In a recent decision, the U.S. Supreme Court made clear that class arbitration can only be compelled when the arbitration agreement between the parties expressly contemplates class arbitration.  The 5-4 opinion by Chief Justice John Roberts was met with dissenting opinions by Justices Ginsburg, Breyer, Sotomayor, and Kagan.  Despite the differing opinions, the majority’s decision offers clear guidance for those seeking to avail themselves of class arbitration.

In Lamps Plus, Inc. v. Varela, plaintiff Varela filed a putative class action lawsuit in California federal court against his employer, defendant Lamps Plus, Inc., for claims arising out of a data breach.[1]  The victim of a successful “phishing” attack, another Lamps Plus employee had been tricked into sending to a hacker copies of current and former employees’ tax forms, specifically the 2015 W-2s of approximately 1,300 employees.  Soon after the data breach, a fraudulent federal tax return was filed in Varela’s name.

Varela and most of the other Lamps Plus employees affected by the data breach had signed employment contracts containing provisions for resolving any disputes through arbitration.  In pertinent part, the arbitration agreement provided that Varela:

• Waived “any right [he] may have to file a lawsuit or other civil action or proceeding relating to [his] employment”;[2]

• Waived “any right [he] may have to resolve employment disputes through trial by judge or jury”;[3] and

• Agreed that “any and all disputes, claims or controversies arising out of or relating to[] the employment relationship between the parties[] shall be resolved by final and binding arbitration.”[4]

In the district court, Lamps Plus moved to compel arbitration on an individual basis and to dismiss the lawsuit.  The district court granted Lamps Plus’s motion to compel arbitration and to dismiss the lawsuit but rejected its request for individual arbitration.  Instead, the district court authorized arbitration on a classwide basis.[5]

On appeal, the Ninth Circuit affirmed the district court’s decision to compel class, rather than individual, arbitration.  The Ninth Circuit began its analysis by acknowledging the Supreme Court precedent established by Stolt-Nielsen v. AnimalFeeds, which held an arbitration agreement that is “silent” on the issue of class arbitration cannot be used to compel class arbitration because the parties to the agreement did not contemplate such.[6]  However, the Ninth Circuit held that Stolt-Nielsen was inapplicable to the present case because Lamps Plus and Varela had not stipulated that the arbitration agreement was silent on the issue of class arbitration, as the parties had so stipulated in Stolt-Nielsen.[7]  Instead, the Ninth Circuit found that the arbitration agreement was “ambiguous” and relied on California law directing courts to construe ambiguities in contracts against the drafter, a doctrine generally known as contra proferentem.  The Ninth Circuit, guided by this doctrine, construed the ambiguity in the arbitration agreement against Lamps Plus and ruled in favor of permitting class arbitration.

Lamps Plus petitioned for a writ of certiorari, which the Supreme Court granted.  The Supreme Court deferred to the Ninth Circuit’s interpretation of the arbitration agreement and accepted it as ambiguous.  The question for the Supreme Court to resolve, then, was whether an ambiguous agreement “can provide the ‘contractual basis’ for compelling class arbitration,” consistent with the Federal Arbitration Act (“FAA”).[8]

The Supreme Court held that an ambiguous agreement could not provide the basis for compelling class arbitration, much like it had held in Stolt-Nielsen that an agreement silent on the issue similarly could not provide a basis for compelling class arbitration.  The majority held that class arbitration is “not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration,” such as reduced litigation costs and speedier resolution.[9]  As such, the FAA “requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.”[10]

The majority ruled, as a “foundational FAA principle,” that arbitration “is strictly a matter of consent.”[11]  Continuing, the majority held that “[c]onsent is essential under the FAA because arbitrators wield only the authority they are given.”[12]  The Supreme Court relied on its precedent that “class arbitration, to the extent it is manufactured by [state law] rather than consen[t], is inconsistent with the FAA.”[13]  Thus, the Supreme Court concluded that the doctrine of contra proferentem “cannot substitute for the requisite affirmative ‘contractual basis for concluding that the part[ies] agreed to [class arbitration].’”[14]  In short, “[c]ourts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.”[15]

The Court was quite divided on many issues presented in Lamps Plus, Inc. v. Varela.  Justice Thomas, in a concurring opinion, argued that that references to “I” and “the Company” in the arbitration agreement “suggest[] that the parties contemplated only bilateral arbitration.”[16]  Because of this, Justice Thomas viewed the agreement as “silent” on the issue of class arbitration and, citing Stolt-Nielsen, would have reversed on that basis.

The Lamps Plus v. Varela case also produced four dissenting opinions.  Justice Ginsburg wrote a separate dissent to “emphasize once again how treacherously the Court has strayed from the principle that ‘arbitration is a matter of consent, not coercion.”[17]  Justice Ginsburg, with whom Justices Breyer and Sotomayor joined, was greatly concerned that the majority’s decision will incentivize companies to “deny employees and consumers the important right to sue in court, and to do so collectively, by inserting solo-arbitration-only clauses that parties lacking bargaining clout cannot remove.”[18]

Justice Sotomayor, in a separate dissenting opinion, argued that Stolt-Nielsen was wrongly decided and that a “class action is simply a procedural device that allows multiple plaintiffs to aggregate their claims.”[19]  As such, in Justice Sotomayor’s view, where “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.”[20]  Furthermore, Justice Sotomayor argues that the majority’s opinion incorrectly holds that the FAA preempts a “neutral principle of state contract law” and, by doing so, has created a “new federal common law of arbitration contracts.”[21]

Together with Stolt-Nielsen, the Lamps Plus decision establishes that a court cannot compel class arbitration where an arbitration agreement is either silent on the issue or ambiguous.  In effect, under the Supreme Court’s holding, class arbitration is not simply a procedural mechanism for resolving multiple disputes arising out of the same situation.  Rather, class arbitration is a fundamentally different mechanism that must be expressly agreed to by the parties before a court can compel class arbitration.  Because they typically have stronger bargaining power, the Lamps Plus decision would seem to give large companies and employers the power to draft class arbitration into or out of their contracts.

As demonstrated by the variety of opinions delivered by the Supreme Court in Lamps Plus, there remains an ongoing debate about how differently class arbitration should be treated as compared to bilateral arbitration.  This debate is likely to gain attention as the Lamps Plus decision effectively restricts the availability of class arbitration to only those agreements in which it is expressly included.  Regardless of the eventual outcome of that debate, Lamps Plus, with its focus on the express language of arbitration provisions, exemplifies the need for careful drafting of arbitration agreements so as to ensure that the parties achieve their specific dispute resolution goals.

ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.