Explicitly Rejects Arbitration Agreement Is Bound By It By Continuing To Work

Justice Segal Dissents.

    An employee can impliedly accept an arbitration agreement by continuing to work for his or her employer. But what happens when the employee explicitly rejects the arbitration agreement yet continues to work, after the employer has said that continuing to work will bind the employee to arbitration? The trial court said that there was no meeting of the minds in Diaz v. Sohnen Enterprises (Los Angeles County Super. Ct. No. BC644622). The Court of Appeal reversed, saying the facts were undisputed, and the employee had impliedly agreed to arbitrate by continuing to work. Diaz v. Sohnen Enterprises, No. B283077 (2/7  4/10/19) (Zelon, author, Feuer, conc., Segal, dsst.).

    Justice Segal, dissenting, took issue with the de novo standard of review applied by the majority. As Justice Segal explained, the trial court found the employer had failed to meet its burden of proving the existence of an implied arbitration contract: "In this situation, we do not review the record to determine whether substantial evidence supports the trial court's finding, but whether the evidence compels the opposite finding as a matter of law." This standard applies when the appeals turns on a failure of proof.

    And Justice Segal did not believe the evidence compelled a finding the parties agreed to arbitrate. The employee explicitly rejected an agreement to arbitrate and stated an intention to continue to work. While the employee's continued employment may be viewed as an implied agreement to arbitrate from the perspective of the employer, the trial judge, and Justice Segal, did not see a clear meeting of the minds. And there was some ambiguous evidence in the record. The arbitration agreement stated it had to be accepted in writing, but the employer's Chief Operating Officer stated she told employees they could accept the agreement even if they did not sign it.

    It will be interesting to see whether, in light of the split opinion, this appeal has a further life.

    

Arbitration, Employment, Choice Of Law: California Choice Of Law Provision Does Not Mean Employee Gets To Avoid Arbitration

Choice-Of-Law Provision Is Interpreted To Exclude Special Rules Limiting The Authority Of Arbitrators Where The Federal Arbitration Act Governed The Agreement.

    California Labor Code section 229 provides that wage disputes "may be maintained without regard to the existence of any private agreement to arbitrate." In Bravo v. RADC Enterprises, Inc., B289506 (2/8  3/29/19) (Wiley, Grimes, Adams), the trial court had interpreted a California choice-of-law provision to mean that a store manager could avoid arbitrating his wage dispute with his employer.  On appeal, the Court reversed the part of the order denying arbitration of claims (except for a PAGA claim that did not need to be arbitrated).

    As the Court of Appeal noted, the "first textual clue" that the parties intended to arbitrate was in the title of the parties' agreement: "'ARBITRATION AGREEMENT.' This agreement is for arbitration and not against it."

    So how was California law to be applied? The Court interpreted the California choice-of-law provision to mean that California substantive law principles were to be applied, but that "special rules limiting the authority of arbitrators" were to be excluded.