On April 24, 2019, the U.S. Supreme Court ruled that an ambiguous arbitration agreement does not provide a sufficient basis to conclude that parties agreed to class arbitration.
In Lamps Plus, Inc. v. Varela, the Supreme Court voted 5-4 to overturn the Ninth Circuit’s decision that the arbitration agreement between Lamps Plus and one of its employees allowed the employee to pursue class claims even though the agreement was vague as to class arbitration.
The underlying dispute stemmed from the employee’s allegations that the retailer failed to protect the tax information of approximately 1,300 employees. The employee sued Lamps Plus after a fraudulent tax return was filed in his name.
Relying on the arbitration provision in the employment contract, Lamps Plus sought to compel arbitration on an individual basis and to dismiss the suit. Lamps Plus based its arguments on the Supreme Court’s decision in Stolt-Nielsen, S.A. v. Animal Feeds Int’l Corp., 559 U.S. 662 (2010), which bars class arbitration when there’s no “contractual basis for concluding” that the parties agreed to it.
As the contractual provisions in this paragraph demonstrate, the agreement between Lamps Plus and its employee was ambiguous on the issue of class arbitration. The employee waived “any right … to file a lawsuit or other civil action or proceeding relating to [his] employment with the Company.” The parties “mutually consent[ed] to the resolution by arbitration of all claims … that [the employee] may have against the Company.” And finally, the parties “mutually consent[ed] to the resolution by arbitration of all claims that may hereafter arise in connection with [the employee’s] employment.”
Although it rejected the individual arbitration request, the District Court authorized class arbitration and dismissed the employee’s claims. On appeal, the Ninth Circuit affirmed, applying California’s contra proferentem doctrine, which provides that contractual ambiguities should be construed against the drafter.
The Ninth Circuit determined that Stolt-Nielsen was not controlling because Lamp Plus’ employment agreement was ambiguous – but not silent – on the issue of class arbitration. Unlike here, in Stolt-Nielsen the parties stipulated that their agreement was silent about class arbitration. Therefore, in that ruling, the Supreme Court did not address whether courts can compel class arbitration when the agreement does not explicitly block such a process and the language is ambiguous.
The issue before the Supreme Court was whether the Federal Arbitration Act (FAA) foreclosed a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in such agreements.
The Supreme Court held that “[u]nder the Federal Arbitration Act, an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.” Citing Stolt-Nielsen, the Supreme Court ruled that the contra proferentem doctrine, a rule of state law which favors public policy considerations over the intent of the parties, is “flatly inconsistent” with the FAA’s foundational principles, “namely, that arbitration is a matter of consent, not coercion.”
The Supreme Court also analyzed the “crucial differences” between individual and class arbitration, many of which were critical to the court’s decision in Stolt-Nielsen. Advantages of individual arbitration include “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” Class arbitration lacks those benefits and is more likely to generate new risks, high costs and “procedural morass.” Therefore, the Supreme Court opined that “[n]either silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself.”
This decision is an extension of Stolt-Nielsen and other recent Supreme Court decisions on class arbitration. For example, in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, (2018), the Supreme Court ruled that under the FAA, arbitration agreements providing for individualized proceedings must be enforced. Additionally, in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court held that the FAA preempts state laws invalidating class arbitration waivers in consumer contracts on unconscionability grounds.
This ruling lends further support to those employers utilizing basic arbitration pacts that lack an express statement that employment disputes can be resolved by class arbitration. Stolt-Nielsen and Lamps Plus make clear that class arbitration cannot be compelled absent express consent. Even so, employers should use this opportunity to review arbitration agreements and ensure the language is well drafted and clear.