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‘Ambiguous’ contract terms do not resolve in favor of class arbitration without parties’ consent, SCOTUS rules

Kate Halloran May 9, 2019

In a 5-4 ruling, the U.S. Supreme Court has held that ambiguous terms in an arbitration agreement cannot be resolved in favor of permitting class arbitration unless that was the outcome that the parties clearly intended. In a case arising from the Ninth Circuit about whether claims against an employer could proceed as class rather than individual arbitration, the Court determined that the Federal Arbitration Act's (FAA) presumption in favor of individual arbitration preempts a California contract law doctrine that resolves ambiguous contracts against the drafter of that contract. Justices Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan, and Sonia Sotomayor dissented. (Varela v. Lamps Plus, Inc., 2019 WL 1780275 (U.S. Apr. 24, 2019).)

Frank Varela filed a putative class action against his employer, Lamps Plus, Inc., after a hacker tricked another employee into disclosing 1,300 employees’ tax information, and a fraudulent tax return was filed in Varela’s name. The defendant moved to compel individual arbitration based on the arbitration clause contained in Varela’s employment contract. The district court, however, held that the contract authorized class arbitration instead, and, after the defendant appealed, the Ninth Circuit affirmed. The U.S. Supreme Court then agreed to decide the case, and oral arguments were held on Oct. 29, 2018, as Trial News previously reported.

When the Ninth Circuit considered the issue, it held that because the contract was ambiguous on the matter of class arbitration, the Supreme Court’s decision in Stolt-Nielsen v. AnimalFeeds International Corp. (559 U.S. 662 (2010)) holding that a court cannot compel class arbitration when an arbitration agreement is silent did not control the analysis. It distinguished that case by stating that the parties in Stolt-Nielsen stipulated to the agreement being silent as to class arbitration, which was not the situation here. It then concluded that the agreement was ambiguous because certain portions “were capacious enough to include class arbitration.”

The Supreme Court, in an opinion written by Chief Justice John Roberts, deferred to the Ninth Circuit’s interpretation of the agreement as ambiguous, but it disagreed that the principles articulated in Stolt-Nielsen and other precedents interpreting enforcement of the FAA did not control. The Court stated that class arbitration is “markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA [and] it also undermines the most important benefits of” individual arbitration: “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.”

While the application of state law contract principles is relevant to interpreting the terms of an arbitration agreement, the Supreme Court reiterated that the FAA preempts state law when it is an impediment to accomplishing “the full purposes and objectives” of that statute. The Court held that consent of the parties to arbitrate is a fundamental component of the FAA, so any ambiguity in the agreement on the issue of class arbitration cannot be resolved by a doctrine that is not based on discerning intent. The contract law principle the Ninth Circuit applied—contra proferentem—provides that ambiguity in a contract should be resolved against the drafter. But this principle does not seek to interpret the contract’s terms to parse out the parties’ intent. Rather, it relies on the court concluding that it cannot determine the parties’ intent and resolving the dispute against the drafter as a matter of public policy.

The Court determined that this would “‘reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent’” in contravention of the FAA. Comparing the question at issue in Varela to the Court’s ruling in AT&T Mobility LLC v. Concepcion (563 U.S. 333 (2011)), which held that the state law contract principle of unconscionability does not bar class action waivers in consumer contracts, the Court reasoned that the default for resolving ambiguity in arbitration agreements is the FAA itself. Here, the preference for individual arbitration and whether the parties consented to class arbitration govern.

Justice Clarence Thomas concurred in the court’s ruling, while Justices Breyer, Ginsburg, Kagan, and Sotomayor each wrote a dissent. Breyer’s dissent focused on whether the Court even had jurisdiction to hear the case. Breyer wrote that he did not “believe that the District Court had the discretion to dismiss the case immediately after granting Lamps Plus’ motion to compel arbitration” and that “an improper dismissal cannot create appellate jurisdiction to review an interlocutory order.” In its amicus brief to the Supreme Court, AAJ made a similar argument that the FAA only allows courts to stay a case pending arbitration, and as such, the district court could not reach a final judgment to dismiss after sending the plaintiff’s claims to arbitration. Kagan and Sotomayor discussed the role of state contract law in the analysis and the overreach of the majority’s application of the FAA, among other issues.

Sharply criticizing the majority in her dissent, Justice Ginsburg emphasized “how treacherously far the Court has strayed from the principle that ‘arbitration is a matter of consent, not coercion.’” Explaining that the FAA “was not designed to govern contracts ‘in which one of the parties characteristically has little bargaining power,’” Justice Ginsburg pointed out how broad the FAA has become, encompassing disputes involving employees and consumers, rather than between businesses as it was originally intended to do, and applying in situations when the agreement to arbitrate is not one of consent but is a take-it-or-leave-it condition within no genuine bargaining. “Today’s decision,” Justice Ginsburg wrote, “underscores the irony of invoking [the principle] that ‘arbitration is strictly a matter of consent’ . . . to justify imposing individual arbitration on employees who surely would not choose to proceed solo.”

“Under the majority's decision, the FAA now preempts even generally applicable state law rules of contract if those rules would be applied in a way that would offend the core objectives of the FAA,” explained Washington, D.C., attorney Matthew Wessler, an author of AAJ’s amicus brief. “So, as Justice Kagan writes in her dissent, the Court has now ruled that the FAA, in effect, federalizes basic contract law. Even a ‘plain vanilla’ rule that an ambiguous contract must be construed against the drafter is now preempted under the FAA. Justice Ginsburg is right: The remedy for this radically expansive view of federal preemption under the FAA, untethered to anything in the text of the law, must come from Congress.”