Insights - September 19, 2019

What Can We Learn from the Supreme Court's Recent Arbitration Opinion?

By Scott G. Hawkins | Grasford W. Smith | Jacob Z. Coates

If the Supreme Court’s most recent opinion on the subject of arbitration teaches us anything, it is that not all arbitration is created equal.

The April 24, 2019 United States Supreme Court opinion in Lamps Plus v. Varela breaks new ground while simultaneously, and perhaps paradoxically, affirming existing principles of the Court’s arbitration jurisprudence. A close examination of Lamps Plus offers lessons on the importance of consent to arbitrate, the problematic nature of class arbitration, and the potential limitations of state contract principles when interpreting arbitration agreements.

The basic facts of Lamps Plus illustrate the problem that arises when injured parties who are bound by arbitration agreements seek to bring a class action. Lamps Plus, a company that sells light fixtures, suffered a data breach in 2016 which resulted in the disclosure of tax information of approximately 1,300 of its employees. Each of these employees signed an Arbitration Agreement provided by the company, which stated in pertinent part:

Except as provided below, the parties agree that any and 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, that are not resolved by their mutual agreement shall be resolved by final and binding arbitration as the exclusive remedy.

I understand that by entering into this Agreement, I am waiving any right I may have to file a lawsuit or other civil action or proceeding relating to my employment with the Company and am waiving any right I may have to resolve employment disputes through trial by judge or jury. I agree that arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.

The Company and I mutually consent to the resolution by arbitration of all claims or controversies (“claims”), past, present or future that I may have against the Company or against its officers, directors, employees or agents in their capacity as such, or otherwise, or that the Company may have against me.

One employee, Frank Varela, sued Lamps Plus in the Federal District Court of California seeking to bring a putative class action on behalf of all Lamps Plus employees whose information had been compromised. Lamps Plus sought to compel individual arbitration based on the arbitration agreement Varela signed with the company in substantially the form as indicated above, while the employees instead sought class-wide arbitration. Ultimately, the United States Supreme Court was asked to decide which type of arbitration was required under the circumstances.

The Court’s opinion rests on three principles: (1) the importance of consent; (2) the “fundamental difference” between individual and class arbitration; and (3) the limitations of state contract law when applied to arbitration agreements.

1. Consent remains key.

Lamps Plus reaffirms the “foundational Federal Arbitration Act (FAA) principle” that “arbitration is strictly a matter of consent.” As a starting point for its analysis, the Court emphasized that the task for courts and arbitrators alike is, above all, “to give effect to the intent of the parties.” Varela’s arbitration agreement did not expressly refer to class arbitration and was therefore determined to be “ambiguous.” Based on this ambiguity, the Court found that the parties had not consented to class arbitration, reversing the 9th Circuit’s order compelling class arbitration.

While the consent requirement may benefit a party seeking to avoid being forced into arbitration, Lamps Plus demonstrates that consent can cut both ways. In her dissenting opinion, Justice Ginsberg notes the “irony” of the Court “paradoxically” invoking the principle that consent is essential in order to “justify imposing individual arbitration on employees who surely would not choose to proceed solo.” According to Justice Ginsberg, the Court‘s emphasis on consent “has hobbled the capacity of employees and consumers to band together in a judicial or arbitral forum.” The Court’s emphasis on consent should highlight to practitioners the importance of precise and carefully-drafted arbitration provisions. The easiest way for a court to “give effect to the intent of the parties” is by reference to clear and unambiguous contractual language.

2. Class arbitration and individual arbitration are fundamentally different.

In reversing the lower court’s determination that class arbitration could be compelled, the Court relied heavily on the idea that there is a “fundamental difference” between class arbitration and the individualized form of arbitration “envisioned by the FAA.” Individual arbitration, the Court noted, is intended to confer certain benefits: “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” Class arbitration, however, sacrifices these benefits. It makes the process “slower, more costly, and more likely to generate procedural morass than final judgment.” Rather than confer the advantages envisioned by the FAA, class arbitration instead shears away efficiency and “wind[s] up looking like the litigation it was meant to displace.” The court found that due to these “crucial differences,” there was reason to doubt that the parties mutually consented to resolve disputes through classwide arbitration.

