Arbitration Pacts Get Supreme Boost Over State Contract Law

Workers will have more difficulty preventing the enforcement of mandatory arbitration agreements based on state contract law in light of the U.S. Supreme Court’s April 24 ruling on class arbitration, attorneys told Bloomberg Law.

The Supreme Court’s five-justice conservative majority reversed a federal appeals court’s decision that had allowed class arbitration over an employer’s objection based on California’s rule that an ambiguous contract should be construed against the drafter, which will almost always be the employer.

That contract rule is premised on a public policy concern—evening out the inequality in parties’ bargaining strength—rather than an attempt to discern the meaning of the contract, the Supreme Court said. Federal law doesn’t allow judges to rely on such state contract doctrines to reshape agreements to individually arbitrate disputes, according to the justices.

The Supreme Court has repeatedly boosted the enforceability of arbitration agreements, including those with class-action waivers, via its interpretation of the Federal Arbitration Act in a series of cases going back more than 30 years. While the FAA has strong pre-emptive power over state laws that interfere with pacts to arbitrate disputes, courts occasionally do invalidate such agreements based on contract law doctrines.

“This ruling could give federal judges license to disregard any state contract law,” said Kimberly Kralowec, a California-based plaintiffs’ attorney. “We may end up with a special federal law of contract interpretation for arbitration that is contrary to lots of principles, like federalism.”

Public Policy v. Arbitration

The Supreme Court’s ruling in Lamps Plus v. Varela specifically calls out California’s rule for ambiguous contracts. Nevertheless, the decision also said that a state’s public policy concerns aren’t elevated above the FAA’s command to enforce arbitration agreements, said Robert Friedman, the co-chair of Littler Mendelson’s alternative dispute resolution group.

The state contract law doctrine of unconscionability, for example, blocks the enforcement of contracts that are so unfair that they “shock the conscience,” said Richard Alfred, head of Seyfarth Shaw’s national wage and hour practice. Judges will have to examine that doctrine more closely to make sure it doesn’t have an adverse impact on arbitration, Alfred said.

The Lamps Plus decision could also fuel a legal challenge to the California Supreme Court’s 2000 decision in Armendariz v. Foundation Health, which set certain fairness requirements for employment arbitration agreements to remain valid, said Scott Witlin of Barnes & Thornburg. Most of the requirements under Armendariz are based on public policy concerns, so they’re now vulnerable, Witlin said.

But judges—particularly those state court judges who are more skeptical of mandatory arbitration—still could get around Lamps Plus, said Imre Szalai, a Loyola University New Orleans law professor who has written extensively about arbitration. They might refuse to enforce an agreement based on another state contract rule and say that Lamps Plus only applies to the contract principle that ambiguities should be construed against the drafter, he said.

“The Supreme Court can’t police every ruling,” Szalai said.

The case is Lamps Plus v. Varela, 2019 BL 145476, U.S., 17-988, Opinion 4/24/19.