Recently the U.S. Supreme Court rendered its decision in Lamps Plus, Inc. v. Varela, 587 U.S. ____ (2019), reported at 2019 WL 1780275, a case with at least three striking lessons:
- Lesson #1 Because arbitration agreements are formed by contract through mutual consent, parties negotiating arbitration agreements should pay very careful attention to the specific words used in the contract.
- Lesson #2 – Binding arbitration agreements can be used to deprive a counter-party of his, her or its “fair day” in court.
- Lesson #3 – The conservative leaning justices on the U.S. Supreme Court seem prepared to use the Federal Arbitration Act (FAA) to allow the elimination of class action lawsuits.
Lamps Plus, Inc. v. Varela: The Decided Case
In many ways the Lamps Plus case seems narrow. In fact, it appears to be little more than an almost inevitable extension of an earlier Supreme Court case called Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).
In Lamps Plus, an employee, Frank Varela, sued his employer for negligently letting hackers obtain his tax information as well as tax information for approximately 1,300 of his coworkers. Plaintiff Varela was bound to a standard employment arbitration agreement with his employer, so when he initiated a class action lawsuit in California federal court, his employer, Lamps Plus, moved to compel arbitration. The California trial court essentially granted the motion to compel arbitration and authorized arbitration of Plaintiff Varela’s class-based claims. Lamps Plus appealed the order, arguing that the trial court erred by compelling class arbitration.
On appeal, the Ninth Circuit affirmed the trial court’s order by deciding that the arbitration agreement was ambiguous on the issue of class arbitration. See Varela v. Lamps Plus, Inc., 701 Fed. Appx. 670 (9th Cir. 2017). Because of the ambiguity, the Ninth Circuit invoked the California state common law principle of contra proferentem (a principle found in all 50 states), i.e., that courts should resolve any ambiguities in a contract against the contract’s drafter. Thus, reasoned the Ninth Circuit, because the arbitration agreement was both drafted by the employer and unclear whether it allowed class-based arbitration, the agreement should be interpreted in favor of the employee’s position that the binding arbitration agreement should allow for the resolution of class-based claims.
On appeal before the U.S. Supreme Court, however, this analysis produced a remarkably “fractured” 5-4 decision reversing the Ninth Circuit’s decision – the 13-page majority decision was authored by Justice Roberts, joined by Justices Thomas, Alito, Gorsuch, and Kavanaugh. The remaining four Justices (Ginsburg, Breyer, Sotomayor, and Kagan) produced four dissenting opinions in the case totaling 32 pages that mostly called out various public policy and procedural concerns and accused the majority of not being intellectually honest, in other words for bending legal principles to achieve a pro-company outcome which could stamp out most class action litigation.
As per the majority opinion, the issue presented in the Lamps Plus case was “whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.” The Court concludes that it doesn’t.
Previously, in the Stolt-Nielsen case, the Supreme Court concluded that an arbitration agreement that was intentionally silent on the question of class arbitration could not be used by a party to compel the other to arbitrate class-based claims. Stolt-Nielsen, 559 U.S. at 684-87 (“From these principles, it follows that 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)). As the Court explained:
We think that the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.Id. at 687.
Extending this logic, the Supreme Court decided in Lamps Plus that state law (in this instance the common law principal of interpreting a contract’s ambiguities against the contract’s drafter) must not override the fundamental proposition that, under the FAA arbitration, is “strictly a matter of consent” and so, fundamentally, one party to an arbitration agreement cannot compel the other to arbitrate disputes outside the express scope of the arbitration agreement. Justice Roberts, writing for the majority, stressed this “foundational FAA principle,” cited to a string of cases supporting this principle, and then used the principle to override California law and Plaintiff Varela’s request to arbitrate his class-based claims.
The Three Takeaways For Arbitration Agreements
As for the three lessons mentioned above:
Pay Careful Attention to the Verbiage in Arbitration Agreements
Because arbitration agreements are built upon mutual consent, it is critically important to make sure the language of your arbitration agreements is detailed and explicit and that it covers everything you want within its scope. Beware of short “template” arbitration agreements that seem to cover all things. This is often not the case and Lamps Plus makes it easier to argue that an arbitrator is powerless to resolve issues without express authority to do so. As the Court explained:
[W]e presume that parties have not authorized arbitrators to resolve certain “gateway” questions, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy. Although parties are free to authorize arbitrators to resolve such questions, we will not conclude that they have done so based on silence or ambiguity in their agreement, because doing so might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide.Lamps Plus, 587 U.S. at ___ (internal quotes and citations omitted).
While this isn’t surprising, the case is a good reminder that arbitration agreements should be taken seriously and parties should take time drafting them to expressly (clearly) fit the parties’ larger objectives.
Binding Arbitration Agreements & Asymmetrical Contractual Relationships
The other two take-aways (e.g., that Lamps Plus could result in a considerable cut back of class action claims) are entirely inferential. Class action lawsuits typically arise from asymmetrical contractual relationships – employee v. employer, stock purchaser v. stock issuer, and customer v. merchant, for example. It is very easy for employers, stock issuers and merchants to thrust “standard contract terms” onto employees, stock purchaser and customers. These “contracts of adhesion” are often struck down for one reason or another, but good counsel and lawyering will fix these until they are enforceable.
Potential Cut Back of Class Action Claims
The implicit message of Lamps Plus is that under federal law contracts of adhesion can lawfully contain, notwithstanding state law, binding arbitration provisions that prevent the arbitration of class action claims. If true, then plaintiffs like Varela can be forced to submit their claims to binding arbitration but only on their own behalf and not as representatives of a much larger class of similarly situation aggrieved persons. This should be chilling to the plaintiff’s bar! As Justice Ginsberg explained in her tour-de-force dissent in Lamps Plus:
Employees and consumers forced to arbitrate solo face severe impediments to the vindication of their rights. Expenses entailed in mounting individual claims will often far outweigh potential recoveries. The defendant has put the plaintiff to this choice: Spend way, way, way more money than your claim is worth, or relinquish your . . . rights. What rational lawyer would have signed on to represent the plaintiffs for the possibility of fees stemming from a $30.22 individual claim? Few individuals can afford to pursue small venue claims; mandating single-file arbitration serves as a means of erasing rights, rather than enabling their effective vindication.Id. (internal quotes and citations omitted).
This is all good news for businesses with asymmetrical leverage in negotiations, of course. It could be a shock to others. Either way, Lamps Plus confirms (yet again) that you should take arbitration agreements seriously because otherwise your potential claims could be negotiated into binding arbitration when you don’t want them there or inadvertently excluded from binding arbitration when you do.