Supreme Court Update for Banking and Financial Services Professionals

by Charles W. Prueter, Waller

The benefits of arbitration to frequent and experienced litigants are widely known. For example, discovery generally is more limited, the length of the entire proceeding typically is shorter, the information at the center of the dispute more easily remains confidential and private, and legal fees overall are lower. But we also have a court system in this country which, at its optimum, can be a place for individuals and businesses alike to secure just, speedy, and inexpensive determinations of rights in legal disputes. The arbitration-or-litigation fight—i.e., whether the parties will resolve their differences in a contractually agreed upon private forum or the public forum provided by the appropriate state or federal court —has been ongoing for years. Institutional parties have come to include arbitration agreements with consumers, employees, and others as a part of the ordinary course of ex ante ordering. Conversely, individuals have sought to vindicate their rights through the public judicial process rather than the private arbitration process.

Unsurprisingly, then, arbitration matters have reached the Supreme Court over and over again, with an uptick in the last decade or so. One of those issues relates to the rights of consumers to bring class actions. Briefly, because high numbers of individuals may be harmed in the same way by a product or service, the “class action” is a vehicle to allow those individuals to pursue relief as a class, rather than on individual bases. Most readers probably have received notices of class actions regarding toasters, electronics, or cars, and as you might have concluded, the potential recovery associated with a defective toaster often does not justify the cost of bringing an individual action. Class actions provide a solution by gathering up many individual claims together in a single lawsuit. But what happens when consumers have signed arbitration agreements?

Several years ago, in a case titled AT&T Mobility v. Concepcion, the Supreme Court held that consumers who enter into arbitration agreements providing for individual arbitration may not circumvent those contracts by bringing class actions. This decision strengthened the position of retailers, service providers, and banks, which were able then to proceed with the certainty that their contracts containing arbitration agreements would be honored.

Around the same time, the Court also considered the possibility of using class action procedures in arbitration—in other words, a group of individuals proceeding as a class in the arbitration forum rather than the judicial forum. Not as appealing to consumers and consumer-rights lawyers as true litigation, class arbitration nevertheless provides some of the benefits to consumers that accompany traditional class actions. The Court took a narrow view of this sort of vehicle, however; in Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., it held that arbitration may not proceed using class procedures unless the parties had “agreed” to class arbitration.

Now pending before the Court is another arbitration-class action case, with a twist. In Lamps Plus Inc. v. Varela, No. 17-988, the company-employer and its employee had entered into a relatively standard arbitration agreement, providing that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings.” The employee contends that he has the right to spearhead a class arbitration, because a class action falls within the scope of “all lawsuits or other civil legal proceedings.” In effect, the employee argues that Concepcion is not a barrier here because he is not trying to bring a class action in court, and Stolt-Neilsen is satisfied here because, under California contract law, his arbitration agreement should be construed to authorize class arbitration. But the employer responds that such a reading would eviscerate Concepcion, which stands for the proposition that a standard arbitration agreement like this one is an agreement to arbitrate to arbitrate on an individual basis—and only on an individual basis.

I expect that the result in this case will fall in line with Concepcion and Stolt-Nielsen—which is to say that Lamps Plus will prevail, and the Court will explain that only an agreement that explicitly provides for a right to class arbitration may serve as the basis for class arbitration. Standard arbitration agreements will continue to require individual arbitration. If I am wrong, I promise to tell you about it here on the Update. A decision in this case is expected after the new year.

In the October iteration of this column, I previewed a Securities & Exchange Commission case, Lorenzo v. SEC, No. 17-1077. Mr. Lorenzo had his “day in court” this past Monday, when the Supreme Court heard oral argument in his case. Recall that Mr. Lorenzo is an investment banker who sent two emails to potential investors, at the direction of his superior at his firm, containing misleading information about a potential investment opportunity. Smelling fraudulent activity, the SEC targeted not only Mr. Lorenzo’s superior but also Mr. Lorenzo himself and handed him a lifetime ban from the securities industry. Mr. Lorenzo argues that he cannot be held liable for securities fraud because he did not “make” the statements, and that much actually appears to be undisputed. Under federal law, in order to be responsible for “making” “false statements,” a person must have ultimate authority over the statement, including its content and whether and how to communicate it. A false statement can be the sole basis of liability, but the law strictly requires proof that the defendant was the “maker” of the statement. As a matter of undisputed fact, Mr. Lorenzo did not have such authority—only his superior did with respect to the two emails in question—and therefore was not the maker of the statement.

But the SEC says that doesn’t matter. The SEC says that it nevertheless properly brought this enforcement action under a separate theory—that Mr. Lorenzo, by transmitting the misleading information, engaged in a “scheme to defraud” those investors. At oral argument, the justices appeared to side with the government, noting generally that federal law regarding “schemes to defraud” sweeps broadly and likely covers Mr. Lorenzo’s conduct. But Justice Gorsuch, skeptical of the way the government wields its enforcement and prosecutorial powers, noted that the SEC had charged Mr. Lorenzo with nothing other than sending the emails, which as a practical matter sounds an awfully lot like charging Mr. Lorenzo with simply “making” false statements. Justice Gorsuch wondered, then, where is the “relevant act for fraud”? Mr. Lorenzo probably should hope that Justice Gorsuch can be persuasive with his colleagues when they discuss this case. A decision is expected in the early part of the new year.

Charles W. Prueter is a trial and appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at