Supreme Court Holds That Parties Must Unambiguously Consent To Class Arbitration
On April 24, 2019, the United States Supreme Court, in a 5-4 decision authored by Chief Justice Roberts, held that an agreement ambiguous as to whether arbitration had been agreed for class claims as well as individual claims could not provide a contractual basis for class arbitration. Lamps Plus, Inc. v. Varela, 587 U.S. ___, 2019 WL 1780275 (2019). The Court addressed two questions: (i) whether the Court had jurisdiction, given that the district court had compelled arbitration in connection with its dismissal of the underlying claims; and (ii) whether state contract law principles could be applied to interpret an arbitration clause that was ambiguous with regard to the authorization of class arbitration as authorizing such arbitration. The Court held that it had jurisdiction because dismissal of the underlying claims qualified as a “final decision” under the Federal Arbitration Act (“FAA”). On the merits issue, the Court held that a contract that was ambiguous as to whether class arbitration was permitted lacked the explicit “consent” to such arbitration required under the FAA.
The underlying claims arose from a data breach at defendant company that resulted in the disclosure of the tax information of approximately 1,300 employees, including plaintiff. Plaintiff brought a putative class action against his employer in federal district court, and the company moved to compel arbitration pursuant to the arbitration clause in plaintiff’s employment contract. The district court ordered arbitration on a class basis, and dismissed the case without prejudice. The Ninth Circuit affirmed, holding that the arbitration clause was ambiguous on the question of class arbitration, but, applying California contract law, interpreted the ambiguity against defendant as the drafter.
The five-member majority first held that it had jurisdiction to consider the appeal, rejecting plaintiff’s argument that appellate courts only have statutory jurisdiction to hear appeals under the FAA where the lower court denies a motion to compel arbitration. Here, plaintiff asserted, neither the Ninth Circuit nor the Supreme Court had jurisdiction because the district court had granted defendant’s motion to compel arbitration. The Court reasoned, however, that Section 16(a)(3) of the FAA provides that an appeal may be taken from a “final decision with respect to an arbitration that is subject to this title.” Because the district court had dismissed plaintiff’s underlying claims when it ordered the parties to proceed to arbitration, the order was “final” within the meaning of Section 16(a)(3). Id. at *3-4. Further, the Court rejected the argument that defendant lacked standing to appeal because it had moved to compel arbitration and, therefore, according to plaintiff, had been granted the relief it had sought. The Court explained that defendant had sought an order compelling individual arbitration, not class arbitration, and since class arbitration is fundamentally different from individual arbitration, defendant’s interest in avoiding the risks associated with class arbitration gave it standing. Id. at *4.
On the merits, the Court deferred to the Ninth Circuit’s interpretation and application of state law, and therefore accepted that the agreement should be regarded as ambiguous. However, the Court held that an ambiguous agreement cannot provide the necessary contractual basis for compelling class arbitration under the FAA. The Court explained its decision as a logical extension of Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), in which it had held that arbitration may not be compelled on a class-wide basis when an agreement is “silent” on the availability of such arbitration. Id. at *5. Recognizing that state contract law principles may ordinarily provide the basis for interpreting arbitration agreements, the Court held that state law is preempted to the extent it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA. Id. Stressing that arbitration under the FAA “is a matter of consent, not coercion,” the Court emphasized it would refuse to infer consent when it comes to “fundamental arbitration questions,” such as the validity or applicability of an arbitration agreement. Id. at *7-9. According to the Court, California’s contra proferentem rule of interpretation applied by the Ninth Circuit—pursuant to which ambiguous contractual provisions are interpreted against the drafter—is not a rule designed to help uncover the intent of the parties and instead reflects public policy considerations. Id. at *6-7. The Court thus held that requiring class arbitration on the basis of such a doctrine would be flatly inconsistent with the foundational FAA principle that arbitration is a matter of consent. Id. at *7.
In a forceful dissent citing to a number of dissents in prior cases, Justice Ginsburg decried that the Court’s recent string of decisions enforcing arbitration agreements in the employment context was inconsistent with the original purpose of the FAA to facilitate arbitration of “commercial disputes” between parties with roughly equal bargaining power. Id. at *9. Justice Ginsburg also decried the “irony” of invoking the principle that “arbitration is strictly a matter of consent” to impose individual arbitration on employees who were forced to accept whatever conditions their employers drafted in an employment agreement. Id. at *10.
Justice Kagan, in a separate dissent, stated that the majority’s decision “federalize[d] contract law” as applied to arbitration agreements. Id. at *16. Justice Kagan reasoned that the FAA’s only exception to the application of state contract law is when state law “discriminates against arbitration agreements.” Id. at *18. Because “California’s anti-drafter rule is as even-handed as contract rules come” and applied to all types of contracts, not just arbitration agreements, Justice Kagan argued that there was no legitimate basis for preempting the rule. Id. She also questioned whether or the extent to which the majority’s holding might apply beyond the anti-drafter rule to other state-law background principles that serve to discern the meaning of ambiguous contract language. Id. at *20 & n.7.