Last week, the Supreme Court heard arguments in Lamps Plus, Inc. v. Frank Varela, a case with major implications for companies seeking to avoid class arbitration. The case involves a dispute between lamp retailer Lamps Plus and employees claiming that the company mishandled their tax information prior to a phishing attack. The outcome will determine just how explicit companies must be in their arbitration agreements in order to avoid class arbitration and require plaintiffs to proceed individually.
Background and Details
In January 2018, lead plaintiff Frank Varela filed suit against his employer, Lamps Plus. He alleged that the company was negligent in handling its employees’ personal data, enabling a 2016 phishing attack that exposed employee tax information. A California federal judge agreed that the case should be adjudicated through arbitration, rather than in court, because of an arbitration provision in Varela’s employment contract. The judge also held, however, that Varela and fellow employees could arbitrate their claims as a class. While companies widely to prefer private arbitration to litigating in court, doing so on a class basis can reverse the benefits of arbitration by increasing the payout to plaintiffs and protracting the process.
The judge permitted the Lamps Plus employees to proceed as a class because the standard Lamps Plus employment contract, while requiring arbitration of employee disputes, was silent on whether such arbitration could be conducted as a class or whether each employee were required to arbitrate individually. The Ninth Circuit upheld the ruling: because the agreement was not explicit one way or the other, the appellate court held, state law required the ambiguous provision to be interpreted against the drafter, Lamps Plus.
Now Lamps Plus has taken the issue to the Supreme Court, which held oral arguments last week. In the landmark 2010 case Stolt-Nielsen v. Animalfeeds International Corp., the Court held that, absent a “contractual basis” in favor of class arbitration, plaintiffs must arbitrate claims individually. Here, the disagreement is whether such a “contractual basis” is evidenced by a general clause requiring arbitration of employee disputes but remaining silent on – and thus not expressly ruling out – class arbitration. Lamps Plus argues that both the Federal Arbitration Act and Stolt-Nielsen compel individual arbitration absent express consent. The plaintiffs, meanwhile, argue that it is reasonable to interpret an ambiguous arbitration provision according to state law principles requiring ambiguities to cut against the drafter. With oral arguments concluded, the Court is set to answer the question this term.
The Supreme Court will soon decide just how explicit arbitration provisions must be in order to require individual – rather than class-based – arbitration. Regardless of the outcome, the case serves as a reminder to companies of the risk associated with reliance on general contractual language that does not expressly prohibit class arbitration. On this issue, it is better to be safe than sorry: companies that want to avoid class arbitration should have counsel review their arbitration provisions and ensure appropriate language is included to expressly rule out class arbitration.