Does Your Arbitration Agreement Cover Arbitration of Class Actions? The U.S. Supreme Court Rules that It Does Not, Unless It Expressly Says So.
In Lamps Plus Inc. v. Varela, 587 U. S. ___, 2019 WL 1780275 (Apr. 24, 2019), the U.S. Supreme Court ruled 5-4 that under the Federal Arbitration Act (FAA), an arbitration provision in an employment agreement that is “ambiguous” does not provide a strong enough basis for concluding that the parties intended to submit to class action arbitration. The Court had previously considered in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010), the issue of whether an arbitration agreement that is “silent” as to class arbitration can be construed as requiring that class claims as well as individual claims must be arbitrated, ruling that arbitration may not be compelled in that circumstance.
In Lamps Plus, a hacker obtained confidential employee tax information and used the information to file a false tax return in the name of employee Varela. Varela filed a class action in federal court in California against his employer because of the data breach. On the employer’s motion to compel arbitration only on an individual basis and to dismiss the case under the arbitration provision in Varela’s employment agreement, the court granted the motion but authorized both individual and class claims to be arbitrated. On appeal, the Ninth Circuit affirmed the ruling, finding that the element of consent by the parties to classwide arbitration required by Stolt-Nielsen was supplied by the fact that the agreement was “ambiguous” on the question, and that California law required such an ambiguity to be construed against the drafter, Lamps Plus.
The Supreme Court’s majority deferred to the Ninth Circuit’s determination that the arbitration provision was ambiguous under California law, but held that the FAA “requires more than an ambiguity to ensure that the parties actually agree to arbitrate on a classwide basis.” Noting that “state law is preempted to the extent that it ‘stands as an obstacle to the . . . full purposes and objectives of the FAA,’” the Court considered whether the “foundational principle” of consent could be found in a mere ambiguity.
As in Stolt-Nielsen, the Court pointed to the “crucial differences” between arbitration of individual and class claims, notably, the loss of “speed and simplicity and inexpensiveness” in a classwide arbitration, which led to the holding there that consent to classwide arbitration cannot be inferred from mere silence in the contractual language. Thus, it held that Stolt-Nielsen controlled the outcome in Lamps Plus: “Like silence, ambiguity does not provide a sufficient basis to conclude that the parties to an arbitration agreement agreed to sacrifice . . . the principal advantage of an arbitration.”
The Court further found that the California rule of construing an ambiguous provision against the drafter did not govern because it would only come into play if a court cannot determine the parties’ intentions. The rule did not provide “the requisite affirmative ‘contractual basis for concluding that the part[ies] agreed to [class arbitration].’”
Lamps Plus, like many previous Supreme Court decisions, again took a narrow view of what a claimant can do in the face of a contract that requires claims to be arbitrated, even if the agreement is not as tightly drafted as it might have been. While the arbitration provision in the case lacked an express waiver of class claims and a prohibition against arbitration of such claims, which are common features of arbitration provisions today, the Court’s holding that class claims can be arbitrated only if there is affirmative consent to arbitrate them accomplished the goal of such provisions. Ultimately, parties seeking class action coverage in their arbitration agreements must be careful moving forward to articulate that in their written agreement.