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Article: July 2019: Arbitration Update

July 30, 2019
Business Litigation Reports

Express Consent Required for Class Arbitration
A recent Supreme Court decision has—for the most part— signaled the end to an era of class arbitration proceedings. In Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019), the Court held that class-wide arbitration can only be compelled if the arbitration agreement expressly authorizes it. Id. at 1419. This case bolsters a line of Supreme Court decisions favoring individualized arbitration over the past decade. See Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018) (validating class arbitration waivers regardless of NLRA conflicts); Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228 (2013) (validating class arbitration waivers irrespective of cost imposed on either party); AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (holding that the FAA preempts state laws prohibiting class arbitration); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) (holding that silence in an arbitration agreement cannot compel class-wide arbitration). In a 5-4 decision authored by Chief Justice Roberts, the Court made it clear that arbitration is “strictly a matter of consent.” Lamps Plus, 139 S. Ct. at 1415.

Background and Procedural History. In 2016, Lamps Plus was hacked. Id. at 1407. Lamps Plus inadvertently disclosed the tax information of 1,300 company employees. Id. After a fraudulent tax return was filed in the name of employee Frank Varela, he filed a putative class action against Lamps Plus in Federal District Court on behalf of employees whose information had been compromised. Id. Lamps Plus, in accordance with its employee arbitration agreement, sought to dismiss the claims and compel individual arbitration. Id. The court dismissed the claims but authorized Valera to pursue class arbitration. Id.

On appeal, Lamps Plus argued that the District Court erred by compelling class arbitration, but the Ninth Circuit affirmed the order. Id. The Ninth Circuit concluded the agreement was ambiguous on the issue of class arbitration. Id. at 1413. The court resolved this ambiguity by applying the contra proferentem doctrine, which requires contractual ambiguities to be construed against the drafter (Lamps Plus). Id.

The Supreme Court’s Reversal. The Court faced the question of, “whether, consistent with the [Federal Arbitration Act], an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.” Id. at 1415. The majority held that it “cannot.” Id.

The FAA has a fundamental rule—arbitration is a creature of “consent, not coercion.” Id. Consent is essential under the FAA because arbitrators wield only the authority they are given. Id. at 1416. That is, they derive their powers from the parties’ agreement to forgo the legal process and submit their disputes to private dispute resolution. Id. At issue here was the interaction between the FAA’s fundamental rule and the contra proferentem rule applied to address the agreement’s ambiguity. Id. at 1415. Under the FAA, state contract law is applied to interpret the intent of the parties to an arbitration agreement—to the extent it does not preempt the FAA. Id. at 1415. But here, the majority found the application of contra proferentem to the agreement preempted the FAA. The Court explained that the contra proferentem doctrine applied by the Ninth Circuit is a rule of “last resort,” and it is only used when the intent of the parties cannot be deciphered. Id at 1417. But if the parties’ intent is undecipherable, they will surely fail to conform with the FAA’s fundamental rule of consent—this logical barrier was the crux of the Court’s opinion. The Court saw the Ninth Circuit’s holding as an effort to “reshape” individualized arbitration in a manner that was inconsistent with the FAA. Id. at 1418.

Chief Justice Roberts emphasized the importanceof consent by “recognizing the ‘fundamental’ difference between class arbitration and the individualized form of arbitration envisioned by the FAA.” Id. at 1416. Class arbitration sacrifices the traditional benefits of informality, cost, and efficiency. Id. Instead, the aggregate process looks like “the litigation it was meant to displace.” Id. Further, “it also raises serious due process concerns by adjudicating the rights of absent members of the plaintiff class” with limited judicial review. Id.

Client Impact. Lamps Plus is a major win for employers. The Court’s ruling was immediately echoed just one day later in Herrington v. Waterstone Mortg. Corp., No. 11-CV-779-BBC, 2019 WL 1866314 (W.D. Wis. Apr. 25, 2019). In the case, a $10 million class arbitration award was vacated when a class arbitration waiver was in conflict with the agreement’s incorporation of the American Arbitration Association (AAA) rules, which authorized class arbitration. Id. at *1. The court held that, even if this conflict created an ambiguity, the award would still be vacated because Lamps Plus confirmed that class arbitration would be improper. Id. at *5.

Employers who wish to avoid class-wide arbitration should still include explicit waivers in their arbitration agreements. However, Lamps Plus will offer additional protection against class arbitration for slow-moving employers and those sued on old contracts without a waiver. As it stands today—silence, ambiguity, and explicit waivers are all valid defenses to class arbitration.

Employers should also be aware of what the court did not decide—the question of “arbitrability.” Lamps Plus, 139 S. Ct. at 1417 n.4. If the wording of an arbitration agreement is not precise, the decision of class-wide arbitration could be left to the arbitrator, not the court. Depending on the agreement, the arbitrator may authorize class arbitration; a ruling the court would have to respect “however good, bad, or ugly.” Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 573 (2013).