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

//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.

By |April 25th, 2019|

About the Author:

For years, Josh has helped lawyers become more organized, productive, and profitable. A trained litigator, Josh came to Smokeball from a large east-coast law firm where his practice focused on franchise, insurance, marine, and general litigation. His work with Smokeball, and his continued passion for what he does each day, is driven by a desire to help lawyers and their staff do better in every way. Knowing well the stress and strain put on today’s legal professional, he regularly focuses on improving work and life in the law. He has traveled the country working with and learning from lawyers and their staff. Josh speaks regularly to bar associations about successful law firm practices and other legal topics. Recent notable engagements have been with the Chicago Bar Association, the Illinois State Bar Association, and the Missouri Bar’s Solo and Small Firm Conference. In addition to his work at Smokeball, Josh serves on the Writing Resource Center staff at The John Marshall Law School. Besides legal technology, his research interests include judicial decision-making, jury decision-making and psychology, and legal writing. He has written and overseen research exploring causal effects of sex/gender on federal appellate court decision-making, and assisted with research for a forthcoming textbook on judicial decision-making. Additionally, Josh sits on the Board of Directors of Chicago-based Community Activism Law Alliance and on the Board of Directors of Chicago Fringe Opera Company. Josh holds his J.D., cum laude, from Washington University in St. Louis, where he served as a Senior Editor of the Wash. U. Law Review, held the prestigious Thompson Coburn Research Fellowship, served as Research Assistant to then-Vice-Dean (now Chancellor) Andrew D. Martin, and clerked at the U.S. District Court for the Eastern District of Missouri. He holds a B.A. in Political Science and a B.M. in Music Performance with Honors Scholar distinction from the University of Connecticut, making him a Huskies basketball fan through and through. Follow Josh’s activity on LinkedIn, and keep up with new articles on the Smokeball Blog.