United States: Class Arbitration: Contractual "Crickets" Are Sufficient For Ninth Circuit To Determine That Class Arbitration Is Permitted, Distinguishing Stolt-Nielsen

When is "silence" in an arbitration clause concerning class arbitration not "Stolt-Nielsen silence"? And what is the difference between a "claim" and a "procedure"? The Ninth Circuit seemingly took hair-splitting to a new level in conceiving the former question, and apparently suffered uncertainty regarding the latter, when it issued its memorandum decision in Varela v. Lamps Plus, Inc., No. 16-56085 (Aug. 3, 2017).

In Lamps Plus, the Court of Appeals affirmed a District Court order compelling arbitration and allowing class-wide arbitration to proceed. Varela, a Lamps Plus employee, had commenced a class-action suit against his employer, alleging negligence, breach of contract, invasion of privacy, and other claims, based upon the release by Lamps Plus of personal identifying information of its employees in a phishing scam. Each of its employees signed an agreement that included an arbitration clause, and so the employer moved to compel bilateral arbitration with Varela concerning his claims. The plaintiff(s) eventually argued for class arbitration, but the arbitration clause said nothing about such a procedure.

The Supreme Court held in Stolt-Nielsen, 559 U.S. 662 (2010), that under the FAA, a party may not be compelled to submit to class arbitration unless "there is a contractual basis for concluding that the party agreed to do so."

"The U.S. Supreme Court ... held that the differences between bilateral and class-action arbitration are too great ... to presume that the parties' mere silence on the issue of class-action arbitration constitutes a consent to class-action arbitration...." 1 Oehmke, Commercial Arbitration § 16:1; accord, 2 Domke, Commercial Arbitration § 32:32.

(Put another way, even if the terms of an arbitration agreement could support a finding that the parties did not preclude class arbitration, that is not enough to deem the parties to have agreed to permit class arbitration.)

In the case at bar, the parties had "agree[d] that the [arbitration] Agreement include[d] no express mention of class proceedings." (Cue the sound of crickets on a still night.) But the Ninth Circuit decided that the absence of an express reference to class arbitration was "not the 'silence' contemplated in Stolt-Nielsen." In the Court of Appeals' view, if there is a basis under state contract law principles – in this case, California's – for a court to interpret an agreement to permit class arbitration, that is sufficient. (Implicit in this is the presumption that that interpretation is to be made by a court rather than by an arbitrator.) And the Court set about doing so.

The District Court had found that the arbitration agreement was (i) a contract of adhesion and (ii) ambiguous as to the permissibility of class arbitration (which it did not mention at all). It construed that ambiguity against the drafter (Lamps Plus) – the contra proferentem rule applies in California "with peculiar force in the case of a contract of adhesion" – and thereupon compelled arbitration of "all claims," and allowed a class arbitration to proceed.

The Court of Appeals' reasoning in concluding that the parties had agreed to permit class arbitration was as follows:

(a) "class actions are ... one of the means to resolve employment disputes in Court";

(b) the arbitration clause provides that "arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to [the] employment"; and

(c) "that arbitration will be 'in lieu of' a set of actions that includes class actions can be reasonably read to allow for class arbitration."

Of course, "in lieu of" means "instead of" or "in place of," Webster's Encyclopedia Unabridged Dictionary of the English Language (deluxe ed. 1996) at 1110, and nothing more. And, as the Supreme Court has recognized repeatedly, "arbitration" is by nature a creation of a private bilateral agreement, and it is very different from "class arbitration". So one might well consider this court's rationale to be a stretch.

The Court also relied on another part of the clause, entitled "Claims Covered by the Arbitration Provision." The Court noted that the Agreement specified that "arbitrable claims are those that 'would have been available to the parties by law.'" The Court then apparently confused "claims" (substantive) with "procedures for hearing claims" (such as a class action). Indeed, the Court recognized that "a class action is 'a procedural device for resolving claims of absent parties on a representative basis' rather than a separate or distinct 'claim.'" Nevertheless, it reasoned that (a) because Varela waived his right to file a lawsuit or other civil action "or proceeding" related to his employment, and (b) because the parties did not exclude from the "claims covered" "any class or collective proceedings," therefore (c) they must have agreed to permit class arbitration. Again, a stretch.

Finally, the Court noted that the arbitration clause authorizes the arbitrator to "award any remedy allowed by applicable law," and thereupon opined that the parties agreed to permit class arbitration because "class-wide relief" would be such a "remedy". But even ignoring the question of whether a class award is a "remedy" for those purposes, the Court seems to have sped past the phrase "allowed by applicable law."

The Ninth Circuit concluded that "the District Court properly found the necessary 'contractual' basis for agreement to class arbitration," not inconsistent with Stolt-Nielsen. Notably, while a majority of the three-judge appellate bench affirmed the decision below, one judge dissented, concisely maintaining that "[w]e should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen...."

We sometimes ponder why lawyers are prone to using belt and suspenders when drafting contracts; why, even after the U.S. Supreme Court instructs that silence in an arbitration clause concerning class arbitration is not a basis to find that the parties agreed to permit it, we might recommend adding a "waiver" of class arbitration to the silence nonetheless. This sort of decision helps to explain it.

Yet litigants in the Ninth Circuit need not despair. The "Not For Publication" designation of the Court's opinion was arguably its most judicious part. Hopefully, when the next Ninth Circuit panel gets to address a similar question, as is likely in time, it will have a bit of a re-think on the subject.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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