On April 24, 2019, the U.S. Supreme Court decided Lamps Plus, Inc. v. Varela, No. 17-988, holding that an ambiguous arbitration agreement cannot provide the necessary contractual basis for compelling class arbitration.
In 2016, a hacker tricked a Lamps Plus employee into disclosing the tax information of approximately 1,300 other employees, leading to the filing of a fraudulent income tax return of Lamps Plus employee Frank Varela. Varela filed a putative class action suit against Lamps Plus in Federal District Court in California, despite having signed an arbitration agreement with his employer. Ultimately, the district court granted Lamps Plus’s motion to compel arbitration but rejected its request for individual arbitration and authorized arbitration on a class-wide basis. The Ninth Circuit affirmed on appeal, reasoning that the employment agreement was ambiguous on the issue of whether class arbitration and California law construes contractual ambiguities against the drafter—here, Lamps Plus.
Accepting the Ninth Circuit’s interpretation that the employment agreement containing the arbitration provision should be regarded as ambiguous, the Supreme Court zeroed in on “the interaction between a state contract principle for addressing ambiguity and a rule of fundamental importance under the FAA, namely, that arbitration is a matter of consent, not coercion.” Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275, at *5 (U.S. Apr. 24, 2019) (internal quotation marks and citation omitted). Stating that consent is essential under the Federal Arbitration Act (FAA) and that “courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so,” id. at *6 (internal quotation marks and citation omitted), the Court held that “[l]ike silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to sacrifice the principle advantage of arbitration.” Id. (internal quotation marks and citation omitted). Underscoring the Court’s decision was its discussion that class arbitration fundamentally changes the traditional form of arbitration envisioned by the FAA, which is individualized in nature. See id. at *2, *5.
The Court’s decision generated dissenting opinions from Justices Ginsburg, Breyer, Sotomayor, and Kagan. In her dissent, while agreeing that courts must enforce arbitration agreements according to their terms under the FAA, Justice Kagan pointed out that the construction of contractual terms is a question of state law when the state law does not discriminate against arbitration, see id. at *18 (Kagan, J., dissenting), and California’s state law rule of construing ambiguities against the drafter is an even-handed rule that does not discriminate against arbitration, see id. (Kagan, J., dissenting). On this basis, Justice Kagan argued that the agreement authorized class arbitration. See id. at *18–19 (Kagan, J., dissenting).
Joining Justice Kagan’s dissenting opinion in full, Justice Ginsburg wrote separately to point out that the FAA was enacted to enable merchants of roughly equal bargaining power to enter into agreements to arbitrate commercial disputes, not to govern contracts in which one of the parties has little or no bargaining power. Id. at *9 (Ginsburg, J., dissenting). According to Justice Ginsburg, the majority’s decision “underscores the irony of invoking the first principle that arbitration is strictly a matter of consent to justify imposing individual arbitration on employees who surely would not choose to proceed solo.” Id. at *10 (Ginsburg, J., dissenting).
Justice Sotomayor, joining Justice Ginsburg’s dissent in full and the above-discussed portion of Justice Kagan’s dissent, noted that “[w]here, as here, an employment agreement provides for arbitration as a forum for all disputes relating to a person’s employment and the rules of that forum allow for class actions, an employee who signs an arbitration agreement should not be expected to realize that she is giving up access to that procedural device.” Id. at *15 (Sotomayor, J., dissenting).
The Supreme Court’s decision not only is a victory for employers seeking to arbitrate workplace claims on an individual basis, but also a victory for manufacturers and businesses who prioritize individual arbitration when faced with consumer disputes. Possibly flying a bit more under the radar is the fact that the Court’s holding also continues a trend in the direction of creating a federal common law on arbitration agreements.
All-in-all, the Supreme Court’s decision makes one thing clear, a flickering light as to whether an arbitration agreement provides for class arbitration will not do. Unless it is crystal clear that the parties agreed to arbitrate on a class-wide basis, it is going to be lights out for any putative class. Given the Court’s decision in Lamps Plus, along with its prior decisions in cases such as 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), it should be pretty easy for employers and businesses to avoid class arbitration, given the light switch is really in their hands.
Pravin R. Patel is an associate at Weil Gotshal & Manges LLP in Miami, Florida.