On April 24, 2019, a sharply-divided U.S. Supreme Court held that an ambiguous arbitration agreement could not be interpreted to require class arbitration, thereby making it even more difficult for individuals who have signed arbitration agreements to pursue class-wide relief.  In Lamps Plus, Inc. v. Varela, 2019 WL 1780275, __ S.Ct. __ (2019), the Court applied and extended its 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), which had held that a court could not compel class-wide arbitration if an arbitration agreement was “silent” on the availability of such arbitration.  In Lamps Plus, the Court went one step farther, finding that a court could not compel class arbitration if an arbitration agreement was ambiguous, thereby essentially requiring that an arbitration agreement must explicitly contemplate and provide for class arbitration before such a procedure may be compelled.

This week’s case arose when Frank Varela, an employee of Lamps Plus, sued his employer in a putative class action.  Varela had signed an arbitration agreement with Lamps Plus, and the employer moved to compel individual arbitration.  The district court ordered the case into arbitration but ruled the arbitration should be on a class-wide basis.  Lamps Plus appealed, and the Ninth Circuit concluded the arbitration agreement was ambiguous on the question of class arbitration.  While the agreement did not explicitly allow class arbitration, it provided that “any and all disputes, claims or controversies” should be arbitrated, and the arbitral rules to which the parties agreed provided for class arbitration.  In light of this ambiguity, the court of appeals applied the state-law rule that an ambiguous contract should be construed against its drafter.  Since Lamps Plus had written the arbitration agreement, the Ninth Circuit construed the ambiguity against the employer and affirmed the order of class-wide arbitration.

The Supreme Court reversed.  The majority, consisting of the Court’s more conservative members (Roberts, Thomas, Alito, Gorsuch, and Kavanaugh), deferred to the Ninth Circuit’s conclusion that the arbitration agreement was ambiguous as to the question of class arbitration.  However, it rejected the court of appeal’s conclusion that the contract should be construed against its drafter.  Instead, the Court held the Federal Arbitration Act (FAA) requires a “contractual basis” for compelling class arbitration, and thus required “more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.”  The Court held that the state-law rule resolving contractual ambiguity against the drafter was preempted by the FAA because it stood as an obstacle to the accomplishment of the full purposes and objectives of the FAA.  In reaching this conclusion, the Court maintained there are “fundamental differences” between class arbitration and individual arbitration, and that class arbitration lacks the benefits of lower costs, greater efficiency and speed applicable to individual arbitration. 

The decision is the latest in a line of cases favoring individual arbitration over class litigation.  For example, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 351 (2011), the Court ruled that a consumer arbitration contract can require individual arbitration of disputes and prohibit class arbitration.  Last year, in Epic Systems Corp. v. Lewis, 584 U.S. __, 138 S.Ct. 1612 (2018), the Court concluded employer provisions may similarly require individual arbitration of employee disputes and prohibit class arbitration without running afoul of the National Labor Relations Act.  And now, in Lamps Plus, where an employee had signed an enforceable arbitration agreement that was ambiguous as to whether class arbitration was allowed, the Court concluded the employer could not be compelled to participate in class arbitration, with the end result that Mr. Varela will be compelled to arbitrate his dispute on an individual basis, and he may not pursue class claims in any forum.

The Court’s more liberal wing strongly dissented, with each justice (Ginsburg, Sotomayor, Breyer, and Kagan) writing a dissenting opinion.  The dissenters concluded by observing that “[t]he heart of the majority’s opinion lies in its cataloging of class arbitration’s many sins,” and this “has more than a little in common with this Court’s efforts to pare back class litigation.”  Lamps Plus, 2019 WL 1780275, at *21 (Kagan, J., dissenting).

Over this vigorous dissent, the majority of the Supreme Court has placed yet more weight on the scale in favor of private arbitration and against class proceedings.  Even ambiguous arbitration agreements will be deemed to preclude class-wide arbitration.   

Do you have questions about whether an arbitration agreement may be appropriate for your business, or whether your existing arbitration agreement satisfies current federal and state law? 

For further information contact:

Katie M. McCray (kmccray@wilsonturnerkosmo.com)

Meryl C. Maneker (mmaneker@wilsonturnerkosmo.com)

Wilson Turner Kosmo’s Special Alerts are intended to update our valued clients on significant developments in the law as they occur. This should not be considered legal advice.