Background
Lamps Plus involved an employee, Frank Varela, who filed a class action against his employer, Lamps Plus, regarding a data breach. In 2016, a hacker tricked Lamps Plus into disclosing tax information of 1,300 company employees. After a fraudulent federal income tax return was subsequently filed in Varela’s name, Varela filed a putative class action against Lamps Plus in federal district court on behalf of employees whose information had been compromised. However, Varela’s employment contract agreement required that he arbitrate any disputes he might have with Lamps Plus.
Therefore, Lamps Plus moved to compel arbitration on an individual basis, rather than on a class basis, and to dismiss the class action lawsuit. The district court rejected Lamps Plus’s request for individual arbitration and dismissed the lawsuit but authorized class arbitration. Notably, the district court held that the “lack of an explicit mention of class arbitration” does not mean that the parties “affirmatively agree[d] to a waiver of class claims in arbitration.” See Varela v. Lamps Plus, Inc., 2016 U.S. Dist. LEXIS 189521, at *7 (C.D. Cal. July 7, 2016).
Accordingly, Varela filed a demand for class arbitration with the American Arbitration Association. In response, Lamps Plus moved to stay class arbitration, pending an appeal; however, the district court rejected the stay, reasoning that the issue was one of simple contract interpretation.
Applying California Law
Lamps Plus appealed to the Ninth Circuit Court of Appeals, arguing that the district court erred by compelling class arbitration, but the Ninth Circuit affirmed. Varela v. Lamps Plus, Inc., 701 F. App’x 670 (9th Cir. 2017). Lamps Plus argued that almost a decade ago, the Supreme Court held a court may not compel class arbitration when an arbitration agreement is silent on whether class arbitration is permitted. See Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010). The Ninth Circuit ruled that Stolt-Nielsen was not controlling because the agreement in this case was ambiguous rather than silent on the issue of class arbitration.
Noting that the Lamps Plus agreement was capable of two interpretations—one supporting class arbitration and one not—the Ninth Circuit concluded the agreement was ambiguous. Therefore, the Ninth Circuit turned to the California contract rule, contra proferentem, which serves as a tie-breaker when an adhesion agreement is ambiguous. Basically, the rule reads against the drafter for public policy reasons, implicitly concluding that weaker parties should be protected in close calls. Applying contra proferentem, the circuit construed that ambiguity against Lamps Plus as the drafter. Under that approach, the circuit concluded that class arbitration was within the scope of the agreement.
Lamps Plus petitioned for a writ of certiorari to the Supreme Court, arguing that the Ninth Circuit’s decision contravened Stolt-Nielsen and created a conflict among the courts of appeals. The Supreme Court granted certiorari.
Looking to the Federal Arbitration Act for Guidance
Rejecting the California doctrine of contra proferentem, the Supreme Court reversed. The Court reasoned that, unlike contract rules that help to interpret the meaning of a term, thus uncovering the intent of the parties, the contra proferentem rule does not seek to determine the actual intentions of the parties. Rather, contra proferentem is by definition triggered only after a court determines that it cannot discern the intent of the parties.
Therefore, the Court turned to the principles of the Federal Arbitration Act (FAA). In a majority decision authored by Chief Justice Roberts, the Court found that the FAA “requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a class-wide basis.” Lamps Plus, Inc. v. Varela, 139 S. Ct. at 1415.
Emphasizing that arbitration is strictly a matter of consent, the Court cautioned that a court’s task is to effectuate the parties’ intentions about the who, what, and how of the arbitration proceedings. Id.at 1416; see also Stolt-Nielsen S.A., 559 U.S. at 683 (“We think it is also clear . . . that parties may specify with whom they choose to arbitrate their disputes.” (emphasis in original)).
Next the Court examined the “fundamental difference” between class and individual arbitration and concluded that individual arbitration offers lower costs, greater efficiency and speed, and the ability to choose expert arbitrators, while class action lacks these benefits.
Recognizing that the agreement may be ambiguous, Justice Kagan argued contra proferentem should apply because it “is as even-handed as contract rules come.” Lamps Plus, 139 S. Ct. at 1431 (Kagan, J., dissenting). First, she argued that under the FAA’s equal-treatment principle, courts must “place arbitration agreements on an equal footing with other contracts.” Second, courts should interpret arbitration agreements according to state law, unless state law treats arbitration agreements as different from other contracts. Meanwhile, Justice Sotomayor argued that the district court correctly resolved any ambiguity against Lamps Plus because the inclusion of the American Arbitration Association rules in the Lamps Plus agreement could be read to permit class arbitration. Id. at 1429 (Sotomayor, J., dissenting).
In another dissenting opinion, Justice Ginsberg cautioned that the majority’s decision underscores 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 1421 (Ginsberg, J., dissenting). Finally, in his dissent, Justice Stephen Breyer focused on the majority’s jurisdictional holding, writing that when a district court orders arbitration, “there should be no appellate interference with the arbitral process unless and until that process has run its course.” Id. at 1424 (Breyer, J., dissenting).
Takeaway
As arbitration clauses become more common in employee contracts, Lamps Plus stresses an important point: unless it is clear that the parties agreed to class arbitration, the arbitration will not precede as class arbitration. Lamps Plus provides that (a) there is a fundamental difference between class arbitration and the individualized form of arbitration; (b) the FAA requires courts to enforce arbitration agreements according to their terms; and (c) courts can interpret arbitration agreements by applying state contract law; however, the FAA preempts state law.
More importantly, because Lamps Plus holds that express consent is required for class arbitration, parties should review and draft arbitration agreements accordingly. To prevent ambiguity, parties should include an express class action waiver provision in their arbitration agreements. In addition, parties should specify in the agreement whether the court or an arbitrator will decide whether a class arbitration can proceed.
Angela Foster, PhD, is principal of the Law Offices of Angela Foster in central New Jersey and New York City. She specializes in intellectual property law and alternative dispute resolution of complex commercial disputes.