Groundhog Day? Supreme Court Strikes Down Class Arbitration Efforts...Again

In what finally may prove to be the effective death knell for most efforts to pursue class-wide arbitration, a closely-divided United States Supreme Court has now held that a party cannot be required to arbitrate claims on a class-wide basis unless the arbitration agreement clearly contemplates such a possibility. Accordingly, now would be a wise time both to evaluate the language of existing arbitration provisions in any standard contracts and to evaluate whether and in what form to include arbitration provisions in future agreements.

In Lamps Plus, Inc. v. Varela, Chief Justice Roberts authored the 5–4 majority opinion reversing the Ninth Circuit’s decision that allowed a Lamps Plus employee whose identity was allegedly stolen as a result of a hacker’s theft of employee data to pursue his claims against Lamps Plus on behalf of a putative class of fellow employees. After first navigating a potentially thorny jurisdictional issue concerning appealability of the order at issue (discussed in more detail in Justice Breyer’s dissent), the Court analyzed the substantive issue: whether California law requiring an ambiguous contract to be construed against the drafter supported the decision to require Lamps Plus to proceed with class-wide arbitration because the arbitration agreement was ambiguous on the subject. Over four separate dissenting opinions, the majority held that because arbitration is purely a matter of consent, and because class arbitration fundamentally alters the nature of an arbitration proceeding (eliminating many of its advantages and raising due process concerns for potential class members), state law providing that ambiguity is construed against the drafter cannot provide a substitute for the consent required to permit arbitration on a class-wide basis.

Lamps Plus follows previous holdings by the Supreme Court over the past decade that collectively curtail, and potentially could be used to effectively eliminate, class-wide arbitration. For example, in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., the Court held that mere silence in an arbitration agreement as to whether class-wide arbitration is permissible cannot be used as a basis to permit class-wide arbitration. In AT&T Mobility LLC v. Concepcion, the Court invalidated a state law doctrine rendering an arbitration agreement unconscionable and void if it does not permit class-wide arbitration. In American Express Co. v. Italian Colors Restaurant, the Court held that a class action waiver contained in an arbitration agreement cannot be invalidated on the grounds that individual arbitration would be prohibitively costly. Shortly before rendering the Lamps Plus decision, the Court held in Epic Systems Corp. v. Lewis that arbitration agreements between employers and employees requiring individual arbitration must be enforced, notwithstanding potentially competing policy concerns favoring collective resolution of certain employment issues. In light of the recent line of arbitration decisions from the Supreme Court, the Lamps Plus decision seems to have been inevitable.

To be sure, class-wide arbitration is not entirely dead. Parties, for example, may expressly allow for it in their arbitration agreement. And there may still be slender reeds on which to rest an effort to arbitrate class-wide absent an express agreement (perhaps, for example, an explicit adoption of specific arbitration rules that, in turn, contain provisions permitting class actions). But, in light of the strong line of Supreme Court precedent emphasizing the consensual nature of arbitration and the fundamental change that a class action brings to an arbitration proceeding, parties should be able to largely eliminate the possibility of class-wide arbitration through well-drafted arbitration agreements.