Summary of Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019)

Anna Grushetsky

J.D. Candidate, Moritz College of Law 2020

Earlier this year, the Supreme Court took up the availability of class arbitration for employees.  This issue has been a divisive one for employers, employees, businesses, and the courts for years.  Some of the disagreement stems from the unclear language of such agreements.  In 2011, the Court held that an arbitrator may only authorize class arbitration if there is some provision in the contract that contemplates such class action procedures.[1]  This decision required class arbitration to have an origin in the parties’ contractual language.  The remaining issue is, not all arbitration agreements are clear enough to determine when assent to class action has been obtained.  The Court in Lamps Plus v. Varela addresses this ambiguity.

The underlying facts of the case proceeded as follows: in 2016, Lamps Plus, a company that sells light fixtures and related products, was victim to a data breach in which an individual impersonating a company official tricked an employee into disclosing tax information of approximately 1,300 employees, putting them at risk of identity fraud. Later that year, an identity thief filed a fraudulent income tax return on behalf of the named plaintiff-employee, Frank Valera.[3]  Valera, like many Lamps Plus employees, had signed an arbitration agreement when he began working at Lamps Plus.[4]  After the breach, he sought to bring a class action on behalf of all employees putatively affected by the security breach in federal court, bringing both state and federal claims.[5]  The district court dismissed Valera’s claims without prejudice, and instead ordered him to proceed in arbitration in compliance with the arbitration provisions in his employment contract.[6]  Lamps Plus objected to the class arbitration, arguing that the employment  contract only envisioned individual arbitration.[7]  The district court held that the contract was ambiguous as to the availability of class arbitration and that the state law doctrine of contra proferentem mandated that the court construe the ambiguity against the drafter.[8]  Therefore, the district court adopted Varela’s interpretation of the contract, and accordingly allowed the claims to proceed in class arbitration.[9]  Lamps Plus appealed the district court’s order and the Ninth Circuit affirmed.[10]  The Supreme Court reversed, holding that an ambiguous contract clause cannot be the basis for class arbitration, which is strictly a “matter of consent.”[11]  This is especially important, as, under the FAA, arbitrators “wield only the authority they are given…deriv[ing] their ‘powers from the parties’ agreement to forgo the legal process….”[12]

Previously, the Court has held that “a party may not be compelled under the [Federal Arbitration Act, “FAA”] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so[.]”[13]  In Lamps Plus, the Court expounded upon that holding, finding that class arbitration must also be prohibited in an employment contract drafted by the employer that included a mandatory arbitration clause that did not specify the availability of class arbitration.-drafted arbitration clause, the Court “consider[ed] whether the FAA … bars an order requiring class arbitration when an agreement is not silent, but rather ‘ambiguous’ about the availability of such arbitration.”[16]

Valera raised a jurisdictional challenge for the first time at the Supreme Court level, contending “that the Ninth Circuit lacked statutory jurisdiction because section 16 permits appeal from orders denying motions to compel arbitrationbut not orders granting such motions….”[17]  The Court dismissed this argument, holding that “[s]ection 16(a)(3) provides that an appeal may be taken from “a final decision with respect to an arbitration that is subject to this title[,]” and that the order to compel arbitration entered by the district court constituted a “final decision,” rendering jurisdiction proper here.[18]

In his concurrence, Justice Thomas explained that his agreement with the majority’s result is due not to the inapplicability of the state contra proferentem doctrine, but rather to the text of the agreement, which used the terms “I,” referencing the singular employee, and claims arising out of “my employment,” referencing the employee’s individual waiver of court proceedings.[19]

The four more liberal justices of the Court dissented from the majority’s opinion.  Justice Ginsburg’s dissent asserted that the FAA was written to give effect to agreements between merchants of “roughly equal bargaining power to enter into binding agreements to arbitrate commercial disputes.”[20] The dissents focused mainly on the differential in power at issue, especially in instances in which a powerful company contracts with its individual employees, to decry the “harm” that recent Supreme Court jurisprudence has done to individuals seeking to vindicate their rights through class arbitration.[21]

Justice Breyer dissented on jurisdictional grounds as well, asserting that “[t]he Federal Arbitration Act…says that a ‘court,’ upon being satisfied that the parties have agreed to arbitrate a claim, ‘shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.’ 9 U.S.C. § 4. Section 16 of the Act then says that ‘an appeal may not be taken from an interlocutory order … directing arbitration to proceed under section 4 of this title.’ § 16(b)(2) (emphasis added). And directing arbitration to proceed is just what the District Court did here.”[22]  Justice Breyer asserted that the congressional intent behind the FAA was to limit appellate review of an arbitration proceeding until after the arbitration between the parties has been completed in order to then raise issues with the completed proceeding.[23]

Justice Sotomayor wrote a separate dissent to emphasize what she described as the Supreme Court jurisprudence “[going] wrong years ago in concluding that a ‘shift from bilateral arbitration to class-action arbitration’ imposes such ‘fundamental changes[.]’”[24]  She also posited that “class-action arbitration ‘is not arbitration as envisioned by the’ Federal Arbitration Act (FAA).[25]

Justice Kagan also dissented separately, writing that the California state law that the Court displaced in favor of the FAA was improperly superseded as it was not “targeting” arbitration agreements more harshly than other contracts, and served to “federalize” contract law.  Kagan’s dissent emphasized the importance of upholding state law and emphasized the importance of avoiding constructions of state law that create a federal conflict.[27]

Lamps Plus will have lasting effects on arbitration clauses in many types of contracts; limiting, for better or worse, the availability of class arbitration actions in contracts that are not merely “ambiguous” on the availability of such actions, but also construing those that are “silent” on the subject as mandating individual arbitration.  On one hand, complex and perhaps more costly and inefficient class arbitrations will be more limited when interpreting arbitration agreements after Lamps Plus.  On the other hand, the Court’s opinion will doubtlessly have the effect of limiting access to effective arbitral relief for those who assent to arbitration agreements with little negotiating power in a contract, especially in the context of employment agreements.

 

[1] See Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).

[2] Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019).

[3] Id.

[4] Id. at 1413.

[5] Id.

[6] Id.

[7] Id at 1417.

[8] Id.

[9] Id.

[10] Id. at 1413.

[11]Id. at 1415 citing Granite Rock Co. v. Teamsters, 561 U.S. 287, 299 (2010).

[12] Id. at 1416 citing Stolt-Nielsen, 559 U.S. 662 at 682.

[13] Stolt-Nielsen, 559 U.S. at 684 (emphasis in original).

[14] Lamps Plus, Inc. v. Varela, 139 S. Ct. at 1416 (citing Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, 1623 (2018)) (explaining that an “individualized form of arbitration [is] envisioned by the FAA”).

[15] Id. at 1412.

[16] Id.

[17] Id. at 1413.

[18] Id. at 1413–14.

[19] Id. at 1419–20 (Thomas, J., concurring).

[20] Id. at 1420 citing Epic Systems, 138 S. Ct. at 1643 (Ginsburg, J., dissenting).

[21] Id. at 1422

[22] Id. (Breyer, J., dissenting).

[23] Id. at 1423.

[24]  Id. at 1427 citing Stolt-Nielsen, 559 U.S. at 686 (Sotomayor, J., dissenting).

[25] Id. citing AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 351 (2011).

[26] Id. at 1431 (Kagan, J., dissenting).

[27] Id. at 1429-32.