Supreme Court Holds Class Arbitration Is Not an Available Remedy Unless the Arbitration Agreement Expressly Allows for It

In a 5-4 decision, the United States Supreme Court held on April 24, 2019 that an employment agreement that was ambiguous about class arbitration could not be used to compel class arbitration.  See Lamps Plus, Inc. v. Varela, 2019 WL 1780275 (U.S. Apr. 24, 2019).  In 2016, a hacker obtained tax information for about 1,300 of defendant’s employees.  After someone filed a fraudulent income tax return for plaintiff, one of defendant’s employees, plaintiff brought a class action lawsuit against defendant.  Plaintiff’s employment agreement contained an arbitration agreement that required that “any and all disputes, claims or controversies” be arbitrated. 

Based on that agreement, defendant filed a motion to compel individual arbitration and dismiss the action, but the District Court instead ordered class arbitration and dismissed the action.  On appeal, the Ninth Circuit affirmed.  Although the Ninth Circuit acknowledged that Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 559 U.S. 662 (2010) prohibits a court from ordering a party to class arbitration unless the party agreed to it, the Court found that the parties in Stolt-Nielsen had stipulated that the agreement was silent as to class arbitration.  Because the parties here had not so stipulated, the Ninth Circuit found that Stolt-Nielsen was not controlling.  The Ninth Circuit proceeded to find that the agreement was ambiguous about class arbitration and, following California law, construed the ambiguity against defendant, who drafted the agreement.  Thus, the Ninth Circuit affirmed the order compelling class arbitration.

The Supreme Court reversed in a decision written by Chief Justice Roberts.  First, the Court found that it had jurisdiction to decide this appeal.  Under the Federal Arbitration Act (the “FAA”), a party may appeal “a final decision with respect to an arbitration that is subject to this title.”  See 9 U.S.C. § 16(a)(3).  Because the District Court both compelled arbitration and dismissed the action, the order was final and appealable under the FAA.  Second, although the Court deferred to the Ninth Circuit in its finding that the agreement was ambiguous, it found that this was insufficient to compel class arbitration.  “Because class arbitration fundamentally changes the nature of the ‘traditional individualized arbitration’ envisioned by the FAA, ‘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’ . . . our reasoning in Stolt-Nielsen controls the question we face today. 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.’”  Similarly, the Court found that the Ninth Circuit erred in construing the ambiguity against defendant.  “The doctrine of contra proferentem cannot substitute for the requisite affirmative ‘contractual basis for concluding that the part[ies] agreed to [class arbitration].’”

Justices Ginsburg, Breyer, Sotomayor and Kagan each wrote a dissent to this opinion.  Justice Ginsburg stated that “mandatory individual arbitration continues to thwart ‘effective access to justice’ for those encountering diverse violations of their legal rights” and noted that, although the majority focused on the consent of the parties, most employment contracts are forced upon employees who are not willingly foregoing their rights to go to court.  Justice Breyer argued that the Court did not have jurisdiction and that “if a district court determines that arbitration of a claim is called for, there should be no appellate interference with the arbitral process unless and until that process has run its course.” 

Justice Sotomayor expressed her disagreement with Stolt-Nielsen and further stated that “[w]here, as here, an employment agreement provides for arbitration as a forum for all disputes relating to a person’s employment and the rules of that forum allow for class actions, an employee who signs an arbitration agreement should not be expected to realize that she is giving up access to that procedural device.”  Finally, Justice Kagan argued that the agreement’s statement that it encompasses “any and all disputes, claims or controversies” necessarily includes class claims, and that, even if the contract was ambiguous, the Court should have deferred to California law and construed the contract against defendant. 

While this was a decision on an employment agreement, it is equally applicable to other consumer or commercial contracts in all industries and businesses.  It gives defendants assurances that, in moving to dismiss a class action for failure to arbitrate, they will not be dragged into a class arbitration when their agreement provides no basis for same.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Dylan Goetsch at dgoetsch@riker.com.