SCOTUS Pulls the Plug on Class Arbitration Ambiguity in Lamps Plus, Inc. v. Varela

On Wednesday, April 24, 2019, the U.S. Supreme Court issued a 5-4 decision that left class arbitration flickering.  The Court was asked to decide whether the Ninth Circuit Court of Appeals had correctly interpreted the application of a prior 2010 case, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., that barred an order requiring class arbitration where an agreement is silent on the availability of class arbitration.  More specifically, the ideologically divided Court set about determining that the Federal Arbitration Act bars class arbitration where agreements are either silent or “ambiguous” as to class arbitration.

The case came about after a 2016 data hack of lighting fixture company Lamps Plus.  The hacker impersonated a company employee and tricked another employee into disclosing tax information for about 1,300 other employees.  Thereafter, a fraudulent income tax return was filed for Frank Varela, who thereafter sued Lamps Plus in federal district court in California, “bringing state and federal claims on behalf of a putative class of employees.”

Because Varela and all other Lamps Plus employees had signed employment agreements containing arbitration clauses, the company moved to compel arbitration on an individual rather than a classwide basis.  The district court granted the motion, but rejected Lamps Plus’s request for individualized arbitration.  Lamps Plus appealed the decision to the Ninth Circuit Court of Appeals arguing that the court erred in compelling classwide arbitration based on its arbitration agreement.

The Ninth Circuit affirmed the district court’s decision, reasoning that while the Lamps Plus agreement included no express agreement to class arbitration, “the fact that the agreement ‘does not expressly refer to class arbitration is not the “silence” contemplated in Stolt-Nielsen.”  Lamps Plus thereafter petitioned for a writ of certiorari to resolve the Ninth Circuit’s interpretation of the prior case and a circuit split.

Chief Justice Roberts penned the majority opinion joined by Justices Thomas, Alito, Gorsuch, and Kavanaugh.  After a brief brushoff of a new jurisdiction argument by Varela, the Court held that under the FAA an “ambiguous agreement can[not] provide the necessary ‘contractual basis’ for compelling class arbitration.”  The Court based its decision on a “refusal to infer consent” applied in many other fundamental arbitration questions.  “Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.”

The decision has already been heralded as a major win for corporations and big business, and Justice Ginsburg wrote in scathing dissent to remind the majority that “Congress enacted the [FAA] in 1925 to enable merchants of roughly equal bargaining power to enter into binding agreements to arbitrate commercial disputes.”  She continued by noting that the Act was not designed to govern contracts where one party holds most, if not all, of the bargaining power (i.e., an employment contract).  Justices Breyer, Sotomayor, and Kagan also wrote separately to voice their displeasure with the majority decision.

You can read the full majority opinion and dissents in Lamps Plus, Inc. v. Varela here.