October 31, 2019 Articles

U.S. Supreme Court Dims the Lights on Plaintiffs’ Rights to Class Action Arbitration in Lamps Plus

The Court determined that class-wide treatment may not be inferred from ambiguous contract language and that, instead, agreements must expressly provide for class arbitration.

By Melinda G. Gordon

In Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275 (Apr. 24, 2019), the Supreme Court confronted the issue of whether parties to an arbitration agreement containing ambiguous terms had agreed to class-wide arbitration.

Background

Varela, a Lamps Plus employee, filed a putative class action complaint against the company after Lamps Plus mistakenly released employee personal identification information in response to a phishing scam. Relying on the arbitration agreement Varela had executed as a condition of employment, Lamps Plus moved to compel arbitration. A federal district court in California granted the company’s motion to compel arbitration but denied the company’s request for individual arbitration. Instead, it ordered arbitration on a class-wide basis. Deeming the parties’ agreement as a contract of adhesion and ambiguous as to whether it permitted class arbitration, the district court construed the ambiguity against the drafter, Lamps Plus.

Lamps Plus appealed the district court’s finding to the Ninth Circuit, which affirmed and found that the parties’ arbitration agreement was open to two reasonable interpretations and that under California state law, ambiguity is construed against the drafter, especially in a contract of adhesion. The U.S. Supreme Court previously held in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), that a court may not compel class-wide arbitration when the agreement is silent. However, the Ninth Circuit determined that Stolt-Nielsen was not controlling because the agreement in Lamps Plus was ambiguous, rather than silent, on the issue of class arbitration.

Analysis

Accepting the Ninth Circuit’s interpretation that the arbitration agreement was ambiguous, the Supreme Court focused on “the interaction between a state contract principle for addressing ambiguity and a ‘rule[] of fundamental importance’ under the FAA [Federal Arbitration Act], namely, that arbitration ‘is a matter of consent, not coercion.’” Lamps Plus, No. 17-988, slip op. at 6–7 (citation omitted). Finding that arbitrators wield only the authority they are given pursuant to the intent of the parties, the Court emphasized that arbitration is strictly a matter of consent and that this principle underscores all of the Court’s arbitration decisions.       

The Court focused on the distinctions between individual arbitration and class arbitration and concluded that, unlike individual arbitration, class arbitration lacks the benefits of speed, informality, and cost-efficiency. The Court, citing Stolt-Nielsen, found that class arbitration also raises due process concerns of adjudicating the rights of absent members with only limited judicial review. The Court concluded that these crucial differences create doubts regarding the parties’ “mutual consent” to resolve disputes through class-wide arbitration.

Relying on Stolt-Nielsen, the Lamps Plus Court determined that ambiguity, like silence, fails to provide a sufficient basis to conclude that parties to an arbitration agreement agreed to sacrifice the advantages of individual arbitration. The Court determined that courts may not infer from an ambiguous agreement that the parties have consented to arbitrate on a class-wide basis. The Court found that the Ninth Circuit’s ruling that state law, rather than consent, determined the availability of class arbitration was inconsistent with the principles of the FAA. The Court reversed the judgment of the Ninth Circuit and remanded the case for further proceedings consistent with the Court’s opinion.

Dissents

The majority opinion caused an avalanche of dissenting opinions from Justices Kagan, Ginsburg, Breyer, and Sotomayor. Justice Kagan’s dissenting opinion, which Justices Ginsburg and Breyer joined and which Justice Sotomayor joined as to Part II, noted that under the FAA, state law governs the interpretation of arbitration agreements so long as the law treats other types of contracts in the same way. Lamps Plus, No. 17-988 (Kagan, J., dissenting). Justice Kagan noted that California law, similar to the law in every other state in the country, construes ambiguity against the drafter and concluded that the parties’ agreement authorized class arbitration. Id.

Justice Ginsburg also filed a separate dissenting opinion, joined by Justices Breyer and Sotomayor. In her dissent, Justice Ginsburg emphasized how treacherously the Court has strayed from the principle that arbitration is a matter of consent, not coercion. Lamps Plus, No. 17-988 (Ginsburg, J., dissenting). Noting that the FAA was designed to enable merchants of roughly equal bargaining power to arbitrate commercial disputes, Justice Ginsburg pointed out how the Court has relied on an expansive interpretation of the FAA to deny employees and consumers, who characteristically have little bargaining power, effective relief against powerful economic entities. Id.

Justice Breyer’s dissent focused on his view that both the Ninth Circuit and the Court lacked jurisdiction to review the case. Lamps Plus, No. 17-988 (Breyer, J., dissenting). Justice Sotomayor’s dissent pointed out that the majority reached its holding without first agreeing that the contract is ambiguous, unnecessarily preempting California contract law. Lamps Plus, No. 17-988 (Sotomayor, J., dissenting).

Melinda G. Gordon is an arbitrator and mediator in Tarrytown, New York.


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