Recently, the Supreme Court imposed yet another roadblock to class arbitration in Lamps Plus, Inc. v. Varela.[1] Relying on Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.,[2] the Court ruled that ambiguous language in an arbitration agreement provides an insufficient basis for concluding a party has agreed to class arbitration. Given the FAA’s broad effect, Lamps Plus virtually forecloses a court’s ability to order parties to class arbitration. But one trapdoor remains, because the Court did not address whether the availability of class arbitration constitutes an issue of arbitrability to be decided by courts, unless “clearly and unmistakably” assigned to the arbitrator.

A “palpable evasion” of Stolt-Nielsen?

In Lamps Plus, Frank Varela, a Lamps Plus employee in California, brought a putative class action alleging claims based on a data breach. According to Mr. Varela, a hacker tricked a Lamps Plus employee into divulging the tax information of over 1,000 employees, as a result of which a fraudulent income tax return had been filed in his name. Mr. Varela sought to represent all Lamps Plus employees whose tax data had been compromised in the breach.

Mr. Varela’s arbitration agreement with Lamps Plus provided for arbitration of “all claims that may … arise in connection with [Mr. Varela’s] employment,” further providing that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment,” and that the arbitrator “is authorized to award any remedy allowed by applicable law.”[3] The arbitration agreement said nothing explicit about class arbitration.

Lamps Plus moved to compel arbitration on an individual basis. The district court agreed that the case should be arbitrated, but ruled that the arbitration should be conducted on a classwide basis. Lamps Plus appealed the ruling, but the Ninth Circuit, in a 2-1 ruling, affirmed the district court’s order.[4]

The Ninth Circuit’s majority distinguished Stolt-Nielsen, where the Court emphasized the differences between bilateral and class arbitration in ruling a court could not infer an agreement to conduct class arbitration simply from the fact that the parties had agreed to arbitrate. According to the majority, Stolt-Nielsen did not control because, in that case, the parties had stipulated that they had not reached any agreement on the issue of class arbitration. In Lamps Plus, however, the parties disputed the construction of the arbitration agreement, with Mr. Varela arguing the agreement reasonably could be read to authorize class arbitration. Finding the agreement ambiguous, the Court of Appeals construed the agreement against the drafter (Lamps Plus) under the state law contractual interpretation doctrine of contra proferentem, thereby providing a contractual basis to conclude the parties had agreed to class arbitration.[5]

Judge Fernandez, in a two-sentence dissent, found the arbitration agreement “not ambiguous” because of its silence on the issue of class arbitration, characterizing the majority as engaging in a “palpable evasion of Stolt-Nielsen.”[6]

A 5-4 majority announces a new federal default rule

The Supreme Court granted certiorari and, in a 5-4 decision by Chief Justice Roberts, reversed the Ninth Circuit. Justice Thomas filed a concurring opinion, while Justices Ginsburg, Breyer, Sotomayor, and Kagan all filed separate dissenting opinions.

According to the majority opinion, “[c]ourts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.”[7] Announcing a new federal default rule for arbitration contracts displacing contra proferentem, the Chief Justice wrote: “[T]he FAA provides the default rule for resolving ambiguity here,” by holding ambiguous agreements do not authorize class arbitration.[8]

In some respects, the majority’s creation of a new default rule was not surprising. The Court has long ruled ambiguities concerning the scope of an arbitration agreement must to be resolved in favor of arbitration. And the Court repeatedly has held courts must decide “gateway” issues of arbitrability, unless the parties “clearly and unmistakably” assign those issues to the arbitrator. Both of these federal rules of arbitration contract interpretation reflect the pro-arbitration policies underpinning the FAA.

But the majority’s path to its decision took several controversial steps. As Justice Breyer addressed in his dissent, the Court’s threshold jurisdictional determination is at odds with Section 16 of the FAA (which forbids appeal of an interlocutory order “directing arbitration to proceed”) and with Microsoft Corp. v. Baker,[9] where the Court held a disappointed litigant could not create appellate jurisdiction over an unappealable interlocutory order through a dismissal.[10] Here, Lamps Plus secured an immediate appeal by seeking only a dismissal (rather than a stay) of the litigation in favor of arbitration, thereby opening the door to immediate appeals of otherwise unappealable arbitration orders “so long as the order incorporates some ruling that one party dislikes.”[11]

Contra proferentem as a rule of “public policy”

Beyond the jurisdictional issue, the majority’s decision indisputably displaced a neutral state rule of contractual interpretation (and one admittedly recognized in every jurisdiction). In past decisions, the Supreme Court abrogated – on preemption grounds – state law rules specific to the arbitration context and hostile to arbitration. And the Court traditionally has endorsed application of state rules of contractual interpretation to ascertain the meaning of agreements governed by the FAA. But Lamps Plus viewed contra proferentem differently.

