Supreme Court Rules that an Ambiguous Agreement Cannot Be a Basis to Compel Class Arbitration

In Stolt-Nielsen S. A. v. Animal Feeds Int’l Corp., the Supreme Court held in 2010 that a court may not compel arbitration on a class-wide basis when an agreement is “silent” on the availability of class arbitration.  The court recognized in Stolt and later cases that  class arbitration fundamentally changes the nature of the “traditional individualized arbitration” envisioned by the Federal Arbitration Act, and that  “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so”. In Lamps Plus v. Varela, the Supreme Court has now addressed the question of “whether the FAA similarly bars an order requiring class arbitration when an agreement is not silent, but rather ‘ambiguous’ about the availability of such arbitration.”

At the time of his employment, Frank Varela  signed an arbitration agreement. Following a data breach in which Varela’s personal data was compromised, Varela filed a federal court action against his employer. Lamps Plus moved to compel arbitration, and the district court granted the motion and dismissed the suit without prejudice. However, the district court rejected Lamps Plus’ request for individual arbitration and instead ordered arbitration on a class-wide basis. The Ninth Circuit found the arbitration provision to be ambiguous, and it affirmed the district court order, applying California law to construe the ambiguity against the drafter.

Writing for the conservative majority of the court in a 5-4 decision, Chief Justice Roberts opinion overturned the Court of Appeals’ decision allowing class-wide arbitration.  His analysis began with the issue of subject matter jurisdiction.

Section 16(a)(3) of the FAA provides that an appeal may be taken from “a final decision with respect to an arbitration that is subject to this title.” The Supreme Court has previously held that when a district court issues an order both compelling arbitration and dismissing the underlying claims, such an order is both “‘final” and appealable. Varela challenged appellate jurisdiction, arguing that the circumstances of his case were different because the appeal in his case was taken by the party who requested and obtained the order dismissing the suit and compelling arbitration. He claimed that Lamps Plus “lacked standing to appeal the dismissal,” because the district court’s order “provided precisely the relief Lamps Plus sought.”

The majority rejected that argument because Lamps Plus did not secure the relief it requested, receiving an order for class-wide arbitration when all that it requested was an order compelling individual arbitration. The court noted that “shifting from individual to class arbitration is a ‘fundamental’ change . . . that ‘sacrifices the principal advantage of arbitration’ and ‘greatly increases risks to defendants,’” and this was sufficient to allow Lamps Plus to appeal the arbitration order.

Addressing the question of whether, consistent with the FAA, an ambiguous agreement can provide the necessary “contractual basis” for compelling class arbitration, the court held that it cannot.

Class arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration. . . The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.

The court emphasized its regular recognition that the “first principle” that underscores all of its arbitration decisions is that arbitration is “strictly a matter of consent.” The power of arbitrators is derived the agreement of the parties, and “the task for courts and arbitrators at bottom remains the same: ‘to give effect to the intent of the parties.’” In a comparison that should assist judges and arbitrators in determining the intent of arbitration agreements the court stated:

In carrying out that responsibility, it is important to recognize the “fundamental” difference between class arbitration and the individualized form of arbitration envisioned by the FAA. . . In individual arbitration, “parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” . . . Class arbitration lacks those benefits. It “sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”

The court further discussed the “crucial differences” between individual and class arbitration and explained that class arbitration undermines “the virtues Congress originally saw in arbitration”. Courts may not compel class arbitration without an affirmative contractual basis for concluding that the parties agreed to it.  Mere silence as to class arbitrability is not enough; the “FAA requires more.”

From the perspective of both drafting and enforcement the decision does not foreclose completely the possibility of classwide arbitration. Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.  Nevertheless, the decision leaves open the possibility od a defendant being forced to arbitrate on a classwide basis if a court finds that the arbitration agreement unambiguously allows such arbitration.

While this ruling will certainly affect the future crafting of arbitration agreements, it also serves as a warning to class action defendants that they need to understand the risk of demanding arbitration. By not foreclosing fully the possibility of class arbitration the Supreme Court has left open the risk that a defendant could be ordered to arbitrate on a class-wide basis, finding itself faced with class determinations by what one judge has referred to as “persons not bound by the hallmarks of the judicial process, such as the rules of evidence and the right to appeal.”