Lamps Plus Inc. v. Varela

Untitled design 1 - Lamps Plus Inc. v. Varela

On April 30, 2018 in Lamps Plus Inc. v. Varela, the U.S. Supreme Court granted a writ of certiorari in a class arbitration case coming out of the Ninth Circuit.  The issue in Varela is whether the Federal Arbitration Act (“FAA”) precludes an interpretation of an arbitration agreement that may authorize class arbitration based solely on general language commonly used in arbitration agreements.  The Ninth Circuit held that even though the arbitration clause did not mention “class arbitration”, mutual assent to class arbitration could be inferred from the language that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings” and a description of the substantive arbitral claims.  This issue is important to consumers nationwide because if the U.S. Supreme Court reverses the Ninth Circuit and disallows class arbitration in Varela, consumers subject to many other arbitration clauses from which class arbitration may be more readily inferred than the one in Varela could be precluded from seeking class arbitration and leveling the playing field against companies committing rampant consumer fraud.

In Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., the U.S. Supreme Court held that a district court could not order arbitration to proceed using class procedures unless there was a “contractual basis” for concluding that the parties have “agreed to” class arbitration. 559 U.S. 662, 684 (2010) (emphasis in original). The Court explained that courts may not “presume” such consent from “mere silence on the issue of class arbitration” or “from the fact of the parties’ agreement to arbitrate.” Id. at 685, 687.

The petitioner company in Varela argued that the U.S. Supreme Court should hear this case because the contract’s arbitration language relied upon by the Ninth Circuit to grant class arbitration, merely identified arbitration “as the agreed-upon substitute for litigation in court”, and did not prescribe that “the arbitration will take place under the same procedures available in court, such as the class device.” Pet. App. at 3 (emphasis in original).  The Varela petitioner argued that the Ninth Circuit co-mingled the arbitration clause’s language about substantive claims and remedies from court proceedings that would be available in the arbitration proceeding with courts’ procedural rules, which would not be so available.

The respondent consumer in Varela argued that the Ninth Circuit got it right by applying generally applicable principles of California contract law to the arbitration clause’s specific language and finding that the parties agreed to include class arbitration within the arbitration provision.

The fact that the U.S. Supreme Court granted the company’s petition would appear to favor an eventual reversal of the Ninth Circuit’s decision.  The real question may be how wide a scope will the Supreme Court ruling be if it vacates the Ninth Circuit’s order. The Court could issue a narrow decision holding that the specific language in the arbitration agreement in Varela does not demonstrate inferred consent to class arbitration under Stolt-Nielsen, or the Court could issue a broader decision finding that unless a court finds the phrase or words “class arbitration”, “arbitration on a class-wide basis” or something similar, consent to class arbitration can never be inferred and ordered.  On the other hand, the Court could uphold the Ninth Circuit’s decision, holding that Varela was merely an interpretation of California contract law and relying on the fact that the ambiguity in the adhesive contract should be resolved in against the drafter, the company, and in favor of the consumer.  This would seem to be the more sound decision because while the company argued to the Court that the arbitration clause’s language was “found in virtually any standard arbitration clause”, there seems to be nothing in the actual record to support that statement.  That clear threat issued to the Supreme Court that class arbitration is going to be granted wholesale if the Court affirms the Ninth Circuit decision seems baseless and a red herring.  The Ninth Circuit decision appears to be a reasoned and restrained contractual interpretation based solely on this contract’s specific provisions, and should accordingly be upheld.

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