Hunton Employment & Labor Perspectives

In  a 5-4 decision, the U.S. Supreme Court slammed the door shut on class arbitration unless specifically authorized by the parties.  The decision, Lamps Plus, Inc. v. Varela, reaffirmed the Court’s prior precedent that arbitration is a matter of consent, and that “[s]ilence is not enough” to infer consent to class arbitration. 

Case Background

Frank Varela, an employee of Lamps Plus, filed a putative class action in California federal court following a data breach.  At his hire, Valera signed an arbitration agreement consenting to arbitration of “all claims that may hereafter arise in connection with my employment or any of the parties’ rights and obligations arising under this agreement.”  Importantly, the agreement was silent on class proceedings.  It otherwise stated, in part:

I understand that by entering into this Agreement, I am waiving any right I may have to file a lawsuit or other civil action or proceeding relating to my employment with the Company and am waiving any right I may have to resolve employment disputes through trial by judge or jury. I agree that arbitration shall be in lieu of all lawsuits or other civil legal proceedings relating to my employment.

Early in the case, Lamps Plus moved to compel arbitration on an individual basis.  The district court granted the motion but ordered class, rather than individual, arbitration.  The district court interpreted the arbitration agreement to be “broad enough to encompass class claims as well as individual claims or … at least ambiguous and should be construed against the drafter.”

A divided Ninth Circuit panel affirmed the decision, holding that “[a] reasonable — and perhaps the most reasonable — interpretation of [the agreement’s] expansive

language is that it authorizes class arbitration.”  The Ninth Circuit panel held that the district court “correctly found ambiguity,” which, according to state

law contractual principles, must be construed against the agreement’s drafter, Lamps Plus.

Supreme Court’s Holding

The Supreme Court reversed, holding that, under the Federal Arbitration Act (“FAA”), an ambiguous agreement cannot provide the “neces­sary ‘contractual basis’ for compelling class arbitration.”  The Court emphasized that “arbitration is strictly a matter of consent.”  While the parties consented to individual arbitration, the Court noted that there is a “fundamental” and “crucial” difference between individual and class arbitration, the latter of which was not consented to.

The Court also rejected the Ninth’s Circuit’s application of state contractual law to find that the parties consented to class arbitration.  The Court held that the state rule was preempted by FAA’s general principle that arbitration is a matter of consent, which cannot be manufactured by state law.

What Does This Mean For Employers?

Lamps Plus is, no doubt, a great victory for employers.  Yet, it is a victory in a battle that need not be fought.  The case’s underlying dispute is the result of an unnecessarily ambiguous arbitration agreement that, if properly drafted, could have explicitly waived class arbitration.

The main takeaway for employers is to review your arbitration agreements to ensure that class arbitration is expressly waived, as any ambiguity or silence on a particular issue could result in unnecessary litigation.