Lamps Plus, Inc. v. Varela, No. 17–988, __ U.S. __ (April 24, 2019) [click for opinion]

In 2016, a hacker tricked an employee of petitioner Lamps Plus, Inc. into disclosing tax information of about 1300 company employees. After a fraudulent federal income tax return was filed in the name of respondent Frank Varela, a Lamps Plus employee, Varela filed a putative class action against Lamps Plus in federal district court on behalf of employees whose information had been compromised. Relying on the arbitration agreement in Varela’s employment contract, Lamps Plus sought to compel arbitration—on an individual rather than a classwide basis—and to dismiss the suit. The district court rejected the individual arbitration request, but authorized class arbitration and dismissed Varela’s claims. Lamps Plus appealed and the Ninth Circuit affirmed. The Supreme Court reversed.

The Supreme Court had held in Stolt-Nielsen that a court may not compel classwide arbitration when an agreement is silent on the availability of such arbitration. The Ninth Circuit ruled that Stolt-Nielsen was not controlling because the agreement in this case was ambiguous, rather than silent, on the issue of class arbitration. There was some language in the contract that the Ninth Circuit said could support class arbitration, such as the part stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.” The Ninth Circuit followed California law to construe the ambiguity against the drafter. Because Lamps Plus had drafted the agreement, the court adopted Varela’s interpretation authorizing class arbitration.

The Supreme Court stated that the first principle that underscores all of its arbitration decisions is that arbitration is strictly a matter of consent. Consent is essential under the Federal Arbitration Act (the “FAA“) because arbitrators wield only the authority they are given. Thus, the task for courts and arbitrators is to give effect to the intent of the parties. In carrying out that responsibility, it is important to recognize the “fundamental” difference between class arbitration and the individualized form of arbitration envisioned by the FAA:

In individual arbitration, parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes. Class arbitration lacks those benefits.

In Stolt-Nielsen, the court had held that courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so. Silence is not enough. The court applied the same reasoning here. Like 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 Supreme Court also addressed specifically the Ninth Circuit’s reasoning based on the state law contra proferentem doctrine, which counsels that contractual ambiguities should be construed against the drafter. That default rule, the Supreme Court said, is based on public policy considerations and seeks ends other than the intent of the parties. Such an approach is flatly inconsistent with the foundational FAA principle that arbitration is a matter of consent.

The decision of the Ninth Circuit was reversed.

A version of this post originally appeared in the May 2019 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.