Continuing a Discussion of the Supreme Court's Term: Arbitration

The US Supreme Court decided three cases this term that speak to the issue of mandatory arbitration clauses. Two of them arose in the context of employment.

The "odd case out" here, a piece of commercial arbitration between two businesses, came down on January 8, when SCOTUS announced its opinion in Henry Schein v. Archer. This was a unanimous opinion saying that there is no "wholly groundless" exception to the general rule that the arbitrator gets to decide the threshold question of arbitrability.

Henry Schein arose out of a dispute between a business that distributes dental equipment and one that manufactures such equipment. I mention this -- indeed I mention the case itself, chiefly to encourage reflection over a sort of knee-jerk reaction one encounters to employment arb cases. "Oh, there is such a gross disparity of bargaining power here! The employer needed a job and signed the contract of adhesion they put in front of him to get it!"

I'm not sure that such a reaction can ever be refined to the level where it would become a reasoned argument. Consider the relationship between a distributor and a manufacturer of dental equipment Ignorant of the market for such equipment (as most judges presumably are) I have no idea which party if either has the upper hand in negotiations. Even if the metric for that could be specified, it would have to call for a fact based inquiry of a sort which would leave no precedential footprint because, by the time the next litigation has arisen, the same industry might have been utterly transformed.

Back to SCOTUS ... Just one week after Henry Schein SCOTUS came up with New Prime v. Oliveira, deciding that it is the courts, not the arbitrators themselves, who must decide the threshold of arbitrability in certain labor cases. The statute, the Federal Arbitration Act, is clear that mandatory arb does not apply to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce."

Dominic Oliveira filed a class action claiming that he and other truck drivers were being cheated by the trucking companies. The companies claimed the matter belonged in arbitration. Oliviera said: no it doesn't , I'm a trucker, which makes me a "worker engaged in" etc. New Prime said, "Tell it to the arbitrator -- if he agrees with you the matter is not arbitrable, THEN you get to go to a judge."

The highest judges in the system said: no, the judges decide this one, and we're deciding it in Oliveira's favor: his class action can proceed. This was a unanimous decision, 8-0 with Kavanaugh not participating because he hadn't been around for the argument. Gorsuch wrote the decision.

The final SCOTUS treatment of arbitration issues this term was decided three months later, April 24: Lamps Plus v. Varela.  Although the two cases referenced above gave us unanimous decisions, this one gave us one of those 5-4 splits everyone talks about, and three passionately worded dissents.

Lamps Plus is part of a line of cases addressed to the distinction between class and individual arbitration. It says that a employer can only be forced into class arbitration if the language of the employment agreement clearly provides for class arbitration -- otherwise individual arb applies. This is striking as a departure from the usual common law rule that ambiguities are interpreted against the drafter.

I'm a fan of the common law rules of contract construction -- they generally arose for good reason -- and consider this departure an unfortunate one.

What is intriguing about Lamps Plus is the factual context. This arose out of a hack attack on an employer that made public data concerning the taxes of roughly  1,300 employees. A stranger then fraudulently filed a tax return claiming to be "Frank Varela," one of those employees, and so to be entitled to a tax refund. Varela, understandably, sued his employer for having allowed his identity to be stolen. There were then two distinct threshold questions: first, litigation or arbitration? second, if arbitration, class or individual? The courts below had said that the employer won on the first of those binary questions, lost on the second, paving the way for class arb. SCOTUS has now reversed this, and it appears the matter is now headed for individual arb.

Ideally, that would be 1,300 individual arbs. That might give Lamps' management a sense of the value of class treatment.