Lamps Plus, Inc. v. Varela
Posted on Categories Class Actions, Court Decisions

By Burton W. Wiand

Absent an affirmative contractual basis for concluding that a party agreed to do so, there can be no class arbitration.

Lamps Plus, Inc. vs. Varela, Dkt. No. 17-988 (U.S. Sup. Ct., 4/24/19).

On April 24, 2019, the Supreme Court entered a decision that further limits the ability of Claimants to pursue class claims in arbitration. This case arose from a lawsuit filed by Frank Varela, (“Varela”) against his employer, Lamps Plus, Inc., (“Lamps Plus”) relating to the disclosure of tax information of 1,300 Lamps Plus employees. Varela sought damages in the United States District Court for himself and all persons similarly situated. When he was employed with Lamps Plus, he signed an arbitration agreement and Lamps Plus sought to compel arbitration of his claim on an individual basis. The District Court rejected the individual arbitration request, compelled class arbitration and dismissed Varela’s claims. Lamps Plus appealed, arguing that the District Court erred by compelling class arbitration. The Ninth Circuit affirmed. The Supreme Court in a 5-4 decision reverses.

The case presents two significant questions with respect to arbitration. The first relates to jurisdiction of appellate courts over arbitration orders and the second relates to the arbitrability of class claims.

With respect to the first of these issues, Varela claimed that the order of the District Court was not appealable because, under Section 16(a) of the FAA, the only orders relating to arbitration that are appealable are those that deny arbitration. He argued that, since the District Court compelled arbitration, albeit class arbitration, the FAA specifically did not provide for appeal of this decision and it was an “interlocutory order.” The majority of the Court determines that the order is actually appealable under Section 16(b) of the FAA, but, as a final order; the trial court dismissed Varela’s claims. However, the court’s reasoning is intertwined with the underlying premise of this case -- that “class arbitration” is so different from “arbitration” that, without specific consent in an agreement to class arbitration, the FAA does not require arbitration of such claims. Class arbitration “sacrifices the principle advantage of arbitration – its informality – and makes the process slower, costlier, and more likely to generate procedural morass than final judgment.” Based on this reasoning, the Supreme Court determines that jurisdiction lies under the FAA for the appeal of this matter and the Court’s review.

For dealing with the second issue, the majority primarily based its ruling on Stolt-Nielsen, S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010), where the Court ruled that silence in an arbitration agreement will not permit courts to infer consent to participate in class arbitration. Building on Stolt Nielsen, the Court affirms that, absent an affirmative contractual basis for concluding that a party agreed to do so, there can be no class arbitration and silence was not enough.

Varela and the Ninth Circuit had reasoned that the agreement before the court was ambiguous and, therefore, the doctrine of contra proferentem provided that the agreement should be construed against the drafter; thus, class arbitration was authorized. The majority of the Court determined that, under Stolt-Nielsen and other applicable precedent, ambiguity is not a sufficient basis to compel class arbitration. Class arbitration is so fundamentally different from individual arbitration that the rights that one foregoes in consenting to class arbitration could not be surrendered absent specific language. “Crucial differences” abound between individual and class arbitration, the Court stated that “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 Court reverses the Ninth Circuit and remands the case for further proceedings consistent with its opinion.

A number of dissents followed. The first by Justice Ginsburg outlined the continuing argument against Stolt-Nielsen and related cases that these actions by the majority of the Court were designed to restrict the availability of class actions to claimants. The dissent expressed the view that, in a consumer context and an employment context, these arbitration agreements were contracts of adhesion that were utilized to strip employees and consumers of any potential available right to seek redress through the courts or arbitration. Justice Breyer disagreed with the majority’s decision relating to jurisdiction. In his view, Section 16(a) of the FAA is clear that the right to appeal a District Court decision relating to arbitration is solely limited to the denial of an order compelling arbitration. He went on to argue at length that the interpretation of 16(b) of the FAA by the majority was a contorted decision and inconsistent with the text of 16(b) and the Court’s prior decisions. Justice Sotomayor analyzed the provisions of the arbitration agreement and the rules for arbitration under which it was to be conducted and concluded that the FAA and the rules of the arbitrable forum allowed class arbitrations. Finally, Justice Kagan in her dissent also reviewed the language of the agreement and argued that there was no reason to undermine the universal law regarding the interpretation of ambiguities in contracts. In her view, the FAA contemplated that state contract rules would control the interpretation of arbitration agreements and believed that under the FAA, the courts were required to enforce arbitration agreements according to their terms. Justice Kagan noted that this opinion has “more than a little in common with this court’s efforts to pare back class litigation,” again highlighting Justice Ginsburg’s fundamental objection to the decision that it allows companies to undermine any right of redress of employees or consumers through the use of arbitration agreements that provide no real ability to seek redress, while at the same time, cutting off any ability of claimants to seek relief in the courts.

(B. Wiand: *Justice Thomas concurred in the decision. His concurrence was related to the fact that the language of Varela’s arbitration agreement indicated that it was related to “my” employment with the company. Justice Thomas believed that the word “my” indicated there was no ambiguity and that the arbitration agreement was limited solely to Varela’s claims. **The court does not explain why a class arbitration is less able to deal with class issues than a court. It’s hard to imagine how an arbitration proceeding dealing with class arbitration issues could be less of a morass than proceeding with those issues before a district court.)

(SOLA Ref. No. 2019-17-01)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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