Supreme Court to review 9th Circuit arbitration case

The U.S. Supreme Court agreed Monday to review an unpublished decision by the 9th U.S. Circuit Court of Appeals in which the lower court found that class arbitration cannot be barred by an ambiguous arbitration agreement under California law.

The review is the latest in a long-running conflict between the Supreme Court and lower federal courts dealing with the Federal Arbitration Act, which holds that courts can only approve class arbitration when the agreement at issue expressly preserves a party's ability to do so.

Plaintiff Frank Varela accused his former employer Lamps Plus Inc. of giving his tax information to a criminal as part of a phishing scam, according to a complaint filed in 2016.

Lamps Plus initially sought to compel arbitration per the terms of its employment agreement, which Varela argued against. Varela said many of his claims fell outside the scope of the arbitration agreement but added that if the court were to compel arbitration, he should be allowed to seek class representation.

The district court dismissed Varela's case and compelled arbitration but declined to limit the arbitration to Varela's individual claims. The court found the language of the agreement ambiguous and concluded that when rightfully construed "against the drafter of the agreement," it did not preclude class arbitration.

Lamps Plus petitioned the ruling to the 9th Circuit, arguing the language of the contract was not as ambiguous as the lower court had implied and did not constitute a tacit agreement to class arbitration. But the panel affirmed 2-1 the district court's decision. Varela v. Lamps Plus Inc. et al., 16-CV56085 (9th Cir., filed July 29, 2016). [ruling attached below]

The majority, comprised of Circuit Judges Stephen Reinhardt and Kim Wardlaw, shared the lower court's stance that the ambiguity of the contract language worked against limiting Varela to his individual claims. California law holds that a contract is ambiguous "when it is capable of two or more constructions, both of which are reasonable."

In a two-sentence dissent, Circuit Judge Ferdinand Fernandez said the agreement was not ambiguous and the court should "not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen," a Supreme Court ruling dealing with the Federal Arbitration Act. Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 US 662, 684 (2010).

Lamps Plus seized on Fernandez's language in its petition, making repeated references to the "palpable evasion" of Stolt-Nielsen. Lamps Plus argues that ruling makes clear that the Federal Arbitration Act imposes rules that cannot be circumvented by state law, and to justify defying the act would require more than an inference of ambiguity.

Steven Katz, a senior counsel at Constangy Brooks, Smith & Prophete LLP, said it's not common that the Supreme Court agrees to hear an unpublished case, which aren't citable. But whether unpublished or not, the ruling still creates a conflict with other circuits the Supreme Court would be keen to address.

Katz said the Supreme Court has long tussled with California courts when it comes to the Federal Arbitration Act, as the lower courts have occasionally sought to circumvent the act in favor of state law. The Supreme Court has sometimes addressed these circumventions through brief per curiam decisions published not long after the court announced its decision to review the case, Katz said.

"Every four, five, six years the Supreme Court has to take a decision out of California and correct their interpretation. It's almost like a give and take. The Supreme Court says X, and the California Supreme Court says, 'Well, you didn't say Y'," Katz said. "The Supreme Court will say, 'No, we mean what we say.'"

Glenn Danas, a partner at Capstone Law APC, said that while the California Supreme Court has certainly butted heads with its federal counterpart on the Federal Arbitration Act, that's not true of the 9th Circuit, "which does not have a track record of getting FAA decisions wrong from the U.S. Supreme Court's perspective."

Fernandez's strong rebuke of the majority's decision might have prompted the Supreme Court's review, Danas said, though it's also possible the higher court simply saw this as an opportunity to address how courts should proceed when an agreement is "silent" on an issue. While the Supreme Court has generally found the language in a standard arbitration agreement would be assumed to extend to class arbitration, lower courts haven't always maintained that view.

"It's a little bit rare that you'd see a court ordering class arbitration -- that's why this issue has come up," Danas said. "You have an issue the court really hasn't talked about in a long time."

Michael Grimaldi, a partner at Lewis Brisbois Bisgaard & Smith LLP and counsel to Lamps Plus, said his team was "gratified" by the Supreme Court's decision.

Michele Vercoski, a partner at McCuneWright LLP and counsel to Verela, said Lamps Plus is trying to "avoid all legal responsibility" for their mishandling of employee personal information.

"This demonstrates that the powerful are not using arbitration clauses for speedy resolution, but instead as a tool to eliminate all employee rights in the most egregious circumstances," Vercoski said. "Arbitration provisions were not intended to allow companies to not only inflict harm upon employees, but also block meaningful recourse in any forum to such injured employees and effectively avoid any liability."