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You’ll Have to Say It If You Mean It: Supreme Court Holds That Agreement to Permit “Class Arbitration” Must Be Express and Unambiguous

Predictably, the U.S. Supreme Court has ruled in Lamps Plus, Inc. v. Varela, No. 17-988, 2019 U.S. LEXIS 2943 (U.S. April 24, 2019), that, under the Federal Arbitration Act, neither silence nor “ambiguity” in an arbitration agreement regarding the permissibility of class arbitration enables a court to find that the parties agreed to permit class arbitration.  According to the Court, consent is fundamental to arbitration, and such an agreement must be express and unambiguous because it would so drastically alter the nature of the proceeding from the simple “bilateral” process that was envisioned in the FAA.

Notably too, the arbitration agreement in question required the use  of, and thus incorporated by reference, either (a) the American Arbitration Association (“AAA”) National Rules for the Resolution of Employment Disputes or (b) the JAMS Arbitration Rules and Procedures for Employment Disputes.  See, id. at *45 (Kagan, dissenting); Varela v. Lamps Plus Inc., 16-CV-00577 (C.D. Cal. Jul. 7, 2016), Order at 2.  Both of those sets of rules in turn incorporate by reference ancillary rules under which arbitrators could conduct class proceedings (e.g., the AAA Supplementary Rules for Class Arbitration (2011)).  See, 2019 U.S. LEXIS 2943 at *45.  This had no effect on the Court’s decision, implying that incorporation of such procedural rules is not a sufficient basis to infer an agreement to permit class arbitration either.

For those employers, consumer product vendors, and financial service providers that have not yet added class and collective action waivers to their arbitration agreements, this decision provides protection in the current legal environment against the imposition of class arbitration proceedings without the parties’ express consent.  However, that environment could be changed by new legislation, which is quite evidently in contemplation both at the state and federal levels, and which might well be stimulated by the Lamps Plus decision.

In Lamps Plus, the Supreme Court reversed and remanded a Ninth Circuit decision that the Court of Appeals originally designated “Not For Publication,” and might easily have wished be forgotten.  See, Lamps Plus, Inc. v. Varela, 701 Fed. Appx. 670 (9th Cir. Aug. 3, 2017).  The Ninth Circuit had in effect answered the unexpected question of “when is ‘silence’ in an arbitration clause concerning class arbitration not ‘Stolt-Nielsen silence’?”  See, Contractual ‘Crickets’ Are Sufficient for Ninth Circuit to Determine That Class Arbitration is Permitted, Distinguishing Stolt-Nielsen, Mintz Levin ADR Blog, Aug. 9, 2017.  The parties had agreed that the arbitration agreement in question included no express mention of class proceedings.  Nevertheless, the District Court and the Court of Appeals found that that agreement was ambiguous as to the permissibility of class arbitration, and they construed that ambiguity against the employer-drafter (Lamps Plus), applying the familiar contra proferentem rule, and permitted class arbitration to proceed with respect to all claims.

And so we commented when the Supreme Court granted certiorari to review this case on April 30, 2018,

“On the one hand, it seems surprising that the Ninth Circuit’s “Not For Publication” opinion did not find a peaceful grave, but instead was pulled up into the harsh sunlight by the Supreme Court.  On the other hand, the Supreme Court can now tell us whether an agreement to permit class arbitration may be ‘found’ by a court without evident regard for the need for a plausible meeting of the minds, or whether an express agreement to permit class arbitration is required, given the Supreme Court’s concern about the very considerable differences between ‘class arbitration’ and normal bilateral arbitration as envisioned in the FAA.” 

Supreme Court Will Determine If Silence in an Arbitration Clause May be Judicially Interpreted to Permit Class Arbitration, Mintz Levin ADR Blog, May 4, 2018.

The Supreme Court was evidently fully engaged despite this case’s arguably esoteric subject.  The policy implications of its decision with regard to the rights and remedies of employees and consumers appear to have evoked considerable concern in the Court’s minority.  Chief Justice Roberts delivered the 13-page opinion of the Court, which split 5-4 with the Court’s conservative wing comprising the majority.  (Justice Thomas added a 2-page concurrence.)  This prompted dissenting opinions by Justices Ginsburg (5 pages), Breyer (9 pages), Sotomayor (3 pages), and Kagan (14 pages), respectively.

