Contract Interpretation

Supreme Court’s Lamp Plus Brings Ambiguity in Classwide Arbitration to Light

May 9, 2019 by Carlton Fields

In 2016, a hacker tricked an employee of petitioner Lamps Plus Inc. into disclosing tax information of about 1,300 company employees. After a fraudulent federal income tax return was filed in the name of respondent Frank Varela, a Lamps Plus employee, Varela filed a putative class action against Lamps Plus in federal district court on behalf of employees whose information had been compromised. Relying on the arbitration agreement in Varela’s employment contract, Lamps Plus sought to compel arbitration — on an individual rather than a classwide basis — and to dismiss the suit. The district court rejected the individual arbitration request, but authorized class arbitration and dismissed Varela’s claims. Lamps Plus appealed, arguing that the district court erred by compelling class arbitration, but the Ninth Circuit affirmed.

The U.S. Supreme Court granted cert on the issue of whether the Federal Arbitration Act (FAA) bars an order requiring class arbitration when an agreement is not silent, but rather “ambiguous,” about the availability of such arbitration. First, the Court held that it had jurisdiction because an order that both compels arbitration and dismisses the underlying claims qualifies as “a final decision with respect to an arbitration” within the meaning of 9 U.S.C. §16(a)(3). Next, the Court held that under the FAA, an ambiguous agreement cannot provide a contractual basis for concluding that the parties agreed to submit to arbitration. The Court explained that pursuant to the FAA, arbitration is a matter of consent. Previously, the Supreme Court held that “courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so,” and that silence is not enough. The Court explained that this reasoning controlled here and, like silence, ambiguity does not provide a sufficient basis to conclude that parties consented to arbitration.

Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275 (2019)

California Federal Court Enforces Arbitration Provision in Uber Agreements

April 23, 2019 by Nora Valenza-Frost

A class action alleging unsolicited text messages received from Uber violated the Telephone Consumer Protection Act (TCPA) and California competition law was sent to arbitration by a California federal court based upon an arbitration clause contained in the Technology Services Agreement (TSA) between certain of the class plaintiffs and Uber subsidiaries. Moreover, the court noted that the delegation clause in the agreement “clearly and unmistakably delegate the gateway question of arbitrability to the arbitrator, no matter what Plaintiffs’ purported subjective understanding of the terms of the agreement may have been.” The plaintiffs who had entered into the TSA were thus dismissed, and the action with the remaining plaintiffs will continue.

Fridman v. Uber Techs., Inc., 4:18-cv-02815 (N.D. Cal. Mar. 27, 2019)

Fourth Circuit Holds That Arbitrator Exceeded Powers

April 19, 2019 by Carlton Fields

Williamson Farm challenged the district court’s decision to vacate an arbitration award that Williamson won against Diversified Crop Insurance, a private insurance company that sold a federal crop insurance policy to Williamson. Federal crop insurance policies are sold pursuant to the Federal Crop Insurance Act (FCIA). The FCIA established the FCIC, a government corporation that administers the federal crop insurance program. The FCIC relies on approved insurance providers, such as Diversified Crop, to issue federal crop insurance policies to farmers. The FCIC reinsures the approved insurance providers’ losses and reimburses their administrative and operating costs. The approved insurance providers must comply with FCIA and other regulations.

In this instance, Williamson made two separate claims under its policy for crop loss and prevention of planting, both of which were denied by Diversified Crop. Williamson then sought arbitration pursuant to the policy. After the arbitrator issued its award, Williamson filed a motion to confirm the award in the U.S. District Court for the Eastern District of North Carolina. Diversified Crop simultaneously filed a motion to vacate the award. The district court granted Diversified Crop’s motion to vacate the award and denied Williamson’s motion to confirm the award. The Fourth Circuit affirmed the district court’s decision, holding that the arbitrator exceeded her powers by: (1) impermissibly interpreting the policy rather than obtaining an interpretation from the FCIC; and (2) awarding extracontractual damages. The court explained that both the policy and FCIC regulations provide that only the FCIC, and not the arbitrator, may interpret the policy, and therefore the arbitrator exceeded her powers by interpreting the policy herself without obtaining an FCIC interpretation for the disputed policy provisions. Further, the court explained that the FCIC has conclusively stated in multiple final agency determinations that extracontractual damages cannot be awarded in arbitration and can only be sought through judicial review and therefore, by awarding extra-contractual damages, she exceeded her powers.

