Justices Limit Class Arbitration Absent Explicit Agreement

April 26, 2019Alerts

Nearly a year after the U.S. Supreme Court issued its opinion in Epic Systems Corp. v. Lewis affirming the enforceability of class action waivers in arbitration agreements between employers and employees (our alert on the Epic Systems decision can be found here), the Court has further limited the use of class proceedings, this time restricting the use of class proceedings in arbitration.

On April 24, 2019, in Lamps Plus, Inc. v. Varela, in a 5-4 decision, the Court held that arbitration may proceed on a class-wide basis only if the applicable arbitration agreement explicitly provides for such a process. Thus, employees subject to arbitration agreements cannot arbitrate their claims as a class unless the parties to the agreement expressly agree that class arbitration is permitted.

Background

In 2016, a hacker tricked an employee of Lamps Plus, Inc. into disclosing the tax information of about 1,300 Lamps Plus employees. The hacker then used that information to file a fraudulent federal tax return in the name of Frank Varela. After Mr. Varela filed a class action lawsuit on behalf of himself and other Lamps Plus employees in federal District Court in California, Lamps Plus asked the court to compel arbitration on an individual basis and dismiss the suit because Plaintiff and the putative class had all signed an arbitration agreement.

The District Court agreed that arbitration was the correct forum and dismissed the suit, but ruled that Mr. Varela could arbitrate his claims on a class-wide basis because the arbitration agreement at issue was vague about whether the matter could proceed in arbitration as a class. Lamps Plus appealed to the Ninth Circuit Court of Appeals, arguing that the District Court erred in compelling class arbitration.

In upholding the District Court’s decision to compel class arbitration, the Ninth Circuit found that because the arbitration agreement was ambiguous as to whether class arbitration was permitted—the language at issue in the arbitration agreement stated that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment”—California contract principles require that courts construe contract ambiguity against the drafter, in this case Lamps Plus. Therefore, according to the Ninth Circuit, because Lamps Plus drafted the arbitration agreement, the ambiguity must be resolved against the company and in favor of Mr. Varela’s interpretation that the agreement permitted class arbitration.

Lamps Plus petitioned the Supreme Court for certiorari, arguing that the Ninth Circuit’s decision was inconsistent with the Supreme Court’s decision in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., which held that a court may not compel class arbitration when an agreement is silent on the availability of such arbitration. However, that left open the question of whether class arbitration can be ordered when the arbitration agreement is ambiguous. The Supreme Court, therefore, was asked to resolve this question.

The Supreme Court’s Decision

Writing for the majority, Chief Justice John Roberts said that the Court’s Stolt-Nielsen decision applies to cases like Mr. Varela’s where arbitration agreements are ambiguous about class arbitration because an ambiguous agreement does not provide a sufficient basis to conclude that the parties to the agreement consented to class arbitration.

The Court first discussed the Federal Arbitration Act (“FAA”), noting that the FAA requires courts to enforce arbitration agreements according to their terms because arbitration is “strictly a matter of consent.” Under the FAA, parties may shape arbitration agreements as they like, identifying the issues and claims that are subject to arbitration, with whom the parties will arbitrate, and the rules the parties must follow. The Court also noted that class arbitration is fundamentally different than individual arbitration as envisioned by the FAA. Individual arbitration, the Court explained, is cheaper, more efficient, and allows parties to choose who adjudicates their disputes. In contrast, class arbitration is slower, more costly, and is procedurally more complex.

The Stolt-Nielsen decision held that, because of these differences, courts cannot infer consent to participate in a class arbitration absent a “contractual basis for concluding that the party agreed to do so”—silence is not enough. Likewise, the Court concluded in its Lamps Plus decision 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.”

In reaching its decision to the question presented, the Court took issue with the Ninth Circuit’s use of a state law doctrine known as contra proferentem, which construes any ambiguity in a contract against the drafter. The Court noted that the doctrine does not help give meaning to the intent of the parties; rather it resolves the ambiguity against the drafter based on public policy, which is inconsistent with the FAA principle that arbitration is a matter of consent. The Court, therefore, determined that the “general contra proferentem rule cannot be applied to impose class arbitration in the absence of the parties’ consent.”

Accordingly, the Court reversed the Ninth Circuit’s decision and remanded for further proceedings, concluding that “[c]ourts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis” and “the doctrine of contra proferentem cannot substitute for the requisite affirmative ‘contractual basis for concluding that the parties agreed to class arbitration.’”

The Court’s liberal justices all dissented. Justice Ruth Bader Ginsberg wrote her own dissent to “emphasize once again how treacherously the Court has strayed from the principle that ‘arbitration is a matter of consent, not coercion,’” noting that the FAA “was not designed to govern contracts ‘in which one of the parties characteristically has little bargaining power’” and how the Court has recently “deployed the law to deny to employees and consumers ‘effective relief against powerful economic entities.’” In effect, Justice Ginsberg essentially argues that arbitration is unfair to employees and consumers.

Justice Elena Kagan also authored a separate dissent, suggesting that the arbitration agreement Lamps Plus wrote should be understood to permit class-wide arbitration, but even if the agreement was ambiguous, “a plain-vanilla rule of contract interpretation . . . requires reading it against the drafter” and permitting class arbitration.

The Impact on Employers

Lamps Plus is a good decision for employers. Between Stolt-Nielsen and Lamps Plus, employers can rest easy that arbitration agreements that are silent or ambiguous on class arbitration will be construed to prohibit class-wide arbitration. However, clarity in an arbitration agreement is always the best bet. Employers should therefore consult with legal counsel to review and update their arbitration agreements to ensure such agreements explicitly address the issue of class arbitration.

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For more information about this Alert, please contact Glenn S. Grindlinger at 212.905.2305 or [email protected], Matthew C. Berger at 646.601.7658 or [email protected], or any other member of Fox Rothschild LLP’s Labor & Employment Department. Visit us on the web at www.foxrothschild.com.