Courthouse Steps Decision Teleforum: Lamps Plus, Inc. v. Varela

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Litigation Practice Group, was recorded on Tuesday, May 14, 2019, during a live teleforum conference call held exclusively for Federalist Society members.     

 

Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is a Courthouse Steps Decision teleforum on Lamps Plus, Inc. v. Varela. My name is Wesley Hodges, and I am the Associate Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the expert on today's call.

 

      Today we are very fortunate to have with us Professor Henry Allen Blair, who is the Robins Kaplan Distinguished Professor, and John H. Faricy Professor of Empirical Research, and Senior Fellow of the Dispute Resolution Institute at the Mitchell Hamline School of Law. After our speaker gives his remarks today, we will move to an audience Q&A, so please keep in mind what questions you have for the decision, for this case, or for our speaker today. Thank you very much for sharing with us. Professor, the floor is now yours.

 

Prof. Henry Blair:  Thank you. Thank you very much for having me, and I just want to say thank you to everyone at The Federalist Society and the folks who are on the phone. It's a pleasure to be here. I am talking about this case which I think has a lot of implications beyond just its simple holding. But I thought the way to start was to give you all a brief recap of the basic decision itself, and then orient you to the background of the case, and then talk about what I think are maybe the three big takeaways from the case or the three biggest impacts of the case.

 

      So the case is fundamentally about class actions, and in it the plaintiff, Frank Varela, brought a lawsuit against his employer on behalf of himself and 1,300 similarly situated employees who were affected by an allegedly negligent data breach. Lamps Plus responded by trying to compel individual arbitration with Mr. Varela. And the district court wound up compelling arbitration, but it did so on a class-wide basis.

 

      The Ninth Circuit upheld the district court's decision, saying that the underlying agreement, the arbitration agreement itself, was ambiguous about whether class arbitration was allowed or not, and then it applied the sort of standard contract rule that every state in the United States uses in adhesive contracts in general, the contra proferentem rule saying that we should read adhesive contracts against the drafter because the contract was ambiguous. Reading against the drafter yielded the conclusion that class arbitration was permitted.

 

      And that set up, then, the appeal to the Supreme Court. The Supreme Court in its simple holding says that an ambiguous arbitration clause cannot serve as the basis for class-wide arbitrations, so it reversed the decision. And that's the simple takeaway of the case.

 

      So let's think about this for a moment in terms of what came before. And of course, I think the case being about class arbitration is particularly a hot-button topic still. Since AT&T v. Concepcion in 2011, the question of class arbitration has sort of been front and center in disputes over arbitration and consumer rights. So I think for a brief moment, it's worth thinking about how we got to where we are. The notion of class arbitration as opposed to class actions in litigation really has its genesis, I think, in Green Tree Financial v. Bazzle back in 2003. Up till that point, it was less clear, at least less clear, I think, to me, and I think to most commentators, whether or not such a thing as class arbitration even existed. In Green Tree Financial, the United States Supreme Court recognized this idea of class arbitration and said that class arbitration was a form of arbitration.

 

      The narrow question in Bazzle back then was, given that class arbitration was possible or permissible, which decision maker should decide if the parties had agreed to class arbitration, arbitrator or the court? And the narrow decision was that an arbitrator should decide those sorts of questions. Immediately after Bazzle was decided, the American Arbitration Association issued rules that created class arbitration options for parties. They were called supplementary rules for class arbitration. And after a few years, the AAA was administering a number of class arbitrations. I think there's some dispute about how many class arbitrations actually took place, but there were a number of them going on, at least.

 

      But then, the Supreme Court almost immediately in its decision making, although it came several years later, began to step back from this notion of class arbitration. Of course, the most famous decision was AT&T Mobility v. Concepcion, but then we get Italian Colors, DIRECTV, and a number of decisions all sort of cutting back on the availability of class arbitration. The most important precedents, I think, for situating Lamps Plus are AT&T, and then Stolt-Nielsen v. Animalfeeds, which is a 2010 decision. So we've got a 2010 decision, and then 2011 in AT&T Mobility v. Concepcion. In Stolt-Nielsen, which is maybe the most relevant decision, it's the one that gets cited in Lamps Plus, the decision was a 5-3 decision. Justice Sotomayor took no part in the decision. But the question was fairly narrowly focused on whether an agreement that was silent as to class arbitrability could create the basis for class arbitration.