Case History

Varela was a Lamps Plus employee who brought a putative class action suit against the company in a federal district court in California concerning the effects of a data breach at the company.  The employer moved to compel arbitration, as was required by the relevant employment agreement, and to dismiss the lawsuit.  The District Court granted that application, but held that class arbitration was permitted.  The Ninth Circuit affirmed.  In doing so, the Court of Appeals adopted the District Court’s opinion that even if the applicable arbitration agreement “does not expressly refer to class arbitration, [that] is not the ‘silence’ contemplated in Stolt-Nielsen.”  2019 U.S. LEXIS 2943 at *7, citing 701 Fed. Appx. at 672.

Jurisdiction Issue

The Supreme Court first disposed of Varela’s challenge to the Court’s jurisdiction.  See id. at *8-*10.  It reiterated that a court order directing the parties to proceed to arbitration and dismissing all of the claims in litigation is “final” within the meaning of FAA § 16(a)(3), 9 U.S.C. § 16(a)(3), and therefore appealable.  Id. at *8-*9, citing Green Tree Financial Corp. vs. Randolph, 531 U.S. 79, 89 (2000).  Furthermore, the Court found that Lamps Plus had standing – i.e., a personal stake in the appeal – because it had sought an order compelling bilateral arbitration, but the lower court had issued an order compelling arbitration on a class-wide basis.  Id. at *9-*10.

Supreme Court’s Majority Opinion

On the merits, then, the Supreme Court deferred to the Ninth Circuit’s interpretation under state (California) law to the extent that it “accept[ed]” that the arbitration agreement should be regarded as ambiguous on the relevant point.  Id. at *10.  On this basis, the Supreme Court distinguished the question before it from the question that it had already answered in Stolt-Nielsen concerning an arbitration agreement that was “silent” regarding class arbitration.  The Court thus identified the question in Lamps Plus as “whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.”  Id. at *10. 

The Court’s holding that it “cannot” follows from its Stolt-Nielsen decision.  The Supreme Court held in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), that an arbitration agreement that is silent concerning the availability of class arbitration could not justify a judicial order compelling such a proceeding.  The Ninth Circuit ruled that an arbitration agreement that said nothing about class arbitration was nevertheless “ambiguous” on the point, rather than “silent” in the way that the Stolt-Nielsen opinion contemplated, and that such ambiguity could be interpreted against the draftsman in order to reach the result that class arbitration was deemed agreed by the parties.  The Supreme Court rejected that analysis.

The Court had stated more than once that a “class arbitration” proceeding would be fundamentally different in nature from the bilateral arbitration envisioned by the FAA.  The former sacrifices the informality of the contemplated bilateral process, as well as its speed, simplicity, and relative inexpensiveness, and instead produces a slower, more costly, and more complex process that looks like “the litigation it was meant to displace.”  See 2019 U.S. LEXIS 2943 at *13.  It also markedly increases the jeopardy of a party-respondent that finds itself in such a proceeding.[1]

And so, given the “crucial differences” between individual and class arbitration, a “class arbitration” proceeding must be founded on “a contractual basis for concluding that the parties agreed to [it].”  2019 U.S. LEXIS 2943 at *13, *5, citing Stolt-Nielsen, 559 U.S. at 684.  In Lamps Plus, the Court concluded that class arbitration is so markedly different from traditional bilateral arbitration that the FAA “requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a class-wide basis.” Id. at *11.

Hence, “[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.”  Id. at *14.

The Court saw an analogy in how it deals with who decides “gateway” issues of arbitrability.  Courts presume that parties have not authorized arbitrators to decide such questions, but rather that they are for a court, unless the parties have clearly and unmistakably agreed otherwise.  Neither silence nor ambiguity in that regard in the arbitration agreement meets that criterion either.[2]  See id. at *14.

Ultimately, the principal legal issue concerned an apparent tension between (a) state contract law concerning the interpretation of ambiguous contract terms and (b) the fundamental rule under the FAA “that arbitration ‘is a matter of consent, not coercion.’” Id. at *18, citing Stolt-Nielsen, 559 U.S. 662, 681, 684 (2010). However, state law is preempted to the extent that it creates “an obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA.  Id., citing AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 352 (2011).

Thus, the Court found unavailing Varela’s argument that the state law contra proferentem rule of contract interpretation should determine the matter.  The Court held that “the general contra proferentem rule cannot be applied to impose class arbitration in the absence of the parties’ consent.”  Id.  Moreover, the contra proferentem rule is not a contract interpretation rule that is intended to ascertain the parties’ intent, but rather a rule of public policy that is applied only as a last resort “when the meaning of a provision remains ambiguous after exhausting the ordinary methods of interpretation.”  See id. at *14-*16.  That is, it is “by definition triggered only after a court determines that it cannot discern the intent of the parties,” and so it cannot be said to be designed to ascertain the parties’ actual agreement.  Id. at *16.  Therefore, the application of that doctrine “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.”  Id. at *16-*17, citing 3 Corbin Contracts § 559, at 269-70.

