The U.S. Supreme Court Further Restricts the Availability of Class Arbitration

In its 2010 decision in Stolt-Nielsen, the United States Supreme Court held that a court may not compel class arbitration when an arbitration agreement is silent on whether class arbitration is permitted.¹ The Court reasoned that class arbitration fundamentally alters the nature of arbitration and therefore, is not permitted unless a court can conclude the parties specifically agreed to class arbitration. In its recent Lamps Plus, Inc. v. Varela, No. 17-988, 587 U.S. ____ (April 24, 2019) decision, the Court has now gone one step further and held that even where an arbitration agreement is ambiguous as to the availability of class arbitration, rather than merely silent, class arbitration is not available. The Court made clear that class arbitration is only available where the parties expressly agreed to class arbitration.

The case arose from a data breach of employee records at Lamps Plus. After the data breach, a fraudulent tax return was filed for an employee. The employee then filed a class action suit against Lamps Plus. The employee had signed an arbitration agreement when he began his employment with Lamps Plus, and based on that agreement, Lamps Plus moved to compel arbitration on an individual basis and dismiss the class action suit. The district court granted Lamps Plus’ motion to compel arbitration but rejected the request for individual arbitration and permitted class arbitration. The Ninth Circuit affirmed and reasoned that the arbitration agreement did not explicitly refer to class arbitration and was ambiguous on whether class arbitration was permitted, and therefore, construing the ambiguity against the drafter, the agreement permitted class arbitration.

The Supreme Court majority viewed the issue in the case as a contest between the state law principle that ambiguity is construed against an agreement’s drafter and the Federal Arbitration Act’s principle that arbitration is “a matter of consent, not coercion.” The Court reasoned the central principle in applying arbitration agreements is to give effect to what the parties intended. The Court then looked to the “fundamental difference” between class and individual arbitration and its presumption that given such differences it should doubt the parties’ intent to permit class arbitration absent an express consent to class arbitration. The Court concluded something more than silence or ambiguity on the issue of class arbitration is required for an agreement to permit class arbitration: “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed [to class arbitration].”

Ironically and as pointed out by Justice Kagan in her dissent, to support the right of businesses to force consumers and employees into arbitration, the Court rejects a neutral rule of state law and creates a special rule for arbitration agreements, whereas in the context of the enforceability of arbitration agreements the Court has repeatedly held state laws cannot create special rules for arbitration agreements and only neutral rules of state law can render arbitration agreements unenforceable. Additionally and as Justice Kagan highlights, the Court has previously applied the contract interpretation principle of interpreting an ambiguous contract against its drafter to an arbitration agreement, and therefore, we are now left, at least in relation to class arbitration, adrift as to how and whether standard contract interpretation principles apply to arbitration agreements.

Also notable is that Justice Thomas joined the majority opinion despite his longstanding aversion to implied preemption of state law by federal law. He authored a concurrence expressing his reservations about implied preemption, but stating he joined the majority decision because it “correctly applies our FAA precedents.” While cryptic, his concurrence appears to indicate he joins the majority purely as a result of stare decisis, and not because he agrees with all of the underlying legal reasoning applied. Given that the majority’s decision is nothing more than an implied preemption application of the FAA to a state contract law, his concurrence leaves one to wonder whether had the preemption issue been directly raised he might have reached a different result.

Justice Thomas’ concurrence is also important and confusing because Justice Thomas appears to rely on an entirely different rationale—that the arbitration agreement expressly bars class arbitration—than that relied on by the majority, and the majority rejects Justice Thomas’ rationale. In other words, the result appears to actually be a plurality decision, yet Justice Thomas joined the majority opinion. This point heightens the importance of whether Justice Thomas may have reached a different result if the preemption issue was clearly raised.

In most respects, the Lamps Plus decision appears to have killed off class arbitration except where an arbitration agreement expressly permits class arbitration. Arbitration agreements permitting class arbitration are therefore presumably like unicorns, i.e., they don’t exist. However, the Lamps Plus decision does not close off the possibility of class arbitration for one group of arbitration agreements. Some arbitration agreements expressly provide that the arbitrator is to decide all arbitrability issues, and that puts the issue of whether class arbitration is permitted to the arbitrator to decide. The arbitrator could decide that the agreement provides for class arbitration.

1^ Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).