David J. Fioccola and Adam J. Hunt
Financial Services and Finance
On April 24, 2019, the Supreme Court’s decision in Lamps Plus, Inc. v. Varela made it clear that an arbitration agreement must explicitly contemplate and provide for class arbitration, building on a line of pro-arbitration rulings from the Supreme Court over the past decade, including American Express Co. v. Italian Colors Restaurant, Stolt-Nielsen, S.A. v. Animal Feeds Int’l Corp., and AT&T Mobility LLC v. Concepcion.
In a 5-4 opinion by Chief Justice John Roberts, the Court’s majority held in Lamps Plus that the Federal Arbitration Act (FAA) bars class arbitration if an arbitration agreement is “‘ambiguous’ about the availability of such arbitration.” In Lamps Plus, plaintiff Frank Varela argued that his arbitration agreement with defendant Lamps Plus allowed him to pursue class claims because certain phrases in his arbitration agreement, such as one stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment,” “were capacious enough to include class arbitration.” The United States Court of Appeals for the Ninth Circuit agreed, holding that courts can infer the availability of class arbitration where an arbitration agreement does not explicitly block class arbitration and the contractual language is ambiguous. The Supreme Court reversed that decision, holding that “an ambiguous arbitration agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration” under the FAA.
The Ninth Circuit’s Decision: Interpreting Ambiguous Arbitration Clauses to Authorize Class Arbitration
In 2016, a hacker gained unauthorized access to tax information of approximately 1,300 Lamps Plus employees. After a fraudulent income tax return was filed in Frank Varela’s name, he filed a putative class action on behalf of himself and other affected employees. Relying on the arbitration clause contained in Varela’s employment agreement, Lamps Plus sought to compel individualized, rather than class, arbitration to resolve Varela’s claims, and to dismiss the class action. The district court granted the motion to compel arbitration, but rejected the individualized arbitration request, instead electing to compel class arbitration and dismiss Varela’s claims. Lamps Plus appealed, arguing that the district court was in error in authorizing class arbitration under the Supreme Court’s decision in Stolt-Nielsen, but the Ninth Circuit affirmed, holding that the arbitration agreement was ambiguous on the issue of class arbitration because it neither barred nor condoned class arbitration explicitly, and should therefore be construed against Lamps Plus, the drafter of the agreement under California contract interpretation rules.
The Supreme Court’s Decision: Reaffirming the Court’s Commitment to Traditional Arbitration and Interpreting Arbitration Clauses strictly In Accordance with their text
In the Lamps Plus decision, the Supreme Court rejected the plaintiff’s—and the Ninth Circuit’s—argument that ambiguity in an agreement must be construed against the drafter to authorize class arbitration. Although the Supreme Court deferred to the Ninth Circuit’s interpretation and application of state law, and thus accepted that the agreement was ambiguous, the Supreme Court held that an ambiguous agreement cannot provide the necessary “contractual basis” for compelling class arbitration under the FAA. The Court reasoned that class arbitration is not only “markedly different” from traditional bilateral arbitration, “it also undermined the most important benefits of that familiar form of arbitration.”
Further, the Court held that “consent is essential under the FAA,” and the intent of the parties is paramount when considering how to interpret an arbitration agreement. Because class arbitration is much more complicated and costly than traditional arbitration, the Court found it doubtful that the ambiguous agreement at issue was intended to be construed as consent to participate in class arbitration.
Finally, the Court held that courts may not rely on state contract principles to “reshape” traditional arbitration, and that the interpretive rule that an agreement must be construed against its drafter cannot “substitute for the requisite affirmative contractual basis for concluding that the parties agreed to class arbitration.” This ruling is the logical extension of the Court’s 2010 ruling in Stolt-Nielsen. In that case, the Court found that silence was an insufficient basis to conclude that the parties to an agreement contemplated class arbitration. Lamps Plus applies the same principle, holding that even where a contract is “ambiguous” on the availability of class arbitration—rather than “silent,” as in Stolt-Nielsen—courts can only compel class-wide arbitration if there is specific express language in the parties’ arbitration agreement permitting such non-traditional arbitration procedures.
The decision in Lamps Plus should not come as a surprise given the Supreme Court’s recent arbitration rulings. Lamps Plus reiterates the Supreme Court’s commitment to prioritizing traditional individual arbitration and sends a clear message that class arbitration is only available if the parties specifically contract for it. Companies therefore no longer need to fear that lower courts may “infer” the availability of class arbitration in an arbitration agreement.
Morrison & Foerster associate Lily Valentine Westergaard assisted in the preparation of this client alert.
 133 S. Ct. 2304 (2013).
 130 S. Ct. 1758 (2010).
 131 S. Ct. 1740 (2011).
Contact our world-class financial services lawyers.
©1996-2019 Morrison & Foerster LLP. All rights reserved.