Lamps Plus v. Varela: It’s Lights Out for Class Arbitration under Ambiguous Arb Agreements

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We have written before about the utility of class waivers in arbitration agreements as a defense to classwide arbitration. As we previously discussed, the U.S. Supreme Court decided in Stolt-Nielson S.A. v. AnimalFeeds Int’l Corp. that arbitration agreements that were silent on the question of class arbitration could not support the arbitration of class claims. Now, as we predicted, the court has taken the rule of Stolt-Nielson a step further, holding in Lamps Plus, Inc. v. Varela that an arbitration agreement that is ambiguous on the question of class arbitration also cannot support class arbitration under the Federal Arbitration Act (FAA). The 5-4 decision further restricts plaintiffs’ ability to arbitrate class claims that an arbitration agreement prevents them from litigating.

Lamps Plus had agreed with its employee Frank Varela to arbitrate “any and all claims” he might have, including claims arising from a data breach. When Varela sued as a putative class representative of his fellow Lamps Plus employees, Lamps Plus moved to compel arbitration of Varela’s individual claims and to dismiss the lawsuit. The district court granted the motion, dismissed Varela’s lawsuit without prejudice, and ordered the claims to arbitration — but as a putative class arbitration. Lamps Plus appealed to the Ninth Circuit, which affirmed, finding that the arbitration agreement was ambiguous on whether it permitted class arbitration, and construing the ambiguous agreement against Lamps Plus under the time-worn common law principle of “contra proferentum”—i.e., construing ambiguities against the drafter.

The Supreme Court reversed, with Chief Justice Roberts’ majority opinion basing its holding on the policy underlying the FAA that arbitration agreements cover only disputes the parties affirmatively agreed to arbitrate. Arbitration is “strictly a matter of consent,” and parties may agree to arbitrate for a number of different reasons: preference for a more informal forum, increased speed and efficiency, lower costs, the selection of specialized arbitrators to hear specialized disputes. Those benefits go out the window, however, in the context of classwide arbitration, the majority noted, with class arbitration often resembling the litigation it was meant to replace. Further, the court noted, class arbitration raises serious due process issues that may prevent absent class members from being bound to a result unfavorable to them, making class arbitration an unusually danger-prone procedure.

The majority concluded that the issue in Lamps Plus was answered by the reasoning underlying Stolt-Nielson — that silence would not be construed as the parties’ agreement to forgo the benefits of arbitration. For the majority, ambiguity on class arbitrability was also not enough to conclude that the parties had affirmatively agreed to arbitrate class claims: “Neither silence nor ambiguity provides a sufficient basis to conclude that the parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself.” The majority concluded that the FAA, not state law contract rules, provided the rule to determine how an ambiguous arbitration agreement should be construed on this question; therefore, California’s normal contract rule — to construe ambiguous contracts against the drafter — was not applicable.

The four dissenters each wrote separate opinions, with Justices Ginsburg and Kagan each gaining two other votes for their views. Justice Breyer believed the court (and the Ninth Circuit before it) lacked jurisdiction to hear the appeal, since Section 16 of the FAA prohibits appeals from an interlocutory order directing arbitration to proceed. (The majority pointed out that jurisdiction was present under Section 16(a)(3), which permits appeals from final orders with respect to an arbitration under the FAA, and under Green Tree Financial v. Randolph, an order dismissing claims and referring them to arbitration was final and appealable, under 16(a)(3)). Justice Kagan argued that there was ambiguity in the arbitration agreement — which frequently used singular pronouns to refer to Varela (i.e., referring to claims “I may have”) — but she also stated the parties’ agreement to arbitrate “any and all claims” must also include any class claims.For Justice Kagan and the dissenters, that ambiguity should be resolved by resorting to state contract law, and under California contract law, that meant construing it against the drafter, Lamps Plus.

That Lamps Plus is strong medicine was underscored by the ruling, the very next day, in Herrington v. Waterstone Mortgage Corp., where the district court vacated a $10 million + class arbitration award. The plaintiff had prevailed in a class-wide arbitration under the Fair Labor Standards Act against her former employer. The court had previously confirmed the award, and the defendant appealed. The Seventh Circuit remanded for the district court to consider the effect of Epic Systems v. Lewis. On remand, the district court vacated the award, holding that incorporating the AAA arbitral rules is not an “automatic authorization” of collective arbitration, even though those rules contain provisions allowing for class arbitration. Instead, the court relied on the class waiver in the arbitration agreement, and held that the agreement’s specific prohibition of class arbitration overcame any authorization of class action procedures in the AAA rules. The court went on to note that even if the class waiver were ambiguous, Lamps Plus prohibited the court from inferring consent to class arbitration from an ambiguous agreement. This decision is a shot below the waterline for the plaintiff. She (and 175 other employees) prevailed in arbitration and had the award confirmed in federal court. Now, two intervening Supreme Court decisions later, the $10 million arbitration award is vacated. Plaintiff is back to individual arbitration, and the opt-in plaintiffs that joined the arbitration must now either file their own arbitrations or their own lawsuits, if the claims are still timely.

Our previous conclusions from review of the class arbitration issue — that class waivers in arbitration agreements are the best protection against having to defend a class action in arbitration — remain unchanged. Companies wishing to avoid class arbitration should still include explicit class waivers in their arbitration agreements at the first opportunity. But Lamps Plus offers hope for those who have not yet included such waivers, and those sued on old contracts without them.  Class arbitration is a dangerous place for companies, and Lamps Plus makes it less likely that companies will end up in class arbitration without choosing and agreeing to it. That is a win. Lamps Plus also offers a new argument for those who might find themselves defending an attempt at class arbitration under an agreement that is arguably ambiguous on that or any other question. As things stand after Lamps Plus, silence, ambiguity, and explicit waiver are all defenses to class arbitration, significantly narrowing the path for plaintiffs who seek to arbitrate on behalf of a class.