United States Supreme Court Limits Class Arbitration

Jeffrey K. Brown and Raymond J. Nhan | Payne & Fears | April 24, 2019

On April 24, 2019, the United States Supreme Court held that the Federal Arbitration Act (“FAA”) bars orders requiring class arbitration when an agreement is ambiguous about the availability of such a procedure. Lamps Plus v. Varela, 587 U.S. __ , 2019 WL 1780275, (2019). In Lamps Plus, the Court clarified a 2010 case in which it held that a court may not compel arbitration on a class-wide basis when an agreement is silent on the availability of class arbitration. Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 559 U.S. 662, 687 (2012).

In Lamps Plus, a 5-4 decision authored by Chief Justice Roberts, the Court explained that because the FAA envisions the use of traditional individualized arbitration, a party cannot be forced under the FAA to submit to class arbitration unless the parties explicitly agreed to do so. Because class arbitration does not share the benefits of traditional arbitration — lower costs, greater efficiency and speed, and the parties’ choice of a neutral — the FAA requires more than an “ambiguous” agreement to show that the parties bound themselves to arbitrate on a class-wide basis. Unlike individualized arbitration, or even traditional class actions, class arbitration raises serious due process concerns because absent class members will have limited judicial review. Based on these critical differences between individual and class arbitration, the Court reiterated in Lamps Plus 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.”

The Court also declined to apply California’s anti-drafter canon in interpreting the arbitration provision-a position urged by Justice Kagan in dissent. The anti-drafter canon resolves contractual ambiguities against drafters when a provision is ambiguous after the court exhausts all ordinary methods of interpretation. The Court did not apply the anti-drafter canon because doing so would allow class arbitration without first obtaining parties’ consent.

What Employers Should Know

After Lamps Plus, employers will have a strong argument to avoid class arbitration unless they clearly agree to do so. To be on stronger grounds, if employers want to avoid class arbitration, they should make sure their arbitration agreements allow only for individualized arbitration. Moreover, employers wanting to avoid class arbitration would be wise to include a “not construed against drafter” clause in their arbitration agreement with employees. Contact Payne & Fears LLP if you have questions about this ruling or implementing arbitration agreements, generally, in your workplace.

Arbitration Provision In Insurance Policy Applies Because Federal Arbitration Act Supersedes State Law Making Such Clauses Illegal

Chip Merlin | Property Insurance Coverage Law Blog | May 15, 2019

“Oh, Boy!” was my first thought after reading a case which holds that those arbitration agreements requiring policyholders to arbitrate in far-away places could not be stopped by state law. Congress should stop this, and state legislators should write laws to ban those insurance carriers who sell such policies.

Let’s all be honest and agree that these arbitration clauses are as anti-consumer as they come. The insurers and agents selling these products are no friends to policyholders. I warned about these clauses in, Surplus Lines Carriers Select Arbitration and Choice of Law in New York to Pay Less Coverage and Less on Claims.

The case1 involves a builders risk policy covering property in Louisiana that has an arbitration clause which states:

Any dispute, controversy or claim arising out of, relating to, or in connection with this Policy, shall be finally settled by arbitration. The arbitration shall be conducted in accordance with the International Arbitration Rules of the American Arbitration Association in effect at the time of the arbitration. The seat of the arbitration shall be New York, New York, in the United States of America.

The policyholder cited Louisiana law making such an arbitration clause illegal and unenforceable. The policyholder also pointed to the conformity to state law clause in the policy arguing that this clause meant that the policy should be interpreted to find that the Louisiana law making the arbitration clause illegal applied:

In the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.

The court disagreed and held:

[T]he policy contains an arbitration provision. It is the arbitration provision of the insurance policy that is said not to conform with [the Louisiana statute,] a statute prohibiting arbitration agreements. This state statute, however, as we held in Safety National, is preempted by the Convention….Because the state statute,….is preempted by the Convention, the statute does not and cannot apply to McDonnel’s policy. And because the statute does not apply to the policy, there is no conflict between the policy and the state statute. With that premise established, the conformity provision is not triggered; its inapplicability leads only to the conclusion that the arbitration provision survives, undiminished by state law.

