Earlier this year, the U.S. Supreme Court ruled in Lamps Plus, Inc. v. Varela that an ambiguous arbitration agreement does not provide a sufficient basis to conclude that parties agreed to class arbitration. In a 5-4 vote, the Supreme Court reversed the Ninth Circuit’s decision that the arbitration agreement between Lamps Plus and one of its employees permitted pursuing class claims in arbitration despite the fact that the arbitration agreement did not expressly address the issue of class arbitration. This is a follow-up to an earlier post where we discussed the District Court’s ruling in this case.
By way of background, the case stemmed from a dispute regarding whether an employer properly protected the tax information of its nearly 1300 employees. After a fraudulent tax return was filed in the name of one of the employees, the employee filed suit against his employer, Lamps Plus. Lamps Plus responded by seeking to dismiss the lawsuit and compel arbitration, relying on the arbitration provision in the employee’s employment contract. Citing the Supreme Court’s 2010 decision in Stolt-Nielsen, S.A. v. Animal Feeds Int’l Corporation, which bars arbitrating claims on a class basis in the absence of a “contractual basis for concluding” that the parties agreed to class arbitration, Lamps Plus sought to compel the employee to arbitrate on an individual basis. The District Court ruled in favor of Lamps Plus on the request to dismiss the case and compel arbitration but rejected the employer’s request to require the employee to arbitrate his claims on an individual basis.
On appeal, the Ninth Circuit affirmed the District Court’s ruling, applying the doctrine of contra proferentem doctrine, which requires construing contractual ambiguities against the drafter—in this case Lamps Plus. The Ninth Circuit distinguished the case from Stolt-Nielsen by pointing out that in Stolt-Nielsen, the parties had stipulated that the arbitration agreement was silent about class arbitration but the parties in Lamps Plus had not made a similar stipulation. Thus, the Ninth Circuit reasoned, the Supreme Court’s holding in Stolt-Nielsen only applied to situations where the arbitration agreement was silent on the issue of class arbitration but did not address situations where the language of the agreement was ambiguous on the issue.
The Supreme Court rejected the Ninth Circuit’s attempt to distinguish the two cases. In doing so, 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.” The Supreme Court began by explaining that in cases involving a conflict between the Federal Arbitration Act (“FAA”) and a state law doctrine, the FAA will prevail. In this case, the Supreme Court found that the FAA’s principle “that arbitration is a matter of consent, not coercion” conflicted with the state law doctrine of contra proferentem. Citing Stolt-Nielsen, the Supreme Court held that the state law doctrine must give way to the FAA.
The Supreme Court buttressed it holding by examining the “crucial differences” between individual and class arbitration, many of which played into the decision in Stolt-Nielsen. Unlike arbitration on an individual basis which offers advantages such as “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes,” the court reasoned, class arbitration is likely to result in higher costs and a “procedural morass.” Accordingly and building on the holding in Stolt-Nielsen, the majority wrote that “neither silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself.”
The court’s full opinion is available here.
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