According to the majority, because class arbitration differs so fundamentally from bilateral arbitration, the issue of consent to class arbitration merits special scrutiny. A court cannot find consent through contra proferentem, because that default rule “is by definition triggered only after a court determines that it cannot discern the intent of the parties.”[12] Citing a treatise, the majority characterized the rule construing ambiguities against the drafter as based on “public policy considerations.”[13]

Justice Kagan disagreed. As she noted in her dissent, California joined “every other State in the country” in construing ambiguities against the drafter.[14] And numerous decisions of the Court have emphasized that nothing in the FAA “‘purports to alter background principles of state contract law regarding’ the scope or content of agreements.”[15] The preemptive effect of the FAA as to state laws disfavoring arbitration did not come into play, according to Justice Kagan, because “California’s anti-drafter rule is as even-handed as contract rules come.”[16]

Nor could contra proferentem be viewed as unrelated to the parties’ agreement; rather, “[f]rom an ex ante perspective, the rule encourages the drafter to set out its intent in clear contractual language, for the other party then to see and agree to.”[17] Here, despite the Court’s decisions upholding class-action waivers, Lamps Plus “still chose not to include a term prohibiting class arbitration,” meaning Mr. Varela “had no reason to think class disputes barred.”[18] According to Justice Kagan, the majority’s decision reflected “impalpable emanations of federal policy” driven by a results-oriented hostility to “class proceedings.”[19]

Class arbitration as inconsistent with the FAA

Justice Kagan closed her dissent by describing the “heart of the majority’s opinion” as its “cataloging of class arbitration’s many sins.” Id. at *21. In her view, the majority engaged in the same policy-driven determination, unmoored to the language of the contract or normal principles of contract law, as the arbitral ruling criticized by the Court in Stolt-Nielsen. Id.

The majority opinion focused on the differences between bilateral and class arbitration, stating that with class arbitration, “‘the virtues Congress originally saw in arbitration, its speed and simplicity and inexpensiveness, would be shorn away and arbitration would end up looking like the litigation it was meant to displace.’”[20] As arbitration practitioners know, however, many bilateral arbitrations are anything but fast, simple, and inexpensive, especially those involving complex commercial claims. Many arbitrations involve an (extremely expensive) three-member panel; extensive deposition and expert discovery; and lengthy judicial proceedings (possibly including appellate proceedings following confirmation or vacatur of an arbitration award by a district court).

The majority also noted the “serious due process concerns” raised by “adjudicating the rights of absent members of the plaintiff class,” subject only to “limited judicial review.”[21] The Court’s “structural” concerns with class arbitration could have formed the basis for a very different opinion in Lamps Plus, one that rejected all class arbitrations as fundamentally inconsistent with the FAA (along the lines of Justice Alito’s concurrence in Oxford Health Plans, LLC v. Sutter[22]).

Even without a categorical condemnation of class arbitration, the majority opinion sparked additional vigorous dissents from Justices Ginsburg and Sotomayor. Justice Ginsburg focused on the vast disparity in bargaining power – especially in the consumer and employment contexts – that produces most of the arbitration agreements we see today. In her view, the majority’s focus on consent turned a blind eye to the reality that most arbitration agreements do not reflect genuine consent but instead “the ‘Hobson’s choice’ employees face: ‘accept arbitration on their employer’s terms or give up their jobs.’”[23] The net effect of allowing companies to “‘muffle grievances in the cloakroom of arbitration,’” said Justice Ginsburg, will be “curtailed enforcement of laws ‘designed to advance the well-being of the vulnerable.’”[24]

According to Justice Sotomayor, the Court got it wrong in Stolt-Nielsen when it concluded that class arbitration represented a “fundamental” change to the traditional bilateral arbitration contemplated by the FAA. In her view, a class action is nothing more than “a procedural device,” and the majority should have been more careful before concluding that a neutral state law rule was preempted by the FAA: “Such haste is as ill advised as the new federal common law of arbitration [the majority] has begotten.”[25]

The nail in the coffin of class arbitration?

After Lamps Plus, courts lack power to compel class arbitration in the absence of an express agreement to class arbitration. The likelihood of this occurring is virtually nil, since no commercial entity would ever have a reason to specify the use of class arbitration in any consumer or employment contract. Although Congress theoretically could amend the FAA to authorize class arbitration, that also seems highly unlikely. And any future amendment to the FAA would likely outlaw arbitration agreements in specific contexts, as opposed to generally authorizing class procedures in arbitration proceedings.

But one trapdoor remains. In the past six weeks, the Court has denied petitions for certiorari in two different cases where the Eleventh Circuit determined an arbitration agreement’s selection of the AAA rules delegated the class arbitration issue to the arbitrator.[26] And the Lamps Plus majority refused to address whether class arbitration constitutes a “question of arbitrability” presumptively for courts, rather than arbitrators, to decide.[27] Thus, in those Circuits following the Eleventh Circuit’s view, businesses utilizing standard arbitration agreement language selecting the AAA’s rules will be required to present their arguments against class arbitration to the arbitrator, whose decision on the class arbitration issue will be essentially unreviewable in court.

Given that broad delegations of authority to arbitrators are enforceable, Lamps Plus does not foreclose the possibility that an arbitrator will issue an errant determination of the class arbitration issue. Thus, businesses should ensure their arbitration agreements include broad class action waivers as well as provisions unambiguously assigning to courts the determination of whether the arbitration agreement authorizes class arbitration.