UK: US Supreme Court Rules That Agreement To Class-Based Arbitration Procedures Must Be Explicit

Last Updated: 10 May 2019
Article by Daniel B. Pasternak and Melissa Legault

The Court's ruling in Lamps Plus, Inc., et al. v. Varela is the latest in the Court's ongoing pro-employer, pro-arbitration jurisprudence

As we first reported here, the United States Supreme Court's docket this term includes three significant cases interpreting various aspects of the Federal Arbitration Act ("FAA").  Earlier this year, the Court ruled in the first of those cases, Henry Schein, et al. v. Archer & White Sales, Inc. (see our discussion here), holding that the FAA does not contain a "wholly groundless" exception and that courts cannot disregard a provision in an arbitration agreement delegating authority to the arbitrator.  In the second case, New Prime Inc. v. Oliveira (see our discussion here), the Court held that the FAA's exemption for interstate transportation workers applies to all such workers, regardless of their classification as an employee or independent contractor.

Unlike these first two FAA cases, in which the Court ruled unanimously, the third case, Lamps Plus, Inc., et al. v. Varela, split down the Court's ideological lines.  The case involved a question left open following the Court's 2010 decision in Stolt-Nielsen S. A. v. AnimalFeeds Int'l Corp., in which the Court held that because arbitration under the FAA is strictly a matter of consent, a party cannot be compelled to arbitrate on a class-action basis if the parties' agreement to arbitrate is silent on the issue of class arbitration.  In Lamps Plus, the issue before the Court was whether an agreement that is not silent but instead is ambiguous on the issue of class arbitration can be construed by a court to permit class arbitration. 

On April 24, 2019, the Supreme Court, in a 5-4 decision with the majority opinion authored by Justice Roberts, held that arbitration agreements must explicitly authorize class arbitration proceedings, and that ambiguous agreements – those that do not explicitly demonstrate that the parties consented to arbitrate claims on a class-wide basis – do not provide the requisite contractual basis for concluding that the parties agreed to such a process.  The four liberal justices each wrote strident dissenting opinions, and Justice Thomas wrote a concurrence, highlighting the deep lack of consensus among the Justices regarding arbitration matters.

In Lamps Plus, Frank Varela filed a class action lawsuit against his employer (Lamps Plus) after a hacker impersonating a company official gained access to sensitive employee tax information, including his own information. However, like most of Lamps Plus' employees, Varela had signed an arbitration agreement, which included general language providing that "arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment."

When Lamps Plus asked the District Court to enforce the arbitration agreement and refer Varela's lawsuit to arbitration, the court agreed to do so, but – and this is why the case made its way to the Supreme Court – it found that because the arbitration agreement was ambiguous on the issue of class arbitration, and because of the California rule of contract interpretation that ambiguities should be construed against the drafter of the agreement (here, Lamps Plus), Varela could bring his class claims in arbitration.  As expected, Lamps Plus appealed that ruling, but the Ninth Circuit Court of Appeals affirmed the reasoning and holding of the lower court.  Lamps Plus then petitioned the Supreme Court to hear the case, framing the issue as whether, consistent with the FAA, an ambiguous arbitration agreement can provide the necessary "contractual basis" for compelling class arbitration.

In ruling that it cannot, the majority rejected the Ninth Circuit's reliance on California contract interpretation principles.  Instead, the majority relied heavily on the Court's previous holding in Stolt-Nielsen, in which, as noted above, the Court held that class arbitration cannot be compelled when an agreement is "silent" on the availability of class-based arbitration.  Expanding on that notion, the majority explained that under the FAA, "arbitration is a matter of consent, not coercion," and highlighted the fundamental differences between individual arbitration and class arbitration.  The majority concluded that "[l]ike silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to 'sacrifice the principal advantage of arbitration.' This conclusion aligns with the court's refusal to infer consent when it comes to other fundamental arbitration questions."

The dissenting Justices took issue with the legal and policy rationales underlying the majority's decision, lamenting the direction that the Court has gone over the years in its arbitration jurisprudence.  Nonetheless, Lamps Plus is a substantial win for employers.  Taking its holding together with that in Stolt-Nielsen, it now appears that unless an arbitration agreement explicitly authorizes class arbitration, those processes are not likely to be available to individual employees in arbitration.  Accordingly, employers can breathe a sigh of relief that class arbitration will not be imposed upon them unless their agreements clearly provide for such a procedures.  Of course, the easiest way to avoid this issue in the first instance is to specifically state in the arbitration agreement whether class arbitration process are or are not available, so as to not leave the issue open for interpretation in the first instance.  One thing is certain, however; given the fluidity of the law in this area, employers should consult with counsel concerning the contours of their existing or contemplated arbitration agreements before taking any next steps.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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