Classwide Arbitration Cannot be Compelled from an Ambiguous Arbitration Agreement, Divided Supreme Court Holds

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Yesterday (April 24, 2019) the United States Supreme Court issued the latest in what has become a burgeoning series of impactful rulings related to arbitration agreements in the employment realm. (Epic Systems v. Lewis (May 21, 2018) – upholding the enforceability of class action waivers in arbitration agreements (which we have written about before); New Prime Inc. v. Oliveira (January 15, 2019)). In this latest case of Lamps Plus, Inc. v. Varela, 587 U. S. ____ (2019) Chief Justice Roberts, writing for the 5-4 majority, expanded upon prior Supreme Court rulings dealing with the ability of courts to compel arbitration on a classwide basis. Specifically, the Varela majority held that a court may not compel classwide arbitration when the applicable arbitration agreement is ambiguous as to the availability of such classwide treatment.

The Court noted that consent is a fundamental principle required by the Federal Arbitration Act because arbitrators, unlike courts, only wield the authority granted to them by the parties’ arbitration agreement. Courts must therefore enforce arbitration agreements in accordance with the parties’ intent as memorialized by the agreements themselves. However, ascertaining the parties’ intent may not always be straightforward, particularly when an agreement either does not mention classwide arbitration, or when it is ambiguous on the issue.

This underlying principle is what motivated the prior holding in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010) which held that a court may not compel classwide arbitration when the agreement is silent as to the availability of class treatment in arbitration. The Court in Stolt-Nielsen reasoned that because classwide arbitration lacks many of the benefits that likely motivated the parties to enter into the arbitration agreement in the first place (such as lower costs, greater efficiency and speed, etc.) it would be improper for a court to infer the parties’ intent to agree to classwide arbitration from an agreement that is silent on the matter.

In Varela, the Supreme Court entertained a similar question, considering an arbitration agreement that was not silent, but instead was ambiguous with respect to classwide treatment.

In upholding a district court ruling compelling classwide arbitration, the Ninth Circuit (from which this case was appealed) relied upon a California contract interpretation doctrine which states that a court should construe ambiguity in a contract against the drafter; in the case of employment arbitration agreements, this is almost invariably the employer. The Varela majority, however, rejected this approach, reasoning that this doctrine of contract interpretation is a tie breaker, and should only be used as a last resort when the court is unable to discern the intent of the parties. Here, despite some degree of ambiguity, the Varela Court held that the same reasoning driving the holding in Stolt-Nielsen also enabled it to discern the intent of the parties in this instant.

The Court in Varela held that “[l]ike silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice the principal advantage of arbitration.’”

What this means for employers:

While the Varela ruling appears on its face to have issued a bright line rule, lower courts will inevitably wrestle with the contours of what it means for an arbitration to be “ambiguous” with respect to classwide treatment. Indeed, as Justice Thomas’s concurrence revealed, his view was that the relevant arbitration agreement was not even ambiguous to begin with. In closely considering the agreement’s specific language, he notes that:

“[h]ere, the arbitration agreement between Varela and Lamps Plus is silent as to class arbitration. If anything, the agreement suggests that the parties contemplated only bilateral arbitration. App. to Pet. for Cert. 24a (waiving “any right I may have to file a lawsuit or other civil action or proceeding relating to my employment with the Company” (emphasis added)); ibid. (“The Company and I mutually consent to the resolution by arbitration of all claims . . . that I may have against the Company” (emphasis added)).” Lamps Plus, Inc. v. Varela, 587 U. S. ____ (2019)

As the concurrence demonstrates, careful and deliberate drafting remains crucial to safeguarding an arbitration agreement’s effectiveness. Additionally, as astute California readers may recall, the California Supreme Court has held that the right to bring a collective action under the Private Attorneys General Act (“PAGA”) may not be waived through an mandatory employment arbitration agreement. Though yesterday’s ruling in Varela may signal the US Supreme Court’s willingness to consider and possibly overturn that precedent, the ruling leaves that precedent undisturbed.

When used properly, arbitration agreements have the potential to greatly reduce business operating and litigation costs, to the benefit of both employers and employees. Before navigating this complicated and rapidly changing legal landscape employers are strongly encouraged to consult with legal counsel both to review any existing arbitration agreements and before implementing any new agreements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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