In a 5-4 decision, the U.S. Supreme Court recently held that classwide arbitration must be explicitly called for in an arbitration agreement to be enforceable. Specifically, the Court held that ambiguity as to whether the parties agreed to arbitration on a classwide basis cannot provide a “contractual basis” sufficient to compel class arbitration.
Plaintiff Frank Varela filed the underlying lawsuit against his employer, Lamps Plus Inc., after a hacker gained access to Varela’s confidential tax information in 2016 and filed a fraudulent tax return in Varela’s name. Varela brought a federal class action against the company on behalf of a putative class of 1,300 Lamps Plus employees affected by the data breach.
As part of his employment, Varela signed an arbitration agreement, which stated that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.” In light of the agreement, the District Court granted Lamps Plus’s motion to compel arbitration, while authorizing the arbitration to proceed on a class-wide basis.
The Ninth Circuit Court of Appeals affirmed the District Court’s ruling. After determining that the agreement was ambiguous on the issue of class arbitration, the Court applied state contract construction principals under California law, which the Court reasoned required the ambiguity in the agreement to be construed against its drafter, Lamps Plus.
The U.S. Supreme Court reversed, holding that “[c]ourts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.” Lamps Plus, Inc. et al. v. Varela, No. 17-988 (Apr. 24, 2019). Writing for the Court’s majority, Chief Justice Roberts emphasized that the Supreme Court’s reasoning in Stolt-Nielsen, in which Court held that class arbitration is only permitted where there is a “contractual basis for concluding” that the parties consented to it, controlled the Court’s ruling in Lamps Plus. See Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 662 (2010). Justices Ginsberg, Breyer, Sotomayor, and Kagan each filed a dissenting opinion in the case.
The Lamps Plus ruling is the latest in a series of cases indicating the high court’s continued interest in issues related to class actions and arbitration. The case closely follows the Supreme Court’s landmark 5-4 ruling in Epic Systems Corp. v. Lewis in 2018, in which the Court upheld the enforceability of class action waivers in employee arbitration agreements. 138 S. Ct. 1612 (2018).
The Court’s ruling in Lamps Plus reaffirms the fact that courts enforce arbitration agreements as written under the Federal Arbitration Act, and that courts may not “infer consent” by the parties where a provision is silent or ambiguous. The case serves as a further reminder to exercise caution when drafting arbitration agreements, and to ensure that the provisions of such agreements clearly and unambiguously spell out the parties’ intent.