Supreme Court Says No to Class Action Arbitrations When the Underlying Agreement is Ambiguous

On Wednesday, April 24, 2019, in a 5-4 vote which overturned the Ninth Circuit’s decision, the US Supreme Court ruled in Lamps Plus, Inc., et. al. v. Varela, No 17-988 (April 24, 2019), that class-wide arbitration is not available to parties when the underlying arbitration agreement between them is ambiguous as to whether it was contemplated.

The Supreme Court had previously held in Stolt-Nielsen S.A.v. AnimalFeeds Int’l Corp., 559 US 662, that a court may not compel class-wide arbitration when the agreement is silent on the availability of such arbitration. According to the Court, like silence, ambiguity also does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to “sacrifice [] the principal advantage of arbitration.”

In 2016, Lamps Plus was tricked by a hacker into disclosing tax information of about 1,300 company employees. After a fraudulent federal income tax return was filed in the name of respondent Frank Varela, a Lamps Plus employee, he filed a putative class action against Lamps Plus in the federal district court on behalf of employees whose information had been compromised. Relying on the arbitration agreement in his employment contract, Lamps Plus sought to compel arbitration on an individual rather than a class-wide basis, and to dismiss the suit.

The district court rejected the individual arbitration request, but authorized class arbitration and dismissed Varela’s claim. Lamps Plus appealed, arguing that the district court had erred in compelling class arbitration, but the 9th Circuit affirmed. It held that Stolt-Nielsen was not controlling because the agreement in this case was ambiguous rather than silent on the issue of class arbitration, and that class-wide arbitration was proper under the agreement because contractual ambiguities should be construed against the drafter.

On appeal, the Supreme Court disagreed and held that the Ninth Circuit’s approach was inconsistent with the notion under the Federal Arbitration Act (FAA) that “[a]rbitration is strictly a matter of consent,” and the task for courts and arbitrators is “to give effect to the intent of the parties.” The Court found that there was a “fundamental” difference between class and individual arbitration, the latter being the form that is envisioned by the FAA. Class 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.” Because of such crucial differences, the Supreme Court has held that courts may not infer consent to participate in class arbitration absent an affirmative “contractual basis for concluding that the party agreed to do so.” Like silence, ambiguity also does not provide a sufficient basis to conclude that parties had agreed to sacrifice the advantages of arbitration.

This case is a clear victory for employers whose existing arbitration agreements are ambiguous on the issue of class action arbitrations. This is a good opportunity for employers to review their arbitration agreements on the issue of class actions.

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