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Another Blow for Class Arbitration at the Supreme Court

Client Alert

Authors: Matthew H. Adler and Benjamin J. Eichel

4/25/2019
Another Blow for Class Arbitration at the Supreme Court

On April 24, the U.S. Supreme Court issued the latest in its line of recent decisions hostile to class action arbitration. In Lamps Plus, Inc. v. Varela, the Court stated that merely showing ambiguity in an arbitration clause is not enough to create an agreement between the parties to allow for classwide arbitration of their disputes. Instead, the parties’ agreement to arbitrate claims in a class action format must be express. Not silent, not ambiguous — express.

There is little surprise in this result. Since its 2011 decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, the Court has issued, almost annually, a series of decisions that intentionally make it very hard for parties to arbitrate on a class basis. In Concepcion, the late Justice Scalia wrote for the majority that arbitration was fundamentally incompatible with class actions, and essentially “banned the ban.” At issue in Concepcion was a California rule that bans on class action arbitration were incompatible with California public policy. The Court held that this state law public policy violated the more controlling federal policy in favor of not passing laws hostile to arbitration, as laid down in the Federal Arbitration Act. To the Concepcion Court, the California ban on class action waivers was a law particularly hostile to arbitration. The ban fell and with it fell most efforts to create class actions in arbitration — as the succeeding years and the Lamps Plus decision show.

The Supreme Court’s negative view of class action arbitration was not, however, complete or per se. Parties could still agree to permit a class action to break out in the resolution of their dispute, but that was just the point: They had to agree. When they agreed, that was fine with the Court because, as repeated opinions emphasize, arbitration is inherently a matter of contract. See, e.g., Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 67 (2010). Just as parties can agree on subjects to arbitrate, the number of arbitrators, the place of arbitration, and virtually any other detail, so can they agree to arbitrate on a class basis when necessary and appropriate to do so.      

But what does “agreement” mean? If arbitration is a matter of contract, and if courts need to apply contract interpretation principles to construe the meaning of arbitration clauses just like any other contract clause, then on what basis can a court find an “agreement” to arbitrate on a class basis? Before the Lamps Plus decision, the Supreme Court had held that mere silence is not an agreement, and so the absence of a class action waiver could not be used to find consent. Stolt-Nielsen S. A. v. Animal Feeds Int’l Corp., 559 U.S. 662 (2010). The presence of a collective bargaining agreement also could not be used to show consent, a point Justice Gorsuch drove home in 2018 in Epic Systems v. Lewis, 138 S. Ct. 1612 (2018). Both cases continued the Concepcion line of making it difficult to arbitrate on a class basis. (In the interim, class action proponents tried to alter this line of cases through rulemaking at the Consumer Financial Protection Bureau that would invalidate class action bans, but that effort died with the transition at the CFPB after the election of Donald Trump.)

The proponents of class action arbitration remained dogged in their pursuit of an opening, and thought that they might have it in Lamps Plus. The facts were contemporary and attractive to a plaintiff: a data breach. As Chief Justice Roberts noted, “In 2016, a hacker impersonating a company official tricked a Lamps Plus employee into disclosing the tax information of approximately 1,300 other employees. Soon after, a fraudulent federal income tax return was filed in the name of Frank Varela, a Lamps Plus employee.” Slip Op. at 2.

Varela had an arbitration agreement with Lamps Plus, just “[l]ike most Lamps Plus employees.” Id. He ignored that clause and filed suit in federal court on a class basis, “bringing state and federal claims on behalf of a putative class of employees whose tax information had been compromised.” Id. Lamps Plus moved to dismiss the court action and compel arbitration on an individual basis. The district court split the decision, throwing out the court action and ordering arbitration, but authorizing the arbitration to take place on a classwide basis. The Ninth Circuit affirmed.

The basis of the lower court holdings was California contract law. Both the district and appellate courts found that the arbitration clause was ambiguous as to whether a class action could be allowed. It was not, as in Stolt-Neilson, silent. Rather, there was language that seemed (as the plaintiff advocated) to allow for such a resolution without being definite or clear, such as the phrase that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to any employment.” The courts applied the maxim of contra proferentem, “construe against the drafter,” and found that, based on that maxim, the better interpretation was to allow for classwide arbitration.

Chief Justice Roberts would have none of that — even though the Court accepted, as it must, the lower court construction that the contract was ambiguous. Writing for a 5-4 majority, he made clear that arbitration may be a matter of contract interpretation, but that interpretation starts with the weight decidedly on the no-class-action side of the scale. Looking back to Concepcion, he emphasized that “class arbitration not only ‘introduce[s] new risks and costs for both sides,’ it also raises serious due process concerns by adjudicating the rights of absent members of the plaintiff class.” Slip op. at 8. Accordingly, any attempt to beat against this current by finding that the arbitration clause allows for classwide arbitration must establish consent clearly, and not by ambiguity plus contract interpretation principles. “Like silence, ambiguity does not provide a sufficient basis to conclude that the parties to an arbitration agreement agreed to sacrifice the principle advantage of arbitration.” Id. In the face of the dissent’s argument that the lower courts were merely applying “neutral” contract interpretation principles, the Chief Justice emphasized that arbitration is not just any contract: “We have explained . . . that such an equal treatment principle cannot save from preemption general rules that target arbitration either by name or by more subtle methods.” Id. at 11. And so, just as “ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration,” Id. at 12, so must ambiguities about whether classwide arbitration is permitted be resolved against allowing a class action.

The four Justices in the minority all wrote separate dissents. Justice Ginsburg reiterated her view, familiar from her other dissents in recent arbitration cases, that the Court’s arbitration decisions have gone too far in upholding arbitration agreements, making arbitration an agreement of coercion rather than consent and, in the process, preventing consumers and employees from vindicating their rights. Justices Kagan’s and Sotomayor’s dissents took issue with the majority’s conclusion that the FAA should preempt a neutral principle of state contract law — the maxim to construe an ambiguous agreement against the drafter. Justice Breyer’s dissent argued that the Court did not have jurisdiction over the appeal because section 16 of the FAA prevents an appeal of an interlocutory order directing arbitration to proceed. These points have been raised consistently but unsuccessfully by the liberal wing of the Court since Concepcion first triggered the debate about class actions in arbitration. Arbitration has become one of the more contested and political issues on the modern Court — as the breakdown of the Justices’ votes shows.

What This Means

We always recommend specificity when drafting the dispute resolution clause of a contract, and, before Lamps Plus, we have recommended express class action waivers in most clients’ agreements. That advice has not changed, as precision is most often the best practice in drafting. But for those businesses inheriting legacy claims, or those that might be hit with such claims over legacy agreements, the decision in Lamps Plus stands as an additional potential basis to resist attempts to force a class action upon you. The sounds of silence mean that there is no class action.

Matthew H. Adler is a partner in the firm’s Trial and Dispute Resolution Practice Group, a seasoned and trial-ready team of advocates who help clients analyze and solve their most emergent and complex problems through negotiation, arbitration and litigation. Benjamin J. Eichel is an associate in the Trial and Dispute Resolution Practice Group.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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