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Sunday, April 28, 2019

Lamps Plus Is Bad for Arbitration: A Commentary by Pamela Bookman

Last week, the Supreme Court decided Lamps Plus v. Varela, reversing the Ninth Circuit’s holding that an ambiguous arbitration agreement should be interpreted to authorize class arbitration. The Ninth Circuit had followed the classic rule of contract interpretation that interprets contract ambiguities against the drafter—here, the employer— who opposed class treatment. The opinion has received no shortage of criticism, including by the three well-articulated dissents and responses on this blog by Ethan Leib and Tal Kastner.  But most critics have assumed that the decision is—consistent with what we’ve come to expect from the Supreme Court—“pro-arbitration.”

It’s not. Lamps Plusis bad for arbitration.

The majority contends that its decision is consistent with previous cases that required interpreting “ambiguities about the scope of an arbitration agreement” “in favor of arbitration.” But there was no question here about whether the court should require arbitration. The question was about what kind of arbitration. (Indeed, as Justice Ginsburg’s dissent highlights, even that wasn’t the question. Without the opportunity to bring his claims as part of a class, there will likely be no dispute, and no possible vindication of Mr. Varela’s rights, at all.) 

Lamps Plus reinforces a trend that I explore in The Arbitration-Litigation Paradox, forthcoming next month in the Vanderbilt Law Review. A growing line of cases views the Federal Arbitration Act (FAA) as protecting only a certain vision of arbitration: “traditional individualized arbitration.” Class arbitration, the Court explains, would “undermine[] the most important benefits of that familiar form of arbitration.” Lamps Plus repeats the Court’s pronouncement last term in Epic Systems v. Lewisthat “with class arbitration[,] ‘the virtues Congress originally saw in arbitration, its speed and simplicity and inexpensiveness, would be shorn away and arbitration would wind up looking like the litigation it was meant to displace.’” (emphasis mine).

As Justice Kagan notes in dissent, the majority’s opinion may specifically target class arbitration, which the majority sees as a “fundamental change” from traditional arbitration. But the individualized nature of “traditional arbitration” is not the only characteristic the Court says is fundamental to the kind of arbitration the FAA protects. The enemy, it seems, is arbitration that looks “like the litigation [arbitration] was meant to displace.” AT&T Mobility v. Concepcion focused on arbitration as “informal, streamlined proceedings.” In Hall Street v. Mattel, the Court limited judicial review of arbitration awards in part “to maintain arbitration’s essential virtue of resolving disputes straightaway.”

Arbitration, however, is not the monolithic quick and dirty dispute resolution mechanism the Court seems to envision. It is many and varied. Interestingly, international commercial arbitration—the original context in which the Court began enforcing arbitration clauses and arguably most legitimate context for enforcing arbitration—often has attributes that contrast sharply with those the Court deems “fundamental.” A hallmark of modern international commercial arbitration is the arbitrator’s ability to select procedures appropriate for the dispute she is presented with, within the limits of the governing agreement. So sometimes, arbitration is procedurally complex, expensive, and slow. It can include multiparty proceedings, appellate processes, and controversies over evidence, discovery, and internal procedures. The essence of arbitration is not any particular procedural characteristic. Because it is “a creature of contract,” its procedural specifics are left open to the parties and the arbitrators to determine.

But according to Lamps Plus,the FAA requires courts to interpret arbitration agreements pursuant to federal default contract principles—not state rules of contract interpretation—to ensure that arbitration follows the “traditional” model. This understanding of the FAA raises real problems. It undermines important arbitration values—including the fundamental value the Court refers to so often in Lamps Plus: that arbitration is a creature of contract. As such, parties usually assume that generally applicable contract interpretation rules will apply to their contract generally and their arbitration agreement in particular. They are also choosing a form of dispute resolution where they’re entrusting many procedural decisions to arbitrators, not to default rules crafted by Supreme Court justices. Indeed, sophisticated business parties specifically delegate resolution of their disputes—and decisions about how they’re processed—to trusted arbitrators instead of courts. And they trust that courts will respect and defer to arbitrators’ decisions about procedure and the merits, even if the arbitration looks like litigation in certain ways.

The arbitration that the Supreme Court prefers is not real arbitration but a caricature that turns the FAA into an end-run around procedures that federal and state policymakers created to facilitate—and encourage—private litigation. The Court’s embrace of the caricature leaves no doubt that it views arbitration and litigation as opposites and antagonists. To the Justices in the majority, the FAA is a mechanism to protect arbitration from becoming too much like litigation. But that vision is at odds with what arbitration is. And when contract principles conflict with the Court’s hostility toward litigation, the hostility to litigation wins. As Justice Kagan ably points out, that’s what happened in Lamps Plus.

This is not good for arbitration, especially international commercial arbitration, in the long run.

--PB

Posted by Ethan Leib on April 28, 2019 at 10:09 PM | Permalink

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