The Supreme Court, in a sharply-divided 5-4 ruling issued on April 24, ruled that nothing in the Federal Arbitration Act allows courts to compel class action arbitration even if the contract is ambiguous in that regard, and notwithstanding rules that direct courts to interpret such ambiguities most strongly against the drafter.

What happened

The Federal Arbitration Act (FAA) broadly favors arbitration and the parties’ ability to contract away their litigation rights through this alternate dispute resolution process. That said, back in 2010, the Supreme Court ruled in Stolt-Nielsen v. AnimalFeeds Int’lthat a court may not compel arbitration on a classwide basis when an agreement is “silent” on the availability of such arbitration. Because class arbitration fundamentally changes the nature of the “traditional individualized arbitration” envisioned by federal law, the Court concluded in ­Stolt-Nielsen that a party may not be compelled to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. In its April 24 ruling, the Court now concludes that federal law likewise prevents class arbitration, even when the arbitration agreement is ambiguous on the issue, because the Federal Arbitration Act requires courts to enforce covered arbitration agreements according to the terms of those agreements, and an ambiguous provision cannot be interpreted to compel class action arbitration.

As a general rule, when a contract is ambiguous, courts will apply, as a last resort, the rule of contract interpretation known as contra proferentem, which means that the ambiguous contract provision at issue will be interpreted against the drafter. In the decision below, the U.S. Court of Appeals for the Ninth Circuit did precisely that, concluding that the arbitration agreement at issue was ambiguous on the question of class action arbitration, and must be resolved in favor of ordering such arbitration. Indeed, this appeared to be consistent with Supreme Court precedent such as Mitsubishi Motors v. Soler Chrysler-Plymouth(1985) and Moses H. Cone Memorial Hospital v. Mercury Construction (1983), holding that any ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration.

But here, the Supreme Court draws the line on class action arbitration. Citing AT&T Mobility v. Concepcion (2011), the Court concludes that individual parties cannot force class action arbitration on other similarly situated parties without the parties’ consent because it is inconsistent with the FAA to apply the more general contra proferentem rule to impose class arbitration in the absence of the parties’ clear consent.

In addition, in one of three dissents, Justice Kagan wrote the primary opinion and largely agreed with a concurring opinion by Justice Thomas on the core principle that the dispute should have been resolved by applying common law contract principles. Those well-established principles, she wrote, ought to have resolved the case against Lamps Plus’s request for individual arbitration because, based on those rules of contract interpretation and Supreme Court precedent requiring contracts to be enforced in accordance with their terms, the arbitration agreement Lamps Plus wrote would be “best understood to authorize arbitration on a classwide basis.” Moreover, she wrote, “a plain-vanilla rule of contract interpretation, applied in California as in every other State, requires reading it against the drafter—and so likewise permits a class proceeding here.”

Ultimately, however, that view did not carry the day. The Court noted the importance of recognizing the fundamental difference between class arbitration and the individualized form of arbitration. Class arbitration is slower, more costly and more likely to generate procedural morass than is individual arbitration. Thus, silence and ambiguity are not enough to compel class arbitration. This decision should ensure that parties to an arbitration agreement are not forced into inefficient class arbitration proceedings unless the parties expressly agreed to such proceedings.

To read the Supreme Court’s opinion, concurrence and dissents, click here.

Why it matters

This is a major development in arbitration law because courts have applied the rule of contra proferentem to force class action arbitration on the parties based on purported ambiguity in arbitration agreements, even when none exists. With the ruling, the Supreme Court has made clear that the FAA prohibits the use of state-law rules of contract interpretation to the extent they seek to impose classwide arbitration in the absence of an express agreement to that effect.