4.29.19

When it comes to arbitration of class claims, Dr. Seuss helps. Last week’s Supreme Court decision in Lamps Plus, Inc. v. Varela can be best summarized by paraphrasing Horton the Elephant: “I meant what I said and I said what I meant. Consent is required, one hundred percent!”

In 2010, in Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., the Supreme Court had held that class arbitration could not be ordered when the agreement was silent about class arbitration. In Lamps Plus, the Court ruled that class arbitration may not be ordered even if the agreement is ambiguous as to whether class arbitration is authorized.

Contra proferentem” and the Lamps Plus agreement

When a contract term is ambiguous, the courts usually interpret the ambiguous term against the party who drafted the contract. The rationale for this rule, known as contra proferentem, is that the party who drafted the contract often had superior bargaining power and was in the best position to clarify its terms.

In the context of employment agreements, the drafter is almost always the employer, not the employee.

Lamps Plus had an arbitration program and was responsible for drafting the arbitration agreement signed by employees. The agreement did not specifically mention class arbitration, but it did say that it applied to “any and all disputes, claims or controversies … relating to the employment relationship,” and that “[a]rbitration … shall be in lieu of any and all lawsuits ….”

The controversy

In 2016, a “phisher” tricked a Lamps Plus employee into providing confidential tax information about approximately 1,300 employees. One of the victims brought a putative class action against the company, which in turn tried to compel him to arbitrate his claims individually. A federal district court in California ordered the plaintiff to arbitrate but ruled that the arbitration agreement was “ambiguous” rather than silent regarding class arbitration and, therefore, that Stolt-Nielsen did not apply. Then, applying the doctrine of contra proferentem, the court ruled that the “ambiguity” in the agreement should be interpreted to mean that Lamps Plus had agreed to allow class arbitration. The U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s decision.

Lamps Plus then sought review by the U.S. Supreme Court, which issued last week’s 5-4 decision in favor of the company. (The majority consisted of Chief Justice John Roberts, who wrote the majority opinion, and Justices Samuel Alito, Neil Gorsuch, Brett Kavanaugh, and Clarence Thomas.)

The Supreme Court’s decision

According to Chief Justice Roberts, “Consent is essential under the FAA because arbitrators wield only the authority they are given.” In recent cases, the Court has referred to consent as “foundational,” “fundamental,” “strict,” and “the first principle that underscores all our arbitration decisions.” And “class arbitration” is virtually an oxymoron. Class arbitration “undermines the most important benefits” of “traditional individualized arbitration,” “introduce[s] new risks and costs for both sides,” and “raises due process concerns.” Thus, the FAA “requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a class basis.” It requires an “affirmative ‘contractual basis for concluding that the party agreed’” to class arbitration.

Contra proferentem is not a “contractual basis” for concluding so. It is not a “contract rule[] that help[s] to interpret the meaning of a term, and thereby uncover the intent of the parties.” Rather, it is “triggered only after a court determines that it cannot discern the intent of the parties.” (Emphasis in original.) It “provides a default rule based on public policy considerations.”

The fact that contra proferentem is a contract interpretation rule of general application – in other words, that it applies equally to agreements to arbitrate and to other types of contracts – does not save it in this context, Chief Justice Roberts said. Applying the doctrine to an arbitration agreement that is “ambiguous” about class arbitration bypasses the requirement of party consent -- and class arbitration without consent “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” To the extent that this occurs, the FAA preempts the doctrine of contra proferentem.

Conclusion

Although the Supreme Court majority may disfavor class arbitration “one hundred percent” unless it has been specifically agreed upon by the parties, the California courts and the Ninth Circuit will probably continue to find “exceptions” that will allow them to mandate class arbitration – or, to invalidate arbitration agreements altogether.

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