The Supreme Court Finds Ambiguous Agreements Do Not Support Class Arbitration
04/26/2019

The Supreme Court Finds Ambiguous Agreements Do Not Support Class Arbitration

In a 5-4 decision on Wednesday, April 24, 2019, the U.S. Supreme Court ruled in Lamps Plus, Inc. et al. v. Varela that an ambiguous arbitration agreement cannot be a basis for concluding that the parties to the agreement have agreed to class arbitration. In order for a matter to be arbitrated as a class action, the arbitration agreement must explicitly allow for class arbitration.

The dispute involved allegations that a California company, Lamps Plus, did not adequately protect employee data and confidential information during a data breach.  An employee filed a class action on behalf of himself and other Lamps Plus employees in Federal District Court in California despite having signed an agreement to arbitrate with the employer. The Ninth Circuit found that the arbitration agreement was ambiguous on the issue of class arbitration and followed California law to construe the ambiguity against the drafter, authorizing class arbitration.

The Supreme Court rejected the Ninth Circuit’s reasoning and confirmed that arbitration is a matter of consent and the task of courts and arbitrators is to give effect to the intent of the parties.  Important to this task is to recognize that 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 class arbitration is fundamentally different from individual arbitration proceedings, the Court explained that it must be expressly agreed to by the parties.  Accordingly, an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration and “sacrifice the principal advantage of arbitration.” 

As a practical matter, the Lamps Plus decision is a win for employers. The Court had previously held in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010), that a court may not compel class-wide arbitration when an agreement is silent on the availability of such arbitration.  Wednesday’s decision in Lamps Plus confirmed that this same principle applies to an ambiguous agreement.  Now, there is no question that employees will be required to individually arbitrate their claims unless the arbitration agreement with their employer explicitly authorizes class arbitration.

In light of this decision, employers should take proactive steps to review their employee arbitration agreements to maximize protection from class arbitration. If an employer does not have an arbitration agreement in place with employees, it should consider drafting and implementing an arbitration agreement with its workforce.

For more information, please contact Jennifer Hostetler at jhostetler@lrr.com.

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