Property insurance defense attorneys in New York, the most common place where the arbitration is to take place in these surplus lines policies, must be smiling because they will be getting a lot of legal business from far-away places. Surplus lines claims managers who are lowballing offers, delaying payments and denying claims are lighting cigars and fist pumping each other over this result. Surplus lines underwriters are getting flooded with messages to change the policy language and write policies with arbitration clauses in New York.

There is nothing good for policyholders in this decision. Surplus lines markets are growing, and this will give those carriers an ability to sell even cheaper insurance because most policyholders will generally find it too costly to fight for their benefits in an arbitration a long way from home.

Thought For The Day

Good intentions can often lead to unintended consequences. It is hard to imagine a law intended for the workforce known to Henry Ford can serve the needs of a workplace shaped by the innovations of Bill Gates.
—Tim Walberg
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1 McDonnel Group, L.L.C. v. Great Lakes Insurance SE, UK Branch, No. 18-30817, — F.3d —, 2019 WL 2082905 (5th Cir. May 13, 2019).

Are Residential Real Estate Contracts Outside the Bounds of the Federal Arbitration Act?

Liz Kramer – July 25, 2012

The Supreme Court of South Carolina just ruled that contracts for the sale of residential property are not interstate commerce, and therefore are outside the reach of the Federal Arbitration Act. Bradley v. Brentwood Homes, Inc., __ S.E.2d __, 2012 WL 2847616 (S.C. July 11, 2012). That is a surprising result in my view, given that the FAA applies to all agreements that involve or affect interstate commerce, Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 271-72 (1995), and the Supreme Court has been largely unreceptive to states’ attempts to carve out certain types of arbitration contracts (like those in nursing home contracts).

In Bradley, the plaintiff bought a “completed dwelling” in Myrtle Beach from defendant. Two years later, the plaintiff sued in state court, alleging construction defects. The parties engaged in six months of discovery before the defendant asserted its right to arbitrate and moved to compel arbitration. The district court denied the motion, not on the basis of waiver (which would have been much simpler), but by finding that the arbitration agreement was unenforceable. It held the arbitration agreement was unenforceable under South Carolina’s Uniform Arbitration Act, because it did not comply with technical requirements of that statute, and also held that the agreement did not involve interstate commerce and therefore was not covered by the Federal Arbitration Act (which would likely have made the agreement enforceable, as the FAA does not have the same technical requirements about font size, etc).

The facts related to interstate commerce are these:

the agreement stated that the defendant was “not acting as a contractor” for the plaintiff;

the defendant did, however, construct the home using subcontractors, materials and suppliers from outside South Carolina;

the defendant provided a warranty from a national company; and

the plaintiff used an out of state bank to finance the transaction.

Despite those last three facts, the South Carolina court held that the FAA did not apply to this arbitration clause. The analysis relied heavily on the court’s assessment that real estate contracts are unique; it begins with a “discussion of the historical intrastate character of real estate transactions.” To support the exceptional nature of real estate contracts, it cited a state court case from South Carolina and federal district court cases from Puerto Rico and Kentucky. The court held that none of the facts cited by the defendant (out-of-state banks, warranty programs, subcontractors, supplies) “negate the intrastate nature of the sale and purchase of residential real estate.” The court was careful to narrow its ruling, however, noting that if the agreement had been for the construction of the home, instead of for the completed dwelling, its arbitration clause would have been governed by the FAA.

Because the conventional wisdom is that the vast majority of arbitration agreements are covered by the FAA, this decision provides rare support to parties who want to keep their claims in court, despite an arbitration agreement that could be unenforceable under state law grounds.

via Are residential real estate contracts outside the bounds of the Federal Arbitration Act? – Lexology.