High court considers a pair of arbitration cases

The U.S. Supreme Court heard back-to-back arguments Monday concerning the Federal Arbitration Act, dealing with whether courts have the power to impose class arbitration in which an agreement does not explicitly prescribe individual resolution, and whether courts can throw out arbitration agreements in which the issue at hand is "wholly groundless."

Arbitration has been a hot issue for the Supreme Court under Chief Justice John Roberts. Monday's two cases, Lamps Plus Inc. v. Frank Varela and Henry Schein, Inc. v. Archer and White Sales Inc., mark the second and third encounters the Roberts court has had with the act this month. Earlier this year, the court also issued a landmark ruling upholding class action waivers under the law.

In Lamps Plus, a worker who sued his employer for disclosing personal information to a scammer filed a class action, and was compelled to arbitration. The 9th U.S. Circuit Court of Appeals ruled that his agreement was ambiguous, allowing him to seek aggregate relief in front of an arbitrator.

In arguments, attorneys for both parties argued that a lack of specific language concerning class arbitration should work in their favor.

"As a threshold matter, we think it's clear that federal law imposes a minimum standard that must be satisfied in order to permit class arbitration. The court made that clear in Stolt-Nielsen, where it said a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so," argued Andrew J. Pincus of Mayer Brown on behalf of Lamps Plus.

Conversely, attorneys for the plaintiff, Frank Varela, contended that without language forbidding class arbitration, the deal allows for it because its language paints arbitration as a parallel process to the courts.

Justice Stephen Breyer asked what the best language in the arbitration agreement was to support that position.

"In our contract, the very best one is 'arbitration shall be in lieu of any and all lawsuits or civil, legal proceedings relating to my employment.' That arbitration will be in lieu of a set of actions that includes class actions and allows for class actions," replied Michele M. Vercoski of McCune Wright Arevalo LLP.

Specifically, she said that "in lieu of" means whatever relief her client sought in court he is entitled to pursue in arbitration.

"That does not limit his right to bringing the proceedings on an aggregate basis. That doesn't change the nature of the claims or the parties' rights. The only thing it changes is the way that the proceedings are processed in arbitration," Vercoski said.

In Henry Schein, lower courts relied on a non-statutory rule allowing them to decide whether claims brought by a plaintiff are arbitrable at all. If the court decides that no reasonable person would conclude claims are covered by the arbitration agreement, the court gets to decide arbitrability even when a "clear and unmistakable" delegation clause is present.

The issue of arbitrability presents a difficult legal question lately. Traditionally, in the presence of an arbitration agreement with a delegation clause, the scope of the claims to be arbitrated and the merits of a claim is left to the arbitrator.

However, some courts have ruled that whether a case should be decided in arbitration at all is best answered by district judges, who can override the wishes of the parties in the deal that the dispute be decided in arbitration. The Supreme Court has held that the intent of the parties is a paramount consideration.

"Where the parties have so agreed, the arbitration act requires a court to honor that agreement. A court does not have the power to decide the issue of arbitrability for itself and to short-circuit the arbitrator's ability to do so," argued Kannon K. Shanmugam of Williams & Connolly LLP for Henry Schein Inc.

"The court, before it can compel arbitration, it has to conclude there's a failure to comply. And if they look and there is no conceivable universe where this case belongs in arbitration, there's not a failure to arbitrate by filing in court," contended Daniel L. Geyser of Geyser PC, representing the respondent, Archer and White Sales Inc.

Based on the justices' questioning and the arguments, some California attorney observers said they expect reversals in both cases, in keeping with the current court's expansive view of the Federal Arbitration Act.

Glenn Danas of Robins Kaplan LLP said that though ambiguous contracts like that in Lamps Plus are typically read against the drafter, the case cited by the petitioner, Stolt-Nielsen, leads to a reversal if followed to its logical conclusion. "I suspect that the court here will reverse, and find that, essentially, any arb agreement that doesn't affirmatively provide that class arbitration is authorized, will be deemed to preclude it," he said.

"This essentially would be casting aside the maxim of contract interpretation that ambiguities are interpreted against the drafting party, but that seems unlikely to stand in the way of carrying the Stolt-Nielsen holding to its ultimate conclusion, given the court's overall FAA jurisprudence."

Ryan Wu of Capstone Law APC said that under the court's current conservative majority, the FAA is read as a near "super statute" universally supporting arbitration.

"After the recent New Prime oral argument, where the justices seem surprisingly skeptical of the business lobby's position, some commentators held out hope that the court might moderate its FAA jurisprudence," he said.

"But the oral argument once again showed the justices splitting along the usual ideological lines, and you'd have to believe that we're in for another round of 5-4 decisions in favor of businesses."

Danas said that while an affirmation is unlikely in Henry Schein, a similar and more interesting question on which circuits are split may find its way to the Supreme Court soon.

"The more interesting and closer question, which the court may decide at some point in the near future, is whether an arbitration agreement that says nothing about who decides whether an arbitration agreement will permit class arbitration is to be decided by the district court or the arbitrator," he said.

The third case concerning arbitration, Oliveira v. New Prime Inc., was argued earlier this month and also touched on the issue of arbitrability. The other key question of that case is whether independent contractors in the transportation industry are covered by a broad exemption for "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce."

In that case, a district court ruled against a motion to compel arbitration by first finding it had the authority to decide arbitrability, then deciding the exemption covered the plaintiff.