Stanford Law’s Robert Gordon on Lamps Plus Decision and Mandatory Arbitration

Robert W. Gordon
Stanford Law Professor Robert Gordon

For over two decades now, in their contracts with consumers and employees, business companies have been inserting a clause that says that disputes between the parties must be settled by arbitration. With increasing frequency, the contracts also preclude class actions—that is, they provide that injured parties must pursue their claims individually, rather than combine them in collective actions. Such mandatory arbitration clauses have often been called “tort reform by contract,” because they keep potential plaintiffs out of the courts, where they might have access to extensive discovery, jury trials, and rights of appeal; and funnel them into arbitration panels that are usually selected by the business. About half of private sector employers now require employees to agree to arbitrate disputes.

Such clauses are for obvious reasons very controversial. The companies argue that arbitration is a cheaper, more efficient way of settling disputes than litigation (although the same companies often choose to litigate rather than arbitrate when disputing with other businesses). That may be right, but such data as we have suggests that consumers and employees generally sue less often, prevail less often when they do sue, and recover less when they do prevail in arbitration than in litigation. If a company is engaging in systemic bad practices – such as imposing undisclosed fees on credit card customers, or stealing small amounts of wages from employees in unpaid overtime—the victims will not usually find it worthwhile to sue and their suits will not force the companies to change behavior.

Despite the controversy, mandatory arbitration clauses have found a stalwart ally in conservative majorities of the U.S. Supreme Court. The Court has turned the Federal Arbitration Act of 1925 into a powerful weapon against challenges to arbitration. The Act says that agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  The Act was pretty clearly meant to apply only to commercial parties, but the Court has read it broadly to pre-empt any common law or legislative limits on mandatory arbitration clauses.  In 2011, the Court overturned a California decision that held precluding class action waivers in consumer contracts was unconscionable (ATT Mobility v. Concepcion, 563 US 333.)  Last year, in Epic Systems v. Lewis (584 US ____), the Court held that a clause mandating individual arbitration precluded a group of employees from banding together to arbitrate, over their protest that labor law’s protection of their “concerted activity” should override the policy favoring individual arbitration.

Lamps Plus v. Varela continues this string of victories for class action waivers. Here a group of employees sought to compel arbitration on a class basis of a negligence suit against their employer, who had disclosed their tax information to a hacker.  Their employment contract was ambiguous on class actions. The Court held (5-4, through Chief Justice Roberts) that the advantages of individual arbitration—its speed, low cost and informality – are so clear that parties may be assumed to have agreed to it.  This was a minor decision compared to ATT Mobility or Epic Systems, but significant for its emphasis on the parties’ consent as the basis for agreement.  Justice Ginsburg in dissent argued strenuously that “consent” is largely a fiction in contract terms that employers require as a condition of employment and that employees mostly never notice,  and that parties should not be assumed to waive important rights via boilerplate provisions.

Lamps Plus is likely to add a little momentum to the growing political opposition to forced arbitration. In 2017 the federal Consumer Finance Protection Board enacted a rule that would have prohibited banks and credit card companies from requiring class action waivers in consumer contracts. Congress overturned the rule later that year, but the Senate vote was 51-50 (Mike Pence cast the deciding vote). The House has reintroduced legislation, and there is some support for it among Senate Republicans.  If arbitration really is such a superior remedy, the sponsors argue, make it optional and consumers and employees will choose it anyway.

Professor Robert Gordon is a legal historian with an expertise in American legal history, evidence, the legal profession, and law and globalization that spans four decades.