Supreme Court Further Restricts Class Arbitration Finding It Must be Unambiguously Authorized

In a 5-4 decision authored by Chief Justice Roberts, joined by Justices Thomas, Alito, Gorsuch, and Kavanaugh, the U.S. Supreme Court in Lamps Plus Inc. v. Varella held that courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.

Lamps Plus Inc. v. Varella involved an employee who had filed a class action against his employer. Lamps Plus responded by seeking to compel arbitration on an individual rather than a classwide basis. The district court dismissed the case and compelled arbitration, but on a class basis. Lamps Plus appealed, and the Ninth Circuit upheld the district court’s decision. The Ninth Circuit’s reasoning hinged on the fact that the arbitration agreement was ambiguous about the availability of class arbitration. The Ninth Circuit thus distinguished Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010), arguing that in Stolt-Nielsen the parties had stipulated that the agreement was silent about class arbitration, whereas the parties had no such stipulation in Lamps Plus. Because the Ninth Circuit held that the agreement was ambiguous, the appellate court turned to California’s contra proferentem rule and held that this state law contract principle required the court to interpret the ambiguous language against the drafter—here, Lamps Plus.

The Supreme Court reversed because the principle of contra proferentem requires the court to create a result where intent of the parties cannot be inferred, which is contrary to the policy considerations under the Federal Arbitration Act (the “FAA”), under which consent is essential. The FAA requires that “an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.” “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to sacrifice the principal advantage of arbitration.” The majority explained that its conclusion aligned with its “refusal to infer consent when it comes to other fundamental arbitration questions.” Thus, the FAA bars an order requiring class arbitration when an agreement is “ambiguous” about the availability of such arbitration.

Justice Kagan dissented on the grounds that the agreement was “best understood” to allow for class arbitration, and that the “plain vanilla” state contract rule used by the California courts allows for a classwide arbitration proceeding even if the agreement was ambiguous. Justice Ginsburg, joined by Justice Breyer and Justice Sotomayor, wrote a separate dissent to “emphasize … how treacherously the court has strayed from the principle that ‘arbitration is a matter of consent, not coercion,’” saying the court has in recent years “hobbled the capacity of employees and consumers to band together in a judicial or arbitral forum.”

Michael R. McDonald, a Director in the Gibbons Commercial & Criminal Litigation Department, and Caroline E. Oks, an Associate in the Gibbons Commercial & Criminal Litigation Department, authored this post. This blog originally appeared on Gibbons Commercial Litigation Alert on May 8, 2019.
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