Supreme Court: Classwide Arbitration Requires Explicit Consent

Introduction

On April 24, 2019, the United States Supreme Court issued its decision in Lamps Plus, Inc., et. al. v. Varela, No 17-988. In a 5-4 opinion, the Court held that an ambiguous agreement cannot provide the requisite contractual basis to support a finding that the parties agreed to submit a dispute to class arbitration.

Background

The underlying dispute arose when a hacker gained access to the confidential tax information of about 1,300 Lamps Plus employees. Thereafter, a fraudulent income tax return was filed on behalf of Frank Varela, a Lamps Plus employee. Mr. Varela brought suit against Lamps Plus in Federal District Court in California, setting forth a variety of claims on behalf of a putative class of Lamps Plus employees whose tax information had also been exposed in the data breach.

Lamps Plus moved to compel individual arbitrations pursuant to arbitration agreements signed by Mr. Varela – and most other Lamps Plus employees – when they were hired. The District Court granted Lamps Plus’s motion to compel arbitration and dismissed Varela’s claims without prejudice, but rejected the request for individual arbitration; instead permitting classwide arbitration. Lamps Plus appealed, arguing that the order allowing classwide arbitration was in error.

The Ninth Circuit affirmed the District Court’s decision, distinguishing the Supreme Court’s decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), which permits class arbitration only if all parties specifically agreed to class arbitration. The Ninth Circuit concluded that the Lamps Plus agreement was ambiguous as to class arbitration but, applying California law and the doctrine of contra proferentem (construing ambiguities against the drafter), the Ninth Circuit adopted Varela’s interpretation permitting class arbitration. Lamps Plus sought certiorari, arguing that the Ninth Circuit’s decision was contrary to Stolt-Nielsen and created a circuit split. The Supreme Court granted certiorari.

The Majority Opinion

Chief Justice Roberts delivered the opinion of the Court, in which Justices Thomas, Alito, Gorsuch and Kavanaugh joined. The majority first disposed of Varela’s threshold argument concerning the Ninth Circuit’s lack of jurisdiction over the appeal by finding that Lamps Plus relied on a different subsection of Section 16 of the Federal Arbitration Act, as opposed to the one Varela claimed Lamps Plus relied upon.

Moving to the main issue, the majority cited the bedrock principles of the Federal Arbitration Act (FAA). First, the FAA requires that a court enforce an arbitration agreement according to its terms. Second, any state law principle that obstructs the purpose of the FAA is expressly preempted. Third, under the FAA “[a]rbitration is strictly a matter of consent.” Granite Rock Co. v. Teamsters, 561 U.S. 287, 299 (2010). In close connection with this third principle, the majority clarified that there exists a “fundamental” difference between class arbitration and “the individualized form of arbitration envisioned by the FAA.” Specifically, Chief Justice Roberts cited Stolt-Nielsen to explain that in individual arbitration, “parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes” before noting that “[c]lass arbitration lacks those benefits.”

Relying upon Stolt-Nielsen, the majority held that “[l]ike 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.” (internal citation omitted). Thus, the majority reasoned that the Ninth Circuit’s application of the doctrine of contra proferentem, meaning that an ambiguity in a contract should be construed against the drafter, could not decide the class arbitration question because that doctrine was based on “public policy” rather than any desire to ascertain the true intent of the contracting parties. Simply stated, the majority held that a court may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis. As such, the Court reversed the Ninth Circuit and remanded for further proceedings.

Conclusion

After the Supreme Court’s decision in Lamps Plus, silence or ambiguity in an arbitration agreement regarding classwide arbitration will not be sufficient to permit classwide arbitration.