Supreme Court Limits Availability of Class Arbitration

04.29.2019

On April 24, 2019, the United States Supreme Court issued a death-knell to attempts to force employers into class arbitration by use of ambiguous language that does not explicitly authorize arbitration of employee claims on a class-wide basis.  In Lamps Plus Inc. v. Varela (2019) –– S.Ct. ––––, the Court held that consent to arbitrate a legal claim as a class proceeding may not be inferred from ambiguous language in an arbitration agreement, and that a contract interpretation rule requiring that agreements be construed “against the drafter” cannot substitute for the requisite “affirmative contractual basis” for concluding that the parties agreed to class arbitration.

 The case arose out of a suit filed by Lamps Plus employee Frank Varela, who sued on behalf of other employees of the company whose private information had allegedly been compromised by the release of their tax information to a computer hacker.  In response, Lamps Plus sought to compel arbitration of Varela’s claims for negligence, breach of contract, and invasion of privacy on an individual basis pursuant to the arbitration agreements it entered into with its employees. That agreement contained a clause stating that arbitration “shall be in lieu of any and all lawsuits or other civil legal proceedings relating to the employee’s employment,” which the Ninth Circuit Court of Appeals construed as authorizing class arbitration because it is a “lawsuit or other civil legal proceeding.”  However, the agreement also contained language stating that the employee waived “any right I may have to file a lawsuit or other civil action or proceeding relating to my employment,” which supported a determination that the agreement was a “bilateral” one, requiring arbitration between only Lamps Plus and its individual employees. 

The Ninth Circuit found the agreement to be ambiguous in terms of whether it provided for class arbitration, because it was “capable of two reasonable constructions.”  As such, it decided to construe the agreement against Lamps Plus and ordered class arbitration, because Lamps Plus was the drafter of the agreement and any ambiguities had to be construed against it pursuant the doctrine of contra proferentem.  The court noted that this doctrine applies “with particular force in cases of contracts of adhesion” in which the weaker party has virtually no bargaining power, which was evident in the employer-employee relationship in that case.

 Relying on several of its decisions in recent years disapproving of class arbitration, including AT&T Mobility v. Concepcion (2011) 563 U.S. 333 and Epic Systems Corp. v. Lewis (2018) 584 U.S. ––––, the Court first stated that the shift from individual to class arbitration is a “fundamental” one that cannot be presumed or lightly inferred.  The Court went on to explain that this is so because class arbitration is “not only markedly different from the traditional individualized arbitration contemplated by the Federal Arbitration Act [“FAA”], but also undermines the most important benefits of arbitration such as its speed, simplicity and inexpensiveness.”  The Court also noted that class arbitration raises serious due process concerns by purporting to adjudicate the rights of absent class members who did not agree to arbitrate their claims as part of the plaintiff class, with only limited judicial review.  Relying on its 2010 decision in the Stolt-Nielsen v. Animalfeeds (2010) 559 U.S. 662, the Court reiterated that

consent to participate in class arbitration may not be inferred absent an affirmative “contractual basis for concluding that the party agreed to arbitrate on a class basis...  Silence is not enough; the FAA requires more.” (Emphasis added).

 Because the Lamps Plus agreement was both silent and ambiguous on the issue of class arbitration, the Court held that the Ninth Circuit’s order requiring class arbitration of  Varela’s claims could not stand.  The Court noted that unlike contract interpretation rules that are intended to help uncover the intent of the parties, the contra proferentem doctrine “is by definition triggered only after a court determines that it cannot discern the intent of the parties.” Instead, it represents a public policy that is divorced from any actual determination of the parties’ intent.  The Court accordingly held that the doctrine cannot  “cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.” 

 The decision was rendered by the five most conservative Justices on the Court, who have generally favored a broadened interpretation of arbitration in the past.  In the Dissenting opinions issued by the four more liberal Justices, comments were made to the effect that mandatory individual arbitration “thwarts effective access to justice for those encountering diverse violations of their legal rights,” and that the decisions like the one issued by the majority “have facilitated companies’ efforts to deny employees and consumers the important right to sue in court” on a collective basis.  Justice Ginsburg emphasized how treacherously the Court has strayed from the principle that “arbitration is a matter of consent, not coercion,” and stated that the Majority’s decision underscores the irony of invoking the principle that arbitration must be consensual:

To justify imposing individual arbitration on employees who surely would not proceed to proceed solo, [in a case in which Varela] sought redress for negligence by his employer for a data breach affecting 1,300 employees. 

 Similarly, Justice Kagan lamented the fact that all states construe ambiguities in contracts against their drafters, and that the “anti-drafter canon” promotes clarity in contracting by resolving ambiguities against the “parties who held the pen.” None of the dissenters, however, acknowledged the fact that unilaterally-imposed arbitration agreements have been legal for many years, in a wide variety of circumstances even outside the employment setting, and are routinely used by doctors, car dealerships, and realtors; and that the law generally requires one who signs an agreement in this country to abide by it, irrespective of any later-made claims that they did not understand it. 

 The Lamps Plus decision is therefore an important one to the development of the law of class arbitration, by confirming that agreements requiring such a procedure are only enforceable when the contracting parties have “affirmatively” agreed to it.  Employers with questions regarding this decision or arbitration agreements may contact the author or their usual employment law counsel at AALRR.

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