UPDATED/No Class: Supreme Court Reverses Ninth Circuit On State Law Over FAA

By Echo K.X. Wang and Russ Bleemer

The U.S. Supreme Court this morning re-affirmed that if parties want class arbitration, they need to contract for it.  Specifically.

The Court today issued a long-anticipated opinion for Lamp Plus Inc. v. Varela, No. 17-988 (April 24) (available on the Court’s website at The decision is available on the Supreme Court website at http://bit.ly/2GxwFbC), holding that as a “fundamental arbitration” question, ambiguity in a contract “cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.”

The 5-4 decision by Chief Justice John G. Roberts Jr. reverses a Ninth U.S. Circuit Court of Appeals decision that used a California state law interpretation to allow a class arbitration.  The divided appellate panel opinion inferred mutual assent to class arbitration from language in the parties’ agreement.

But the statutory interpretation principle deployed by the appeals court, relying on public policy, was rejected. “[C]lass arbitration, to the extent it is manufactured by [state law] rather than consen[t], is inconsistent with the FAA,” wrote Roberts, adding,

We recently reiterated that courts may not rely on state contract principles to ‘reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.’ . . . . But that is precisely what the court below did, requiring class arbitration on the basis of a doctrine that ‘does not help to determine the meaning that the two parties gave to the words, or even the meaning that a reasonable person would have given to the language used.’ 3 Corbin, Contracts §559, at 269–270. Such an approach is flatly inconsistent with “the foundational FAA principle that arbitration is a matter of consent.  . . .

In that key passage, Roberts cited three seminal class arbitration cases to back up his point: AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011) (available at https://bit.ly/2KJc8RE), Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) (available at https://bit.ly/2rWzAE8), and on the last point, the key Court case rejecting class arbitration unless it was permitted in the parties’ contract, Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010) (available at http://bit.ly/2Pp3Jq4).

The chief justice began and ended the opinion emphasizing Stolt-Nielsen.

Today’s Lamps Plus decision demonstrates the court’s profound conservative-liberal split. There are four dissents—the first by Justice Ruth Bader Ginsburg, joined by Justices Stephen G. Breyer and Sonia Sotomayor; two solo dissents by Breyer and Sotomayor, and the last by Justice Elena Kagan, joined by Breyer and Ginsburg, and, for one part of the opinion, Sotomayor.

Kagan’s 14-page opinion, the longest of the dissents, rejects the Court’s Stolt-Nielsen backing and suggests it’s a screen for the majority’s own preferences. She writes that the Lamps Plus holding “is rooted instead in the majority’s belief that class arbitration ‘undermine[s] the central benefits of arbitration itself.’ But that policy view—of a piece with the majority’s ideas about class litigation—cannot justify displacing generally applicable state law about how to interpret ambiguous contracts.” [Citations omitted.]

Kagan writes that the Ninth Circuit applied a neutral interpretation rule in dealing with an ambiguity.

But Roberts rejected her reasoning in the majority opinion, the only dissent discussed beyond the footnotes in his majority opinion.  He cites AT&T Mobility for the principle that the interpretation “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  He states that the same rule applies in Lamps Plus: “[The] rule cannot be applied to impose class arbitration in the absence of the parties’ consent.”

Roberts continues:

Our opinion today is far from the watershed Justice Kagan claims it to be. Rather, it is consistent with a long line of cases holding that the FAA provides the default rule for resolving certain ambiguities in arbitration agreements. For example, we have repeatedly held that ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration. See, e.g., [Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614 (1985 (available at http://bit.ly/2VmubpU); Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1, 24–25 (1983) (available at http://bit.ly/2VhK0OE)%5D. In those cases, we did not seek to resolve the ambiguity by asking who drafted the agreement. Instead, we held that the FAA itself provided the rule. As in those cases, the FAA provides the default rule for resolving ambiguity here.

Justice Clarence Thomas wrote a separate concurrence noting that he remains skeptical of the Court’s use of the Federal Arbitration Act to preempt state law, but concurs in the majority opinion because of its backing of the Epic Systems and AT&T Mobility precedents.

* * *

 

Lamps Plus, the last of three arbitration cases to be decided in the Court’s current term, resolves a circuit splits between the Ninth and the Sixth, Third and Fifth Circuits on whether an arbitration agreement can be read to permit class wide arbitration where the agreement is silent on the matter. Compare, e.g., AlixPartne LLP v. Brewington, 836 F.3d 543, 547 (6th Cir. 2016), with Varela v. Lamps Plus Inc., No. 16-56085, 701 F. App’x 670, 673 (9th Cir. 2017)(unpublished)(available at http://bit.ly/2W66tv1), cert. granted, 138 S. Ct. 1697 (2018).

