Last Wednesday, the US Supreme Court issued yet another pro-employer arbitration decision.

In a 5-4 split, the Supreme Court held in Lamps Plus Inc. v. Varela that a party cannot be compelled to submit to a class arbitration (as opposed to the arbitration of individual claims) unless the arbitration agreement explicitly authorizes class proceedings in arbitration.

In doing so, the Supreme Court reiterated two key aspects of its Federal Arbitration Act jurisprudence:

  1. Arbitration is a matter of consent, not coercion; and
  2. Class arbitration is fundamentally different than the traditional individualized arbitration envisioned by the FAA.

Because, according to the majority opinion, class arbitration so fundamentally changes the nature of arbitration, a party can only be forced to litigate class claims in arbitration under the FAA if there is a contractual basis for concluding that the party agreed.

The issue before the Supreme Court Lamps Plus was what type of contractual basis was required. We now have the answer – the contract must explicitly permit class arbitration, and either silence or ambiguity on the issue are not enough. 

Background

In 2010, in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., the Supreme Court held that a court may not compel arbitration on a class-wide basis when an agreement is “silent” on the availability of such arbitration. In Lamps Plus, a former employee of the lighting store chain filed a putative class action asserting claims against his employer after a data breach exposed employee personal information. The employer moved to compel arbitration on an individual rather than a class-wide basis. The federal district court granted the motion to compel arbitration, but rejected the employer’s request for individual arbitration, instead authorizing arbitration on a class-wide basis. The Ninth Circuit affirmed.

The Ninth Circuit acknowledged the agreement included no express mention of class proceedings. But that did not end the inquiry, the Ninth Circuit reasoned, because unlike in Stolt-Nielsen, the parties in Lamps Plus had not stipulated that the agreement did not address (i.e., was “silent” about) class arbitration. The Ninth Circuit then determined the agreement was ambiguous on the issue of class arbitration. On the one hand, certain phrases seemed to contemplate purely binary claims, while other phrases were broad enough to arguably include class claims. Because the employer had drafted the agreement, the Ninth Circuit applied California contract interpretation rules to construe the ambiguity against the drafter, adopting the employee’s interpretation favoring class arbitration.

Supreme Court: “More than ambiguity” required

The Supreme Court reversed the Ninth Circuit, holding that consistent with the FAA, an ambiguous agreement cannot provide the necessary “contractual basis” for compelling class arbitration. The Supreme Court pointed out that, in applying the California rule of construing ambiguity against the drafter, the Ninth Circuit did not find the arbitration clause reflected an agreement to class arbitration, but instead actually held the opposite – that the parties had different understandings of the clause, rendering it ambiguous. As summarized by the Supreme Court:

Class arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration. . . . The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a class-wide basis.”

Key Takeaways

  • Following Stolt-Nielsen, Concepcion and Epic Systems, this is yet another Supreme Court decision affirming the enforceability of agreements to arbitrate on an individual basis, while also reiterating the benefits of individualized arbitration.
  • Although we continue to recommend that an arbitration agreement include an express class action waiver, this decision mitigates against the risk that an employer may be compelled to class arbitration based on an agreement that is ambiguous (i.e., silent, absent a stipulation that the agreement is “silent”) on the availability of class arbitration.

For more, please reach out to your Baker McKenzie employment lawyer.