Statutory originalism & the Federal Arbitration Act

OT18

Last term, in Epic Systems Corp. v. Lewis, 2018 DJDAR 4705 (May 22, 2018), the U.S. Supreme Court held that class arbitration cannot be ordered when the agreement is "silent" about class arbitration. In Lamps Plus, Inc. v. Varela, 2019 DJDAR 3349 (Apr. 24, 2019), turned to the question of whether it may be ordered if the agreement is not "silent," but rather "ambiguous"--and general state contract law would require the ambiguity to interpreted against the defendant and in favor of class arbitration. The answer, unsurprisingly, is "no."

Lamps Plus presents a familiar fact pattern. The employer had an arbitration program, and the arbitration agreement did not provide for class arbitration. The employer moved for individual arbitration. But the trial court ordered class arbitration, and the 9th U.S. Circuit Court of Appeals affirmed.

In the view of the lower courts, Epic Systems didn't resolve the case. They both held that the agreement was ambiguous on class arbitration, largely because it applied to "any and all disputes, claims or controversies ... relating to the employment relationship," and provides that "[a]rbitration ... shall be in lieu of any and all lawsuits."

Because the arbitration agreement was ambiguous, the 9th Circuit turned to a familiar principle of contract law: contra proferentum -- interpret ambiguities against the drafter. So construed, the Lamps Plus agreement was silent no more. It provides for class arbitration, which is just what the district court ordered.

The Supreme Court deferred to the 9th Circuit and "accept[ed] that the agreement should be regarded as ambiguous." But as to the 9th Circuit's recourse to contra proferentem to fill the gap -- "not so fast," says the 5-4 majority. "Consent is essential under the FAA [Federal Arbitration Act] because arbitrators wield only the authority they are given." In recent cases, the Supreme Court has referred to consent as "foundational," "fundamental," "strict," and "the first principle that underscores all our arbitration decisions." Further, "class arbitration" is a very peculiar animal. It is virtually an oxymoron. It "undermines the most important benefits" of "traditional individualized arbitration," "introduce[s] new risks and costs for both sides," and "raises due process concerns." Thus, the FAA "requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a class basis." It requires an "affirmative 'contractual basis for concluding that the party agreed'" to class arbitration.

Contra proferentem is not a "contractual basis" for so concluding. It is not a "contract rule[] that help[s] to interpret the meaning of a term, and thereby uncover the intent of the parties." It is "triggered only after a court determines that it cannot discern the intent of the parties." It "provides a default rule based on public policy considerations."

The fact that it is a contract rule of general application does not save it in this context. While it may not discriminate against arbitration, it still represents a state law imposing a form of arbitration in lieu of party consent -- and as such, is a "more subtle method[]" of targeting arbitration in a fashion that "interferes with fundamental attributes of arbitration." Accordingly, it is preempted.

At the heart of the Lamps Plus ruling is the notion that "traditional individual arbitration" enjoys a special status in the FAA, and that departures from that form of arbitration are not be permitted unless all parties unambiguously agree. This idea is implicit in Justice Elena Kagan's dissenting observation, "how treacherously the Court has strayed from the principle that 'arbitration is a matter of consent, not coercion.'" It is more explicit in the other dissents. Justice Stephen Breyer wrote that, in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), "[w]e did not hold that class arbitration is not arbitration at all." Justice Sonia Sotomayor wrote that "[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' ... FAA."

What is going on just under the surface of Lamps Plus is a continuation of the debate over "statutory originalism" that I previously described in connection with the Supreme Court's earlier arbitration rulings of the term -- Henry Schein, Inc. v. Archer & White Sales, Inc., 2019 DJDAR 147 (Jan. 8, 2019), and New Prime, Inc. v. Olveira, 2019 DJDAR 397 (Jan. 15, 2019). See "Statutory originalism has firmly arrived," Daily Journal (Jan. 30, 2019).

"Statutory originalism" is a commitment to interpret statutes (1) strictly, according to the words chosen by Congress, and (2) in light of the common meaning of those words at the time of enactment. It rejects any effort to divine the underlying purpose and interpret the statue so as to effectuate that purpose -- whether the purpose is in the mind of the representatives and senators who drafted and approved the statute, or based on the evolving contemporary meanings or functions of the statute.

In New Prime a unanimous Supreme Court held that since the term "employment" commonly meant simply "work" in 1925 (the year in which the FAA was enacted), the phrase "contracts of employment" in Section 2 of the FAA was not limited to contracts that defined an employment relationship as understood today. Accordingly, agreements for independent contractors would be a "contracts of employment" within the meaning of Section 2.

Lamps Plus's debate over the special status of "traditional individual arbitration" in the FAA turns on another word in Section 2: "arbitration." In 1925, "arbitration" meant "traditional individual arbitration." As the Supreme Court noted in AT&T Mobility LLP v. Concepcion, 563 U.S. 333 (2011), "class arbitration was not even envisioned by Congress when it passed the FAA." It is, in the words of the California Supreme Court in Discover Bank v. Superior Ct., 36 Cal. 4th 148 (2005), a "relatively recent development." They weren't even common in litigation at that time. Rule 23 -- which laid the foundation for the modern class action -- wasn't added to the Federal Rules of Civil Procedure until 1937.

Section 2 of the FAA makes a "contract ... to settle by arbitration a controversy ... valid, irrevocable, and enforceable." If, consistent with "statutory originalism," this means that a 'contract to settle by traditional individual arbitration' is "valid, irrevocable, and enforceable," any state law rule that would turn an agreement for "traditional individual arbitration" into something else stands as a clear obstacle to Section 2.

The division in the Supreme Court in Lamps Plus is not merely over the merits or demerits of arbitration. It is fundamental debate about the role of the courts and the nature of judicial decision making.