Supreme Court Narrows Availability of Class Arbitration

Clark Hill PLC

In another Supreme Court decision on arbitration clauses, a majority of five justices in Lamps Plus, Inc. v. Varela,  held that the Federal Arbitration Act requires a non-ambiguous, clear expression of agreement to arbitrate class actions.  Following its decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 5589 U.S. 662 (2010), holding that a court may not compel class arbitration if the agreement is silent, and last year’s holding in Epic Systems Corp. v. Lewis, 548 U.S. (2018), that there must be a contractual basis for finding agreement to class arbitration, the Court held that an ambiguous agreement is not sufficient to provide that contractual basis.  In other words, unless expressly stated, a broader clause that is capable of ambiguous interpretations that would include class arbitration is not sufficient.  While the majority considers this a straightforward matter of contract interpretation, the various dissents viewed it as a significant policy decision.

Varela’s arbitration agreement with his employer, Lamps Plus, was not quoted in the opinion, but the Ninth Circuit opinion noted the relevant parts of the agreement as including Varela's waivers of  (1) “any right I may have to file a lawsuit or other civil action or proceeding relating to my employment with the Company,” (2) “any right I may have to resolve employment disputes through trial by judge or jury,” and a statement that (3) “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.” The Ninth Circuit panel, in a 2-1 decision, found the agreement ambiguous since it was capable of two reasonable interpretations—the broad language included remedies allowed by law which included class-action relief—so permitted the class action to proceed under this contractual basis.  The dissenting Ninth Circuit judge called in an evasion of Stolt-Nielsen.

The Supreme Court held that such an ambiguous agreement did not reflect the clear and express contractual authority for class arbitration to denote unambiguous consent.  Chief Justice Roberts, writing for the majority, emphasized the importance of finding clear expression of consent for class arbitration, noting the “fundamental” difference between class and individual arbitration, and the Court’s past decisions refusing to infer consent regarding other “fundamental arbitration questions,” such as the scope of arbitration.  Consequently, the majority rejected the Ninth Circuit’s permission of class action arbitration based on the ambiguity of the clause that could be interpreted to provide consent.  Consequently, the ability to have class arbitration was waived, and Varela was subject to personal mandatory arbitration for himself, but could not bring it as a class action.

Justice Thomas, who had joined the majority, separately concurred to note that the complete silence as to class arbitration indicated a contemplation of only bilateral arbitration, and that under Stolt-Nielsen, that was sufficient.

The various individual dissenters touched on different aspects, with most joining Justice Ginsburg’s dissent in full, in which she spoke in no uncertain terms that “[n]othwithstanding recent steps to counter the Court’s current jurisprudence, mandatory individual arbitration continues to thwart effective access to justice for those encountering diverse violations of their legal rights.” Justice Kagan wrote separately, joined in part by other dissenters, and urged reading an ambiguous contract clause against the employer/drafter, viewing the arbitration clause at issue as having “comprehensive scope.” She applied the California rule—“like every other State in this country”--as reading the agreement to authorize class arbitration because of the default rule of construction of ambiguities against the drafter.

As a practical matter, the lesson of Varela is clear: just as waivers of jury trials and class actions must be clear and express, so must the affirmative contractual right to class action be clear and express.  Nothing in Varela diminishes the state law exceptions to enforcement of a clause or contract based on unconscionability or other contract defenses, provided such are not based solely on the agreement being one of arbitration.  Employees and consumers seeking to avoid this result may attempt to negotiate more express rights, but the degree of leverage they have may be limited.  Supporters of the result will see the Supreme Court reemphasizing what it has said several times before and is following its own precedent, and opponents will view it as a continuing restriction of consumer rights.

Lamps Plus, Inc. v. Varela, No. 17-988, --U.S.—(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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