Michael E. McCarthy
Greenberg Traurig, LLP
Employers and business owners breathed a collective sigh of relief on April 24, 2019, when the United States Supreme Court issued its highly anticipated ruling in Lamps Plus, Inc. v. Varela, No. 17-988, ___ U.S. ___, 139 S. Ct. 1407 (2019), and held, in a 5-to-4 decision, that under the Federal Arbitration Act (FAA), an ambiguous agreement cannot provide the basis for concluding that the parties agreed to submit to class arbitration. The Varela opinion reaffirms the Court’s decision in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010), which held that a court may not compel class arbitration when an agreement is silent on the availability of such proceedings.
In Varela, a hacker tricked an employee of Lamps Plus, Inc. into disclosing tax information of approximately 1,300 company employees. After a fraudulent federal income tax return was filed in his name, Frank Varela filed a putative class action 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 basis—and to dismiss the suit. The United States District Court for the Central District of California ruled that the agreement authorized arbitration, but on a classwide basis instead.
Lamps Plus appealed, and the Ninth Circuit affirmed. The Ninth Circuit found that certain phrases in the arbitration agreement were capacious enough to include class arbitration, such as terms stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment[,]” and that arbitration shall be “in accordance with” the rules of the arbitral forum (which, in turn, allowed for class arbitration). The Ninth Circuit thus reasoned that the agreement was ambiguous (rather than silent) on the issue of class arbitration, and was therefore outside of the holding in Stolt-Nielsen. Further, relying on the state law contra proferentem doctrine, which instructs that contractual ambiguities should be construed against the drafter, the Ninth Circuit determined that the agreement authorized class arbitration.
Reversing, the Supreme Court rejected the Ninth Circuit’s conclusions and Varela’s arguments outright. First, the Supreme Court rejected Varela’s contention that it lacked jurisdiction to hear the appeal under Section 16 of the FAA. The Court held that an order compelling arbitration and dismissing the underlying claims is “final” within the meaning of 9 U. S. C. §16(a)(3), and, further, that Lamps Plus retained standing since it did not secure an order compelling individual arbitration—the relief it requested.
Second, stressing the fundamental differences between individual arbitration and class arbitration, the Court held that lower courts may not infer consent to participate in class arbitration absent an affirmative “contractual basis for concluding that the party agreed to do so.” The FAA “requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.” The Court further explained that, unlike rules that help to interpret the meaning of a term, and thereby uncover the intent of the parties, contra proferentem is triggered only after a court determines it cannot discern the parties’ intent. Thus, because the key inquiry is party consent, courts cannot rely on state law contract principles to mandate class arbitration without evidence of the parties’ express agreement.
Chief Justice Roberts delivered the opinion of the Court. Justices Ginsburg, Breyer, Sotomayor and Kagan each filed dissenting opinions.
At least one lower court has already followed the Varela decision to foreclose a claimant’s attempt to compel class arbitration based on a purportedly ambiguous agreement. See Ford v. Account Control Tech., Inc., No. 1:19-CV-203 AWI-JLT, 2019 U.S. Dist. LEXIS 74564 (E.D. Cal. May 2, 2019).
Notwithstanding the outcome in Varela, and as a best practice, drafters should continue to include explicit class action and class arbitration waivers in their arbitration agreements at the earliest opportunity. Moreover, employers and business owners should recognize that consent can cut both ways, and thus the clarity and conspicuousness of arbitration provisions remain crucial to their enforcement on an individual basis.
Michael E. McCarthy is a litigation attorney in Greenberg Traurig, LLP’s Los Angeles office. His practice focuses on complex commercial litigation and class action defense. He may be reached at firstname.lastname@example.org. The views he expresses are his own and not those of Greenberg Traurig, LLP or its clients.