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Shining a Light on Ambiguous Arbitration Agreements: 'Lamps Plus v. Varela'

New Jersey Law Journal

Does an ambiguous contract provide a contractual basis to compel class arbitration under the Federal Arbitration Act (FAA)? In Lamps Plus v. Varela, the United States Supreme Court answered “no,” continuing a series of victories upholding class action waivers. 139 S. Ct. 1407, 1416 (2019).

The underlying dispute in Lamps Plus is straightforward. In 2016, approximately 1,300 Lamps Plus employees’ tax information was compromised in a data breach from a “phishing attack.” One of those employees, Frank Varela, discovered that a fraudulent income tax return was filed in his name. He filed a putative class action against Lamps Plus in the Central District of California. Lamps Plus v. Varela, 139 S. Ct. 1407, 1412–13 (2019).

In response to Varela’s lawsuit, Lamps Plus moved to compel individual arbitration based on an agreement he signed when he began his employment with the company (“the Agreement”). As relevant here, the Agreement required Varela to waive “any right … to file a lawsuit or other civil proceeding” related to his employment. The Agreement also required Varela to waive “any right … to resolve employment disputes” through a trial by jury and stated that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings” related to his employment. In addition, the Agreement defined arbitrable claims as those claims which “would have been available to the parties by law.”

Lamps Plus’ motion yielded mixed results. The district court granted Lamps Plus’ motion to compel arbitration, but did so on a class-wide basis. Lamps Plus appealed the district court’s order compelling class arbitration.

The Ninth Circuit affirmed the district court. In a concise, three-page opinion, the Ninth Circuit explained its view that the Agreement was ambiguous because it was “capable of two or more constructions, both of which are reasonable.” 701 Fed. App’x 670, 672 (9th Cir. 2017). According to the Ninth Circuit, one reasonable interpretation was that the Agreement contemplated class arbitration. The court eschewed Lamps Plus’ “interpretative acrobatics,” in favor of applying California’s contra proferentem rule to construe ambiguities against the drafter—and here, that meant interpreting the Agreement against Lamps Plus. Under that approach, the Ninth Circuit concluded that class arbitration was within the scope of the Agreement. The court explained:

Class actions are certainly one of the means to resolve employment disputes in court. That arbitration will be “in lieu of” a set of actions that includes class actions can be reasonably read to allow for class arbitration.

The broad language of the Agreement is not limited to claims. Varela surrendered his right to bring all “lawsuit[s] or other civil action[s] or proceeding[s].” Additionally, the Agreement authorizes the Arbitrator to “award any remedy allowed by applicable law.” Those remedies include class-wide relief.

Id. at 672–73 (emphasis in original). Judge Fernandez dissented. In his view, the agreement was not ambiguous, and the majority’s decision was a “palpable evasion of the Supreme Court’s decision in Stolt-Nielsen S.A. v. Animalfeeds International Corp.” Id. at 673 (Fernandez, J., dissenting).

The Supreme Court granted certiorari and reversed the Ninth Circuit.

The Supreme Court’s analysis focused on two propositions from FAA jurisprudence. The first is that ‘“arbitration is strictly a matter of consent.’” Lamps Plus v. Varela, 139 S. Ct. 1407, 1415 (2019) (quoting Granite Rock Co. v. Teamsters, 561 U.S. 287, 299 (2010)). It follows that a court’s task is to effectuate the parties’ intentions about the “who,” “what” and “how” of the arbitration proceedings. Id. at 1416 see also Stolt-Nielsen S.A., 559 U.S. at 683 (“We think it is also clear … that parties may specify with whom they choose to arbitrate their disputes.” (emphasis in original)).

The second proposition is that arbitration is principally an individual dispute resolution method and “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Stolt-Nielsen S.A., 559 U.S. at 684. In several cases—beginning with Stolt-Nielsen—the Court examined the “fundamental” differences between individual and class arbitration. Lamps Plus, 139 S. Ct. at 1416. In individual arbitration, for example, “parties forgo the procedural rigor and appellate review of the courts” to obtain “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” Stolt-Nielsen S.A., 559 U.S. at 685; see also Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1623 (2018) (“[T]he virtues Congress originally saw in arbitration … would be shorn away and arbitration would wind up looking like the litigation it was meant to displace.”) AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011) (“[T]he switch from bilateral to class arbitration … makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”). Because of these differences, “courts may not infer consent to participate in class arbitration absent an affirmative contractual basis.” Lamps Plus, 139 S. Ct. at 1416 (internal quotation marks omitted). As Justice Kagan succinctly stated in Oxford Health Plans LLC v. Sutter: “Class arbitration is a matter of consent: An arbitrator may employ class procedures only if the parties have authorized them.” 569 U.S. 564, 565 (2013).

