Mcle Self-study: the Sound of Silence: Class Action Issues in Arbitration

• Jurisdiction: United States,Federal
• Author: By Hon. John M. True (Ret.)
• Publication year: 2017
• Citation: Vol. 31 No. 5

MCLE Self-Study: The Sound of Silence: Class Action Issues in Arbitration

By Hon. John M. True (Ret.)

Judge True retired from the Alameda County Superior Court bench in 2015 and currently provides mediation, arbitration, and other services as a neutral through ADR Services, Inc.

I. INTRODUCTION

The question whether an employer can draft an arbitration agreement containing a class-action waiver requiring its employees to arbitrate a dispute on a one-on-one basis only, and not as a group, is presently before the U.S. Supreme Court.¹ Guidance on the issue will come soon, and, should the Court give its imprimatur to the practice, the employer community may begin utilizing language prohibiting class arbitrations with some regularity. Such a development will, in turn, cause the metaphysical tectonic plates underlying employment law to shift appreciably. In the meantime—and perhaps thereafter—there is the "silence" challenge: discerning whether an agreement that says nothing about class actions should be interpreted to prohibit them or permit them.

II. THE PROBLEM

In Stolt-Nielsen, S.A. v. Animal Feeds Int'l. Corp.,² the Supreme Court analyzed a situation in which "the parties agreed that their agreement was 'silent' in the sense that they had not reached any agreement on the issue of class arbitration. . . ."³ Indeed, the parties had entered into a stipulation to that effect. In a subsequent case, the Court emphasized this distinction:

We overturned the arbitral decision [Stolt-Nielsen] because it lacked any contractual basis for ordering class procedures, not because it lacked . . . a 'sufficient' one. The parties in Stolt-Nielsen had entered into an unusual stipulation that they had never reached an agreement on class arbitration. See, 559 U.S. at p. 668-669, 130 S. Ct. 1758. In that circumstance, we noted, the panel's decision was not—indeed, could not have been—'based on the determination regarding the parties' intent' [Id. at 673, n. 4; see Id. at 676] ('Th[e] stipulation left no room for an inquiry regarding the parties intent.').⁴

But what about the more usual case, in which the parties do not "agree"? There is an abundance of case law on the issue, with some courts following dicta in Stolt-Nielsen that "silence" suggests that a business (be it employer, bank or otherwise) cannot be deemed to have contemplated class procedures when it enters into a bilateral agreement with one person or entity. Other courts conclude that "silence" can only mean that the parties have agreed that the arbitral form will provide the same substantive and procedural rights that they would have if they were in court.

III. CONTEXT

Before discussing how to listen for the "sound of silence" in arbitration contracts, there are a couple of preliminary issues that need attention. First is the question of who decides whether an agreement admits of class treatment. Then there is the issue of whether they are even legal.

A. Who Decides?

Guidance on this issue would be forthcoming, many thought, in Sandquist v. Lebo Automotive, Inc.⁵ But the California Supreme Court could find no across-the-board rule of any use. Instead, litigants' attention is directed back to contract language:

We conclude no universal rule allocates this decision in all cases to either arbitrators or courts. Rather, who decides is in the first instance a matter of agreement, with the parties' agreement subject to interpretation under state contract law. Under state law, these parties' arbitration agreement allocates the decision to the arbitrator. Under federal law, no contrary presumption requires a different result, so the issue remains one for the arbitrator.⁶

A dissent authored by Justice Kruger and joined by Justices Corrigan and Chin took the position that case law under the Federal Arbitration Act (FAA)⁷ compels the conclusion that "the availability of class arbitration under the parties' agreement is a 'gateway question of arbitrability' that is presumptively for a court to decide."⁸ It could well be that the U.S. Supreme Court will be called upon to resolve this question, too, but it is beyond the scope of this article to speculate on how that might turn out. Here in California, at least for the time being, we are to look at arbitration agreements to suss out whether it is a court or an arbitrator who has the task of deciding the issue.

[Page 7]

B. Legality

In Morris v. Ernst & Young, LLP,⁹ the Ninth Circuit Court of Appeals held that an employer that requires its employees as a condition of employment to enter into waivers of their right to pursue class-based remedies violates sections 7 and 8(a)(1) of the NLRA by interfering with employee rights to engage in "concerted" activity.¹⁰ Concerted activity has been held to include the filing of a lawsuit by a group of employees, and "courts regularly protect employees' right to pursue concerted work-related legal claims under section 7."¹¹ Section 7 rights are substantive rights.¹² Accordingly, an employer may not require an employee to waive them as a condition of employment, as to do so would violate federal labor law prohibiting interference with the exercise of these legal rights.¹³

Morris dealt with an explicit, written relinquishment of class treatment. Where there is no specific class action waiver language in an agreement, however, section 8(a)(1) of the NLRA cannot be said to apply directly. The employer has not specifically required an applicant or employee, as a condition of employment, to surrender his or her right to engage in concerted conduct. This puts the California arbitrator in the interesting position of possibly being called upon to give effect to a contract that could be deemed to be unenforceable as long as Morris remains controlling in our circuit.

IV. THREE SUGGESTED ANALYTICAL APPROACHES

Leaving these issues aside, however, let's assume that a pair of litigants finds themselves in an arbitrable (e.g., not illegal, unconscionable or otherwise unenforceable) dispute and are faced with the problem of making appropriate arguments to an arbitrator about the interpretation of an agreement "silent" as to class treatment. What are some useful areas each party may explore? I see three main questions: (1) What rules of contract construction should be applied to the problem? (2) What were the circumstances of the formation of the contract? And (3) What does the contract actually say? Underlying all of this is the fundamental principle that an arbitrator is limited to the task of giving effect to what the parties intended, and is not to impose his or her own ideas about what might constitute sound policy.¹⁴

A. Rules of Contract Construction

California principles of contract interpretation apply to the construction of an arbitration agreement having effect in this state.¹⁵ An arbitrator is not to indulge in a presumption either in favor of or against arbitration when the agreement is silent on the issue. Put another way, although parties may implicitly agree to the device of class-action litigation, an arbitrator may not assume from contractual silence that this is the case:

An implicit agreement to authorize class-action arbitration . . . is not a term that the arbitrator may infer solely from the fact of the parties' agreement to arbitrate. This is so because class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.¹⁶

Under California law, a contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.¹⁷ "It is one of the cardinal rules of interpreting an instrument to give it such construction as will make it effective rather than void."¹⁸

Two other principles of California contract law must be kept in mind: First, a contract of adhesion is construed against the drafter. "In cases of uncertainty . . . the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist."¹⁹ It is now well settled that

[t]he rule requiring resolution of ambiguities against the drafting party . . . "applies with peculiar force in the case of the contract of adhesion. Here the party of superior bargaining power not only prescribes the words of the instrument but the party who subscribes to it lacks the economic strength to change such language."²⁰

Hence, any ambiguity in the contract should be resolved against the draftsman, and questions of doubtful interpretation should be construed in favor of the subscribing party.

Second, in California the parties to an agreement are presumed to be aware of existing law, indeed to have incorporated it into their agreement.²¹ "[A]ll applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have in mind, necessarily enter into the contract...