Molly E. Meacham, Babst Calland Clements & Zomnir.

One of the key questions for any dispute is forum. Most parties are limited to selecting from the available court or courts provided by state and federal law as a function of jurisdiction and venue. Some contracting parties choose the courts of a particular forum in advance as part of their agreements. Other businesses and individuals take it a step farther and choose to opt out of the courts entirely by agreeing to resolve some or all of their disputes through arbitration.

There are aspects of arbitration that may be advantages or disadvantages, depending upon your viewpoint: privacy, typically faster resolution and streamlined discovery, lack of a jury's emotion in the verdict and limited appellate rights. In addition, arbitration can have significantly higher up-front forum costs in the thousands of dollars, as compared to the relatively low forum cost in the hundreds of dollars to file a complaint in the courts.

Given the higher forum costs, some plaintiffs—particularly those with smaller claims—may seek to bring their arbitrations as class claims. In recent years the U.S. Supreme Court has addressed several questions relating to arbitrability of class claims. In Stolt-Nielsen v. AnimalFeeds International, 559 U.S. 662 (2010), the Supreme Court prohibited class arbitration where the agreement is silent on whether the parties agreed to classwide arbitration. On April 24, the Supreme Court released its opinion in Lamps Plus v. Varela, No. 17-988, __ U.S. __ (2019), extending the holding of Stolt-Nielsen to also bar class claims where the agreement is ambiguous on whether the parties agreed to classwide arbitration.

In 2016, a malicious hacker used a phishing and social engineering scheme to convince one of the employees of Lamps Plus to send that hacker the W-2 forms of over 1,000 of the company's employees. The company notified its employees of the data breach and offered them credit monitoring and counseling. After the data breach, employee Frank Varela learned that he was the victim of identity theft in the form of a fraudulent federal income tax return filed by someone else in his name.

Varela had signed an arbitration agreement at the beginning of his employment with the company, agreeing to submit “any and all disputes, claims or controversies” to arbitration. However, Varela chose to file a complaint in federal court bringing a lawsuit on behalf of a putative class of employees whose W-2s were compromised in the 2016 data breach. The company filed a motion to compel individual arbitration of Varela's claim, not classwide arbitration, on the grounds that the arbitration agreement was silent on classwide arbitration and therefore did not allow it.

The lower court and the U.S. Court of Appeals for the Ninth Circuit ruled that under the terms of the agreement Varela's complaint had to be arbitrated, but could proceed as a class claim in arbitration. The Ninth Circuit affirmed the lower court's decision on the basis that the arbitration agreement was a contract to which California law applied, and California law required application of the principle of contra proferentem to construe ambiguities in the arbitration agreement against the company as the drafter. Applying that principle, the Ninth Circuit held that the arbitration agreement was ambiguous regarding classwide claims and under California law it must be read to include the possibility of class arbitration.

The Supreme Court reversed those decisions, holding in Lamps Plus that “neither silence nor ambiguity” can confer the right to classwide arbitration. Justice John Roberts, writing for the majority, emphasized that “arbitration is strictly a matter of consent.” Roberts held that California's doctrine of contra proferentem is pre-empted by the Federal Arbitration Act, because construing ambiguities against the drafter does not determine whether the parties intended to consent to classwide arbitration. Instead, the doctrine is a default rule meant to apply where the court cannot ascertain the intent of the parties—fundamentally in conflict with “the foundational FAA principle that arbitration is a matter of consent.” Further, classwide arbitration is “markedly different” from individual arbitration under the Federal Arbitration Act, and it “undermines the most important benefits” of individual arbitration because it “sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly and more likely to generate procedural morass than final judgment.” As a result, “more than ambiguity” is required to ensure that the parties consented to classwide arbitration. Effectively, following Lamps Plus only express and unambiguous consent to classwide arbitration will be sufficient to establish such a right.

Roberts' 13-page opinion in Lamps Plus sparked more than 30 pages of dissent from the four justices in the minority. Justice Elena Kagan disagreed with the majority's decision to disregard California law on contra proferentem on the basis that ambiguities in the agreement should be resolved against the company, which drafted the agreement and could have included language “expressly barring class arbitration if that was what it wanted.”

In another dissent, Justice Ruth Bader Ginsburg called out the decision as denying “employees and consumers effective relief against powerful economic entities,” as the decision serves to potentially deny judicial remedies in circumstances “when submission to arbitration is made a take-it-or-leave-it condition of employment or imposed on a consumer given no genuine choice in the matter.” Ginsburg pointed out the “proliferation” of arbitration agreements following the Supreme Court's series of arbitration decisions, which have “hobbled the capacity of employees and consumers to band together in a judicial or arbitral forum” with the result that “mandatory individual arbitration continues to thwart 'effective access to justice' for those encountering diverse violations of their legal rights.”

Under the current state of the law, parties to arbitration agreements that do not contain an express consent to arbitration of classwide claims may have effectively waived the right to bring such claims. However, given the vehement dissents in Lamps Plus and the 5-4 decision, future Supreme Court decisions may alter or amend that holding. As a result parties entering into arbitration agreements should not rely on silence or ambiguity to determine the treatment of classwide claims. Instead, the parties should consider expressly addressing classwide claims in their arbitration agreements, so that a future court is not left to construe the vital question of whether or not the parties intended to consent to the arbitration of these claims.

Molly E. Meacham is a shareholder and co-chair of the litigation group at Babst Calland Clements & Zomnir in Pittsburgh. Contact her at [email protected].