 

      It's important to note that the Supreme Court accepted a stipulation by the parties that the agreement was, in fact, silent about this question. So there was no debate about the silence of the availability of class arbitration. Given that silence, the Supreme Court said, "No, silence isn't enough," that there needs to be an agreement. The Court was maybe a little more coy about whether or not there was an agreement. The important, I think, takeaway of Stolt is that fundamentally, the Court relied on this idea that arbitration is a creature of contract and that parties have to agree to whatever processes they're going to do in arbitration.

 

      Then we get Concepcion in 2011, and of course, Concepcion is about the enforceability of class waivers. Everybody in AT&T v. Concepcion agreed that there was an arbitration agreement, and the question was whether or not the parties could be -- whether or not AT&T could be compelled to adjudicate the arbitration on a class-wide basis. There was a class arbitration waiver, and the Supreme Court said that was acceptable.

 

      And the logic underpinning AT&T, I think, is particularly important. The Court says that there's a grave difference between bilateral arbitration, individual versus company arbitration, and class arbitration, and that that fundamental difference in the structure of arbitration means that parties have to really want to have class arbitration. In its holding, AT&T v. Concepcion holding, the Court wound up saying that what looked on its face to be a generally applicable contract defense, unconscionability, was, in fact, targeting a fundamental attribute of arbitration. Again, the fundamental attribute that was being targeted was bilateral arbitration.

 

      And it said that the unconscionability rule that the California Supreme Court had used said that consumers couldn't give up their right to an aggregate form of dispute resolution in an adhesive contract, at least where there was an allegation of some sort of fraud on the part of the stronger party, a fraud or a systematic abuse on behalf of the stronger party. The Supreme Court said that targeted this fundamental attribute of arbitration and so was unenforceable. It was not a generally applicable contract defense.

 

      I think it's important to note that AT&T v. Concepcion is really the first case that expressly talked about the savings clause of Section 2 of the FAA. The Section 2 FAA savings clause, you might recall, says that save on such grounds as exist in law or equity for the revocation of any contract, arbitration contracts are enforceable. So it creates in the Concepcion Court's words, an equal treatment principle, that we have to treat arbitration agreements as being equal to any other contract. So anything that's discriminating against an arbitration agreement, any rule that is covertly or overtly discriminating against arbitration is not enforceable.

 

      There were precursors to that discussion going back all the way to 1984 in Southland v. Keating, but AT&T is really the first case that specifically honed in on that Section 2 savings clause language. And in doing so, it created what I think of as obstacle preemption. It said if a generally applicable rule interferes with a fundamental attribute or stands as an obstacle to a fundamental attribute of arbitration, then the FAA preempts it. And so that's what happened in Concepcion.

 

      So that brings us then to Lamps Plus. What's the takeaway from Lamps Plus in terms of these previous cases? Well, first, with Stolt-Neilson, the idea again there was that if the agreement was silent. Well, here, the agreement isn't silent. Here, the agreement is ambiguous. So that precedent the Supreme Court brushes aside and says it doesn't have any bearing on the decision in Lamps Plus. So what is the decision, or what is the basis for the decision? Well, the basis of the decision is that this generally applicable contract rule, contra proferentem, reading the agreement against the drafter doesn't apply.

 

      But it's really sort of an interesting holding, I think, because it's not that that contra proferentem rule discriminates against arbitration. In fact, unlike the Discover Bank rule, which was at issue in Concepcion, which arguably did target arbitration, at least at the time, there was no effort by anybody so far as I'm aware to have a class waiver in litigation. Class waivers were just in arbitration agreements, and still predominantly are today. So it did arguably target arbitration specifically.

 

      But here, contra proferentem, that rule applies in any adhesive contract, not only in arbitration agreements. So the Supreme Court has to deal with it a little bit differently. What the Supreme Court does, what Justice Roberts writing for the majority does is he says contra proferentem is not actually about discerning parties' intent. It's not a contract interpretation rule that's looking for the intent of the parties. Instead, it is a public policy rule that reads against the drafter in certain contexts but is not actually figuring out what the parties intended in any way. And because of that, it doesn't have sufficient horsepower, if you will, to create a basis for class-wide arbitration.

 

      Class-wide arbitration, Justice Roberts reiterates from AT&T v. Concepcion is a dramatic departure from the norm of arbitration. He says, echoing what Justice Scalia had said in AT&T, that class-wide arbitration imposes greater risks on a defendant. It increases the possibility of abusive settlement demands or settlement tactics, bringing less meritorious claims in order to extract quick settlements from defendants. It also creates -- Justice Roberts, I think, does a better job than Justice Scalia did of trying to suggest it creates due process problems. Fundamentally, the idea there was that class actions have due process concerns for the absent class members, for the people who are not directly represented, not the named plaintiffs. And class arbitration, as opposed to class action pubic litigation, are not well suited to making sure that the interests of those absent class members are protected, and so on and so forth.

