Lamps Plus v. Varela
Lamps Plus, Inc. v. Varela (United States Supreme Court)
At issue in this case was whether the Federal Arbitration Act (FAA) permits a court to order class arbitration when the parties’ agreement makes no express mention of class arbitration, but the court concludes nonetheless that certain contractual language is ambiguous and could be interpreted to support class arbitration. Nearly a decade ago, in Stolt-Nielsen S.A. v. AnimalFeeds Internat’l Corp., 559 U.S. 662, 684 (2010), the Supreme Court held that, because class arbitration is so inimical to the individual arbitration contemplated by the FAA, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” (Emphasis in original). In that case, however, the Court did not have to explain what constitutes a “contractual basis” authorizing class arbitration because the parties had stipulated that there was none. (Not only was their agreement silent on the issue, but the parties in Stolt-Nielsen also made the unusual stipulation before the arbitral panel that this silence meant that they had not agreed to class arbitration.) Faced in this case with an arbitration agreement that was purportedly ambiguous on the issue of class arbitration, the Court had to decide whether contractual ambiguity alone could provide the necessary contractual basis authorizing class arbitration under Stolt-Nielsen and the FAA.
Lamps Plus and one of its employees, Frank Varela, executed the company’s standard arbitration agreement, in which the two parties (“I” and “the company”) agreed to “resolve[,] by final and binding arbitration as the exclusive remedy,” “all disputes, claims or controversies arising out of or relating to this Agreement, the employment relationship between the parties, or the termination of the employment relationship . . . .” The agreement also provided Varela with express notice that, by agreeing to arbitrate all employment-related disputes, he was thereby waiving his right to sue in court and obtain a jury trial for those claims. (E.g., “I agree that arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.” (emphasis added.)). The agreement further provided Varela with detailed notice of the kinds of employment-related claims that he was agreeing to arbitrate with his employer.
Notwithstanding the parties’ arbitration agreement, Varela filed a class action complaint in federal court for the Central District of California, alleging that Lamps Plus, through one of its employees, had wrongfully disclosed personal identifying information of its employees, in a mistaken response to a phishing scam requesting such information. Lamps Plus moved to compel arbitration on an individual basis. The district court ordered arbitration, but on a classwide basis. The Ninth Circuit affirmed, crediting Varela’s argument that there was contractual language (namely, “lawsuits or other civil legal proceedings,” quoted above) that could be interpreted to include class arbitration. (Needless to say, Lamps Plus argued strenuously that the agreement contemplated individual arbitration only.) The Ninth Circuit resolved this purported ambiguity by construing it against the drafter, Lamps Plus, under California contract law. Accordingly, the lower court held that the parties had consented to class arbitration.
NELF filed an amicus brief supporting Lamps Plus’s position, arguing that, in fact, the parties’ standard arbitration agreement provided no contractual basis supporting class arbitration. NELF argued that the agreement unambiguously provided for individual arbitration only. It was a simple contract between two parties to arbitrate their disputes, and nothing more. Not only was the agreement dead silent on the issue of class arbitration, but also, NELF argued, none of its boilerplate language could reasonably be interpreted to permit class arbitration. In particular, NELF argued that the language purportedly authorizing class arbitration (“lawsuits or other civil legal proceedings”) added nothing new to the agreement. That language merely explained to the employee what it meant to agree, in the first sentence of the agreement, to submit all employment disputes with his employer to binding and final arbitration.
In a 5-4 decision issued on April 24, 2019, the Court agreed with NELF that the arbitration agreement at issue did not authorize class arbitration, but for different reasons. Surprisingly in NELF’s view, the Court, in a majority opinion by Chief Justice Roberts, deferred to the Ninth Circuit’s conclusion that the agreement was ambiguous on the issue of class arbitration, as a matter of California contract law (identifying such deference to state law as the Court’s “normal practice”). In NELF’s view, however, the entire question of whether an arbitration agreement supplies a contractual basis for class arbitration is a matter of federal law under the FAA. Even though the Court did defer to state law on that issue, the Court nonetheless went on to hold that this purported ambiguity made no difference under federal law, because neither contractual silence nor contractual ambiguity is sufficient to authorize class arbitration under the FAA. “Like silence,” the Court explained, “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to sacrifice the principal advantage[s] of [individual] arbitration” contemplated by the FAA, namely, “its speed and simplicity and inexpensiveness.” (Citation and internal punctuation marks omitted). In short, a court may not presume that a party has consented to the costly, burdensome and virtually unreviewable procedure of class arbitration, based on merely ambiguous contract language.
Importantly, the Court also held that the FAA preempted the lower court’s attempt to resolve the purported contractual ambiguity on class arbitration by applying the general rule of state contract law that construes an ambiguity against the drafter. As the Court explained, that rule resolves a contractual ambiguity as a matter of public policy, based on considerations of relative bargaining strength. It does not address in any way what the parties actually agreed to. The FAA, however, requires the parties’ consent to class arbitration. Therefore, the application of that general rule of state contract law to resolve the purported ambiguity would have impermissibly imposed class arbitration without the parties’ consent. This the FAA does not permit
While the Court did hold that neither silence nor ambiguity is enough to satisfy the FAA, the Court never did state affirmatively what contractual language is required to warrant class arbitration under the FAA. At the very least, such language would have to be unambiguous, but most likely it would have to be clear and unmistakable, given the high stakes involved in submitting to class arbitration. Notably, the Court relied for support on an analogous area of its FAA jurisprudence, in which the Court requires “clear and unmistakable” contract language to overcome the presumption that certain “gateway” issues of arbitrability (such as the validity and scope of the agreement) should be decided by a court, not an arbitrator. Just as the Court will not presume that parties who have agreed to arbitrate have also agreed to class arbitration:
"[W]e presume [in our related FAA cases] that parties [to an arbitration agreement] have not authorized arbitrators to resolve certain “gateway” questions . . . . Although parties are free to authorize arbitrators to resolve such questions [or to conduct a class proceeding], we will not conclude that they have done so based on “silence or ambiguity” in their agreement . . . . Neither silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself."