April 24, 2019

April 24, 2019:

Supreme Court holds than an arbitration agreement that is ambiguous about class arbitration does not authorize class arbitration, rejecting application of a California contract construction rule (contra proferentem -- a contract should be construed against the drafter) that would lead to a contrary result.  Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275 (Apr. 24, 2019).

A hacker tricked Lamps Plus into disclosing tax information of more than 1,000 of its employees, including Frank Varela.  A fraudulent federal income tax return was then filed in the name of Mr. Varela.  Mr. Varela filed a class action lawsuit against Lamps Plus in California federal court.  Based on an arbitration agreement that Mr. Varela signed when he went to work for Lamps Plus, Lamps Plus moved to compel arbitration, asking that the arbitration be on an individual basis rather than a classwide basis.  The district court compelled arbitration, but contrary to Lamps Plus's request, determined that class arbitration was appropriate.  The Ninth Circuit affirmed.  It found that the arbitration agreement was ambiguous on the issue whether class arbitration was authorized.  Given that Lamps Plus had drafted the arbitration agreement, the Ninth Circuit applied the California contract construction rule contra proferentem (a contract should be construed against the drafter) to rule against Lamps Plus on the class issue and hold that class arbitration was allowed.  The Supreme Court reversed, with four Justices dissenting.   

Justice Roberts authored the opinion of the Court.  He began with the noncontroversial proposition that arbitration is a creature of consent.  "[T]he task for courts and arbitrators at bottom [is] 'to give effect to the intent of the parties.'"  Id. at *5.  Congress enacted the FAA to allow parties to agree to a process that would be cheaper, more efficient, and faster than litigation.  "Class arbitration lacks those benefits.  It 'sacrifices the principal benefit of arbitration -- its informality -- and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.'"  Id.  "Because of these 'crucial differences' between individual and class arbitration, . . . there is 'reason to doubt the parties' mutual consent to resolve disputes through classwide arbitration."  Id. at 6.  In Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010), the Court held "that a court may not compel arbitration on a classwide basis when an agreement is 'silent' on the availability of such arbitration."  2019 WL 1780275, at *2.  "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.'"  Id. at *6.                  

Lamps Plus, not Varela, drafted the arbitration agreement at issue, and the Ninth Circuit, determining that the agreement was ambiguous on the issue of class arbitration, resolved the ambiguity against Lamps Plus based on the state contract construction rule of contra proferentem -- ambiguity in a contract is resolved against the drafter of the contract.  Justice Roberts, however, found that the doctrine of contra proferentem was based, not on an effort to ascertain the parties' intent, but instead of public policy concerns, "primarily equitable considerations about the parties' relative bargaining strength.  . . .  Such an approach is flatly inconsistent with 'the foundational FAA principle that arbitration is a matter of consent.'"  Id. at *6-7.  Accordingly, the FAA preempted the California rule of contract construction that would resolve the class arbitration ambiguity against Lamps Plus, the drafter of the agreement.  "The general contra proferentem rule cannot be applied to impose class arbitration in the absence of the parties' consent."  Id. at *7.            

Justice Kagan, joined by three other Justices, dissented.  She reasoned that while the FAA "requires courts to enforce arbitration agreements according to their terms, . . . the Act does not federalize basic contract law.  Under the FAA, state law governs the interpretation of arbitration agreements, so long as that law treats other types of contracts in the same way."  Id. at 16.  Because the California contra proferentem rule did not single out arbitration agreements for discriminatory treatment, but instead applied in neutral fashion to all contracts, the FAA did not displace that rule.  Accordingly, Justice Kagan would have affirmed the Ninth Circuit ruling that class arbitration against Lamps Plus was authorized.    

    

  

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