In another sure-to-be-controversial decision, the US Supreme Court, by a 5-4 margin, recently held that class action arbitrations cannot be compelled unless explicitly agreed to. The case is Lamps Plus, Inc. v. Varela, Case No. 17-988 (US Supreme Court April 24, 2019). In its ruling, the Supreme Court overruled the US Federal Ninth Circuit court sitting in San Francisco.

At issue in the case was an arbitration provision for employees of Lamps Plus, Inc., a California-based company that makes light fixtures and related products. Back in 2016, a computer hacker tricked a Lamps Plus employee into disclosing the tax information of approximately 1,300 other employees. The hacker was pretending to be part of the upper management for Lamps Plus. Since the release of the tax information included social security numbers, W-2 forms, and other personal and tax data, some of the 1,300 employees had fraudulent federal income tax returns filed in their names, including the lead plaintiff in the case, Frank Varela. Eventually Varela sued Lamps Plus for negligence and various other causes of action.

Like all Lamps Plus employees, Varela had signed an arbitration agreement when he started work. Varela sued in federal court as the representative of the entire class of 1,300 employees. Shortly after the case was filed, Lamps Plus asked the federal court to compel arbitration. Varela argued against being compelled to arbitrate and alternatively argued that, if arbitration was compelled, it should be class-wide arbitration. Lamps Plus argued the opposite, saying that it had not agreed to class arbitration. The contract at issue was silent on whether class arbitration was allowed or disallowed. Class action arbitration, like class action lawsuits, involve a small number of plaintiffs who represent a large class of litigants. In essence, the 1,300 arbitrations would be bundled together. Class action cases are expensive and time-consuming.

As an aside, the facts of the case demonstrate why it is important to have an experienced San Diego corporate attorney draft and review your employment contracts. A provision added to the Lamps Plus employment agreement stating that no class action arbitrations were allowed would have saved a lot of time and litigation expenses.

In any event, in the Lamps Plus case, at the trial level, the court ordered arbitration but allowed class arbitration. The matter was appealed to the Ninth Circuit which affirmed in a 2-1 split. The majority of the Ninth Circuit panel held that the arbitration provision was ambiguous since it did not explicitly deal with class arbitrations. There is a rule under California law, that, if a contract is ambiguous, the courts decide the case against the drafter of the contract. That is what the Ninth Circuit did when they affirmed the order compelling class arbitration since, if Lamps Plus had wanted to prevent class arbitrations, then Lamps Plus could have written that in the contract. The dissenting judge on the Ninth Circuit panel objected based on an earlier Supreme Court case decision and based on the argument that the federal law at issue — the Federal Arbitration Act — took control over and preempted California state law with respect how arbitration contracts are interpreted. According to the dissent, agreements to arbitrate must be clear and explicit and the courts are only to enforce that to which the parties have agreed. Since Lamps Plus did not clearly agree to class arbitrations, Lamps Plus could not be compelled to engage in class arbitrations.

The Supreme Court agreed with the dissenting judge from the Ninth Circuit. The SCOTUS majority agreed that the Federal Arbitration Act preempted California law and that no party could be compelled to engage in class arbitration if that was not clearly and explicitly agreed. The majority focused on the fact that class arbitrations defeat two of the three main advantages of arbitration. Arbitration has three advantages — speed, low cost, and the ability to choose arbitrators with expertise in the relevant field. As noted, class action arbitration are slow proceedings and are high in cost. Linking the legal issues, the court majority stated that “… ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to sacrifice the principal advantages of arbitration.”

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For more information, call corporate attorney Michael Leonard, Esq., of San Diego Corporate Law. Call Mr. Leonard at (858) 483-9200 or contact him via email. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters, and he proudly provide legal services to business owners in San Diego and the surrounding communities. Like us on Facebook.

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