Supreme Court Requires Unambiguous Consent to Class Arbitration

Last Wednesday, the Supreme Court held in Lamps Plus, Inc. v. Varela, No. 17-988 (April 24, 2019) that an ambiguous agreement cannot authorize class arbitration. The 5-4 decision split along ideological lines, with Chief Justice Roberts writing for the Court’s conservative majority. Per Roberts’ opinion, the Federal Arbitration Act (FAA) requires both parties to an arbitration agreement to give their full consent to authorize class arbitration, a “markedly different” process than traditional individualized arbitration. In its 2010 decision in Stolt-Nielsen v. Animalfeeds Int’l Corp., 559 U.S. 662 (2010), the Court held such consent is lacking when an agreement is silent as to class arbitration. It “follows directly,” says the Court in Lamps Plus, that consent is also lacking when an agreement is ambiguous.

The dispute in Lamps Plus arises out of a 2016 phishing hack of the company’s website that gave hackers access to the tax information of about 1,300 Lamps Plus employees. After a fraudulent federal income tax return was filed in his name, employee Frank Varela brought a putative class action in Federal District Court on behalf of his fellow victims. Lamps Plus moved to dismiss the case and compel individual arbitration, relying on the arbitration agreement that Varela had signed upon joining the company. The District Court granted the motion to compel arbitration and dismissed the action without prejudice. The court, however, declined Lamps Plus’ motion for individual arbitration, instead allowing Varela and his coworkers to arbitrate on a class-wide basis.

The Ninth Circuit affirmed. Applying Stolt-Nielsen, the court acknowledged that an arbitration agreement must provide a contractual basis for concluding that the parties agreed to class arbitration. The Lamps Plus agreement, however, was ambiguous. Some provisions seemed to contemplate “purely binary claims,” but others seemed to allow for a broader remedy. To resolve the ambiguity, the circuit court turned to California common law, which requires courts to construe ambiguity against the drafter. The court held that, so construed, the arbitration agreement provided a sufficient contractual basis to allow for class arbitration under Stolt-Nielsen.

The Supreme Court reversed. While the FAA allows courts to apply state contract principles to enforce the terms of an arbitration agreement, the Court held that state law is preempted where it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives” of the Act. As the FAA fundamentally requires that arbitration be based on consent, not coercion, state law cannot subject a party to a process beyond the scope of its consent. Class arbitration fundamentally differs from traditional individualized arbitration by sacrificing the latter’s “principal advantage” of efficient informality for a “process slower, more costly, and more likely to generate procedural morass than final judgment.” Given these crucial differences, the FAA will accept nothing less than explicit consent to class arbitration. “Like silence,” the Court summarized, “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice the principal advantage of arbitration.’”

In a separate concurrence, Justice Thomas questioned the need for the Court’s holding. The contract, in his view, unambiguously requires individualized arbitration because it never mentions class arbitration. In the face of such silence, a simple application of Stolt-Nielsen would have sufficed.

The Court’s liberal minority offered four vigorous dissents. Justice Ginsburg, with Justices Breyer and Sotomayor, decried the majority as “treacherously” violating the purpose of the FAA by further denying employees and consumers the opportunity to vindicate their rights against powerful economic entities wielding superior bargaining power. Joined by all the dissenters, Justice Kagan accused the majority of allowing its personal distaste for class arbitration to override generally applicable state law and—joined by all except Justice Sotomayor—questioned whether the contract did not unambiguously allow for class arbitration. Writing for herself, Justice Sotomayor conceded that the contract was ambiguous but questioned why the majority preempted state law before at least considering the “off ramp” offered by Justice Thomas. And, in another individual dissent, Justice Breyer shared his view that the Ninth Circuit lacked jurisdiction to hear the case because, under the FAA, the District Court’s order should have been construed as an unappealable interlocutory order, not—as the Court had summarily held—as an appealable final order.

For an opinion based around consent, Lamps Plus is a deeply divided decision. But with six disparate opinions, Lamp Plus illuminates one point of apparent agreement among the Justices: The case is not likely to be the Court’s last word on arbitration agreements.