First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. This month we report on two recent cases involving the Federal Arbitration Act (FAA). In the first case, the Supreme Court held that for there to be class arbitration (as opposed to individualized arbitrations), the arbitration agreement must clearly provide for class arbitration—an ambiguous contract will not suffice. See Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275 (S. Ct. April 24, 2019). In the second case, the Second Circuit explained that federal courts can have subject matter jurisdiction to confirm domestic arbitral awards if the Court would have had jurisdiction over the underlying controversy. See Landau v. Eisenberg, No. 17-3963, 2019 WL 1924224 (2d Cir. May 1, 2019).
Lamps Plus, Inc. v. Varela
Lamps Plus, a company that sells light fixtures, was hacked by outside parties. Through the hack, tax information of approximately 1300 employees was stolen and a false federal income tax return was filed in the name of Frank Varela. Varela filed a class action against Lamps First in federal court in California for claims relating to the data breach. Lamps Plus, which had agreements to arbitrate disputes with its employees, moved to compel individual arbitration rather than class-wide arbitration. The district court compelled class-wide arbitration. The Ninth Circuit affirmed, reasoning that the contract was ambiguous about whether it authorized class-wide arbitration, thus under California law it could be construed against the employer. In other words, the Ninth Circuit construed the ambiguity as authorizing class based arbitrations.
The Supreme Court ruled that a clear statement authorizing class based arbitration was required under the FAA and preempted state law doctrines construing an ambiguity in a contract. Lamps Plus, at *3-*4(citation omitted). As the Supreme Court described, "[a]t issue in this case is the interaction between a state contract principle for addressing ambiguity and a 'rule of fundamental importance' under the FAA, namely, that arbitration 'is a matter of consent, not coercion.'" Id. at *5.
Key to the Court's reasoning was the "'fundamental' difference between class arbitration and the individualized form of arbitration envisioned by the FAA." Id. The Court stated that the benefits of private dispute arbitration are lower costs, greater efficiency and speed, and the ability to choose the arbitrators. Id. at *5-*6. Class arbitration, on the other hand, lacks some of those benefits because the process would be "slower, more costly, and more likely to generate procedural morass than final judgment." Id. at *5.
Because of these fundamental differences between individualized and class arbitrations as well as because arbitration is a creature of consent, "courts may not infer consent to participate in class arbitration an affirmative contractual basis for concluding that the party agreed to do so." Id. at *6. So even though the California district court and the Ninth Circuit applied ordinary state law to construe an ambiguity against the employer, the FAA—as federal law—required more. Id. "Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis." Id.
The dissents criticize the majority opinion on several fronts. In a seemingly reversal of traditional positions, the dissents say that state law should control the interpretation of contracts and their ambiguities. Congress never intended for federal law to preempt ordinary rules of contract construction. The dissents would find that the FAA was intended to overcome then-existing judicial hostility toward arbitration and thus should only preempt state law that is directly hostile to arbitration. A neutral principle that is applied to all contracts, such as construing an ambiguity against the draftsman in an adhesion employment contract is not specifically targeted at arbitration and thus should stand. The dissents also comment that recent cases have made it more difficult for employees and consumers to obtain access to justice because individuals arbitrating against more powerful corporate interests face difficult costs and cannot access a collective action either in court or through arbitration.
The bottom line takeaway continues to be that arbitration provisions must be drafted with care and forethought. A clear provision increases the chances it will be enforced as intended.
Landau v. Eisenberg
"The FAA is 'something of an anomaly in the realm of federal legislation: It bestows no federal jurisdiction but rather requires for access to a federal form an independent jurisdictional basis over the parties' dispute.'" Landau, No. 17-3963, slip op., at 3 (citing Vaden v. Discover Bank, 556 U.S. 49, 59 (2009) (emphasis added). In order for a federal court to have jurisdiction over a domestic arbitration to compel it, enforce the award, or modify or vacate the award, there must be a basis for subject matter jurisdiction. For instance, diversity jurisdiction, 28 U.S.C. § 1332, is an acceptable basis for a federal court to rule on arbitration issues.
The Second Circuit recently explained that even though the FAA does not enlarge federal court jurisdiction, "district courts should 'look through' the petition to the underlying substantive controversy to determine whether the claims arose under federal law." Landau, slip op., at 4 (citation omitted). "Specifically, a district court should 'assume the absence of the arbitration agreement and determine wither it would have jurisdiction under title 28 without it.'" Id.
In Landau, two groups from the Bobov Hasidic Jewish community disputed whether "Bovov" was a trademarked term and which of the parties had the right to use it. The parties agreed to arbitrate the dispute before a rabbinical tribunal. The winning party sought to confirm the award in federal court where the respondent raised an objection to subject matter jurisdiction. Both the district court and the Second Circuit agreed that since the substantive controversy involved federal trademark law, the Court had subject matter jurisdiction to confirm the award. Id. at 5. This is yet another issue to consider when seeking to confirm or attack arbitral awards.
This limitation on the FAA's subject matter jurisdiction, however, only applies to domestic arbitrations. Federal courts have subject matter jurisdiction over international arbitrations falling under the New York Convention since Chapter 2 of the FAA expressly grants jurisdiction to enforce a treaty of the United States. See 9 U.S.C. § 203 ("An action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States. The district courts of the United States . . . shall have original jurisdiction over such an action or proceeding, regardless of the amount in controversy.").