U.S. Supreme Court Said “No” to Class Arbitration in Employment-Related Data Breach Dispute Because Arbitration Agreement Ambiguous on Class Procedures

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The U.S. Supreme Court issued two 5-4 decisions in as many months regarding class procedures. Lamp Plus, Inc. v. Varela, 587 U. S. ____ (2019) was favorable to corporate defendants by limiting the availability of class arbitration when the arbitration agreement is ambiguous, while Home Depot U.S.A., Inc. v. Jackson, 587 U. S. ____ (2019) favored consumer plaintiffs by preventing third-party counterclaim defendants from removing class actions from state court to federal court under the Class Action Fairness Act (CAFA). Interestingly, Justice Thomas joined the conservative majority (in concurrence) in Lamp Plus and he joined the more liberal Justices in Home Depot, authoring the pro-consumer majority opinion. Lamp Plus is the next in the Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662, 686 (2010) line of cases, which have probed the boundaries on plaintiffs’ access to class procedures in the arbitration forum when an arbitration agreement has foreclosed access to any litigation in the courts. The Lamp Plus majority makes plain that corporations cannot be forced to face class arbitration due to ambiguity or silence in an arbitration agreement regarding the availability of class procedures. We discuss Lamp Plus further below and will address Home Depot in a separate post.

At the Intersection of Data Privacy and Employment Law

Lamp Plus sits at the intersection of data privacy and employment law, two of the hottest areas driving developments in class action jurisprudence. According to recent survey data, labor and employment cases have remained the most common type of class action and the number of companies expecting data privacy and security cases to constitute the next wave of class actions doubled from 2017 to 2018. In Lamp Plus, the tax information of 1300 employees was disclosed by the employer to a hacker and a fraudulent tax return was filed later in the name of one of the employees. The employee filed a putative class action in federal court on behalf of those employees whose tax information had been released and the company moved to compel individual arbitration based on the arbitration agreement signed by the named plaintiff and most other employees. The District Court issued one order dismissing the case and compelling class arbitration, instead of individual arbitration as the company had requested. The company appealed and the Ninth Circuit Court of Appeals upheld the lower court’s class arbitration ruling, distinguishing the case from Stolt-Nielson because the arbitration agreement was ambiguous regarding the availability of class arbitration rather than silent like the Stolt-Nielsen agreement. Applying state law contract interpretation principles, the Ninth Circuit construed the ambiguity in the arbitration agreement against the drafter, Lamp Plus, and ruled that class arbitration was permitted under the agreement.

Unequivocal Affirmative Contractual Basis

The Supreme Court in Lamp Plus accepted (without deciding) the Ninth Circuit’s conclusion that the arbitration agreement was ambiguous. However, it rejected the Ninth Circuit’s resolution of the ambiguity. Stolt-Nielsen established that there must be an affirmative contractual basis for concluding that a party agreed to class arbitration, given the fundamental changes to the arbitration process that class procedures impose. In the Court’s view, class arbitration negates the central advantages of the traditional arbitration process that the FAA was drafted to facilitate. Therefore, silence on the issue (which was stipulated by the parties in that case) was deemed an insufficient basis on which to conclude the parties had agreed to class arbitration. So, what if the language of the agreement is ambiguous? Lamp Plus finds ambiguity insufficient, as well, and demands that class arbitration be agreed upon by the parties unequivocally.

The Court in Lamp Plus flatly rejected the notion that state contract rules of interpretation could require any ambiguity on the issue of class arbitration to be construed against the drafter of an arbitration agreement. A fundamental premise underlying the FAA is that arbitration “is a matter of consent, not coercion,” the Court stressed. Key to the Court’s position was the fact that the state rule resolving ambiguities against the drafter is applied only after the actual intent of the parties cannot be determined and its disadvantage to the drafter of the agreement is based on public policy, not consent. The Court pointed to “a long line of cases holding that the FAA provides the default rule for resolving certain ambiguities in arbitration agreements,” and determined that the federal statute must resolve the ambiguity in this case.

