Ambiguity Is Insufficient to Compel Class Arbitration Under the FAA

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Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

In a recent 5-4 decision, the U.S. Supreme Court held that, under the Federal Arbitration Act (“FAA”), an agreement that is ambiguous on the matter of class arbitration cannot provide the requisite affirmative contractual basis for compelling class arbitration. Additionally, the lower court’s decision to compel class arbitration when the moving party sought to compel individual arbitration was significant enough to warrant immediate appeal.

In the case of Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (April 24, 2019), a hacker obtained the tax information for approximately 1,300 Lamps Plus employees by impersonating a company official. Following the data breach, a fraudulent federal income tax return was filed in the name of employee Frank Varela.

Varela filed an action against Lamps Plus in the Federal District Court in California on behalf of himself and a putative class of employees whose information had also been disclosed, alleging various state and federal claims. Lamps Plus moved to compel individual arbitration and to dismiss the lawsuit based upon the arbitration agreement signed by Varela upon hiring.

District Court
The District Court granted the motion to compel arbitration and dismissed Varela’s claims without prejudice. However, it also refused to compel individual arbitration and instead authorized arbitration on a classwide basis. Lamps Plus appealed the order compelling class arbitration.

Ninth Circuit
The Ninth Circuit Court of Appeals affirmed the District Court’s decision to compel class arbitration. It considered the decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), which held that there must be a contractual basis for concluding that the parties agreed to class arbitration before it may be compelled. It is not enough that the agreement is silent on the matter. However, the Court distinguished Stolt-Nielsen from the present case because the Lamps Plus arbitration agreement was not silent, but merely ambiguous, on the subject.

In finding ambiguity, the Court considered language offered by Lamps Plus that appeared to authorize only binary claims as well as language offered by Varela that appeared to be broad enough to indicate an allowance for class claims. It then applied California contract law to construe ambiguities against the drafter, especially in the case of an adhesion contract.

Lamps Plus appealed to the U.S. Supreme Court, arguing the Ninth Circuit’s failure to follow Stolt-Nielsen. In his response, Varela also challenged the Ninth Circuit’s jurisdiction over the matter under the FAA, and the resulting jurisdiction of the U.S. Supreme Court.

U.S. Supreme Court
Varela first argued that the Ninth Circuit, and therefore the Supreme Court, lacked jurisdiction because the FAA at 9 U.S.C. §16(a)(1)(B) only permits a party to appeal an order denying a motion to compel arbitration, and the motion of Lamps Plus to compel arbitration was granted. 

However, the Supreme Court pointed out that §16(a)(3) authorizes a party to appeal a “final decision” with respect to arbitration. In this case, the District Court both compelled arbitration and dismissed the underlying claims. Citing Green Tree Financial Corp.-Ala. v. Randolph, 531 U. S. 79 (2000), it concluded that such an order is sufficiently final within the meaning of the statute. Even though Lamps Plus sought and was granted an order dismissing the claims and compelling arbitration, the District Court’s decision to compel classwide instead of individual arbitration was a fundamental change that defeated the primary benefit sought through arbitration, giving Lamps Plus sufficient grounds to appeal.

Effect of Ambiguity
The Supreme Court pointed out that, under 9 U.S.C. §2, the FAA requires courts to enforce arbitration agreements according to their terms. Arbitration is strictly a matter of consent. The distinction between classwide and individual arbitration is significant, in that class arbitration undermines key benefits to be derived from individual arbitration, including informality, reduced cost, increased speed and efficiency, and the ability to choose expert/specialized adjudicators. As noted in Stolt-Nielsen, this distinction is so significant that consent to class arbitration cannot simply be inferred from silence and there must be an affirmative contractual basis for ordering class arbitration.

Ambiguity, like silence, is therefore an insufficient contractual basis on which to infer consent to giving up such fundamental benefits.

Applying California contract law, the Ninth Circuit found the Lamps Plus agreement to be ambiguous regarding class arbitration because the language was subject to two or more reasonable constructions. However, the Supreme Court determined that the Ninth Circuit’s reliance on the doctrine of contra proferentem (that contract ambiguities should be construed against the drafter) was misplaced. Unlike the contra proferentem doctrine, which is based solely on public policy considerations, the FAA seeks to give effect to the intent of the parties and therefore relies on affirmative consent. Applying this doctrine would result in the imposition of class arbitration in the absence of the parties’ consent, in conflict with the clear purposes of the FAA. State law is preempted to the extent that it conflicts with the purposes and intent of the FAA.

The Supreme Court also noted the case of AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011), which looked at the general contract defense of unconscionability as a bar to class action waivers in consumer contracts. Because it would result in granting any party to a consumer arbitration agreement the right to demand class proceedings without consent, it was deemed inconsistent and therefore preempted by the FAA.

In summary, contractual ambiguity is an insufficient basis on which to compel class arbitration. The arbitration agreement must explicitly provide for it.

The Supreme Court reversed the decision of the Ninth Circuit and remanded.

Considerations for Credit Unions
When considering an arbitration agreement in either an employment or a consumer setting, it is imperative to work with legal counsel to determine the best approach for the dispute resolution process and to ensure that the desired intent is clearly and unambiguously given effect.


Article by Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

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