The case marks a return to a class arbitration issue after the Court’s first two 2018-2019 cases were mostly focused on other Federal Arbitration Act areas.  Both were decided in January:

  • Henry Schein v. Archer & White Sales, 139 S.Ct. 524 (Jan, 8, 2019) (available at https://bit.ly/2CXAgPw), mandating that arbitrators, rather than the courts, decide whether a case should be arbitrated in the face of an allegation that an argument for arbitration is “wholly groundless,” and
  • New Prime v. Oliveira, No. 17–340 (Jan. 15) (available at https://bit.ly/2JnrFWf), which enforced an FAA exclusion from arbitration a pre-dispute agreement with independent contractors who work in interstate transportation.

The Lamps Plus issue was “[w]hether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”

In its statement on the question presented, the Court invoked its best-known class arbitration case, Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., which it noted held that a court could not order arbitration to proceed using class procedures unless there was a “contractual basis” for concluding that the parties have “agreed to” class arbitration. 559 U.S. at 684. The Court’s introduction to the Lamps Plus issue explained that courts may not “presume” such consent from “mere silence on the issue of class arbitration” or “from the fact of the parties’ agreement to arbitrate.” Id. at 685, 687.

That presumption carried today’s opinion, which focused on arbitration agreement ambiguity, rather than silence. The Ninth Circuit majority had inferred mutual assent to class arbitration, according to Lamps Plus’s court papers, from language stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings” and a description of the substantive claims subject to arbitration.

Plaintiff Frank Varela, filed suit in 2016 against his employer, Lamp Plus Inc., a Chatsworth, Calif., home lighting retailer. Varela, who had worked at the company for nine years, has signed documents as a condition of his employment, including an arbitration agreement.  He also provided personal information to Lamp Plus prior to starting his job.

In March 2016, Lamp Plus was subject to a phish scam attack, resulting in sensitive personal information, such as employee tax forms for 1,300 Lamp Plus current and former employees, to be sent to a third party. As a result of the breach, Varela’s 2015 income tax was fraudulently filed with the stolen information.

Varela initiated a class action suit in California’s Central District state court on behalf of current and former employees affected by the breach, asserting both statutory and common law claims for the data breach, negligence, contract breach, and invasion of privacy. Lamp Plus moved to compel individual arbitration.

The court interpreted the contract under California state law and granted Lamp Plus’s motion compel to arbitration. The court, however, found ambiguities about whether class arbitration is permissible under the employer-drafted agreement. Varela v. Lamp Plus Inc., 2016 WL 9110161, at *7 (C.D. Cal. July 7, 2016), aff’d, No. 16-56085, 701 F. App’x 670, 673 (9th Cir. 2017)(unpublished)(available at http://bit.ly/2W66tv1).

Lamp Plus argued that the arbitration should be compelled on an individual basis, because since the agreement does not mention class arbitration, there was “no contractual basis for finding that the parties intended to arbitrate on a class-wide basis.” Id. at *6. Relying on Stolt-Nielsen, Lamp Plus contended that if an arbitration clause is “silent” as to class arbitration, that parties cannot be compelled to submit their disputes to class arbitration. Id.

The district court rejected this argument. The district court distinguished the case from Stolt-Nielsen by interpreting the “silence” in Stolt-Nielsen to mean an “absence of agreement” rather than the absence of language within an agreement that explicitly refers to class arbitration (“The lack of an explicit mention of class arbitration does not constitute the ‘silence’ contemplated in Stolt-Nielsen, as the parties did not affirmatively agree to a waiver of class claims in arbitration.”) Lamp Plus, 2016 WL 9110161, at *7.

The court then found that the arbitration agreement was ambiguous as to the class claim, and interpreted the ambiguity against the contract drafter, noting that “the drafter of an adhesion contract must be held responsible for any ambiguity in the agreement”. Lamp Plus, 2016 WL 9110161, at *7 (citing Jacobs v. Fire Ins. Exch., 36 Cali. App. 4th 1258, 1281 (1995)).  Accordingly, the district court granted Lamp Post’s motion to compel arbitration, but compelled arbitration on a class-wide basis rather than an individual basis.

Lamp Plus appealed to the Ninth U.S. Circuit Court of Appeals. Before a panel of Senior Circuit Judge Ferdinand F. Fernandez, Circuit Judge Kim M. Wardlaw, and the late Circuit Judge Stephen Reinhardt, Lamps Plus argued that the parties did not intend to permit class arbitration.

In an unpublished opinion, the Circuit court affirmed the district court decision authorizing class proceedings. Varela v. Lamps Plus Inc., No. 16-56085, 701 F. App’x 670, 673 (9th Cir. 2017)(unpublished)(available at http://bit.ly/2W66tv1). Judge Fernandez authored a short dissenting opinion, in which he opined that the majority opinion as a “palpable evasion of Stolt-Nielsen.”  Id.

Lamp Plus then petitioned and was granted certiorari at the Supreme Court. Oral argument was heard on Oct. 29, 2018 (a transcript of the oral argument is available at https://bit.ly/2FukX2d).

Between the grant of certiorari and the oral argument, several organizations filed amicus curiae briefs to the Supreme Court in favor of reversing the Ninth Circuit decision, including the U.S. Chamber of Commerce, the New England Legal Foundation, the Retail Litigation Center, Inc., the Voice of the Defense Bar, and the Center for Workplace Compliance. Friend-of-the-court briefs in favor of Respondent Varela were filed by a group of contract law scholars, and the American Association for Justice. The amicus curiae briefs can be accessed from https://bit.ly/2Ojt44n.

