May 1, 2019

Courts May Not Compel Arbitration of Claims on a Classwide Basis Absent Parties’ Explicit Authorization

Authored by Amy Fisher, Esq.

On April 24, 2019, the United States Supreme Court ruled in Lamps Plus, Inc., et al., v. Varela, 587 U.S. ___ (2019) (“Lamps Plus”) that a court may not compel class arbitration if the parties to an arbitration agreement have not affirmatively consented to arbitrate their disputes on a classwide basis. The Lamps Plus opinion takes a step further than the Supreme Court’s decision in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) (“Stolt-Nielsen”), in which it held that a court may not compel arbitration on a classwide basis where an agreement is silent as to the arbitrability of class claims.

Case Background:

Lamps Plus, Inc. (“Lamps Plus”) California employee Frank Varela sued his employer after one of his fellow employees accidentally released roughly 1,300 Lamps Plus employees’ tax information to a computer scammer. Despite having signed a mutual agreement to arbitrate claims with Lamps Plus, as most of his fellow employees had, Varela filed a putative class action lawsuit on behalf of himself and other Lamps Plus employees in U.S. district court after a fraudulent tax return was filed in his name.

Lamps Plus moved to compel individual arbitration of Varela’s claims. The trial court agreed to compel arbitration, but on a classwide—as opposed to individual—basis.

Lamps Plus appealed to the Ninth Circuit, which concluded Stolt-Nielsen was not controlling because, unlike the parties in Stolt-Nielsen, who had stipulated that their agreement was silent regarding the arbitrability of class claims, Varela and Lamps Plus disputed the impact of the language of their agreement. The Ninth Circuit thus proceeded with its own analysis of the agreement and found it was indeed ambiguous on the class arbitration issue.  Applying a California law that calls for any contractual ambiguities to be construed against the drafter, who in this case was Lamps Plus, the Ninth Circuit adopted Varela’s interpretation that the agreement authorized class arbitration. It therefore affirmed the trial court’s order compelling classwide arbitration of the employees’ claims.

Supreme Court Decision:

Lamps Plus again appealed, this time to the Supreme Court, where it argued that the Ninth Circuit’s decision contravened the Supreme Court’s holding in Stolt-Nielsen. The Supreme Court, in a 5-4 decision, agreed. The majority held that the Court’s reasoning in Stolt-Nielsen did in fact control the inquiry because the same disadvantages that accompany class arbitration were relevant here:

[Class arbitration] sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. . . . [I]ts speed and simplicity and inexpensiveness[] would be shorn away and arbitration would wind up looking like the litigation it was meant to displace.

Lamps Plus, 587 U.S. ___ (2019) (slip opinion at 8) (internal citations and quotations omitted). These disadvantages cast doubt on the notion that parties would mutually consent to class arbitration as a means to resolve their disputes. Thus, just as with agreements that are silent on the matter, the Supreme Court held that courts cannot infer consent to class arbitration when the wording of an agreement is ambiguous as to whether it allows classwide arbitration. This is consistent with two central principles recognized by the Supreme Court in a long line of FAA cases: that arbitration under the FAA is a “matter of consent, not coercion” (Stolt-Nielsen, 559 U.S. at 681 (internal quotations omitted)), and that the FAA, not state law principles, “provides the default rule for resolving certain ambiguities in arbitration agreements” (Lamps Plus, 587 U.S. ___ (2019) (slip opinion at 12)).

It is important to note that the Supreme Court did not address whether availability of class arbitration is one of the “so-called ‘question[s] of arbitrability’” that parties may agree to submit to the arbitrator rather than the court. Id. (slip opinion at 9 n.4).

What This Means for Clients:

Taken with the Supreme Court’s holding in Stolt-Nielsen, Lamps Plus means that an arbitration agreement must explicitly authorize arbitration of claims on a classwide basis before a court may compel class arbitration. This is a win for employers and companies who would like to avoid class arbitration while preserving their ability to resolve disputes with claimants in arbitration on an individual basis.

A word of caution: Because the Supreme Court expressly declined to rule on whether the issue of availability of classwide arbitration is a threshold “question of arbitrability,” it may be the arbitrator, and not the court, who determines whether an agreement provides for class arbitration. And, depending on the terms of the agreement, this arbitrator may or may not be required to abide by Supreme Court precedent and his or her decision may be virtually unreviewable. Therefore, it is still best practice for clients to include unequivocal language in all of their arbitration agreements.