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Article Summary

Based on oral arguments in twin cases at the U.S. Supreme Court on Monday, the justices seemed likely to revert to their accustomed interpretation of the Federal Arbitration Act — which is to say, whatever interpretation is most helpful to big business. The pairing of these cases for an "FAA Day" at the high court drew special attention to the contortions that'll be needed to produce such a result.

This expert analysis by TELG managing principal R. Scott Oswald was published by Law360 on October 31, 2018.

Reprinted from:

Faced with Conflicting Paths on FAA, High Court Seems Likely to Take Both

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By R. Scott Oswald

The test of a first-rate intelligence, said F. Scott Fitzgerald, is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.

By this measure, some fierce brainpower was on show Monday at the U.S. Supreme Court, where the justices heard arguments in two separate cases under the Federal Arbitration Act and seemed likely to deliver a business-friendly outcome in both — even though this will require them to treat the FAA’s blind enforcement of arbitration agreements as sacrosanct in one instance, while undermining it in the other.

In the first case, Henry Schein, Inc. v. Archer and White Sales, Inc., the justices indicated they’d force courts to send disputes to arbitration under the FAA even when a defendant’s basis for claiming arbitrability is “wholly groundless.”

Meanwhile in the second case, Lamps Plus, Inc. v. Varela, the justices seemed ready to tell lower courts to forbid class arbitration (leaving only individual arbitration available) under the FAA without an explicit agreement among the parties — even if those courts would otherwise rule that class arbitration should be allowed.

To recap, then: Arbitration must barrel ahead under the FAA even if its premise is entirely unsupported, yet it can’t advance as a class proceeding without support that’s significantly stronger than required by regular contract law.

Strangely, Justice Elena Kagan was alone Monday in hinting at the inconsistencies in such a result, in which the opposed ideas would veer closer to George Orwell’s doublethink than to Fitzgerald’s enlightened state.

Oral arguments don’t always augur outcomes, of course. The court’s conservative wing mostly kept its powder dry in Henry Schein on Monday, making its position ever-so-slightly unpredictable — particularly after its evident willingness earlier this month to side with employees in New Prime Inc. v. Oliveira, another FAA case.

Yet Justice Sonia Sotomayor — generally a liberal in other matters — seemed to align with pro-business interests in both cases, raising the odds of two more wins for corporate defendants under the FAA, a 1925 statute that big business has wielded to its overwhelming advantage in the 21st Century.

FAA Day at the Court

Although they both arose under the FAA, Monday’s cases were an odd pairing. Their docketing on the same day surely was deliberate, and it made their logical divergence all the more obvious.

Henry Schein is a commercial dispute that, by a plain reading of the parties’ agreement, ought to get bounced from arbitration because the plaintiffs requested injunctive relief — which everyone had agreed would not be arbitrated. Assuming that the parties agreed that such “gateway” issues of arbitrability would be handled by an arbitrator, could a court nonetheless refuse to enforce this delegation if it were challenged, since any such delegation would be a waste of time?

Some courts recognize this sort of exception to the FAA for “wholly groundless” cases, and Henry Schein arrived at the Supreme Court after the exception was endorsed by U.S. Court of Appeals for the Fifth Circuit.

Lamps Plus, by contrast, is an employment case — an unusual situation in which a poorly drafted litigation waiver, forced upon employees, backfired and was interpreted by courts as requiring the employer to submit to the possibility of class arbitration with its employees.

Having failed at the U.S. Court of Appeals for the Ninth Circuit, employer Lamps Plus asked the justices to create a new rule to rescue it from a fate it described as “100 times worse” than class litigation.

So: One petitioner insists on a no-exception treatment of the FAA, even if the outcome seems undesirable, and one petitioner seeks special treatment specifically because the outcome would be undesirable — and vice versa for the respondents.

Early in arguments on Lamps Plus, Justice Kagan drew an explicit connection between the cases. Speaking with Andrew Pincus of Mayer Brown LLP, who represented petitioner Lamps Plus, she directly compared his position to that of Daniel Geyser of Geyser P.C., who represented the respondent in Henry Schein and had argued earlier for the “wholly groundless” exception.

