US Supreme Court Overturns Ninth Circuit Ruling on Class Arbitration – FAIR Act Introduced in Congress

Class Arbitration Granted, Granted, Then Denied.

In a 5-4 decision, the conservative-majority Roberts Court recently overturned two decisions by California District and Circuit courts, forcing individual arbitration (rather than arbitration as a class). Lamps Plus, Inc. v. Varela, No. 17-988 (U.S. Apr. 24, 2019).

A California employee tried to sue his employer, Lamps Plus, over a data breach resulting in a fraudulent tax return. Frank Varela sued Lamps Plus on behalf of an employee class harmed by the data breach. Lamps Plus sought arbitration and argued that its arbitration agreement authorized only individual arbitration, and not class proceedings. The district court sent the matter to arbitration. In sending the dispute to arbitration, the court held that the broad terms of the arbitration allowed class proceedings. Lamps Plus appealed.

The Ninth Circuit ruled the same way. The Ninth held that because Lamps Plus wrote an ambiguous arbitration clause, such ambiguity over individual-vs-class arbitration would be resolved against Lamps Plus (result: allowing class arbitration). This rule of “ambiguity-resolved-against-drafter” is a rule of general contract interpretation in California.

The Supreme Court disagreed with the two courts below. Justices Roberts, Thomas, Alito, Gorsuch, and Kavanaugh wrote an opinion finding that under the Federal Arbitration Act (FAA) “[c]lass arbitration, to the extent it is manufactured by [state law] rather than consen[t], is inconsistent with the FAA.” The “manufacture” referenced is the ambiguity-against-drafter rule.

Whose Consent?

“Consent” is an interesting basis upon which to ground the majority opinion, given the fact that the Lamps Plus required Varela to sign its arbitration clause as a condition of Varela’s employment. The majority found (essentially) that the ambiguity of the clause Lamps Plus wrote effectively meant that there was not consent on agreeing to class-arbitration.

The dissenting Justices authored a number of opinions recognizing the irony of “imposing individual arbitration on employees who surely would not choose to proceed solo.” (Ginsberg, J., dissenting)

The issue here is collective action versus individual action. “Divide and conquer” is the old adage. The more employers can force employees to proceed individually, the less those claims are worth and the less likely those claims will be to proceed. Lamps Plus already won in the District Court by moving this to arbitration. This decision handed Lamps Plus a further victory by preventing these employees from joining together to address harms (credit problems, etc.) that may be too small to fight “one by each”.

The FAIR Act Addresses Coercive Arbitration.

The FAIR Act has been introduced in Congress to end the practice of coercive arbitration of public rights. This law has two stated purposes:

  1. prohibit predispute arbitration agreements that force arbitration of future employment, consumer, antitrust, or civil rights disputes;
  2. prohibit agreements and practices that interfere with the right of individuals, workers, and small businesses to participate in a joint, class, or collective action related to an employment, consumer, antitrust, or civil rights dispute.

This has been in the news lately. Google employees have led an effort to help voters reach their congressional representatives about this issue. A number of consumer groups have weighed in on this issue. Notable voices include: Consumer Reports, Harvard Law Students’ Pipeline Parity Project, the National Consumer Law Center, and many others.

A similar effort is underway (again) in the California Legislature. AB-51 (currently in committee) would prevent employers from requiring employees to “waive any right, forum or procedure” for employer violations of the California Fair Employment and Housing Act and/or the California Labor Code.

Note that the prior version of this California bill was vetoed by former Governor Brown. However, Governor Newsom cut his teeth on the San Francisco Board of Supervisors and has made a platform of opposing policies of a certain federal executive department official.

If you face a demand that you sign a pre-dispute arbitration agreement, seek legal counsel. We recommend this because arbitration clauses significantly impair consumers’ legal rights. Further, if you agree to arbitration it will reduce your bargaining power once a dispute arises. Contact our experienced attorneys for a no-charge initial consultation.