On April 24, 2019, the Supreme Court decided Lamps Plus, Inc. v. Varela, No. 17-988, holding that courts may not compel classwide arbitration based on an ambiguous agreement.

In 2016, a hacker tricked a Lamps Plus employee into disclosing confidential information of approximately 1,300 Lamps Plus employees. Shortly after the breach, a fraudulent tax return was filed in the name of Frank Varela, one of Lamps Plus’ employees.

Varela brought a putative class action against Lamps Plus in federal district court. Based on an arbitration agreement that Varela had signed with the company, Lamps Plus moved to compel arbitration on an individual basis and to dismiss Varela’s putative class-action lawsuit. The district court granted Lamps Plus motion to compel arbitration but ordered that it be arbitrated on a classwide basis rather than on an individual basis. The district court then dismissed the lawsuit.

Lamps Plus appealed, and the Ninth Circuit Court of Appeals affirmed, finding that the agreement was ambiguous and construing the ambiguity against Lamps Plus, the drafter. In so holding, the Ninth Circuit distinguished the Supreme Court’s earlier decision in Stolt-Nielsen, which prohibited forcing a party “to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010). In Stolt-Nielsen, the Court clearly stated that contractual silence cannot be used to provide a basis for classwide arbitration.

The Supreme Court initially quickly dispensed with Varela’s argument that the Court lacked jurisdiction to hear the appeal. It held that jurisdiction existed under Section 16(a)(3) of the Federal Arbitration Act (FAA), which provides that an appeal may be taken from “a final decision with respect to an arbitration that is subject to this title.” Relying on an earlier precedent, the Court explained that the district court’s order compelling classwide arbitration and dismissing all the claims before the court was a “final decision” within the meaning of §16(a)(3).

The Court then turned to the substantive question before it: whether “an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling classwide arbitration.” The Court held that it could not. It based its decision primarily on what it termed a “rule of fundamental importance” under the FAA — “arbitration is a matter of consent not coercion.”

Although the Court accepted the Ninth Circuit’s determination that the agreement was ambiguous, it nevertheless refused to hold that an ambiguous agreement demonstrates the required consent to arbitrate under the FAA. The Supreme Court rejected the Ninth Circuit’s use of a California principle of contract interpretation — contra proferentem — to infer the parties’ consent by construing the ambiguous agreement against Lamps Plus.

The Court instead held that “the foundational FAA principle that arbitration is a matter of consent” preempted application of California’s contra proferentem doctrine. As the Court explained, “courts may not rely on state contract principles to reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.” (Quotations omitted.) At the heart of the Court’s conclusion that the two principles were at odds was the Court’s explication of the “crucial differences” between classwide arbitration and individualized arbitration.

As such, the Court clarified that just as silence in an agreement is not enough to compel classwide arbitration, neither is an ambiguity.

Chief Justice Roberts delivered the opinion of the Court, in which Justices Thomas, Alito, Gorsuch, and Kavanaugh joined. Justice Thomas filed a concurring opinion. Justice Ginsburg filed a dissenting opinion, in which Justices Breyer and Sotomayor joined. Justice Breyer and Justice Sotomayor filed dissenting opinions. Justice Kagan filed a dissenting opinion, in which Justices Ginsburg and Breyer joined, and in which Justice Sotomayor joined in part.

Download Opinion of the Court.