The majority in Lamps Plus held that an ambiguous agreement is insufficient to infer that the parties intended to arbitrate claims on a class basis. Lamps Plus, 139 S. Ct. at 1416. According to the Court, this result follows almost directly from its prior decision in Stolt-Nielsen. Like the agreement in Stolt-Nielsen—which was silent with respect to class arbitration—the Court in Lamps Plus concluded that the ambiguous agreement was lacking in the “affirmative contractual basis for concluding that the party agreed” to arbitrate class claims. Id. (emphasis in original) (internal quotation marks omitted).

The majority also explained that the contra proferentem doctrine “cannot substitute for the requisite affirmative contractual basis” for class arbitration. Id. at 1419. According to the Court, contra proferentem is inconsistent with the FAA because it is “a default rule based on public policy considerations.” Id. at 1417. Viewed in that light, the doctrine “seeks ends other than the intent of the parties.” Id. And, because the parties’ intent is the paramount concern under the FAA, the district court and Ninth Circuit’s application of contra proferentem to ascertain some object other than the parties’ intent, was preempted.

The majority’s refusal to apply the contra proferentem doctrine in favor of class arbitration drew a sharp dissent from Justice Kagan, which Justices Ginsburg and Breyer joined, and Justice Sotomayor joined in part. First, Justice Kagan disagreed that the Agreement was ambiguous, based on language such as the requirement that Varela assert “any and all disputes, claims or controversies” in arbitration. Id. at 1430 (Kagan, J., dissenting). She asserted that this language “carries no hint of consent to surrender altogether—in arbitration as well as court—the ability to bring a class proceeding.” Id. at 1429 (Kagan, J., dissenting).

But, recognizing that the Agreement may be ambiguous, Justice Kagan argued that contra proferentem nonetheless required class arbitration. She invoked two principles from FAA jurisprudence. First, under the FAA’s “equal-treatment principle,” courts “[must] place arbitration agreements on an equal footing with other contracts.” Id. at 1431 (Kagan, J., dissenting). Second, courts should interpret arbitration agreements according to state law, unless state law treats arbitration agreements different from other contracts. Id. (Kagan, J., dissenting).

It follows, she argued, that contra proferentem should apply because it “is as even-handed as contract rules come.” Id. (Kagan, J., dissenting). Indeed, the rule applies to arbitration agreements as well as any other type of contract; and it could be applied against Varela (if he drafted the Agreement) as easily as it could be applied in his favor. Id. (Kagan, J., dissenting) (“The anti-drafter rule … takes no side—favors no outcome—as between class and individualized dispute resolution.”).

Justice Kagan was not the only dissenter. Justice Ginsburg took aim at the Court’s emphasis on the parties’ consent, arguing that “consent” is a legal fiction in a take-it-or-leave-it employment contract. Id. at 1420 (Ginsburg, J., dissenting). Justice Breyer argued that the Court lacked jurisdiction because the FAA states that a party cannot appeal from an interlocutory order granting arbitration. Id. at 1422 (Breyer, J. dissenting). And Justice Sotomayor faulted the Court for preempting California contract law without analyzing whether the Agreement was, in fact, ambiguous. Id. at 1427–28 (Sotomayor, J., dissenting).

The takeaway from Lamps Plus is clear. When a party moves to compel class action arbitration, that motion will be denied unless the arbitration agreement explicitly authorizes class arbitration.

“Shining a Light on Ambiguous Arbitration Agreements: 'Lamps Plus v. Varela',” by Stephen M. Orlofsky and Michael R. Darbee was published in the New Jersey Law Journal on June 6, 2019.

Reprinted with permission from the June 6, 2019, edition of New Jersey Law Journal © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.