 

      Of course, the standard byline from both of these cases now is that bilateral arbitration is supposed to be swifter, faster, and at least ostensibly, cheaper; that class arbitration undercuts those fundamental virtues or attributes. And so because of that, you have to have, the Supreme Court says, Justice Roberts writing for the majority, you have to have an express intent to opt into class arbitration. Contra proferentem is not evidence of an express intent. Instead, it's this public policy reading against the drafter, and so it's not good enough, either. The takeaway then is that an ambiguous contract cannot create the basis for class arbitration.

 

      I think, then, that there are kind of three important components to this decision going forward. Certainly, the class arbitration issue is a big deal. I wrote in a blog that I write, and if you're interested in arbitration, it might be worth checking out. I took over from a good friend of mine, Liz Kramer, who started the blog and really has built it up to what it is today. But www.arbitrationnation.com is a source -- I hope it remains a source of up to date news about arbitration. But I wrote a post for that about this case, and I said as far as the class arbitration issues go, I don't think anybody was surprised by what happened in Lamps Plus. And in fact, in many ways, I feel a little bit like the Court has beat class arbitration almost to death. I'm not sure that there's a whole lot left, although there are still a couple of issues that remain open, maybe.

 

      But I think the longer-term importance of the case really focuses on this obstacle preemption issue. So AT&T v. Concepcion, as I said, was really the first case to focus on the savings clause language in Section 2 of the FAA. We saw in 2017 Kindred Nursing Centers with Justice Kagan in the majority that also focuses on the savings clause. And now we have Lamps Plus, which is clearly a savings clause provision. I think what's interesting about this is that, despite Lamps Plus being a 5-4 split — and we see the more conservative Justices and the more liberal Justices opposed to one another — there doesn't seem to be the same split about obstacle preemption.

 

      In 2017, Justice Kagan, writing for the majority and writing for everyone, writing for the whole Court, said that anything that is an obstacle to the accomplishment of the FAA's ends is preemptive. She basically adopted, and in fact quotes several times AT&T v. Concepcion. Lamps Plus does as well, but I think Lamps Plus advances the ball even further. So I don't know where the liberal Justices exactly will sit in terms of this bigger question of preemption.

 

      The preemption principle that comes out of Lamps Plus is a little different, again, than AT&T Mobility v. Concepcion because contra proferentem is in no way, shape, or form focused on arbitration. We only kind of get to an arbitration impact if we think of it in terms of class arbitration, and we think class arbitration truly is antithetical to a fundamental principle of arbitration. And bilateral arbitration is what arbitration is all about. I'm not sure that either of those steps are necessary, but I think that the idea of a super preemptive FAA is definitely on the table again. There was a lot of talk about that after AT&T Mobility v. Concepcion. Think this case goes even further.

 

      And then the third thing that this case sort of raises and doesn't raise particularly neatly, but it's worth mentioning, is a question that is very, very practical to arbitration practitioners, I think. And that is the jurisdiction issue. So we have a dissent about jurisdiction, and the main issue in the dissent about jurisdiction is the district court wound up granting the motion to compel arbitration. And in Section 16 of the FAA, if you grant a motion compelling arbitration, the order is not appealable. There is no right to an interlocutory appeal. Under Section 16, if a district court denies a motion to compel arbitration, that decision is immediately appealable. So it creates a difference in when you can appeal a motion to compel.

 

      Here, the district court granted the arbitration motion, but it did so compelling class arbitration. So the jurisdictional fight that we see, with Justice Breyer sort of focusing on this, is that the district court's decision shouldn't have been appealed at all. Now, the reason that the district court's decision -- the Supreme Court, the majority, Justice Roberts says that it's okay is because the district court dismissed the lawsuit itself, dismissed the lawsuit and compelled arbitration. This raises kind of an "in the weeds" argument. Section 4 of the FAA doesn't actually give any right to a district court, at least expressly, to dismiss a case. It says instead that a district court should stay any pending litigation and compel arbitration.

