U.S. Supreme Court Holds Arbitration of Classwide Claims Not Required Where Agreement is Ambiguous
On April 23, 2019, a divided U.S. Supreme Court answered a question that had been left open by the Court in 2010: namely, whether an agreement that is ambiguous on the availability of class-wide arbitration could form the basis for an order compelling the arbitration of such claims. In Lamps Plus, Inc. et al. v. Varela, the Court ruled that such an agreement does not support an order compelling arbitration of class action claims.
Factual Background and Lower Court Rulings
Lamps Plus was subject to a data breach in which a hacker impersonating a company official tricked an employee into disclosing the tax information of about 1300 employees. After an employee, Varela, had a false tax return filed in his name, he sued on behalf of himself and other employees. His employer moved to dismiss and compel arbitration of his claims individually based on an agreement making arbitration the exclusive means for resolving disputes with Lamps Plus.
The district court granted the motion to dismiss the case in favor of arbitration, but as a class rather than individual action. Lamps Plus appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit, which affirmed. The Ninth Circuit acknowledged that the Supreme Court had previously held that class arbitration may not be compelled where an agreement is silent on the matter (in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.). However, the Ninth Circuit found the agreement ambiguous as to the availability of class arbitration. Because under California law, ambiguity is construed against the drafter, the court concluded that the district court properly compelled the arbitration of class claims against Lamps Plus.
The Supreme Court Majority’s Ruling
In a 5 to 4 decision, the U.S. Supreme Court reversed and held that arbitration of class claims is foreclosed where the agreement is ambiguous on the availability of class arbitration. The majority explained that the Federal Arbitration Act (FAA) requires courts to enforce arbitration agreements according to their terms. Parties to arbitration agreements are allowed to specify with whom they will arbitrate, the issues subject to arbitration, the rules that will be used and what arbitrators will resolve the dispute. Courts are required to give effect to whatever the parties intended. While State laws of contract interpretation often allow courts to determine the terms of agreements and to construe them, the FAA preempts State laws that create obstacles to achieving the underlying purposes of the FAA (including the goals of lower costs and greater speed in resolving claims).
The majority noted that prior Court precedent has recognized the fundamental differences between the “individualized form of arbitration envisioned by the FAA” and class arbitration. Individual arbitration achieves the FAA’s intended benefits of cost savings and efficiency. Class arbitration lacks these benefits and, according to the majority, raises serious due process concerns by adjudicating the rights of absent members with only limited judicial review. As such, there is reason to doubt that parties have mutually consented to participate in class arbitration. Thus, in Stolt-Nielsen the Court held that consent could not be inferred from silence. “Like silence, ambiguity does not provide a sufficient basis to conclude that the parties to an arbitration agreement agreed to sacrifice the principal advantage of arbitration.”
In rejecting the Ninth Circuit’s use of State rules of contract interpretation, the majority noted that construing ambiguity against the drafter is based on a public policy consideration that the party that drafted the agreement should bear the burden of ambiguity. This public policy is inconsistent with the FAA, which requires actual consent. “We recently reiterated that courts may not rely on contract principles to ‘reshape traditional individualized arbitration agreements by mandating classwide arbitration procedures without the parties consent.’ But that is precisely what the court below did…Such an approach is flatly inconsistent with ‘the foundational FAA principle that arbitration is a matter of consent.’” (citing Stolt-Nielsen and Epic Systems Corp. v. Lewis).
The Dissenting Justices
The main dissenting opinion, authored by Justice Kagan, would have affirmed the Ninth Circuit because the FAA “does not federalize basic contract law.” The agreement seemed plainly to contemplate class arbitration since it requires arbitration of “any and all disputes, claims, or controversies arising out of or relating to the employment relationship of the parties.” However, even if this clause was ambiguous, the “plain vanilla rule of contract interpretation” applied by the Ninth Circuit (and applicable in every other State) would cut against Lamps Plus as the drafter, requiring the claims to be arbitrated on a class-wide basis. The FAA has long been interpreted by the Court to require State law be applied except where such law discriminates against arbitration.
The approach taken by the majority, in the dissent’s view, continues the trend in Court precedent of over-weighting concerns of defendants by “its cataloging of class arbitration’s sins … In this case, the result is to disregard the actual contract the parties signed. And to dismiss the neutral and commonplace default rule that would construe that contract against the drafting party. No matter what either requires, the majority will prohibit class arbitration.”
Impact of the Ruling
Needless to say, the decision is a significant victory for companies that wish to have employment claims decided by arbitration on an individual basis to the greatest degree possible. It also makes State laws that seek to limit the reach of arbitration even more vulnerable to preemption. Ensuring that such agreements are drafted properly appears to be all that is needed to avoid judicial meddling.