Lights Out on Classwide Arbitration: The Supreme Court Rules in Lamps Plus That Ambiguity in Agreements Is Not Enough to Permit Classwide Arbitration

Carlton Fields
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Carlton Fields

Yesterday, the Supreme Court extended its prior rulings looking skeptically at the idea of classwide arbitration, holding that even when an agreement is “ambiguous” about the availability of classwide arbitration, such arbitration is still barred.

Nine years ago, in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), the Court had ruled that classwide arbitration may not be compelled when an agreement is “silent” on the availability of such arbitration. It had emphasized that there must be a contractual basis for concluding that the parties agreed to conduct such arbitration. In subsequent decisions, the Court continued to evince a marked preference for individual arbitration over classwide arbitration or classwide litigation, even holding that state laws standing in the way of arbitration of individual claims are preempted by the Federal Arbitration Act (FAA). See AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

Here, a district court and the Ninth Circuit ruled that an arbitration agreement between Lamps Plus, a seller of light fixtures, and its employees was ambiguous on the availability of class arbitration. The Ninth Circuit reasoned that, in these circumstances, Stolt-Nielsen was not controlling because the parties in that case has stipulated that their agreement was silent about class arbitration. It followed California law to construe the agreement against the drafter and to authorize class arbitration.

The Supreme Court, in a 5-4 majority decision authored by Chief Justice Roberts, rejected that reasoning. It accepted, for purposes of its decision, the Ninth Circuit’s conclusion that the arbitration agreement contained ambiguity. That did not matter because even an ambiguous agreement cannot provide the necessary contractual basis for compelling class arbitration. Rather, it seems, a contract must unambiguously require class arbitration for it to occur.

The majority reasoned that in individual arbitration, parties realize certain distinct benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes. In contrast, class arbitration lacks those benefits and even “undermines” them. It makes the process slower and more costly. It also raises serious due process concerns by adjudicating the rights of absent class members but with limited judicial review. In short, it is a “fundamental” change that “greatly increases risks to defendants.” Thus, like silence, ambiguity does not provide a sufficient basis for a court to conclude that parties to an arbitration agreement agreed to sacrifice the principal advantages of arbitration. Moreover, state contract principles of interpretation (such as the rule that contracts must be construed against the drafter) may not be used to “reshape” individual arbitration without the parties’ consent.

The four justices in dissent decried the majority’s now routine deployment of the FAA to “deny to employees and consumers ‘effective relief against powerful economic entities.’”

Once again, we urge companies and their lawyers to review their employment and consumer agreements to ensure that they say exactly what the company wants to say regarding any recourse to class litigation or arbitration. The benefits of individual arbitration described by the majority should not be cast aside lightly.

Lamps Plus, Inc. v. Varela, No. 17-988 (U.S. Apr. 24, 2019).

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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