Stressing the fundamental differences between individual and class arbitration under FAA preemption principles, the Court held that ambiguities in an arbitration agreement cannot provide the basis for finding the parties agreed to class arbitration.
Under the Federal Arbitration Act, an ambiguous agreement cannot provide the necessary contractual basis for concluding that parties agreed to submit to class arbitration, the U.S. Supreme Court ruled in a 5-4 decision authored by Chief Justice Roberts. Splitting again along ideological lines, the Court reversed and remanded a Ninth Circuit decision that upheld a lower court’s refusal to compel individual arbitration—instead compelling class arbitration—in an employee’s putative class action against Lamps Plus, Inc., on behalf of 1,300 employees whose tax information inadvertently had been disclosed to a hacker by the company. Justices Thomas, Alito, Gorsuch, and Kavanaugh joined the 13-page majority opinion; Thomas also filed a 2-page concurring opinion (Lamps Plus, Inc. v. Valera, April 24, 2019, Roberts, J.).
In the majority’s view, the Ninth Circuit’s erroneous conclusion was based on the state law contra proferentem doctrine, which says that contractual ambiguities should be construed against the drafter and which, according to the High Court, “seeks ends other than the intent of the parties.” That approach is flatly inconsistent with “the foundational FAA principle that arbitration is a matter of consent” and essentially interferes with fundamental attributes of arbitration, which contemplate individual, not class arbitration, the Court concluded.
Employee class action. In brief, a hacker persuaded a Lamps Plus employee to disclose the tax information of about 1,300 company employees and as a result, a fraudulent federal income tax return was filed in the name of the respondent employee. He filed a putative class action against the company, which moved to compel individual arbitration based on the agreement in his employment contract and to dismiss the suit. Although the district court granted the motion to compel arbitration and dismissed his claims without prejudice, it rejected Lamps Plus’s request for individual arbitration, instead authorizing arbitration on a classwide basis, which Lamps Plus appealed.
Ninth Circuit ruling. Affirming, the Ninth Circuit acknowledged that Stolt-Nielsen SA v. AnimalFeeds Int’l Corp. prohibits forcing a party “to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” But that did not end the inquiry, the appeals court reasoned, because the fact that the agreement “does not expressly refer to class arbitration is not the ‘silence’ contemplated in Stolt-Nielsen” where the parties had stipulated that their agreement was silent about class arbitration.
California contract interpretation. Instead, the Ninth Circuit determined that the agreement was ambiguous on the issue of class arbitration. It included language that committed the parties to use arbitration “in lieu of any and all lawsuits or other civil legal proceedings,” specified that arbitral claims include those “that, in the absence of this Agreement, would have been available to the parties by law,” and authorized the arbitrator to “award any remedy allowed by applicable law.” The Ninth Circuit followed California law to construe the ambiguity against the drafter, a rule that “applies with peculiar force in the case of a contract of adhesion” such as this. Because Lamps Plus had drafted the agreement, the court adopted Varela’s interpretation authorizing class arbitration.
Jurisdiction. First addressing its jurisdiction to hear the case, the Supreme Court explained that the employee had argued the Ninth Circuit lacked statutory jurisdiction because FAA Section 16 permits appeals from orders denying motions to compel arbitration, Section16(a)(1)(B), but not from orders granting such motions, Section16(b)(2). Lamps Plus, however, relied on Section 16(a)(3), which allows an appeal from “a final decision with respect to an arbitration that is subject to this title.”
Although the employee claimed the company “lacked standing to appeal the dismissal” because the lower court order “provided precisely the relief Lamps Plus sought,” that was not actually the case. Lamps Plus sought an order compelling individual arbitration but instead got an order compelling class arbitration. The difference between the two gave Lamps Plus the “necessary personal stake in the appeal” required to proceed.
Class arbitration is different. The Court emphatically held that under the FAA, an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration. In the Court’s view, there is a “fundamental” difference between class arbitration and the individualized form of arbitration envisioned by the FAA. Class arbitration “sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment,” said the Court, considering the perspective of the defendant.
Silence is not consent; neither is ambiguity. “Arbitration is strictly a matter of consent,” and the task for courts and arbitrators is “to give effect to the intent of the parties,” the Court continued. Given the differences between individual and class arbitration, courts may not infer consent to participate in class arbitration absent an affirmative “contractual basis for concluding that the party agreed to do so,” and silence is not enough. Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to “undermine the central benefits of arbitration itself.”
State law interpretation inconsistent with FAA. The Court said that the Ninth Circuit’s reliance on the state law contra proferentem doctrine, which says contractual ambiguities should be construed against the drafter, was inconsistent with the FAA. At issue in this case is the interaction between a state contract principle for addressing ambiguity and a “rule of fundamental importance” under the FAA, namely, that arbitration “is a matter of consent, not coercion.”