The Court failed to elaborate on the specifics of these “crucial differences,” and at first glance, it is unclear how dozens (or hundreds) of individual arbitrations would be preferable class arbitration. However, the Court cites to an earlier opinion, Stolt-Nielsen S.A. v. AnimalFeeds International Corp., which provides some insight. In Stolt-Nielson, the Court described the differences between traditional bilateral arbitration and class arbitration under the American Arbitration Association’s Class Action Rules. First, “[u]nder the Class Rules, the presumption of privacy and confidentiality that applies in many bilateral arbitrations shall not apply in class arbitrations . . . thus potentially frustrating the parties’ assumptions.” The Stolt-NielsenCourt also expressed concern that in class arbitration “the arbitrator’s award no longer purports to bind just the parties to a single arbitration, but adjudicates the rights of absent parties as well.” Finally, the Court noted that while the commercial stakes of class action arbitration are comparable to those of class action litigation, the scope of judicial review is much more limited. Based on these distinctions, the Court in Stolt-Nielsen held that “the parties’ mere silence” on the issue of class action arbitration was insufficient to constitute consent.

Operating against this backdrop, the Lamps Plus Court reaffirmed that “silence is not enough” to infer consent to participate in class arbitration. Going a step further, the Court found that “[l]ike silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to sacrifice the principal advantage of arbitration.” The Court therefore held that “neither silence nor ambiguity provides a sufficient basis to undermine the central benefits of arbitration itself.” This holding provides an important lesson for those charged with drafting arbitration provisions, especially those who intend to include class arbitration within the scope of the provision. In light of the reputed pro-business Roberts Court’s hypersensitivity to consent in the class arbitration context, the parties’ intent to submit to class arbitration should be made completely unambiguous. An arbitration provision that does not expressly mention class arbitration does not evince the parties’ consent to arbitrate on a classwide basis.

As Justice Kagan notes in her dissenting opinion, the arbitration provision in Varela’s contract contained broad language, stating that “any and all disputes, claims or controversies arising out of or relating to the employment relationship between the parties shall be resolved by final and binding arbitration.” The provision further stated that the arbitrator may “award any remedy allowed by applicable law.” Nevertheless, the Court held that class arbitration was not encompassed in the scope of the agreement. The breadth of this provision highlights the specificity that is required to compel class arbitration under Lamps Plus.

3. State contract interpretation principles may not contravene the FAA.

Finally, Lamps Plus raises important considerations regarding the application of state contract principles when interpreting arbitration agreements. After finding the arbitration agreement ambiguous, the 9th Circuit in Lamps Plus applied California’s contra proferentem doctrine of contract interpretation which resolves ambiguities against the drafter based on public policy factors. Because Lamps Plus had drafted the arbitration provision, the lower court construed the ambiguous arbitration provision in favor of Varela.

However, the Supreme Court found that the contra proferentem rule was preempted by the FAA because it “interferes with the fundamental attributes of arbitration.” The Court assigned particular importance to the fact that the contra proferentem rule does not help to uncover the intent of the parties, but rather is based on policy considerations. Accordingly, the Court refused to “rely on state contract principles to reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.”

This determination, that a seemly neutral state law rule of contract interpretation would be preempted by the FAA, is significant. As Justice Kagan states in her dissent, “[u]nder the FAA, state law governs the interpretation of arbitration agreements, so long as that law treats other types of contracts in the same way.” Precedent holds that the interpretation of arbitration agreements is governed by ordinary state-law principles, except in situations where the state rule discriminates against or disfavors arbitration agreements. Ultimately, the Court’s holding hinged on its determination that class arbitration is inconsistent with the fundamental attributes of arbitration under the FAA. Due to majority view of the problematic nature of class arbitration, the Court refused to allow state law principles to “substitute for” the level of consent required.

Ultimately, Lamps Plus is as an important illustration of the Court’s current views of class arbitration and arbitration in general. Practitioners should take careful heed of the Court’s interpretations of consent, the purposes of the FAA, and the role of state law. Whether the client is a multinational corporation, an employee, or otherwise, the Lamps Plus closely decided opinion should serve as a cautionary tale for practitioners who must construct precise and unambiguous arbitration provisions for their clients in the aftermath of this landmark opinion.

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