Furthermore, the Court rejected the argument that the application of the contra proferentem rule to ambiguous contract language is nondiscriminatory, in that it can be applied generally with regard to any agreement including an arbitration agreement, because such an application in this case would interfere with the fundamental attributes of arbitration and thus create a scheme inconsistent with the FAA.  Id. at *18.

Principal Dissenting Opinions

In dissent, Justice Ginsburg reiterated the policy-based argument that she previously made in Epic Systems Corp. v. Lewis, 584 U.S. _____, 138 S.Ct. 1612 (2018).  She opined that the FAA was enacted “to enable merchants of roughly equal bargaining power to enter into binding agreements to arbitrate commercial disputes,” and was not designed to govern contracts “in which one of the parties characteristically has a little bargaining power”.  2019 U.S. LEXIS 2943 at *21 [(Ginsburg, dissenting)].  As a result of the Supreme Court’s recent decisions, “[e]mployees and consumers forced to arbitrate solo face severe impediments to the ‘vindication of their rights.’”  Id. at *24.  “When companies can ‘muffl[e] grievance[s] in the cloakroom of arbitration,’ the result is inevitable:  curtailed enforcement of laws ‘designed to advance the well-being of [the] vulnerable.’”  Id. at *27 (citations omitted).  Justice Ginsburg also in effect asked whether the consent to arbitration given by a prospective employee or employee in a take-it-or-leave-it adhesion situation was the sort upon which the Court should rely in its jurisprudence.

Finally, Justice Kagan opined in dissent that the arbitration agreement in question was “best understood to authorize arbitration on a class-wide basis,” id. at *42, but if it were viewed as ambiguous, then the FAA relies on state law for the interpretation of such agreements “so long as that law treats other types of contracts in the same way.”  She further opined that the California rules of contract interpretation that were applied in the case at bar (e.g., contra proferentem) were “plain-vanilla,” and so likewise permitted class arbitration in this case.  Id. In her view, the majority rejected the application of California state law concerning contract interpretation “only by insisting that the FAA trumps that neutral state rule whenever its application would result in class arbitration.”  Id. at *42-*43.

Justice Kagan also points out that while “many of the majority’s statements indicate that any tool for resolving contractual ambiguity is forbidden if it leads to class arbitration,” id. at *54n.7, “the part of the opinion focusing on the anti-drafter rule [i.e., contra proferentem] suggests that today’s holding applies to only a subset of contract default rules -- to wit, those (supposedly) sounding in ‘public policy considerations.’”  Id.  Notably, the latter interpretation of the majority opinion would detract from an absolute rule and suggest that an arbitration agreement that is ambiguous concerning the availability of class arbitration could indeed be interpreted to permit it if other state law contract interpretation rules were applied.

Looking Ahead re “Class Arbitration”

Arbitration is a creature of the parties’ consent because the adjudicator (arbitrator) has only the authority that he is given by the parties’ agreement. Parties agreeing to arbitrate can specify the identity of the arbitrator, the rules, and the issues that will be addressed; and the parties to such an agreement are thus the bound counterparties in the private proceeding that they have created.  See id. at *12. The Supreme Court has not yet squarely addressed the fundamental question of who else could be bound by a bilateral agreement to permit “class arbitration” or by its consequences.  That seems to be a dilemma for another day.

 

 

[1]  The Court noted also that class arbitration “raises serious due process concerns by adjudicating the rights of the absent members of the plaintiff class….”  2019 U.S. LEXIS 2943 at *13.  This is an issue with which the Supreme Court has not yet grappled, but it may eventually have to address the fundamental question of whether “class arbitration” is an oxymoron.

[2]  The Court noted that it need not decide whether the availability of class arbitration is such a gateway question because the parties in Lamps Plus had agreed that a court should resolve the class arbitration availability question.  See id. at *14n.4.  The Courts of Appeals have thus far opined that this decision is presumptively for the courts.  The ultimate resolution of that issue may prove to be important because of how deferential and limited a review of an arbitrator’s decision must be. See, e.g., Oxford Health Plans v. Sutter, 569 U.S. 564 (2013).

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Gilbert A. Samberg is a Mintz litigator with experience in complex international and domestic commercial disputes. He focuses on international arbitration and other cross-border alternative dispute resolution proceedings, drawing on his science background to assist biotech and chemical companies.