No public policy argument. The rule on which the Ninth Circuit relied “is based on public policy factors, primarily equitable considerations about the parties’ relative bargaining strength,” said the Court. “We recently reiterated that courts may not rely on state contract principles to ‘reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent,’” it reasoned. Such an approach is flatly inconsistent with “the foundational FAA principle that arbitration is a matter of consent.” Instead, the FAA provides the default rule for resolving certain ambiguities in arbitration agreements.
Ambiguities always are resolved in favor of arbitration. “For example, we have repeatedly held that ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration. In those cases, we did not seek to resolve the ambiguity by asking who drafted the agreement. Instead, we held that the FAA itself provided the rule. As in those cases, the FAA provides the default rule for resolving ambiguity here,” the Court concluded, reversing and remanding the Ninth Circuit.
The dissenters. Justice Ginsburg filed a 5-page dissenting opinion, in which Justices Breyer and Sotomayor joined. Breyer also filed a 9-page dissenting opinion as to jurisdiction, and Sotomayor filed a separate 2-page dissenting opinion. Justice Kagan also filed a 14-page dissenting opinion, in which Ginsburg and Breyer joined, and in which Sotomayor joined in part.
Ginsburg. Justice Ginsburg’s initial dissenting opinion focused on the purposes behind the FAA, noting the Act was not designed to govern contracts “in which one of the parties characteristically has little bargaining power,” and citing the Court’s own 1967 precedent. She contended that the Court has far exceeded the Act’s seemingly limited purpose of overcoming the then-existing “judicial hostility” to the arbitration of contract disputes between businesses.
“Today’s decision underscores the irony of invoking ‘the first principle’ that ‘arbitration is strictly a matter of consent,’ … to justify imposing individual arbitration on employees who surely would not choose to proceed solo,” Ginsburg commented.
“The Court, paradoxically reciting the mantra that ‘[c]onsent is essential,’ … has facilitated companies’ efforts to deny employees and consumers the ‘important right’ to sue in court, and to do so collectively, by inserting solo-arbitration-only clauses that parties lacking bargaining clout cannot remove.”
Sotomayor. Justice Sotomayor bluntly noted that “This Court went wrong years ago in concluding that a ‘shift from bilateral arbitration to class-action arbitration’ imposes such ‘fundamental changes,’” as a class action is simply “a procedural device” that allows multiple plaintiffs to aggregate their claims. Her argument continued, “Where, as here, an employment agreement provides for arbitration as a forum for all disputes relating to a person’s employment and the rules of that forum allow for class actions, an employee who signs an arbitration agreement should not be expected to realize that she is giving up access to that procedural device.”
Kagan. Finally, Justice Kagan pointed out that regardless of what the FAA does require, “the Act does not federalize basic contract law. Under the FAA, state law governs the interpretation of arbitration agreements, so long as that law treats other types of contracts in the same way.” She suggested that even if the Court was correct to view the agreement as ambiguous (she wasn’t so sure), “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,” she stressed.
Kagan argued that the “majority can reach the opposite conclusion only by insisting that the FAA trumps that neutral state rule whenever its application would result in class arbitration. That holding has no basis in the Act—or in any of our decisions relating to it (including the heavily relied-on Stolt-Nielsen).” She characterized the opinion as “rooted instead in the majority’s belief that class arbitration ‘undermine[s] the central benefits of arbitration itself.’ But that policy view—of a piece with the majority’s ideas about class litigation—cannot justify displacing generally applicable state law about how to interpret ambiguous contracts.”
Expert commentary. Bryan C. Keane, partner at Dorsey & Whitney, reflected on the Court’s opinion. “The Court’s decision in Lamps Plus—coupled with its earlier decision in Stolt-Nielsen—provide a significant barrier (perhaps a nearly insurmountable barrier) to arbitration on a classwide basis, absent express consent to class arbitration in the parties’ agreement.”
Keane continued that “if the parties wish to consent to class arbitration, then such consent ought to be included expressly in the parties’ agreement. At minimum, however, something more than “ambiguity”—i.e., some indicia of the parties’ intent to permit classwide arbitration—will be required for a court to be able to compel arbitration on a classwide basis,” Keane says.
Open question: Who decides issue of class arbitration? But Keane further explained that the Court was neither asked to nor did address whether availability of class arbitration is a question of arbitrability to be decided by an arbitrator. “Certainly, a party should anticipate that arbitration claimants will continue to argue that the issue of class arbitration is a matter of arbitrability to be resolved by an arbitrator and not a court. Accordingly, it is important for parties to understand what their arbitration agreements and referenced or applicable arbitration rules provide with respect to questions of arbitrability (and to revise such agreements accordingly) if they desire to ensure the issue of class arbitration is not deemed one of arbitrability to be decided by the arbitrator,” Keane stressed.
Settled law: Silence = arbitration. Seyfarth Shaw employment litigation partner Richard L. Alfred agreed that the ruling is “a big victory for the large number of employers that maintain arbitration agreements with common clauses that simply invoke arbitration as the proper forum for resolving employment disputes without an express statement including class or collective arbitration in that mandate.”
He continued: “In such circumstances, there is no longer any question that only individual, not class or collective arbitration may be allowed as a result of today’s Lamps Plus decision.”
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