“In a strange kind of way … your position is very similar to Mr. Geyser’s,” said Justice Kagan. “You both have … this very broad contractual language, right? … And what I hear you to be saying is essentially that you want to say, Except for class suits.”

Then she went further, noting that both Mr. Pincus and Mr. Geyser also offered the same rationale for their proposed exception: Namely, that “we can’t [reasonably] believe that the parties agreed” to cover such a dubious outcome in the broad language of their contract, as the FAA requires for court enforcement.

Given these parallels, could the justices really rule for the petitioners in both these cases — as urged by pro-business amici such as the U.S. Chamber of Commerce?

Quite possibly, it seems.

The Henry Schein Argument

Although it often swerved into matters that weren’t before the court, Henry Schein seemed like the simpler case on Monday.

Arguing for the petitioners that a clause delegating arbitrability with no exceptions should be enforced as written, Kannon Shanmugam of Williams & Connolly LLP had no trouble sticking to his guns — even when hit with a hypothetical from Justice Stephen Breyer that went beyond his whimsical norm.

“[What if] my claim [to be arbitrated] here is, ‘A Martian made me do it?'” asked Justice Breyer, to laughter. “Are you saying, no matter what — even if [we must] read the word ‘Yes’ in the contract to mean ‘No’ — never, under no circumstances, is there [an] exception, no matter what?”

“Yes,” answered Mr. Shanmugam, insisting that a court must send even such ludicrous claims to the arbitrator. “There is no exception, no matter what, but there are remedies available where a party makes a truly frivolous claim.”

The liberal justices dominated Mr. Shanmugam’s time, and seemed fairly skeptical of his position. Until Mr. Geyser stepped to the lectern for the respondent, that is — and faced a full-on buzzsaw.

Mr. Geyser had barely eked out a sentence before Justice Sotomayor swooped in and all but declared her support for his adversary.

“I don’t see how determining whether something is ‘wholly groundless’ is anything but a merits determination” that belongs to an arbitrator, she said — and when Mr. Geyser cited a case in response, she flatly said he had gotten it wrong.

What’s more, Justice Sotomayor said later in arguments, she had done research and determined that “the number of ‘wholly groundless’ cases is very small.”

“It — it — it is,” conceded Mr. Geyser, opening himself to her conclusion that the harm that he sought to prevent was minimal.

Justice Ruth Bader Ginsburg fretted, meanwhile, about asking courts to administer the meaning of “wholly groundless.”

“Where do you draw the line between merely incorrect, groundless, and wholly groundless?” she asked.

“Good question!” interjected Justice Neil Gorsuch — and Chief Justice John Roberts chimed in to agree, grumbling that such deliberations would require “slicing the baloney a little thin.”

“The whole point of arbitration … is to try and streamline things,” said Justice Gorsuch. “Having litigation all the way up and down the federal system over ‘wholly groundless,’ only to wind up in arbitration, ultimately seems highly inefficient.”

And indeed, no justice showed any appetite for such an outcome. Asking courts to decide a gateway issue in the face of a delegation clause, said Justice Kagan, is a lost cause in light of previous FAA cases.

“The ship has sailed,” she said.

By the time Mr. Geyser sat down, he looked to be facing a 9-0 decision against him.

Moving on to Lamps Plus

As Justice Kagan observed, the issue argued in Lamps Plus was broadly similar — although each case had its own procedural peculiarities.

Lamps Plus, a lighting retailer, required its employees to sign an agreement agreeing to arbitration “in lieu of any and all lawsuits or other civil legal proceedings” related to their employment. After Lamps Plus accidentally sent its employees’ tax records to a hacker, worker Frank Varela sought to file a class-action lawsuit against the company on behalf of his colleagues — and Lamps Plus asked the judge to send the matter to arbitration.

The judge did just that, but interpreted the agreement to require classwide arbitration as the proper substitute for a class-action lawsuit. Unlike many litigation waivers, including the one in the Epic Systems case decided in May, the Lamps Plus contract didn’t prohibit class arbitration, and therefore presumptively allowed it — especially where Lamps Plus had drafted the contract itself. The Ninth Circuit agreed.

Back in 2010, the Supreme Court had held that class arbitration can’t be enforced without some contractual basis — here supplied by a written agreement construed by courts under California contract law. Mr. Pincus argued, however, that this wasn’t enough. A higher standard should be met before allowing class arbitration, he said: A “clear and unmistakable” affirmation by the parties that they agreed to that specific procedure.