 

      So there's an ongoing dispute about whether or not district courts have the ability to dismiss a case and compel arbitration. Justice Breyer suggests that the Court should have dealt with this issue. The Court had one other opportunity to deal with this issue in an earlier case, and it refused to do so. In Green Tree Financial v. Randolph in 2000, the Supreme Court had an opportunity to address this issue and didn't, sort of punted on the issue and assumed that the district court had the ability to grant the dismissal, and then said dismissal is an immediately appealable final judgement.

 

      But the question remains, and the Supreme Court has punted on it now twice, whether or not that's acceptable or not. And I think that remains an open question that Lamps Plus doesn't wind up addressing. And so with that, I will invite questions that you might have.

 

Wesley Hodges:  Thank you, Professor Blair, for your remarks. It looks like we do have one question from the audience. Professor, here is our first caller of the day.

 

Bob Fitzpatrick:  Hi. Bob Fitzpatrick. Two quick questions. What if the lower court and the Ninth Circuit affirmed a finding that the contract was not ambiguous, that it was unambiguous? And then, secondly, do you think the Court has now resolved this delegation issue of delegating to AAA, and therefore, because AAA has the supplementary class action rules that therefore is somehow an agreement to class arbitration?

 

Prof. Henry Blair:  Thank you for both of those questions. With respect to the first question, I think that if the lower court had said that this was unambiguous and had granted the right to class arbitration that, at least in theory, the Supreme Court wouldn't have had anything to do. So then that just becomes a question of contract interpretation, and I think that's probably a fact-based question. Now, I don't know. And in fact, this is a question Justice Sotomayor believed that the contract was not ambiguous. And she made the argument that, in fact, the lower courts should have decided that this was unambiguous right to class arbitrability. So I think that's an interesting question. I think ultimately, the Supreme Court was somewhat lucky that that's -- at least if it wanted to address this issue that that's not how the Ninth Circuit dealt with the problem.

 

      With respect to your second question, I think the Supreme Court may have decided this issue. Again, Justice Sotomayor and Justice Kagan in her dissent suggest that she agrees that, or at least suggests that she might agree, that the selection of the AAA, because there are class arbitration procedures available under the AAA, meant that the parties had intended to agree to class arbitration. The majority doesn't accept that rationale and says again that's just an inference. That doesn't show us the clear and unequivocal intent. So I think that the majority is going to require more than just the implication under any circumstances. And I think, at least at the moment, that's pretty well settled.

 

      That does conflict with other rules that the Supreme Court has where the Supreme Court is willing to take implicit or discern implicit intent of the parties, so delegation, for instance, about arbitrability. So there's the First Options v. Kaplan case and the Rent-A-Center v. Jackson case where the Supreme Court says that parties can delegate to an arbitrator decisions of arbitrability. There, the Court is very willing to look to implicit delegations and say we can discern parties' intent through their selection of institutional rules or other things. But it seems with class arbitrability, they are not willing to do that. Great questions. Thank you.

 

Wesley Hodges:  Thank you so much, caller. We do appreciate your question. Well, seeing no immediate questions from the audience—and audience, we do have a moment if you do have one—Professor, I turn the mic back to you. Do you have any more thoughts that have come up, or if not, any closing thoughts for us today?

 

Prof. Henry Blair:  Well, I would just say in closing, I think, that the last caller's point about how resolved some of these issues with class arbitrability are, I would say that the Supreme Court seems to not be giving up on class arbitration and seems to remain fairly focused on class arbitration. So something that I have talked about with students a number of times is what's left? What are the remaining questions open for class arbitration? And I don't really think there are very many.

 

      So I think as the previous caller's question suggests, there really aren't a lot of remaining questions about class arbitrability. The Supreme Court seems to have fairly clearly said that class arbitration is an anomaly. It is possible. So we know that from Bazzle it is possible to have class arbitration, but it seems pretty clear that the Court is reluctant to find the intent to have class arbitrability. Whenever we're looking for that intent, that's fundamentally a question that goes to the arbitrator. And courts are going to be very deferential to arbitrator's decision making about whether class arbitrability is available.

 

      So I don't know that there are a lot -- and of course we can have waivers of class arbitrability. So I don't know that there are a lot of remaining questions. That said, the Supreme Court seems quite willing to continue to talk about this subject for whatever reason.

 

Wesley Hodges:  Well, very good. Professor, we do appreciate your remarks. Everyone, on behalf of The Federalist Society, I would like to thank him for the benefit of his very valuable time and expertise today. We welcome all listener feedback by email at [email protected]. Thank you, everyone, for joining today. This call is now adjourned.

 

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