The Court noted that without regard to the drafter of the arbitration agreement, it has held that ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration under the FAA. The class arbitration ambiguity similarly should be resolved without regard to the drafter and with a focus on the FAA itself, it reasoned. The Court noted several factors requiring the ambiguity to be resolved against permitting class arbitration, including: (1) the FAA’s fundamental view that arbitration must be consensual and not coerced, (2) class arbitration undermines the most important benefits of “traditional individualized arbitration,” (3)  class arbitration “introduce[s] new risks and costs for both sides,” and (4) limited judicial review of arbitration decisions “raises serious due process concerns” with respect to the rights of absent plaintiff class members.

The Skeptical and the Dissent

The Lamp Plus decision was 5-4, with Justice Thomas filing a concurring opinion and Justices Ginsburg, Breyer, Kagan, and Sotomayor dissenting through several opinions. “Skeptical” is the word Justice Thomas chose to describe his view of the majority’s resolution of the perceived ambiguity in the arbitration agreement. He concurred with the majority in ultimate judgment, but he determined that the arbitration agreement was silent on the issue of class arbitration and at most indicated that the parties envisioned only individual arbitration.

The Dissent was more than skeptical regarding the majority’s disregard of the state contract law resolving ambiguity against the contract drafter. The Dissent chastised the majority for rejecting the default interpretive techniques applied to every other type of contract that is ambiguous, given the underlying tenant that the FAA requires arbitration agreements to be treated as any other contract. “[T]he Act does not federalize basic contract law….a plain-vanilla rule of contract interpretation, applied in California as in every other State, requires reading it against the drafter—and so likewise permits a class proceeding here.” The idea that the FAA could pre-empt this state rule because the Court finds that it “has too much ‘public policy’ in it comes only from the majority’s collective mind,” Justice Kagan rebuked. Justice Ginsburg went further to opine that the case “underscores the irony” in the majority’s reliance on the argument that “consent” is essential in arbitration. Pointing to the fact that the FAA originally was meant to address business disputes between parties of equal bargaining power, Ginsburg asserted that “Congressional correction of the Court’s elevation of the FAA over the rights of employees and consumers to act in concert remains urgently in order.” (internal quotations omitted).

Who Decides is Left Open for Another Day

Disputes certainly still will arise regarding the availability of class arbitration, and whether it is within the purview of the court or the arbitrator to decide whether the contract evinces an agreement to class arbitration remains an open question. In reaching its conclusion, the Lamp Plus majority pointed to other arbitration questions on which it has refused to infer consent. The court gave the example of “gateway” questions that it presumes the parties have not authorized arbitrators to address, like whether the arbitration agreement is valid or whether an arbitration clause applies to a dispute. The Lamp Plus majority then noted in a footnote that “the Court has not decided whether the availability of class arbitration is a so-called ‘question of arbitrability,’ which includes these gateway matters,” citing to Oxford Health Plans LLC v. Sutter, 569 U. S. 564, 569, n. 2 (2013). The Court explained that it did not address the issue in Lamp Plus since the parties agreed that the court should resolve the question.

Takeaway – Precision is Key

If a company intends to limit exposure to class actions in court, as well as class procedures in arbitration, case law makes it clear that the generic arbitration agreement that merely requires the resolution of all disputes through arbitration should be a remnant of the past. It also is not enough for an arbitration clause to explicitly prohibit class actions and to remain silent regarding class arbitration. It is critical for companies to have precisely crafted arbitration clauses that will mitigate the risk of exposure to class procedures appropriately. Arbitration agreements must use precise language regarding the availability of class actions and class arbitrations. And companies should take care in making agreements regarding who will resolve any question that arises on the availability of class procedures. The parties in Lamp Plus delegated that question to the court, opening the door to the possibility that the appellate process would get it right. If the decision is made by an arbitrator, Oxford Health demonstrated that there will be little to no room for a court to reverse it if the arbitrator gets it wrong.

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