In Favor of Arbitration: Supreme Court Rules Class Arbitration Provision Must be Express

By Allison C. Pearson

The U.S. Supreme Court issued its opinion in Lamps Plus, Inc. et al. v. Varela on April 24, 2019 (No. 17-988). The Lamps Plus opinion continues this court’s trend of favoring and enforcing arbitration agreements under the Federal Arbitration Act (FAA) and has potentially broad implications beneficial to employers. 

In Lamps Plus, an employee brought a class action lawsuit against his employer, Lamps Plus, on behalf of approximately 1,300 employees whose tax information was hacked from the company. At the beginning of his employment, the employee had signed an agreement requiring him to bring all claims against his employer in arbitration instead of filing suit in a court. Thus, when the employee filed suit, Lamps Plus sought an order to compel arbitration pursuant to the terms of the parties’ agreement. Lamps Plus argued that the agreement required the employee to proceed in arbitration as an individual. The employee argued the agreement was ambiguous, and thus, he should be allowed to pursue arbitration on behalf of a class. On appeal, the Ninth Circuit applied a California law requiring courts to interpret ambiguous provisions in a contract against the drafter — in this case, against Lamps Plus. Thus, the Ninth Circuit held that the employee’s claims were subject to arbitration, but he should be permitted to pursue class arbitration because of the ambiguity in the agreement.

Accordingly, the U.S. Supreme Court considered whether “an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.”  The Supreme Court has previously held that class arbitration is not permitted when an agreement is silent regarding class arbitration because the agreement lacks the necessary contractual basis.  See Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).  In Lamps Plus, however, the employee argued that various provisions of the arbitration agreement could be interpreted to either permit or disallow class arbitration.  Thus, he argued the Court should interpret the agreement against the drafter, and he should be allowed to pursue class arbitration.  The Supreme Court disagreed, and held that an agreement allowing class arbitration must be express — it cannot be ambiguous. 

The Supreme Court reasoned that the FAA, rather than California law, provides the default rule when an agreement to arbitrate is ambiguous: any ambiguity must be interpreted in favor of arbitration.  Further, the Court distinguished individual arbitration from class arbitration on the basis that class arbitration strips traditional individual arbitration of its characteristic benefits including lower costs, speed, and efficiency.  In short, the Court stated, “Class arbitration lacks those benefits.”  Thus, the Court found that interpreting an ambiguous agreement to permit class arbitration would interfere with a fundamental attribute of arbitration in violation of the FAA.

Because many employers rely on arbitration agreements, this is a beneficial new tool for employers to limit claims and limit their exposure.  The bottom line for employers who use arbitration agreements governed by the FAA is that employees may only pursue individual arbitration unless your agreement specifically allows for class arbitration.  If you have questions about whether your arbitration agreement is governed by the FAA, or how the Lamps Plus decision may affect your arbitration agreement, please contact one of our attorneys.

Written by Attorney Allison C. Pearson at Friday, Eldredge & Clark, LLP. She is an associate in the Labor and Employment Practice Group.

This information is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Labor and Employment attorneys.