Yesterday, in a 5-4 decision written by Chief Justice John Roberts, the United States Supreme Court held that ambiguous arbitration agreements do not provide the affirmative contractual basis required to send a dispute to classwide arbitration. In so ruling, the Court extended previous pro-business decisions holding that consent to classwide arbitration cannot be inferred from a contract that is “silent” on the issue. This decision is a business- and employer-friendly outcome that affirms the use of efficient and cost-effective individual arbitrations.
In Lamps Plus Inc. v. Varela, the plaintiff had filed a class action complaint against his employer, Lamps Plus, alleging negligence, invasion of privacy, and breach of contract after the company inadvertently released employees’ personal identification information in response to a phishing scam. As a condition of employment, the plaintiff had signed an arbitration agreement and sought to rely on that agreement to compel Lamps Plus to submit to class arbitration on his class claims.
The district court found the arbitration agreement to be ambiguous as to whether it permitted class arbitrations or whether arbitrations under the agreement must proceed on an individual basis. Accordingly, relying on state contractual interpretation principals, the court construed this ambiguity against the drafter – Lamps Plus – and allowed the arbitration to proceed on a class basis. Lamps Plus appealed and argued that it had not implicitly agreed to class arbitration by failing to explicitly address it in the arbitration agreement and cited Supreme Court precedent holding a court may not compel classwide arbitration when an agreement is silent on the availability of class arbitrations. The Ninth Circuit affirmed the lower court’s decision and distinguished existing precedent, holding that the underlying arbitration agreement was ambiguous as to whether it allowed class arbitrations rather than merely silent on the issue.
In reversing the Ninth Circuit, the Court explained that 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 Court emphasized that consent is an essential element under the FAA because “arbitrators wield only the authority they are given” and the Court would “refus[e] to infer consent when it comes to . . . fundamental arbitration questions.”
The decision comes on the heels of other business- and employer-friendly arbitration decisions from the Court over the past year, including its decision in Epic Systems Corp. v. Lewis, upholding the practice of employers including class or collective action waivers in mandatory arbitration agreements. The decision continues the trend of the Court to strictly enforce the FAA in enforcing and interpreting properly drafted arbitration agreements applicable to employees and consumers.