Caroline Powell Donelan and Taylor C. Morosco
On April 24, 2019, the U.S. Supreme Court issued its 5–4 opinion in Lamps Plus, Inc., et al. v. Varela holding that class arbitration is only allowed when the parties’ agreement explicitly allows for it. In other words, when an arbitration agreement is silent or even ambiguous as to whether class-wide proceedings are allowed, claims must be arbitrated on an individual basis.
Lamps Plus is the latest decision from our highest court bolstering the enforceability of individual arbitration in the workplace.
In this post, we’ll take a semi-deep dive into Lamps Plus and evaluate potential implications for your workplace as well as for future litigation strategies.
Lamps Plus’ arbitration agreement somewhat ambiguously stated that the parties would arbitrate “all disputes, claims or controversies.” While the agreement used the singular pronoun “I” and singular possessive “my,” there was no express mention of whether arbitration must proceed on a class or individual basis.
Lamps Plus moved to compel individual arbitration of the plaintiff’s tort and contract claims arising from the company’s release of employee personal identifying information in response to a phishing scam. The Ninth Circuit, affirming the District Court’s ruling, held that the arbitration agreement was ambiguous and therefore should be construed against the drafter, Lamps Plus, to allow for class arbitration. The key question became, when interpreting an ambiguous arbitration agreement, do state contract law interpretation principles or the Federal Arbitration Act (“FAA”) principles apply?
This question is crucial because, indisputably, the FAA preempts state law when state law frustrates the purpose and objective of the FAA, which is to enforce arbitration agreements according to their terms. Indeed, a foundational principle of the FAA is that arbitration is strictly a matter of consent, as arbitrators “derive their powers from the agreement” and may “wield only the authority they are given.” These principles are fundamentally contrary to the state’s “construe against the drafter” rule, which seeks to apply a default rule triggered only after the parties’ intent cannot be determined.
In short, if the FAA applies, then clear consent to class arbitration is required.
Relying on the fact that state contract law would be contrary to the purposes of the FAA and in fact eviscerate the principle advantages of individual arbitrations—speed, efficiency, cost, and informality—the Supreme Court held that the FAA must apply and provides the default rule for resolving the ambiguity: the parties must consent and explicitly agree to class arbitration. Ambiguous agreements do not cut it.
This ruling, as well as the Supreme Court’s other pro-arbitration rulings in Epic Systems Corp. v. Lewis, American Express Co. v. Italian Colors Restaurant, Stolt-Nielsen, S.A. v. Animal Feeds Int’l Corp., and AT&T Mobility LLC v. Concepcion, further solidifies the Court’s commitment to supporting the FAA and its central purpose: to promote fast and efficient dispute resolution.
While these rulings are as strong as Valyrian steel, employees may still be able to challenge arbitration agreements based on state contract principles relating to conscionability.
It is also worth noting that legislation has been proposed in Congress to overturn Epic Systems by adding language to the National Labor Relations Act which would prevent employers from interfering in employee concerted activity through bans on class arbitration. A similar proposed bill did not make it through the House last year and the fate of the proposed legislation is far from certain.
Moreover, while arbitration is often a far more efficient forum and can obviate the risk of class claims, implementing mandatory arbitration is not a “one size fits all” decision, as that efficiency comes at a price. This is particularly true in states like California, where the employer is on the hook for the entirety of the arbitrator’s fee—a fee that can become an unwelcome bargaining chip for the employee when the employer finds itself facing an arbitrator’s invoice of tens of thousands of dollars versus paying a slightly lower, albeit inflated, individual settlement demand.
Finally, while these rulings are generally seen as employer-friendly, they may continue to stoke the fire of representative claims that are not covered by class action waivers, such as California’s Private Attorneys General Act.
As always, evaluating your current ADR program with experienced legal counsel to meaningfully weigh these costs and benefits is still the best way to mitigate risks and get back to the business of doing business.