Friday, September 2, 2016

Time to Fix that Arb Agreement . . .

Sandquist v. Lego Automotive, Inc., No. S220812 (Jul. 28, 2916)

Who decides if an arbitration can proceed on a class basis? It’s an unresolved question under both state and federal law. Because Court of Appeal decisions on the issue were somewhat inconsistent, the Supreme Court granted review on it. The answer, according to divided 4-3 court: It depends. 

Justice Werdegar—writing for the Court and joined by the Chief Justice and Justices Liu and Cuellar—says that the question fundamentally turns on the parties agreement. Moreover, the interpretive rules addressed to that question are ordinary state law principles of contract formation. The clauses at issue in the case look like pretty standard broad clauses. They assign any disputes arising from or related to the contract to arbitration. According to the Court, that’s enough to assign the “who decides” question to the arbitrator, even though the specific issue isn’t spelled out. The Court finds this result further supported by both the presumption in favor of arbitrability and the canon of contra preferendum.

The Court further finds that neither state nor federal law creates a special interpretive presumption that unless the parties affirmatively elect to assign the question of whether class arbitration is appropriate the arbitrator, that question should go to the court. The Court holds no such presumption in state law. And it further finds that there is no “convincing evidence the FAA imposes an anti-arbitral presumption that overrides the state law reading of the parties‘ arbitration clause.”

This last point is a little thorny. Generally, the FAA creates two presumptions: First, courts, not arbitrators, are presumed to decide whether or not the parties are actually party to an enforceable arbitration agreement. On the other hand, procedural prerequisites—like the sufficiency of a notice or following a contractual ADR procedure—are presumably in the hands of the arbitrator. These presumptions are rebuttable—they apply primarily when the agreement doesn’t specifically address the issues they concern.

Which brings us—and the Court—to a U.S. Supreme Court case called Green Tree. See Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003). Like this case, Green Tree involved a typical broad clause, assigning all disputes arising from or related to the parties contract to the arbitrator. A four justice plurality opinion written by Justice Breyer held that the FAA didn’t create a presumption that the questions of “who decides” about class arbitration should stay with the court. According to the plurality, when the case is generally arbitrable, whether or not there could be class arbitration was just another procedural issues that arbitrators could decide.

On the other hand, Chief Justice Rehnquist’s principal Green Tree dissent was based on the language of the contract dealing with arbitrator selection—it didn’t rely on a presumption. According to the dissent, the contract’s procedure that let the parties select an arbitrator for each case was inconsistent with having one arbitrator preside en masse as it would in a class action. And since questions of who has to arbitrate are as fundamental as whether the parties agreed to arbitrate, the decision should have been up to the court to decide.

Reading the Green Tree plurality and some later decisions that gloss on the issue, the Court sees the point as being whether the availability of class arbitration is or is not a condition precedent to the arbitration itself. Particularly given the interpretive rule that courts read contracts in favor of arbitration, the court finds that the contract was not set up so that the non-availability of class arbitration was so crucial that the contract precluded submitting the issue to the arbitrator to decide.

Finally, the court explains that the error can’t be harmless. It is true that Article VI, § 13 of the State Constitution and Code of Civil Procedure § 475 generally require a procedural error to affect substantial rights before a reversal is merited. But some errors—such as the who decides question at issue here—are essentially unmeasurable and thus defy the application of the standard. Who can say whether the case would have come out differently had the arbitrator been permitted to decide the class cert-ability issue? Indeed, as the Court points out, to hold the error harmless would basically recommit the very error at issue—to let the wrong decider decide. The issue is thus the sort of error that requires reversal without the application of a harmless error analysis.

Justice Kruger (joined by Justices Chin and Corrigan) dissents. She thinks it’s folly to follow the Green Tree plurality because some later SCOTUS decisions—in particular, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) and AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)—generally cast doubt on Green Tree and specifically discuss how class arbitration is fundamentally different from regular one-on-one arbitration. Because of this difference, the availability of class arbitration goes so fundamentally to the heart of the agreement to arbitrate that, unless the parties quite clearly state otherwise, it needs to be decided by the court, not the arbitrator. As the dissent notes, the post-Green Tree decisions of the federal circuit courts mostly all come out this way.

Which raises the question, does this case create enough of a split to draw cert? California probably has more arbitration cases than the federal courts combined. And with the Stolt-Nielsen and Concepcion majorities eroded by the passing of Justice Scalia (and perhaps his replacement by Justice Garland) how does that play out?


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