Micha Nandaraj Gallo | Covington & Burling | April 25, 2019
On April 24, 2019, the Supreme Court issued its opinion in Lamps Plus, Inc., et al. v. Varela, addressing the question of whether an ambiguous arbitration agreement can be read to compel class arbitration under the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (2000). Underscoring the controversial nature of this decision, the case was decided by a 5-4 split that included dissenting opinions authored by Justices Ginsburg, Breyer, Sotomayor, and Kagan. The majority opinion, authored by Chief Justice Roberts, held that contract ambiguity did not suffice to compel class arbitration.
The Underlying Case
The underlying dispute in Lamps Plus arose in 2016 when a Lamps Plus employee was the target of a phishing scam. The employee was tricked into disclosing approximately 1,300 other employees’ tax information when a hacker contacted the employee and impersonated a company official. Frank Varela, an employee of Lamps Plus, initiated a suit against Lamps Plus after a fraudulent federal income tax return was filed on his behalf. The suit was brought “on behalf of a putative class of employees whose tax information had been compromised” in the phishing scam. The California District Court granted Lamps Plus’s motion to compel arbitration, but in doing so authorized a class arbitration. Lamps Plus subsequently appealed the order to the Ninth Circuit, which affirmed the district court’s decision and laid the groundwork for the Court’s decision here.
The Court’s Decision
The Lamps Plus decision extends and clarifies the Court’s earlier ruling in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., where the Court held that “courts may not infer consent to participate in class arbitration absent an affirmative ‘contractual basis for concluding that the party agreed to do so.” The 9th Circuit in Lamps Plus declined to apply Stolt-Nielsen because in that case “the parties had stipulated that their agreement was silent about class arbitration.” In contrast, in Lamps Plus the Ninth Circuit found that the agreement included terms that were ambiguous as to whether class arbitration would be permitted.
After determining that Stolt-Nielsen did not apply, the Ninth Circuit proceeded to evaluate the terms of the ambiguous arbitration agreement by applying state contract law, specifically contra proferentem. Under California’s law on contra proferentem, ambiguous contract terms are interpreted against the drafter—in this case Lamps Plus. Applying this rule, the Ninth Circuit affirmed the lower court’s decision to permit class arbitration.
After granting cert, the Court reviewed the Ninth Circuit’s decision and reversed. While the Court accepted the Ninth Circuit’s finding that the underlying contract was ambiguous, it rejected the Ninth Circuit’s ultimate conclusion. Specifically, the Court found that contra proferentem only applies as a rule of “last resort.” Therefore, in this case, the Ninth Circuit should have looked to the FAA to construe the contract provisions before applying contra proferentem.
According to the Court, party consent to arbitrate is a fundamental tenet of the FAA, and courts may not infer consent to arbitrate on a classwide basis from an ambiguous agreement. Moreover, in the case of class arbitration where proceeding would “sacrifice[] the principal advantage of arbitration,” the Court found ambiguity especially insufficient to compel class arbitration. The Court characterized this holding as consistent with its other cases addressing “fundamental arbitration questions,” in which it has also refused to infer consent.