The United States Supreme Court ruled yesterday that arbitration agreements must explicitly authorize class arbitration in order for the process to be invoked by one of the parties. The decision overturns a Ninth Circuit ruling that permitted an employee’s arbitration to move forward on a class basis.
In Varela v. Lamps Plus, Inc., Frank Varela, a Lamps Plus employee, filed a putative class action in the Central District of California alleging that Lamps Plus allowed a hacker to obtain his and other employees’ tax information. The complaint alleged violations of state and federal law based on the compromise of employees’ tax information.
Lamps Plus moved to compel arbitration on an individual basis. The District Court rejected Lamps Plus’ attempt to arbitrate the matter individually but dismissed the case in favor of class arbitration. The District Court found that “[t]he lack of an explicit mention of class arbitration” in the parties’ contract did not constitute silence, “as the parties did not affirmatively agree to a waiver of class claims in arbitration.” Varela v. Lamps Plus, Inc., 2016 WL 9110161, at *7 (C.D. Cal. July 7, 2016)
Lamps Plus appealed, arguing that the parties did not agree to class arbitration. The Ninth Circuit affirmed, finding that the parties’ arbitration agreement did not explicitly prohibit class arbitration and was, therefore, ambiguous. The Circuit Court applied California contract law principles, found that the agreement was ambiguous, and construed that ambiguity against Lamps Plus as the drafter.
The Supreme Court’s Decision
In a 5-4 decision authored by Chief Justice Roberts, the Supreme Court reversed, finding that the Federal Arbitration Act (“FAA”) “requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.” Lamps Plus, Inc. v. Varela, 2019 WL 1780275, at *4 (2019).
The question before the Court was: “[W]hether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.” Id. In concluding that it cannot, the Court relied on its 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corporation, 559 U.S. 662, where it held that a court may not compel arbitration on a classwide basis when an agreement is silent on its availability. There are “crucial differences” between individual and class arbitration, the Court noted, meaning that courts cannot “infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so. Silence is not enough; the FAA requires more.” Id. at *6. The opinion highlighted the Court’s recent jurisprudence on arbitration and emphasized the necessity of both parties’ consent to arbitrate.
The decision split among party lines, with Justice Thomas writing separately to concur and Justices Breyer, Ginsburg, Kagan, and Sotomayor each authoring separate dissents.
Implications Moving Forward
The decision in Varela is another in the Court’s long line of cases favoring arbitration but only when it is explicit and clear in the contractual agreement. Moreover, the Court also seems to more cautious in its treatment of class arbitration given its fundamental difference from individual arbitration and the associated contract language that would be necessary for class arbitration. In short, this is a reminder that arbitration provisions should be clear, up front, and explicit in any contract you have with a consumer or client.