The U.S. Supreme Court Affirms Its Support for the Traditional Arbitration Model
In Lamps Plus, Inc. v. Varela, the U.S. Supreme Court, in a 5-4 decision, has affirmed its long-standing support for permitting businesses to enforce mandatory arbitration provisions with their customers and employees, and to avoid any class determination of claims. The decision is not a sea change in the law – instead, it underscores the fact that with effective drafting of arbitration agreements, businesses will generally be able to keep their disputes out of court and within a traditional arbitration framework.
The parties, Lamps Plus and Frank Varela, an employee of Lamps Plus, had a pre-existing arbitration agreement that was “ambiguous” about the availability of class arbitration (which would adjudicate in one proceeding the claims of numerous similarly situated employees). The agreement did not explicitly bar class arbitration, but also did not explicitly permit it. For example, there were references to “me” and “I” in the agreement which suggested a traditional arbitration framing, but another phase stated that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment,” which suggested the availability of class arbitration, given the fact that class remedies are available in “civil legal proceedings.”
Litigation arose when a hacker tricked an employee of Lamps Plus into disclosing tax information for 1,300 Lamps Plus employees. When a fraudulent federal income tax return was filed in Varela’s name, he initiated a lawsuit in federal district court seeking class resolution on behalf of all employees injured by the hack. The company filed a motion seeking to halt the lawsuit, on the ground that Varela was bound by the parties’ arbitration agreement.
The federal district court, in a decision affirmed by the Ninth Circuit Court of Appeals, agreed with Lamps Plus that the dispute should be sent to arbitration, but took the step, opposed by Lamps Plus, of permitting a class wide arbitration of the hacking incidents. The Ninth Circuit relied on California state law for interpreting ambiguous contracts, which requires that ambiguous terms in a contract should be construed against the drafter – in this case the employer, Lamps Plus. Because the arbitration agreement was ambiguous on whether class arbitration was available to Varela, the Ninth Circuit held that the employee, Varela, should prevail on the issue, because his employer, Lamps Plus, had drafted the arbitration agreement.
The U.S. Supreme Court overturned this Ninth Circuit decision, relying on prior cases interpreting the Federal Arbitration Act (the federal law governing arbitration) (“FAA”) as preempting any state law doctrine that undermines the right to arbitrate disputes. The Court applied this preemption doctrine to California law on the interpretation of ambiguous contracts, holding that the California rule is preempted because class arbitration “fundamentally” changes the nature of the “traditional individualized arbitration” envisioned by the FAA and thus interferes with the right to arbitration embodied by the FAA. Accordingly, the Supreme Court held (over strong dissents by four of the justices) that federal courts can no longer order class arbitration unless there is an arbitration agreement expressly authorizing it.
A key lesson of this case is that with a well-drafted arbitration provision, businesses are in a strong position to avoid the courts, avoid class treatment of disputes and require that employees and consumers arbitrate disputes. Businesses should review their arbitration agreements to ensure the effectiveness of these agreements on the issue of class arbitration, and, although the matter will for many prove nonnegotiable, consumers and employees should carefully consider the effect of such arbitration agreements before accepting them.
This article is intended only as a general discussion of these issues. It is not considered to be legal advice or relied upon. We would be pleased to consider providing additional details or advice about specific situations. For additional information on this topic, please feel free to contact Mark H. Moore, who regularly counsels and litigates for clients in connection with business disputes.