Supreme Court: Arbitration Must Be Explicit

In a reversal of a Ninth Circuit ruling, the U.S. Supreme Court ruled this week that class arbitration has to be explicitly authorized in the arbitration agreement in order to move in that direction. Silence and ambiguity are not enough. The 5-4 ruling is a win for Lamps Plus Inc., who sought to stop class arbitration in an employee data breach case. 

The case, brought on by Plaintiff Frank Valera, alleges Lamps Plus Inc. did not protect employee’s personal data, and employees were exposed to a phishing scam.  

This Court had held in Stolt-Nielsen S. A.v. Animal Feeds Int’l Corp., 559 U. S. 662, that a court may not compel class-wide arbitration when an agreement is silent on the availability of such arbitration. The Ninth Circuit ruled that Stolt-Nielsen was not controlling because the agreement, in this case, was ambiguous rather than silent on the issue of class arbitration.

Lamps Plus argued the claim should be individually arbitrated, as per the agreement Valera signed which did not expressly include class arbitration. In its appeal of the Ninth Circuit decision, Lamps Plus asked the Court to consider whether the Federal Arbitration Act overrules arbitration pacts carried out under state law. Specifically requesting that the Ninth Circuit’s contrary conclusion, which was based on the state law contra proferentem doctrine, which counsels that contractual ambiguities should be construed against the drafter, be overturned. 

“Under the Federal Arbitration Act, an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration,” the justices said. “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice the principal advantage of arbitration.’ This conclusion aligns with the court’s refusal to infer consent when it comes to other fundamental arbitration questions.” 

“Arbitration is strictly a matter of consent.  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 Federal Arbitration Act. Class arbitration ‘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.’ Because of such ‘crucial differences,’ Stolt-Nielsen, 559 U. S., at 687, this Court has held that courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so.” 

This decision answers the question of whether the Federal Arbitration Act overrules a state-law interpretation of arbitration agreements that authorize class arbitration based solely on the general language commonly used in agreements. The ruling disallows class arbitration if class arbitration isn’t expressly allowed in the initial agreement. 

The dissenting opinions cited various reasons for dissent including pointing to a misuse of the Federal Arbitration Act, in this case, lack of jurisdiction for the Court to even consider this issue and the fact that the Court decision finds that the Federal Arbitration Act should pre-empt over state contract law on this issue. 

It will be interesting to see how this ruling is used in future cases. The case is Lamps Plus Inc. et al. v. Frank Varela, case number 17-988.