The U.S. Supreme Court Strengthens the Hand of Employers to Compel Individual Arbitration of Claims, while Public and Business Attitudes Towards Arbitration Are in Ferment

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Opposition to arbitration clauses by consumers and employees is growing, some employers, in response to that opposition, are taking actions to eliminate arbitration clauses in employment agreements or employee policies, and support is growing in Congress to rein in the ambit of arbitration.  In the midst of this political and cultural ferment over arbitration, the United States Supreme Court continues its years-long trend to enforce arbitration clauses in a manner that favors employers and consumer-focused companies.

In Lamps Plus, Inc. v. Varela, __ U.S. __, 139 S.Ct. 1407 (Apr. 24, 2019), the Court sided with employers to prevent class arbitration where the arbitration agreement was ambiguous as to whether class arbitration was contemplated.  Explaining that the Court’s “normal practice” is to defer to the Circuit Court on “interpretation and application of state law,” it adopted the Ninth Circuit’s conclusion, applying California contract law, that the “agreement was ambiguous on the availability of class arbitration.”

The finding of ambiguity teed up the issue of “whether, consistent with the [Federal Arbitration Act], an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.”   (Citing Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010).)  Relying on Stolt-Nielsen and Epic Systems Corp. v. Lewis, 584 U.S. ___, 138 S.Ct. 1612 (2018), decided last term, the Court held that “it cannot” provide such supports, because “[c]lass arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration.”

The Court rejected the Ninth Circuit’s application of California’s rule of contractual interpretation, under which an ambiguous contractual provision is construed against the party that drafted the contract.  It found the interpretive principle inconsistent with the FAA, because it undermines the foundational principle that arbitration is a matter of consent.  This rule of contractual construction, “[u]nlike contract rules that help to interpret the meaning of a term, and thereby uncover the intent of the parties” is “triggered only after a court determines that it cannot discern the intent of the parties.”  (Emphasis in original.)

In Epic Systems, the Court had admonished courts not to “rely on state contract principles to ‘reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.’”  Explaining that “the FAA provides the default rule for resolving ambiguity here,” the Court determined that the California rule of construction could not be “applied to impose class arbitration in the absence of the parties’ consent.”  Neither silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself.”

Lamps Plus further closes the loop to prevent employees and consumers from evading individual arbitration of their claims.  Companies can rest assured that employees and consumers will not be able to rely on arbitration agreements that do not clearly prohibit class arbitration to compel class arbitration.

What is next for arbitration in the appellate courts?  In California, the California Supreme Court will soon address the issue of whether its decision in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), holding that arbitration agreements are not enforceable in claims under California’s Labor Code Private Attorneys General Act (“PAGA”), applies to a claim for wages under section 558(a) of the California Labor Code.  Section 558(a) states that the unpaid wage claim penalty is recoverable 100 percent by the employee,[1] unlike other PAGA claims, for which the employee receives only 25 percent, the other 75 percent going to the state.  The U.S. Supreme Court has not yet taken up a case raising the issue of the enforceability of an arbitration agreement in a PAGA claim.  Meanwhile, the California Supreme Court recently reminded parties to an arbitration that court review of erroneous decisions by an arbitrator is extremely limited – in keeping with the notion that arbitration is designed to be a streamlined process.  Heimlich v. Shivji, __ Cal.5th __, 2019 WL 2292828 (May 30, 2019).  Be careful what you wish for.

In sticking to its established unwavering support of arbitration clauses, the Court may further fuel the flame for legislative reform of the arbitration process.  But any such reform will have to come from Congress, because efforts by state legislatures to adopt laws restricting arbitration will run afoul of FAA preemption.  Companies need to consider whether the benefits of enforcing agreements or policies requiring individual arbitration of claims outweigh the growing public backlash against such policies.

[1]               One California appellate court has held that the employee is entitled to only 25 percent of the recovery under section 558(a), because the same split must be applied to this claim as is applied to other PAGA claims.  Zakaryan v. Men’s Wearhouse, Inc., 33 Cal.App.5th 659, 674-75 (2019).

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