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SCOTUS Strikes Another Blow to Class-Action Claims, Favoring Individual Arbitration

ABSTRACT: The Supreme Court has issued another ruling limiting class-action claims, in favor of individual arbitration, this time finding that contractual ambiguity is no substitute for a clear expression of consent to class-wide arbitration.

A divided United States Supreme Court recently handed down the latest in a series of wins for employers, manufacturers, retailers, and other businesses looking to use arbitration as a means to mitigate the risks of possible class-action litigation. This time, in Lamps Plus, Inc. v. Varela, the Supreme Court overturned the Ninth Circuit Court of Appeals, finding that an employer could not be compelled to arbitrate similar claims by its employees on a class-wide basis, even though its employment agreement was ambiguous as to whether the arbitration of similar claims be conducted on a class-wide basis, instead of individually. 

I.                    A clear, albeit controversial, trend in favor of individual arbitration

Arbitration agreements, which are strongly favored under the Federal Arbitration Act (“FAA”), can be a powerful tool for potential class-action defendants, both to mitigate the risks of potential exposure and to make those risks more predictable. But a contract is only useful to the extent it can be enforced. Fortunately for potential defendants, there has been a string of Supreme Court decisions in recent years empowering businesses to use arbitration clauses to narrowly define the procedures by which class-wide claims can be asserted. 

These decisions have been controversial, and most have been decided along roughly the same ideological divide. But there has been a clear trend in favor of the enforceability of arbitration agreements that limit or exclude class-wide arbitration actions.

For example, Stolt-Nielsen S.A. v. AnimalFeeds International Corp. was a 2010 case in which the Supreme Court concluded that silence was no substitute for the requisite “affirmative consent” to class arbitration, meaning that class-wide arbitration cannot be compelled based on an agreement that is simply silent as to the availability of class-wide remedies.   

The following year, in AT&T Mobility LLC v. Concepcion, the Supreme Court found that the FAA preempted a California statute providing that any class-action waiver in a consumer contract was unconscionable and, therefore, unenforceable. This 5-4 decision held the state statute was inconsistent with the FAA’s “overarching purpose” of ensuring “the enforcement of arbitration agreements according to their terms, so as to facilitate informal, streamlined proceedings.”

Then in the 2013 case of American Express Co. v. Italian Colors Restaurant, SCOTUS rebuffed another attempt to invalidate contracts that affirmatively waived the right to class arbitration. There, the Second Circuit had found a class-action waiver in American Express’s merchant agreement to be unenforceable, on the grounds that individually arbitrating each claim would be prohibitively expensive, since the costs of the arbitration would almost always exceed the potential recovery on any one claim. On appeal, a divided Supreme Court found that this sort of practical analysis was beyond the courts’ authority and ran counter to the principle, embodied in the FAA and recent case law, that parties should be free to agree to arbitrate, or not, as they see fit.

And just last year, in Epic Systems Corp. v. Lewis, the high court—once again split 5-4 along ideological lines—found that the National Labor Relations Board had overstepped its authority by finding that the National Labor Relations Act’s protection of employee “concerted activities” taken for their “mutual aid or protection” gave employees the right to pursue class claims and displaced the FAA in interpreting arbitration agreements between employers and employees. Recognizing that whether to arbitrate on an individual or class-wide basis is one of the “fundamental attributes” of an arbitration agreement’s character, the majority held that class-action waivers are just as enforceable in employment agreements as in any other arbitration agreement.

II.                  The recent Lamps Plus decision

This brings us to the recent Lamps Plus case, decided on April 24, 2019. It arose from a corporate data breach in which a hacker gained access to the personal financial and tax information of 1,300 company employees. Many of these employees had been required by the employer to sign contracts at the start of their employment, each of which included a clause requiring disputes regarding their employment to be submitted to binding arbitration. The arbitration language, however, was ambiguous as to whether similar claims would be arbitrated in separate proceedings or together, on a class-wide basis.

Frank Varela was one of the employees whose personal information had been compromised in the data breach, and he filed a civil lawsuit in the Central District of California seeking to assert claims under state and federal law, both individually and as a representative of a putative class of similarly situated employees. The employer moved to dismiss the civil case and to compel arbitration, specifically requesting that arbitration be on an individual rather than class-wide basis.

The trial court granted the employer’s motion to dismiss, but its order specified that arbitration would proceed on a class-wide basis. The employer appealed to the Ninth Circuit, which affirmed the trial court’s ruling, reasoning that ambiguities in the employment agreement—which was mandatory for the employees and was drafted exclusively by the employer—should be construed against the employer and in favor of the employees’ right to assert claims as a class.

The Supreme Court granted certiorari and struck down the lower courts’ rulings. Chief Justice Roberts authored the majority opinion and was joined by the court’s four other conservative-leaning justices (Thomas, Alito, Gorsuch, and Kavanaugh). The remaining four justices each filed dissenting opinions.

The court accepted the Ninth Circuit’s conclusion that the arbitration clause was ambiguous as to whether arbitration would be conducted individually or on a class-wide basis. Even though the agreement never specifically mentioned class-wide proceedings, some of its language—for example, its statement that arbitration would be “in lieu of any and all lawsuits or other civil legal proceedings”—was “capacious enough to include class arbitrations” as a potential remedy. 

But that ambiguity was not enough to force class-wide arbitration. Irrespective of state-law principles that ambiguous contractual language should be construed against its drafter, arbitration remains “a matter of consent, not coercion,” according to the majority, so there must be an “affirmative contractual basis for concluding that the parties agreed to class arbitration.” Relying heavily on the Stolt-Nielsen opinion discussed above, the majority ruled that without a clear expression of the parties’ intent to arbitrate on a class-wide basis, courts cannot force them to do so. An ambiguous contract is, by its very nature, not a clear expression of intent. Therefore, each employee’s claim was subject to individual arbitration, rather than a single class-action.

In a scathing dissent, Justice Ginsberg lamented what she sees as the Court’s consistent use of the FAA “to deny employees and consumers effective relief against powerful economic entities.” She found it ironic for the majority to invoke “the first principle” that “arbitration is strictly a matter of consent,” when employment agreements like the one at issue here are often presented on a take-it-or-leave it basis, and she decried the “Hobson’s choice employees face: accept arbitration on their employer’s terms or give up their jobs.” 

Justice Sotomayor authored a dissent of her own, in which she took issue with the majority’s characterization of class arbitration as fundamentally different from individual arbitration, characterizing it as “simply a procedural device,” which “an employee who signs an arbitration agreement should not be expected to realize that she is giving up.”

Justice Kagan’s dissent focused on the authorship of the employment agreement, arguing that it should be construed against its drafter—the employer—under general principles of contract law adopted in every state, which are not abrogated by the FAA.

Justice Breyer also authored a dissent, focused largely on the threshold question of whether the order compelling arbitration a “final” order was vesting the appellate courts with jurisdiction even to hear the appeal.

This case fits the mold of recent Supreme Court cases addressing class arbitration, which have consistently affirmed the validity of arbitration agreements and pushed back on efforts to limit their applicability or enforceability. Although the dissenting opinions evidence just how controversial the use of arbitration clauses remains, the majority opinion further entrenches arbitration agreements as a bulwark against class-action liability. Given the current makeup of the Supreme Court, the trend is unlikely to be reversed any time soon.