The U.S. Supreme Court, in a 5-4 decision, ruled that arbitration agreements must provide a “contractual basis for concluding that the part[ies] agreed to [class arbitration].” Reversing the Ninth Circuit, Chief Justice John Roberts found not only that the Court had jurisdiction over the case but also that the state law contract construction rule dealing with ambiguity applied by the Ninth Circuit was inconsistent with the Federal Arbitration Act core principle that consent of the parties was required. See Lamps Plus, Inc. v. Varela, No. 17-988 (April 24, 2019).
The Decisions Below
Lamps Plus was subjected in 2016 to a successful phishing attack, during which one of its employees sent copies of current and former employees’ 2015 W-2 forms to a third party. Shortly thereafter, Frank Varela filed a putative class action in California federal court seeking relief for the data breach. Lamps Plus responded by seeking individual arbitration under Varela’s arbitration agreement. Instead, the district court interpreted the arbitration agreement to authorize class arbitration. A divided Ninth Circuit panel affirmed.
Judges Reinhardt and Wardlaw first distinguished Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 55 U.S. 662, 684 (2010). In Stolt-Nielsen, “silence” was “more than the mere absence of language explicitly referring to class arbitration; instead it meant absence of agreement.” So, the mere fact that an agreement did not expressly refer to class arbitration was not determinative, according to the judges. The majority then applied California contract principles to interpret the arbitration agreement. They found the agreement was ambiguous as to class arbitration and construed it against the drafter, Lamps Plus. This finding was based on “three sweeping phrases” in the agreement:
According to the Ninth Circuit majority, the district court “properly found the necessary ‘contractual basis’ for agreement to class arbitration” and affirmed.
The Supreme Court Analysis
Chief Justice Roberts’ opinion first dealt with the issue of the Court’s jurisdiction, raised by Varela in his opposition to certiorari. As one might suspect, the Court did have jurisdiction. Section 16(a)(3) of the FAA grants a right to appeal from “a final decision with respect to an arbitration that is subject to this title.”
Varela argued that Lamps Plus did not have standing to appeal as it had received exactly the result it sought – arbitration. The Court disagreed. What Lamps Plus wanted was an order granting individual arbitration, not on a classwide scope. The Court reiterated that moving from individual to class arbitration was a “fundamental” change that “sacrifices the principle advantage of arbitration” while increasing the “risks to defendants,” citing AT&T Mobility v. Concepcion, 563 U.S. 333, 348, 350 (2011). Thus, Lamps Plus’s interest in overturning that result gave it the necessary “stake” in the appeal.
The second and premier issue was the Ninth Circuit’s use of California contract law on ambiguous agreements to avoid the consent requirement of the FAA. As noted above, the Court of Appeals employed California contract law to determine that the agreement as to the use of class arbitration was ambiguous. Because it was ambiguous, the appellate court construed it against Lamps Plus. The Court found this approach defective. Indeed, “[n]either silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself.”
Citing Concepcion, the Court reiterated that “class arbitration to the extent it is manufactured by [state law] rather than consen[t], is inconsistent with the FAA.” While the ruling is of less importance in an environment where class action waivers are routinely used, it did resolve important issues regarding the court’s jurisdiction and the impact of general state contract principles. In footnote 4, the Court specifically reserved the question of whether the availability of class arbitration was a “question of arbitrability” and who should resolve it. We will likely read more about that issue.
BOTTOM LINE: The Supreme Court held it had jurisdiction to resolve the case and that ambiguity of the agreement premised on state law does not represent the consent required by the FAA.