* * *

In his brief 13-page majority opinion, Chief Justice Roberts first disposes of a late-in-the-litigation motion Varela challenging both the Ninth Circuit’s and the Supreme Court’s jurisdiction over the case. The opinion states that the determination of class over individual arbitration affects a fundamental characteristic of arbitration, and the result did not provide the defense what it sought—therefore, a final and appealable decision.

The meat of the majority opinion was reserved for the Ninth Circuit’s examination of California state law, which allowed for the class arbitration determination. It accepted the lower court’s state law “interpretation and application” that the agreement “should be regarded as ambiguous.”

But ambiguity from the state law statute wasn’t enough—“a conclusion,” Roberts writes, “that follows directly from our decision in Stolt-Nielsen.” He continues:

Class arbitration is not only markedly different from the “traditional individualized arbitration” contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration. [Citing Epic Systems and Stolt-Nielsen.] The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.

Roberts notes that in carrying out the parties’ arbitration contracting wishes and intent, courts must “recognize the ‘fundamental’ difference between class arbitration and the individualized form of arbitration envisioned by the FAA,” again citing Epic Systems, AT&T Mobility and Stolt-Nielsen.  Noting that class arbitration lacks the benefits of lower costs, greater efficiency and speed—“‘crucial differences’ between individual and class arbitration”—mutual consent is needed.

The opinion states that Stolt-Nielsen’s reasoning on silence being insufficient to infer class arbitration applies to ambiguity, too. “This conclusion aligns with our refusal to infer consent when it comes to other fundamental arbitration questions,” Roberts writes.

The chief justice explains that the Ninth’s Circuit’s use of the contra proferentem doctrine—construe the ambiguous document against the drafter—produced the result in favor of class arbitration. But the doctrine should only be invoked where “a court determines that it cannot discern the intent of the parties.” (The emphasis is Roberts’.)

Class arbitration provided by state law, explains Roberts, is inconsistent with the Federal Arbitration Act. “The general contra proferentem rule cannot be applied to impose class arbitration in the absence of the parties’ consent,” the chief justice concludes.

* * *

In addition to Justice Thomas’s concurrence, and Justice Kagan’s dissent, Justice Ruth Bader Ginsburg joined Kagan’s opinion but writes separately “to emphasize once again how treacherously the Court has strayed from the principle that ‘arbitration is a matter of consent, not coercion,’” also citing to Stolt-Nielsen at 681.

Decrying the Court’s use of mandatory arbitration in consumer disputes, Ginsburg says that the majority’s Lamps Plus decision “underscores the irony of invoking ‘the first principle’ that “arbitration is strictly a matter of consent,” citing to the majority opinion.

Invoking her own dissents in three cases, among others, Ginsburg concludes that “mandatory individual arbitration continues to thwart ‘effective access to justice’ for those encountering diverse violations of their legal rights,” and repeats her Epic Systems dissent calling on Congress to intervene.

* * *

Justice Stephen G. Breyer joined in the Kagan and Ginsburg dissents, but also provides a nine-page analysis disputing the Court’s quick work on the jurisdiction question.

Breyer writes that the case should be arbitrated as determined by the California courts. “[T]he appellate scheme of the FAA reflects Congress’ policy decision that, if a district court determines that arbitration of a claim is called for, there should be no appellate interference with the arbitral process unless and until that process has run its course,” he writes.

Breyer notes later that Lamps Plus successfully obtained appellate review by “transform[ing]” an interlocutory order in a final decision.

* * *

Justice Sonia Sotomayor also joined Justices Ginsburg’s and Kagan’s separate dissents, but added her view that the Court’s class arbitration view is, at best, highly confused.  She began:

This Court went wrong years ago in concluding that a “shift from bilateral arbitration to class-action arbitration” imposes such “fundamental changes,” Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662, 686 (2010), that class-action arbitration “is not arbitration as envisioned by the” Federal Arbitration Act (FAA), AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 351 (2011). See, e.g., id., at 362–365 (Breyer, J., dissenting). A class action is simply “a procedural device” that allows multiple plaintiffs to aggregate their claims, 1 W. Rubenstein, Newberg on Class Actions § 1:1 (5th ed. 2011), “[f]or convenience . . . and to prevent a failure of justice,” Supreme Tribe of Ben-Hur v. Cauble, 255 U. S. 356, 363 (1921).

Sotomayor says that the FAA should not preempt a “neutral principle of state contract law,” at least not in this instance. She concludes, “[T]he majority today invades California contract law without pausing to address whether its incursion is necessary. Such haste is as ill-advised as the new federal common law of arbitration contracts it has begotten.”

 

* * *

Wang was a Spring 2019 CPR Institute intern, and a student at Brooklyn Law School. Bleemer edits Alternatives, which the CPR Institute publishes. See altnewsletter.com.

 

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