Supreme Court : Classwide Arbitration Unavailable Under Ambiguous Agreement

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Keith Richards once said: “I look for ambiguity when I’m writing because life is ambiguous.” This would probably be number one on the list of things a lawyer would never say. Lawyers generally do not like ambiguity. Courts don’t like it either, including the U.S. Supreme Court, and including when it evaluates the availability of class arbitration under an arbitration agreement. Several years ago, in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., the Supreme Court held that courts could not compel class arbitration when the underlying agreement was “silent” on the issue. In Lamps Plus, Inc. v. Varela, the U.S. Supreme Court extended this holding to ambiguous agreements, holding that class arbitration is not available under an arbitration agreement that is ambiguous about the availability of such arbitration.

Plaintiff in Lamps Plus was a company that sold, you guessed it, “lighting fixtures and related products.” In 2016, the company suffered a data breach that revealed the tax information of approximately 1,300 of its employees. Soon after, a fraudulent tax return was filed in defendant’s name. He sued in California federal court on behalf of himself and a putative class of employees whose tax information had been compromised. But, like most of plaintiff’s employees, defendant had signed a broad arbitration agreement when he started working at the company. Thus, in response to defendant’s complaint, plaintiff moved to compel arbitration on an individual, not classwide, basis. The district court granted the motion to compel arbitration, but rejected plaintiff’s request for individual arbitration. The U.S. Court of Appeals for the Ninth Circuit affirmed.

The Ninth Circuit determined that the arbitration agreement was ambiguous on the issue of classwide arbitration. So it applied the state law doctrine of contra proferentem – an equitable principle under which any ambiguities in a contract are construed against the drafter – and construed this ambiguity against plaintiff. The Ninth Circuit held that Stolt-Nielsen was not controlling because the arbitration agreement in that case was silent on classwide arbitration, while the arbitration agreement in Lamps Plus was ambiguous on the issue. The Ninth Circuit used contra proferentum to resolve that ambiguity.

The Supreme Court rejected the Ninth Circuit’s reasoning and reversed its decision. It held that the Federal Arbitration Act requires courts to “enforce arbitration agreements according to their terms.” This obligation recognizes a rule of “fundamental importance” under the Act, that arbitration is “a matter of consent, not coercion.” Parties can shape arbitration agreements as they see fit, but “[w]hatever they settle on, the task for courts or arbitrators at bottom remains the same, ‘to give effect to the intent of the parties.'”

To do so, the Supreme Court, as it did in Stolt-Nielsen recognized the “‘fundamental’ difference between class arbitration and the individualized form of arbitration envisioned by the FAA.” According to the Supreme Court, individualized arbitration is quicker, cheaper, and more flexible than litigation. Class arbitration is, again, according to the Supreme Court, none of these things. Class arbitration also “raises serious due process concerns by adjudicating the rights of absent members of the plaintiff class . . . with only limited judicial review.” Because of these differences, the Supreme Court, in Stolt-Nielsen held that there was “reason to doubt the parties’ mutual consent to resolve disputes through classwide arbitration.” In its simplest terms, without consent, there could be no duty to arbitrate, and silence alone was not enough to infer consent.

In Lamps Plus, the Supreme Court held that ambiguity was not enough either. “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice the principal advantage of arbitration.'” The Supreme Court rejected the Ninth Circuit’s use of contra proferentem because that principle “seeks ends other than the intent of the parties.” It resolves ambiguity against the drafter for policy reasons, not because that approach best implements the intent of the parties. It “does not help to determine the meaning that the two parties gave to the words, or even the meaning that a reasonable person would have given to the language used.” As such, it is inconsistent with the “foundational” principle of the FAA – that arbitration is a matter of consent to be determined by ascertaining the intent of the parties – and therefore the Ninth Circuit was wrong to apply it to permit classwide arbitration.

The majority opinion in Lamps Plus was authored by Chief Justice Roberts and joined by Justices Thomas, Alito, Gorsuch, and Kavanaugh. But it also generated five other opinions that are interesting and worth reading:

  • Justice Thomas joined Chief Justice Roberts’s decision, but also wrote his own concurring opinion, in which he: (1) claimed that the arbitration agreement was silent, not ambiguous, therefore the case should have been resolved simply by applying the reasoning of Stolt-Nielsen; and (2) renewed his skepticism of the Supreme Court’s “implied pre-emption precedents.” This sounds an awful lot like he doesn’t really agree with the majority decision he joined, a fact that Justice Kagan pointed out in her dissent.
  • Justice Ginsburg wrote a dissenting opinion (joined by Justices Breyer and Sotomayor) in which she argued that the FAA was created to “enable merchants of roughly equal bargaining power to enter binding agreements to arbitrate commercial disputes,” not to “govern contracts in which one of the parties characteristically has little bargaining power.” She noted the “irony” of the majority relying on the “consent, not coercion” principle of the FAA in a situation where employees like defendant were powerless to negotiate the arbitration agreement.
  • Justice Breyer wrote a dissent arguing that the Supreme Court lacked jurisdiction to hear the case. (This one is a little wonkish.)
  • Justice Sotomayor wrote a dissenting opinion that essentially echoed Justice Ginsburg’s and Justice Kagan’s decision, but also noted that the majority and Justice Thomas can’t even agree on whether the arbitration agreement was ambiguous in the first place.
  • Justice Kagan wrote a dissenting opinion, joined by Justices Ginsburg, Breyer, and Sotomayor (in part). She argued that contra proferentem (what she cleverly calls, the “anti-drafter canon”) is a universally recognized canon of contractual interpretation, which “applies with peculiar force to form contracts” like the Lamps Plus arbitration agreement. She held that this state law, which does not impermissibly “target” arbitration agreements, but instead treats them just like all other contracts, should have been used as the Ninth Circuit used it.

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