United States: Lamps Plus, Inc. v. Varela: Do Ambiguous Arbitration Agreements Provide "Consent" Necessary for Class Arbitration?

Last Updated: August 20 2019
Article by H. Rowan Leathers, III

In Lamps Plus, Inc. v. Varela,[i] a 5-4 decision issued on April 24, 2019, the Supreme Court of the United States concluded "Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis." Chief Justice Roberts delivered the opinion of the Court, in which Justices Thomas, Alito, Gorsuch, and Kavanaugh joined. Justice Thomas filed a concurring opinion. Justices Ginsburg, Breyer, Sotomayor, and Kagan filed dissenting opinions.

Frank Varela, an employee of Lamps Plus, like most other employees at the company, signed an arbitration agreement at the inception of his employment. In 2016, a hacker impersonating a company official tricked a Lamps Plus employee into disclosing the tax information of approximately 1,300 employees. Shortly thereafter, a fraudulent federal income tax return was filed in Varela's name.

After the data breach, Varela sued Lamps Plus in California federal district court, alleging both state and federal claims on behalf of a putative class of employees whose tax information had been disclosed. Lamps Plus moved to compel arbitration on an individual rather than a classwide basis and to dismiss the lawsuit. The District Court granted the motion to compel arbitration and dismissed Varela's claims without prejudice. However, the Court rejected Lamps Plus's request for individual arbitration; instead, authorizing arbitration on a classwide basis. Lamps Plus appealed the order and the Ninth Circuit affirmed.

The Ninth Circuit held the arbitration agreement was ambiguous as to whether the parties agreed to class arbitration. The Court applied a state contractual interpretation doctrine known as contra proferentem providing that ambiguities should be construed against the drafter, which in this instance was Lamps Plus. The court determined the agreement allowed arbitration of a classwide basis.

On appeal, the Supreme Court held it had appellate jurisdiction over the dispute under Section 16(a)(3) of the Federal Arbitration Act. This section provides that an appeal may be taken from "a final decision with respect to an arbitration that is subject to this title." The Court stated the district court's order compelling classwide arbitration and dismissing all claims was a "final decision" within the meaning of § 16(a)(3).

In reviewing the Ninth Circuit's decision to allow classwide arbitration, the Supreme Court addressed the Ninth Circuit's application of thecontra proferentem doctrine. The Court noted the "rule applies 'only as a last resort' when the meaning of a provision remains ambiguous after exhausting the ordinary methods of interpretation." "At that point, contra proferentem resolves the ambiguity against the drafter based on public policy factors, primarily equitable considerations about the parties' relative bargaining strength." "Although the rule enjoys a place in every hornbook and treatise on contracts, we noted in a recent FAA case that 'the reach of the canon construing contract language against the drafter must have limits, no matter who the drafter was.'"

The Supreme Court stated "[c]lass arbitration, to the extent it is manufactured by [state law] rather than consen[t], is inconsistent with the FAA." Courts cannot rely on "state contract principles" to "reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties' consent." The parties' intent must be express and cannot be inferred through the use of doctrines of contract interpretation. There must be an affirmative contractual basis for concluding that a party agrees to arbitrate.

Prior to Lamps Plus, plaintiffs often relied on ambiguities in arbitration agreements to argue that classwide arbitration is allowed. Going forward, that will not be sufficient. Arbitration agreements must now include express provisions addressing the allowance of class and collective action waivers. Additionally, the arbitration agreement should specify that a court decides the threshold issue of whether class arbitration can proceed. The Lamps Plus decision also highlights the importance of having arbitration agreements regularly reviewed by legal counsel.

[i] 139 S.Ct. 1407 (2019).

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