On April 24, 2019, in a 5-4 opinion written by Chief Justice Roberts, the U.S. Supreme Court held that even if an arbitration agreement is ambiguous as to whether classwide arbitration is permitted, that is insufficient to find that the parties consented to class arbitration. Lamps Plus, Inc. v. Varela, No. 17–988 (2019). In doing so, the Court emphasized that there is a fundamental difference between class arbitration and the individualized form of arbitration envisioned by the Federal Arbitration Act (FAA). The Court’s decision firmly reinforces decades of precedent that arbitration is a matter of consent and aligns with its recent trend of pro-arbitration opinions.
Background
In 2016, a company fell victim to a data breach when an employee was tricked into disclosing the tax information of approximately 1,300 employees to a hacker. Subsequently, an employee had a fraudulent federal income tax return filed in his name. He sued the company in federal district court in California alleging claims on behalf of himself and a putative class of employees. The company moved to compel arbitration and while its motion was granted by the district court, it was on a classwide rather than individualized basis. The company appealed to the Ninth Circuit, which affirmed utilizing a principle of California contract law based on public policy concerns. The Ninth Circuit reasoned that because the agreement was ambiguous on the issue of class arbitration, rather than silent, that ambiguity should be construed against the drafter of the arbitration agreement – i.e., the company.
The Decision
The Supreme Court reversed the Ninth Circuit, noting the issue was whether a state contract principle, grounded in public policy, for addressing ambiguity should trump a rule of fundamental importance under the FAA that arbitration is a matter of consent. The Court underscored that “arbitration is strictly a matter of consent” as it had previously found in Stolt-Nielson S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) when finding silence did not authorize classwide arbitration.
The Court reiterated that there are crucial differences between individual and class arbitration, as it had recently noted in Epic Systems Corp. v. Lewis, 584 U.S. ___, ___ (2018). Specifically, individual arbitration allows the parties to obtain “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” Stolt-Neilson, 559 U.S. at 685. On the other hand, classwide 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.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 348 (2011). Accordingly, the Court found that Stolt-Nielsen did control the issue they were deciding because like silence, ambiguity is not sufficient to infer consent to sacrifice “the principal advantage of arbitration.” Concepcion, 563 U.S. at 348.
Further, the Court cautioned that the Ninth Circuit’s contrary conclusion, presuming the parties authorized classwide arbitration based on silence or ambiguity, would too often undermine one of the central benefits of arbitration. The Court called out the California contract law rule that ambiguity in a contract should be construed against the drafter, the contra proferetem doctrine, as flatly inconsistent with “the foundational FAA principle that arbitration is a matter of consent.” It found that the general contra proferetem doctrine cannot be applied to impose class arbitration in the absence of the parties’ consent. Importantly, this finding lends more support to arguments that the FAA alone provides the default rule for resolving ambiguities in arbitration agreements and contrary state law principles that may appear neutral, but target arbitration by interfering with its fundamental attributes are preempted.
Finally, the Court clarified that a court order compelling classwide arbitration is immediately appealable under the FAA as long as the petitioner had originally sought to compel arbitration only on an individualized basis. This is significant because court orders often compel arbitration, but on different terms than what was requested in the motion. The Court has cleared the way for an immediate appeal rather than forcing the party to continue with classwide arbitration and appeal after the costs are incurred.
Implications
The Court’s decision is another win for companies that are seeking to enforce a class action waiver in their arbitration agreement or move forward with individualized arbitration if their agreement is silent or ambiguous. With this case, the Supreme Court has once again strengthened its precedent that parties cannot be coerced into classwide arbitration. Although this decision offers protection to employers with arbitration agreements that are silent or ambiguous at to class proceedings, employers should review their arbitration agreements to ensure they include express class and collective action waivers. And employers should preserve their rights in moving to compel arbitration on an individualized basis at the first chance.
