Justices Push Back on Class Proceedings, Arbitration Exception (1)

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By Perry Cooper

Justice Elena Kagan found a common thread in the two seemingly discrete arbitration issues argued before the U.S. Supreme Court Oct. 29.

Both raise questions under the Federal Arbitration Act but one seeks a ruling on the appropriateness of a court-made exception to sending a case to arbitration, and the other on the availability of classwide arbitration.

But in each case, one party sought to limit broad arbitration provision language by saying, “we can’t really believe that the parties agreed to include a certain set of things,” Kagan said.

That similarity doesn’t necessarily mean the court will rule the same way in each case.

Instead the justices seemed to be leaning in favor of the employer arguing “we can’t really believe the parties agreed to allow classwide arbitration” in one case, and against the company arguing “we can’t really believe the parties agreed to send a wholly groundless question to arbitration” in the other.

Those rulings would favor the business seeking to move the suit to arbitration, and would therefore fall in line with the court’s recent pro-business arbitration jurisprudence.

‘A Martian Told Me To’

The first case argued, Henry Schein Inc. v. Archer & White Sales Inc., arises from an alleged antitrust conspiracy in the dental equipment market.

Archer filed the conspiracy suit against several other dental equipment suppliers. It argued the defendants’ request to send the case to arbitration was “wholly groundless” because the suit included claims for injunctive relief that can’t be arbitrated.

The wholly groundless exception isn’t part of the FAA and it wasn’t in the contract language. But Daniel L. Geyser of Geyser P.C. in Dallas, arguing for Archer, told the court that parties don’t say in their arbitration agreements that sham arguments for arbitration won’t be entertained because everyone assumes that.

It is more efficient not to send wholly groundless arbitration demands for arbitration to an arbitrator, but to let a court decide up front that they are frivolous, Geyser argued.

But if the court were to follow the federal appeals courts that have adopted the wholly groundless exception, “we’re now inviting this fight in every motion to compel arbitration,” Justice Sonia Sotomayor said. “It’s not clear to me that your solution is more efficient in a meaningful way,” she told Geyser, citing a greater burden on the courts.

Kannon K. Shanmugam, arguing for Henry Schein, said it’s unlikely the party seeking arbitration would use a totally ridiculous argument like Justice Stephen G. Breyer’s example that “a Martian told me to do it.”

“Often the defendants bear the cost of arbitral proceedings” so they wouldn’t do it frivolously, Shanmugam of Williams & Connolly LLP in Washington said.

Ambiguous?

The second second case, Lamps Plus Inc. v. Varela, arose from a workplace data breach where the employer sought to send an employee class action to individual arbitration.

The lower courts said class arbitration was appropriate because the contract was ambiguous on whether class arbitration was allowed, and California law requires ambiguity to be construed against the drafter.

Breyer pressed the employee’s attorney, Michele M. Vercoski of McCune Wright Arevalo in Ontario, Calif., on whether this contract was really ambiguous on that point.

Andrew J. Pincus of Mayer Brown LLP in Washington, who argued for the employer, asked the court to create a rule that an agreement must have “clear and unmistakeable” language to permit class arbitration.

But Sotomayor raised federalism concerns involved in an FAA rule trumping state law. “Now we’re creating a federal common law, something we’re loath to do in virtually every other context,” she said.

The cases are Henry Schein, Inc. v. Archer & White Sales, Inc., U.S., No. 17-1272, argued 10/29/18 and Lamps Plus, Inc. v. Varela, U.S., No. 17-988, argued 10/29/18.

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