Relying on Stolt-Nielsen, the Supreme Court ruled that ambiguity, like silence, does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to arbitrate on a classwide basis.
On April 24, 2019, the Supreme Court of the United States issued a 5-4 decision in Lamps Plus Inc. v. Varela, No. 17-988 (U.S. Apr. 24, 2019), holding that under the Federal Arbitration Act (FAA), a court cannot compel class arbitration if the arbitration agreement did not affirmatively authorize it. The ruling focuses on the parties’ actual consent to class proceedings and, significantly, rejects the application of the common-law rule that an ambiguous contract of adhesion is construed against its drafter insofar as: (1) the contract in question is an arbitration contract; and (2) the ambiguity concerns whether plaintiff-employees may arbitrate on a class basis.
The underlying cause of action in Lamps Plus arose when a hacker posed as a Lamps Plus official and tricked an employee into disclosing tax information relating to approximately 1,300 employees. Soon after the data breach, a fraudulent tax return was filed in employee Frank Varela’s name. Varela subsequently filed a putative class action in federal court against Lamps Plus on behalf of the employees whose information had been compromised.
However, Varela, like most Lamps Plus employees, had signed an arbitration agreement when he began working for the company. Relying on this agreement, Lamps Plus moved to dismiss Varela’s lawsuit and to compel individual arbitration. The district court dismissed the lawsuit and granted the motion to compel arbitration, but also ruled that Varela could proceed with arbitration on a classwide, not individual, basis.
Lamps Plus appealed to the Ninth Circuit, which affirmed the district court’s decision. The Ninth Circuit held that the arbitration agreement was ambiguous about whether it compelled class arbitration. The court applied the common law doctrine contra proferentem, which states that contract ambiguities are to be construed against the party that drafted the contract—in this case, Lamps Plus. As such, the court held that the arbitration agreement could be construed to include classwide arbitration.
The Ninth Circuit also rejected Lamps Plus’ argument that under the Supreme Court’s decision in Stolt-Nielsen v. Animalfeeds International Corp., 559 U.S. 662 (2010), a court cannot compel arbitration when an agreement is silent as to the availability of arbitration. The Ninth Circuit held Stolt-Nielsen was not controlling because the agreement Varela signed was ambiguous rather than silent on the issue of class arbitration.
The Supreme Court majority disagreed. Although the Supreme Court did not disturb the Ninth Circuit’s finding that the arbitration agreement should be treated as ambiguous, it further ruled that, under the FAA, an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties consented to class arbitration. The Supreme Court found that consent is “essential” under the FAA “because arbitrators wield only the authority they are given” by the parties. Arbitrators must “give effect to the intent of the parties,” and that intent cannot be inferred from an ambiguous arbitration provision.
The Supreme Court highlighted the three core principles underlying arbitrations:
- Parties must agree to arbitrate, and the FAA requires courts to enforce arbitration agreements according to their terms.
- Courts interpret arbitration agreements by applying state contract law, but the FAA preempts state laws that treat arbitration contracts differently from other contracts.
- There is a “fundamental difference” between class arbitration and the individualized form of arbitration envisioned by the FAA.
This third principle was key to the Supreme Court’s decision in Stolt-Nielsen, which held that arbitrators cannot order class arbitration when the arbitration agreement is silent as to the use of class procedures. Relying on Stolt-Nielsen, the Supreme Court ruled that ambiguity, like silence, does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to arbitrate on a classwide basis.
In sum, class arbitration can only be compelled where it has been explicitly authorized in an arbitration provision.
What This Means for Employment Contracts and Consumer Agreements
Arbitration agreements have become increasingly popular in employment contracts and consumer agreements because arbitration typically reins in the high costs associated with litigation. While the Supreme Court’s ruling in Lamps Plus is a win for employers and companies, it also underscores the importance of carefully drafting arbitration agreements to ensure their language is clear, enforceable and unambiguous. Although it may no longer be necessary to include an explicit class action waiver in an arbitration provision, it is still good practice to do so to eliminate any doubt that the parties do not consent to such. Employers and companies should take care to regularly review their arbitration agreements to confirm the agreements do not contain any opt-out provisions and apply to all relevant employees.