SCOTUS Rules That Express Authorization is Required for Class Arbitration

in Business, Employment, Employment, News

On April 24, 2019, the Supreme Court of the United States decided Lamps Plus, Inc. v. Varela, No.17-988, holding that courts may not compel class-wide arbitration based on an arbitration agreement that is ambiguous as to whether the parties agreed to arbitrate on a class basis. 

Varela sued Lamps Plus in federal district court. The parties had an arbitration agreement that did not speak directly to whether arbitration could be conducted on a class basis, but contained some provisions that could be read to contemplate arbitration of only individual claims, and other provisions that could be read to contemplate arbitration on a class basis. 

Lamps Plus moved to compel arbitration on an individual basis. The district court granted Lamps Plus’s motion to compel arbitration, but ordered that the arbitration proceed on a class-wide basis rather than on an individual basis, and dismissed the case. The Ninth Circuit affirmed on appeal, holding that the agreement was ambiguous whether the parties agreed to class arbitration, and that the ambiguity had to be construed against the drafter of the agreement, which was Lamps Plus.

The Supreme Court reversed. The Supreme Court, in a majority decision authored by Chief Justice Roberts, held that courts cannot order an arbitration to be conducted on a class-wide basis unless there is an arbitration agreement that expressly authorizes class arbitration. In 2010, the Supreme Court previously held in Stolt-Nielsen, S.A. v. Animal Feeds Int’l Corp. that a court may not compel class arbitration when an agreement is “silent” on the availability of such arbitration. Now the Supreme Court has gone a step further. Courts cannot compel arbitration when an arbitration agreement is ambiguous about the availability of class arbitration. In other words, class arbitration is only available if the parties specifically contract for it.

According to the Court, party consent to arbitrate is a fundamental tenet of the Federal Arbitration Act (FAA), and courts may not infer consent to arbitrate on a class-wide basis from an ambiguous agreement. Moreover, in the case of class arbitration where proceeding would “sacrifice[] the principal advantage of arbitration,” the Court found ambiguity especially insufficient to compel class arbitration. The Court characterized this holding as consistent with its other cases addressing “fundamental arbitration questions,” in which it has also refused to infer consent.

The Court made clear that class arbitration “fundamentally changes” the nature of “traditional individualized arbitration” envisioned by the FAA in several ways, including making the process slower, more costly, and “more likely to generate procedural morass than final judgment.” Because arbitration under the FAA is strictly a matter of the parties’ consent, the Court reasoned that to allow class arbitration under an ambiguous agreement is “flatly inconsistent with the ‘foundational FAA principle that arbitration is a matter of consent.'”

The decision is an important victory for businesses. Courts can no longer order class arbitration under the FAA unless the arbitration agreement unambiguously authorizes class arbitration. Under the Lamps Plus decision, businesses no longer face the risk that ambiguous phrases in their agreements will lead to class arbitration. Only express agreements can lead to class arbitration.

Thus, despite the fact that the Lamps Plus decision makes it less likely that businesses will face class arbitration, we continue to urge businesses to review their employment and consumer agreements to ensure that they say exactly what the company wants to say regarding any recourse to class litigation or arbitration.

CONTACT INFORMATION

Matthew C. Miller

216.687.3236

mmiller@westonhurd.com