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A Proposal: Adopt a “Clear and Unmistakable” Standard to Determine If Parties Have Agreed to “Class Arbitration”

The U.S. Supreme Court has ruled that “class arbitration” may be permitted if an arbitration agreement authorizes it, Stolt-Nielsen v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010), and that state contract law governs the interpretation of the parties’ arbitration agreement. A proposal: that an agreement to permit class arbitration must be “clear and unmistakable” to be enforceable.

This is analogous to the “clear and unmistakable” standard for determination of whether parties have agreed to delegate gateway arbitrability issues to an arbitrator; i.e., whether the presumption that courts are to adjudicate issues of arbitrability, cf. FAA § 4 (9 U.S.C. § 4), is rebutted.

Since SCOTUS has indicated — most recently in Epic Systems Corp. v. Lewis, 2018 U.S. LEXIS 3086 (May 21, 2018) — that arbitration is fundamentally a less formal method of bilateral dispute resolution, it seems reasonable to presume that an arbitration agreement intends a bilateral proceeding unless the parties clearly and unmistakably manifest an intention to permit “class arbitration.” Consider that

“[t]he 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 Ohmke, Commercial Arbitration §16(1); accord, 2 Domke, Commercial Arbitration §32:32

More recently, in Epic Systems, the Supreme Court further evidenced its implicit presumption that an agreement to arbitrate governed by the FAA means an agreement to “traditional” bilateral arbitration. For example,

Concepcion’s essential insight remains: courts may not allow a contract defense to reshape traditional individualized arbitration by mandating class-wide arbitration procedures without the parties’ consent.” 2018 U.S. LEXIS 3086 at *17-18, citing Concepcion, 563 U.S. at 344-351.

Furthermore, the Court remarked that “even a statute’s express provision for collective legal actions does not necessarily mean that it precludes ‘individual attempts at conciliation’ through arbitration.” 2018 U.S. LEXIS 3086 at *29.

The question seems to be how clear must an arbitration agreement be in order for a court (or arbitrator) to determine that the presumption of bilateral arbitration is rebutted because the parties have agreed to authorize class arbitration? We propose “clear and unmistakable” as the standard for that purpose.

The Supreme Court will have its opportunity to adopt this standard next term when it considers the case of Lamps Plus, Inc. v. Varela (No. 17-988, U.S. Sup.), having granted certiorari with respect to a Ninth Circuit unpublished decision issued in August 2017. In Lamps Plus, Frank Varela brought a class action suit against his employer (Lamps Plus), alleging negligence, breach of implied contract, violations of California’s Consumer Records Act and its Unfair Competition Law, invasion of privacy, and negligent violation of the Fair Credit Reporting Act. The employer moved to compel arbitration with Varela individually based on an arbitration provision in his employment agreement. The District Court compelled arbitration, but it compelled class arbitration.

The arbitration agreement said nothing whatever about class arbitration, which seemed problematic, considering that the Supreme Court had held in Stolt-Nielsen 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 Ninth Circuit Court of Appeals opined, however, in affirming the District Court’s ruling, that the “silence” described in Stolt-Nielsen was “more than the mere absence of language explicitly referring to class arbitration; instead it means absence of agreement.” Then, applying state contract law interpretation principles (including the contra proferentem rule), it eventually determined that the “ambiguous” arbitration agreement in question, although silent regarding class arbitration, nonetheless authorized it. But was that the parties’ mutual intention?

Lamps Plus argued in its petition for certiorari that silence regarding class arbitration in the arbitration clause in question could not be interpreted to constitute a consent to class arbitration proceedings “[b]ecause ‘class arbitration’ is ‘not arbitration as envisioned by the [FAA]’ and ‘lacks its benefits,’ AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 350-351 (2011).” And therefore “arbitrators or courts may not infer ‘[a]n implicit agreement to authorize class-action arbitration … from the fact of the parties’ agreement to arbitrate.’ Stolt-Nielsen, 559 U.S. 685, 687.” The arguable point is that inferred “consent” seems inadequate for these purposes. Certainly an “ambiguous” arbitration agreement could not clearly and unmistakably manifest the parties’ mutual consent to “class arbitration.”

Regarding the delegation issue, the courts have determined that one of the ways by which parties may “clearly and unmistakably” manifest their agreement is implicit — by incorporation of institutional arbitration rules that expressly authorize arbitrators to adjudicate their own jurisdiction (i.e., to adjudicate issues of arbitrability). See, e.g., T.Co Metals v. Dempsey Pipe & Supply, 592 F.3d 329 (2d Cir. 2010); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366 (Fed. Cir. 2006). However, there are no current institutional arbitration rules that, without more, authorize an arbitrator to conduct class arbitration proceedings. Hence, incorporation by reference of any institutional arbitration rules will not of its own constitute an agreed authorization of class arbitration.

Indeed, we would distinguish (a) the proposed standard regarding “class arbitration” from (b) the current standard regarding delegation. It seems reasonable to require that the manifestation in an arbitration agreement of the parties’ mutual intention to permit class arbitration should be express in order to be “clear and unmistakable.”

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Gilbert A. Samberg is a Mintz litigator with experience in complex international and domestic commercial disputes. He focuses on international arbitration and other cross-border alternative dispute resolution proceedings, drawing on his science background to assist biotech and chemical companies.