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SCOTUS Analysis: Lamps Plus Inc. v. Varela

Richard D. Freer |
Richard D. Freer

It is becoming a tradition: each year, we seem to get another 5-4 Supreme Court decision enforcing arbitration that requires individual, and forbids aggregate, resolution of claims. This year’s case is Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (April 24, 2019). Neither the result nor the 5-4 split surprised anyone. The court’s jurisprudence under the Federal Arbitration Act (FAA) has become predictable.

Arbitration is an important form of dispute resolution that offers an alternative to litigation in court. It is heralded as less expensive and less protracted than litigation and for its flexibility in permitting the parties to engage an expert as decision-maker. But parties to arbitration surrender a good bit: the proceeding is not constrained by the rules of evidence, there is no jury and there is very little judicial oversight; even an arbitrator’s clear mistake of law does not necessarily require a court to vacate an arbitration decision. 

Historically, American courts refused to enforce arbitration clauses. In part, this resistance was rooted in turf: courts concluded that arbitration agreements improperly “ousted” them of jurisdiction. Congress enacted the FAA in 1925 to overcome this judicial hostility by requiring courts to enforce arbitration clauses. In 1925, such agreements were found only in the business-to-business context, and the clear goal of the FAA was to foster arbitration of commercial contract disputes.

But there was another reason for the courts’ reluctance to enforce arbitration clauses: some claims are so important that they deserve court litigation. Thus, for over half a century, the court held that federal statutory claims could not be arbitrated. The rights created by those statutes required vindication in the courts. Moreover, the court refused to apply the FAA to contracts of adhesion—deals that are offered on a take-it-or-leave-it basis.

In the past generation, the court has reversed course. Now, the FAA applies to contracts of adhesion, and the court has abandoned the idea that federal statutory claims require court litigation. As a result, retailers and employers routinely insert arbitration provisions into their contracts. Consumers and employees can avoid the clauses only by refusing to purchase the product or by refusing to accept the offer of employment.

This sea change in arbitration jurisprudence is remarkable in itself. But this sea change is not the entire story. Secure that the courts would enforce arbitration clauses in adhesion contracts, retailers and employers began adding a clause that forbade claimants from arbitrating with other claimants. As a result, consumers and employees not only must arbitrate, but must arbitrate alone.

The inability to arbitrate en masse creates a significant problem with “negative value” claims. These claims are not economically viable if pursued alone. For example, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), an estimated 1 million consumers had claims of $30 apiece. Because no one but a zealot or a nut (to paraphrase Judge Posner) will go through arbitration for a return of $30, a requirement that claimants proceed alone may ensure that very few claims will be pursued, even if well-grounded in law and fact. Reacting to this reality, some states refused to enforce class waivers. The court swept aside these efforts in Concepcion, in which it held that the FAA preempts such state laws.

What if the parties’ agreement is silent as to class arbitration? In Stolt-Neilsen S.A. v. AnimalFeed International Corp., 559 U.S. 662 (2010), the parties stipulated that their agreement said nothing about class arbitration. The court held that class arbitration could not be ordered. The FAA is founded on agreement, and if there is no agreement to permit class arbitration, it simply cannot be ordered. To the majority, class arbitration is so complex and antithetical to the goal of simplified dispute resolution that it can be ordered only if the parties consented to it.

Lamps Plus is a one-off from Stolt-Neilsen. In Lamps Plus, the agreement was not silent on the question of aggregate litigation; instead, language on the point was “ambiguous.” The 9th Circuit, applying California law, construed the ambiguous provision against the party that drafted the contract (the employer) and ordered class arbitration. The court reversed. The California law (that the agreement be construed against the drafter) is a default rule that applies only when a court has been unable to determine the intent of the parties. By definition, then, there was no stated intent to permit class resolution of claims. Under Stolt-Nielsen, class resolution could not be ordered. (Lamps Plus is likely anachronistic because most businesses will have learned by now to insert class waivers into their contracts.)

 Lamps Plus is the latest of an increasing string of cases demonstrating a profound clash of policies. On one side are five justices (here led by the chief justice) who see enforcing the terms of the contract as paramount. On the other side are the four liberal justices, who appeal to a broader policy: that a contract of adhesion ought not rob claimants of access to a meaningful remedy. The root of the policy clash is whether the FAA ought to apply to contracts of adhesion. Everyone knows how the court is split on this matter. And everyone knows that if change is to come, it must come from Congress.

—Richard D. Freer
Charles Howard Candler Professor of Law


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