In the final arbitration-centric decision of the Term, the Supreme Court on April 24 held 5-4 in Varela v. Lamps Plus, Inc., No. 17-988, that an express agreement is required for there to be class arbitration.
We reported in SAAs 2018-41E (Nov. 5) and -41 (Oct. 31) that SCOTUS heard oral argument in this case on October 29th. The issue before the Court, as described in the Petition for Certiorari, was: “Whether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”
Varela v. Lamps Plus, Inc., 701 Fed. Appx. 670 (9th Cir. 2017), involved a class action brought by Lamps Plus employees, who alleged that their personal data was breached when their employer was victimized by a phishing scam. Lamps Plus moved to compel individual, bilateral arbitrations, per the predispute arbitration agreement (“PDAA”) in the employment agreements (ed: which called for arbitration at either the AAA or JAMS under the institution’s employment rules). The employees countered that any arbitrations should be conducted on a class basis, while Lamps Plus contended that nothing in the PDAA authorized class arbitrations. Although the PDAA did not state expressly that class arbitrations were permitted, the District Court, applying California law, had inferred this from other language in the arbitration agreement and the Ninth Circuit agreed. Finding these inferences created ambiguity and construing the ambiguity against the drafter, the District Court ordered classwide arbitration and a divided Ninth Circuit affirmed. Oral argument at SCOTUS took place October 29 in Lamps Plus, the last of three arbitration cases heard this Term.
Majority Holding: Express Agreement Required
Our editorial comment after the oral argument was: “The stakes are high here! Imagine a regime where class arbitration may be ordered by a court, without an immediate appeal, and arbitration panels proceeding to class certification wield tremendous power without judicial review. While re-drafting clauses to add class action waivers and specific provision for individual arbitration, as Justice Ginsburg observed, will moot these concerns, those companies caught in such a web face grave financial risk.” The majority seemed to have similar concerns, as expressed in the Opinion authored by Chief Justice Roberts, who was joined by Justices Alito, Gorsuch, and Kavanaugh, and Thomas.
The core holding? An express agreement is required to compel a dispute to class arbitration. Say the majority: “We therefore face the question whether, consistent with the FAA, an ambiguous agreement can provide the necessary 'contractual basis' for compelling class arbitration. Stolt-Nielsen, 559 U. S., at 684. We hold that it cannot – a conclusion that follows directly from our decision in Stolt-Nielsen. Class arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration. Epic Systems, 5 84 U. S., at ___ (slip op., at 8); see Stolt-Nielsen, 559 U. S., at 686–687. The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis…. Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis. The doctrine of contra proferentem (ed: construing ambiguous language against the drafter) cannot substitute for the requisite affirmative ‘contractual basis for concluding that the part[ies] agreed to [class arbitration].’ Stolt-Nielsen, 559 U. S., at 684” (brackets in original). Justice Thomas filed a separate concurring Opinion, stating: “This agreement provides no ‘contractual basis’ for concluding that the parties agreed to class arbitration, Stolt-Nielsen, supra, at 684, and I would therefore reverse on that basis.”
Sidebar Jurisdictional Issue
Another issue was why was Lamps Plus permitted, given the constraints on interlocutory issues in FAA section 16(a)(3), to appeal an order granting arbitration? At oral argument, Justices Sotomayor and Breyer worried that the federal appellate courts could be inundated with appeals of arbitration orders. On that question, the majority holds that “an order that both compels arbitration and dismisses the underlying claims qualifies as ‘a final decision with respect to an arbitration’ within the meaning of 9 U. S. C. §16(a)(3).”
The Court’s liberal wing dissented. Justice Kagan wrote a blistering dissent, joined by Justices Breyer and Ginsburg. Justice Sotomayor joined Justice Ginsburg in full, and Part II of Justice Kagan’s dissenting Opinion. In Part I, the dissent argues that the PDAA and the JAMS and AAA Rules both “furnish rules for arbitrators to conduct class proceedings.” In Part II she finds that: “Under the FAA, state law governs the interpretation of arbitration agreements, so long as that law treats other types of contracts in the same way…That well-established principle ought to resolve this case against Lamps Plus’s request for individual arbitration. In my view, the arbitration agreement Lamps Plus wrote is best understood to authorize arbitration on a classwide basis. But even if the Court is right to view the agreement as ambiguous, a plain-vanilla rule of contract interpretation, applied in California as in every other State, requires reading it against the drafter -- and so likewise permits a class proceeding here. The majority can reach the opposite conclusion only by insisting that the FAA trumps that neutral state rule whenever its application would result in class arbitration. That holding has no basis in the Act -- or in any of our decisions relating to it….” Justice Ginsburg wrote a separate dissent, adding: “I write separately to emphasize once again how treacherously the Court has strayed from the principle that ‘arbitration is a matter of consent, not coercion.’ Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662, 681 (2010).” Justice Breyer, too, authored a separate dissent, stating: “In my view, the Court of Appeals lacked jurisdiction to hear this case. Consequently, we lack jurisdiction as well.”
A Recap for the Term
Two other arbitration-centric cases were also heard this Term, New Prime, Inc. v. Oliveira, No. 17-340, on October 3rd and Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272, also on October 29. As we’ve noted before, SCOTUS hadn’t heard three arbitration cases during the same Term since 1960, when the Court decided three landmark arbitration cases involving the United Steelworkers union. These decisions were later dubbed, the “Steelworkers Trilogy.” The final score for this Term? Pro-arbitration/business 2, anti-arbitration/employees 1. In the first Opinion authored by Justice Kavanaugh, the Court on January 8 held unanimously in Henry Schein that there is no delegation carveout for “wholly groundless” assertions of arbitrability under the FAA. Then, in an Opinion authored by Justice Gorsuch, SCOTUS on January 15th held unanimously in New Prime that the FAA does not cover independent contractors actually engaged in interstate commerce, and that this "§1 exclusion" issue must be decided before arbitration is compelled by a court.
(ed: *In the end, we view this as a pro-business, pro-arbitration decision, since absent an express provision to the contrary, arbitrations are to be bilateral. **Under the AAA's Supplementary Rules for Class Arbitrations, the arbitrator is directed to determine, “as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of ... a class.”) (SAC Ref. No. 2019-16-01)
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