Consistent with prior US Supreme Court opinions, the Supreme Court held on April 24, 2019, that contractual ambiguity regarding class arbitration may not be construed against the drafter because of Federal Arbitration Act (FAA) preemption. Lamps Plus, Inc. v. Varela, No. 17-988. The 5-4 decision authored by Chief Justice Roberts reversed a Ninth Circuit holding that an arbitration provision that is ambiguous on class arbitration could be construed under state law to permit class arbitration.
Lamps Plus furthers the Supreme Court’s recent jurisprudence on class actions and class arbitration waivers and continues the Supreme Court’s analysis in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010). In Stolt-Nielsen, the Supreme Court held that a party may not compel class arbitration unless the parties agreed to do so in writing in the underlying agreement; if an arbitration clause is silent as to whether class arbitration is permitted, then only single-plaintiff arbitration is authorized. Otherwise, the Supreme Court held, requiring that parties engage in class arbitration when they have not agreed to do so would be contrary to the FAA. Stolt-Nielsen followed a line of Supreme Court precedent favoring arbitration under the FAA, which predicates arbitration upon the parties’ written consent. In upholding this principle, the Supreme Court held that class arbitration may not be imposed upon a party “unless there is a contractual basis for concluding that the party agreed to” class arbitration. (emphasis in original). Since Stolt-Nielsen, the Supreme Court has emphasized the FAA’s federal authority in preempting state law and has instructed courts to enforce arbitration agreements strictly to their terms.1 For further discussion and an in-depth analysis of Supreme Court precedent on the enforceability of arbitration provisions and class action waivers, see our Class Action Report: 2010-2015. Our prior alerts have tracked earlier Supreme Court rulings on issues such as those related to the contractual enforceability of individualized arbitration in light of restrictions under the National Labor Relations Act as well as those discussing the FAA’s preemptive power. As recently as January 2019, the Supreme Court continued its trend of rigorously enforcing arbitration provisions as written in holding that courts may not override a provision’s delegation of threshold arbitrability questions to an arbitrator.2
Lamps Plus addresses the issue as to how lower courts should interpret ambiguity in an arbitration agreement on the question of class arbitration, particularly when state common law principles may interpret ambiguity against the party that drafted the agreement. Lamps Plus presented a related but distinguishable question from Stolt-Nielsen, where the parties specifically stipulated that their contract was silent on class arbitration. The Lamps Plus dispute arose from a data breach of the plaintiff’s employer, Lamps Plus, resulting in a tax return being fraudulently filed in the plaintiff’s name. The plaintiff and Lamps Plus were subject to an employment contract that required the parties to submit all disputes to arbitration. The plaintiff filed an action in federal court in California, asserting that Lamps Plus failed to adequately protect his financial information, resulting in damages associated with his stolen tax records and fraudulent tax return.
Lamps Plus invoked the arbitration clause in the employment contract, which provided that Lamps Plus and the plaintiff “mutually consent to the resolution by arbitration of all claims or controversies . . . past, present or future” regarding the plaintiff’s employment. In analyzing the clause’s language, the California federal district court distinguished Stolt-Nielsen by limiting Stolt-Nielsen’s application to cases where arbitration clauses are “silent” on class arbitration. Further, the parties in Stolt-Nielsen stipulated that their contract was silent as to class arbitration. The district court held that the clause’s failure to specifically include class arbitration is not tantamount to “silence,” as was the case in Stolt-Nielsen. Instead, the court concluded that the language providing for the arbitration of “all claims” was ambiguous and any ambiguity in a contract must be construed against the drafter, in this case, Lamps Plus. Since the court concluded that the arbitration clause did not forbid class arbitration, ambiguity would be construed in favor of the plaintiff, who was seeking class arbitration. The Ninth Circuit, in a split decision, affirmed the district court, and Lamps Plus sought certiorari.
The Supreme Court reversed and held that an ambiguous arbitration clause is not sufficient under the FAA to force class arbitration on a non-consenting party. The Supreme Court concluded that courts cannot draw an inference from an ambiguous agreement that the parties consented to class arbitration and neither silence nor ambiguity can establish a party’s consent to class arbitration under the FAA. The Supreme Court highlighted that arbitrators may only exercise authority that has been given to them through the parties’ specific written agreement to arbitrate their dispute. The parties’ consent, as an essential component of the agreement to arbitrate, is related to the arbitrator’s authority over the dispute. Recognizing that consent is a foundational principle under the FAA, the Supreme Court declined to infer parties’ consent to class arbitration from silence or ambiguity.
Lamps Plus requires that courts look for, and require, explicit written contractual language authorizing class arbitration. Because parties rarely agree to class arbitration, Lamps Plus is expected to mitigate the risk that a party may be subject to unintended class arbitration based on alleged ambiguity in an arbitration agreement. Further, the Supreme Court’s instruction to lower courts to strictly read and interpret arbitration provisions will likely reduce exposure to class arbitration, given that many arbitration provisions explicitly require that the decision on class arbitration be made by the court.