Seyfarth Synopsis: Today the Supreme Court issued a 5-4 decision in the Lamps Plus, Inc. v. Varela class action arbitration case. The holding and rationale are important to employers because the Court decisively ruled that class arbitration "fundamentally" changes the nature of the "traditional individualized arbitration" envisioned by the Federal Arbitration Act and, for that reason, requires an express agreement of the parties to be compelled. In so ruling, the Court rejected the basis of the Ninth Circuit's contrary ruling, which had found the arbitration agreement at issue to be ambiguous and, applying California state contract law that contractual ambiguities should be construed against the drafter, held that the agreement allowed for class arbitration. Relying on its prior class action arbitration decisions, the Court found that such an approach is "flatly inconsistent with the 'foundational FAA principle that arbitration is a matter of consent.'" How this part of today's decision will impact Plaintiffs' efforts to use state laws to invalidate arbitration agreements will undoubtedly be the subject of future litigation, but it is now clear that courts can no longer order class arbitration unless there is an arbitration agreement expressly authorizing it.
What Did The Supreme Court Hold?
The Supreme Court held today that courts cannot order an arbitration to be conducted on a class-wide basis unless there is an arbitration agreement that expressly authorizes class arbitration. The Supreme Court previously held in its Stolt-Nielsen decision that a court may not compel class arbitration when an agreement is "silent" on the availability of such arbitration. Now the Supreme Court has gone a step further. Courts cannot compel arbitration when an arbitration agreement is ambiguous about the availability of class arbitration.
The parties — Lamps Plus and Varela, an employee of Lamps Plus — had an arbitration agreement that was ambiguous about the availability of class arbitration. Certain phrases, particularly the use of "I" and "my" throughout the agreement, seemed to contemplate purely individual arbitration. Other phrases, such as one stating that "arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment," the employee argued, were broad enough to suggest class arbitration. The employee sued Lamps Plus on behalf of a class of employees whose personal information had allegedly been compromised.
The Ninth Circuit affirmed the district court's order compelling not individual arbitration, as the company had sought, but class arbitration. In deciding whether to compel class arbitration, the Ninth Circuit relied on California state law principles in applying a doctrine know as contra proferentem, which means that ambiguous terms in a contract should be construed against the drafter. In applying this doctrine, the Ninth Circuit found that the ambiguous terms of the parties' agreement should be interpreted against Lamps Plus — the drafter of the agreement — and in favor of the employee, who argued for class arbitration.
The Supreme Court reversed the Ninth Circuit's decision with five justices joining in the opinion. Relying on its past decisions in Stolt-Nielsen, Concepcion, and Epic Systems, the Court made clear that class arbitration "fundamentally changes" the nature of "traditional individualized arbitration" envisioned by the Federal Arbitration Act in several ways, including making the process slower, more costly, and "more likely to generate procedural morass than final judgment." Because arbitration under the Federal Arbitration Act is strictly a matter of the parties' consent, the Court found that applying contra proferentem to allow class arbitration under an ambiguous agreement is "flatly inconsistent with the 'foundational FAA principle that arbitration is a matter of consent.'" The Court, therefore, found that the Ninth Circuit decision ordering class arbitration was improper and reversed.
No Decision On Who Should Decide Whether An Agreement Allows For Class Arbitration
In a footnote, the Court stated that it was not deciding whether the availability of class arbitration is a "question of arbitrability" that is presumptively for courts (rather than arbitrators) to decide. The Court pointed out that the parties had agreed that a court should decide the issue, and therefore concluded that the question was not at issue. Thus, while every circuit court that has addressed the issue has found that the availability of class arbitration is a "question of arbitrability" for courts to decide in the absence of an express agreement to the contrary, the Supreme Court still has not decided the issue.
What Does The Lamps Plus Decision Mean For Employers?
The decision is an important victory for employers. Courts can no longer order class arbitration under the Federal Arbitration Act unless the employers' arbitration agreement unambiguously authorizes class arbitration. Under the Lamps Plus decision, employers no longer face the risk that ambiguous phrases in their agreements will lead to class arbitration. Only express agreements can lead to class arbitration. While many employers have revised existing arbitration agreements or adopted new ones since Epic Systems that include express class arbitration waivers, those employers with older clauses using generic language to the effect that all employment disputes are subject to arbitration benefit from today's opinion.
The decision did not, however, close the door on future litigation as far as the availability of class arbitration. Plaintiffs will likely continue attempts to use principles of state contract laws to invalidate arbitration agreements. Lamps Plus, however, should significantly narrow the successful use of such laws to the extent they "target arbitration either by name or by more subtle methods..." In this light, even general contract principles such as unconscionability cannot stand in the way of arbitration enforcement if they over-ride the "foundational FAA principle that arbitration is a matter of consent."
Additionally, Justice Ginsburg argued in her dissenting opinion that Congress should act to "correct" the elevation of the FAA over "the rights of employees and consumers" to bring class actions. Congress could, therefore, someday pass legislation that would make class arbitration more widely available.
Thus, despite the fact that the Lamps Plus decision makes it less likely that employers will face class arbitration, we continue to urge employers to have their employment agreements reviewed by experienced counsel and revised consistently with this and prior Supreme Court opinions.
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