Once again, the liberal justices were skeptical — and Justice Kagan, in particular, seemed uninclined to find “a kind of implicit exception” in permissive language that was clear on its face, particularly after the justices had just agreed not to overthink a similar FAA matter.

“A general clause usually speaks to the things inside it,” she said. “If I say ‘All furniture,’ it usually means tables and chairs. If I say ‘All clothing,’ it usually means pants and shirts. We don’t insist that everybody lay out all the subcategories.”

Yet when Michele Vercoski, of McCune Wright Arevalo LLP, took the lectern to argue for Mr. Varelo, it became evident that most of the justices wouldn’t insist on consistency.

Far more than Mr. Pincus, Ms. Vercoski got bogged down by practical and procedural matters — a focus that she invited, perhaps, when she opened her argument by implying that the Supreme Court didn’t even have jurisdiction in the case.

(Ms. Vercoski also set a curiously unornamented tone in her first Supreme Court appearance by neglecting to address any of the justices with honorifics, as is customary, except for a single “Your Honor” to Justice Ginsburg.)

Justices Gorsuch and Samuel Alito burned into her time by pressing the question of whether class arbitration could even be a thing, while Chief Justice Roberts noted that past jurisprudence marked it as “a type of arbitration that is … fundamentally inconsistent with arbitration.”

Justice Breyer offered Ms. Vercoski a wan defense, noting that class arbitration certainly must be a thing if arbitral bodies have rules for it, but even Justice Ginsburg — who just five months ago read a furious dissent about class-action waivers from the bench in Epic Systems — now seemed resigned to the death of most collective action in the workplace.

“We’re not doing very much, are we?” she asked wearily. “If we say that [class arbitration is permitted here], then all the parties who want to arbitrate [only] bilaterally will simply put in their contract that a class action is waived and the party to that adhesion contract can’t do anything.”

Perhaps worse for Ms. Vercoski, Justice Sotomayor offered an unprompted concurrence with Justice Gorsuch’s earlier observation that arbitrators, not courts, should decide the procedural mechanics of arbitration — even though, as Mr. Pincus himself had stipulated, both sides actually agreed in this case to defer to the district court.

Then, in a longer, testier exchange, Justice Sotomayor went on to dismiss class arbitration as an invalid stand-in for class litigation anyhow, undercutting the lower courts’ rationale for ordering it.

“My problem with that,” she said, “is [that] arbitration isn’t law proceedings by definition. … Everything’s different procedurally.”

No Hobgoblins at This Court

With Justice Sotomayor evidently finding common cause with the conservatives — and with the conservatives skeptical that class arbitration should be allowed at all, let alone without an explicit opt-in — Ms. Vercoski’s prospects seemed dim.

Earlier, in a somewhat mean-spirited callback to Justice Kagan’s concession in Henry Schein, Justice Brett Kavanaugh had asked Mr. Pincus to sum up the court’s precedents: “You’re saying … the ship has sailed?”

“I think the ship has certainly sailed,” replied Mr. Pincus, with relish, and it seems probable that he’ll be proved correct.

As a best-case scenario for logical consistency — not to mention life’s “little guys,” for whom arbitration is usually a loser’s game — we might hope for a dismissal of the petition in either of Monday’s cases as improvidentially granted, since both have procedural issues.

For decades now, the FAA has been a favorite topic at the high court, almost always to the advantage of powerful corporations. Even so, it’s remarkable to see arguments in three separate cases about a (nearly) century-old statute in the space of a month.

New Prime, earlier in October, is likely to strike a small blow for employees. But Monday’s twin cases look to set the court back onto its accustomed corporatist axis — despite the contortions that’ll be required to square them with each other.

Perhaps the justices’ true muse in these cases isn’t Fitzgerald or even Orwell, but Ralph Waldo Emerson, of hobgoblin fame:

“Speak what you think now in hard words, and tomorrow speak what tomorrow thinks in hard words again, though it contradict every thing you said today.”

—–

R. Scott Oswald is managing principal of The Employment Law Group, P.C.

(Note: This version has been edited slightly from the version published by Law360.)

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