Williamson Farm v. Diversified Crop Ins. Servs., No. 18-1463 (4th Cir. Feb. 27, 2019)

Connecticut Superior Court Holds That Consolidation Is a Procedural Question to Be Considered by an Arbitrator

April 18, 2019 by Carlton Fields

The Hartford and Employers Insurance Co. of Wausau entered into a Non-Obligatory Casualty Excess of Loss Reinsurance Agreement (the “Agreement”). The Agreement contained an arbitration provision that provides that the arbitration panel should consist of three arbitrators, one chosen by each party and then the third chosen by the two chosen.

Hartford demanded arbitration under the Agreement and 18 other contracts arising out of eight different reinsurance programs between Wausau and four subsidiaries of Hartford. Wausau responded to the arbitration demand arguing that each contract required separate arbitrators and to avoid this Wausau proposed consolidating the arbitrations into three separate proceedings against Hartford and its subsidiaries. Hartford would not proceed with Wausau’s proposal, arguing that any consolidation was for the arbitrators to determine, not the parties.

Wausau filed a summons with the Connecticut Superior Court demanding that Hartford appoint an arbitrator under the Agreement, and Hartford responded by filing a cross-motion to compel arbitration in this action. The court explained that if the parties have an agreement to arbitrate and one of the parties refuses to submit to arbitration, the party seeking arbitration may petition a court for an order compelling arbitration. Whether a dispute is subject to arbitration is a question for the court; however, “procedural questions which grow out of the [parties’] dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide.” Further, whether an arbitration proceeding should be consolidated with one or more other arbitration proceedings is a question for the arbitrator.

In this case, the parties did not dispute that they entered into a valid arbitration agreement and that their dispute fell within the scope of the agreement. Therefore, the court held that the procedural question of consolidation is for the arbitrators and not for the court to decide.

Employers Ins. Co. of Wausau v. The Hartford, No. HHD CV 18 6099158 S (Conn. Super. Ct. Feb. 13, 2019)

California Appellate Court Holds U.S. Supreme Court’s Epic Systems Ruling Does Not Authorize Waiver of Class Relief or Arbitration of PAGA Claims Absent Consent From California

April 10, 2019 by Michael Wolgin

Former employees sued their former employer, alleging wage and hour violations and seeking civil penalties under the California Private Attorneys General Act of 2004 (PAGA). In response, the employer petitioned for arbitration under the parties’ arbitration agreement. The agreement provided that arbitration shall be the exclusive forum for any dispute and prohibited employees from bringing a “representative action.”

The trial court granted the arbitration petition on all causes of action except for the PAGA claim, relying on the California Supreme Court decision in Iskanian v. CLS Transportation Los Angeles LLC, which held that agreements that waived the right to bring PAGA representative actions in any forum were unenforceable. The trial court stayed the PAGA claim pending the conclusion of the arbitration.

On appeal, the employer argued that the court erred because Iskanian is inconsistent with a recent Epic Systems decision by the U.S. Supreme Court. The appellate court rejected this argument, finding that Epic Systems did not address the scenario in Iskanian, which involved a claim under PAGA brought on behalf of the government, and the enforceability of an agreement barring a PAGA representative action in any forum. The court concluded that the trial court properly ruled that the waiver of representative claims in any forum is unenforceable. The appellate court agreed with other California court rulings that held that Iskanian’s view of a PAGA representative action — that a PAGA litigant is an agent of the state — means that this claim cannot be compelled to arbitration based on an employee’s arbitration agreement absent some evidence that the state consented to the waiver of the right to bring the PAGA claim in court. There was no such evidence in this case.

The employer also argued that the parties’ arbitration agreement should be interpreted to mean that if the representative-action waiver is unenforceable, the PAGA claim for statutory penalties remains subject to arbitration. The court rejected this argument on the basis that several California courts of appeal have held that a PAGA arbitration requirement is unenforceable based on Iskanian’s view that the state is the real party in interest in a PAGA claim for penalties.

The court also distinguished federal courts that have reached a different conclusion regarding the arbitrability of a PAGA representative claim, finding that these decisions were unpersuasive because the courts did not fully consider the implications of the qui tam nature of a PAGA claim on the enforceability of an employer-employee arbitration agreement.

Correia v. NB Baker Elec., Inc., No. D073798 (Cal. Ct. App. Feb. 25, 2019).