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Supreme Court Says Class Arbitration Must Be Explicitly Authorized

April 24, 2019

On April 24, 2019, the U.S. Supreme Court issued a landmark ruling that arbitration agreements must explicitly provide for class arbitration in order for that process to be available. In a close, 5-4 vote, the justices overturned a Ninth Circuit ruling that an arbitration agreement, silent on the issue of class arbitration, was sufficient to permit class arbitration of the underlying dispute.

At issue was an arbitration agreement crafted by lighting retailer Lamps Plus and signed by one of its employees, Frank Varela. The agreement required Mr. Varela to arbitrate “all claims or controversies, past, present, or future, that [he] may have against the company” and required both parties to “mutually consent to the resolution by arbitration of all claims that may hereafter arise in connection with [Mr. Varela’s] employment or any of the parties’ rights or obligations arising under [the] agreement.” However, the agreement was silent on the issue of class arbitration, neither explicitly permitting the process nor prohibiting it via class action waiver.

Lamps Plus argued that the agreement required individual arbitration under the Supreme Court’s 2010 decision in Stolt-Nielsen S. A. et al. v. Animalfeeds International Corp., 559 U.S. 662, which held that a party may not be compelled to submit to class arbitration under the FAA absent a contractual basis for concluding that the party agreed to do so. While the Court, in Stolt-Nielsen held that the mere existence of an agreement to arbitrate was insufficient to infer the requisite contractual basis for class arbitration, the decision did not address whether courts could infer such a contractual basis from arbitration agreements that contained vague or ambiguous language.

In siding with Lamps Plus, the Supreme Court held that silence or ambiguity in contractual language does not provide a sufficient basis to conclude that parties agreed to class arbitration. The opinion, authored by Chief Justice John Roberts, rejected the Ninth Circuit’s application of general contract principles to impose class arbitration—specifically, the doctrine of contra proferentem, which holds that ambiguous contract language should be interpreted against the drafter. The Court explained that a decision to the contrary would sacrifice the principal advantage of arbitration and would conflict with the longstanding tenet that “consent is essential under the FAA” since arbitrators “wield only the authority they are given.”

The ruling, while significant, was anticipated following oral arguments last October, wherein the Court’s conservative majority grilled counsel for Mr. Varela on how the Ninth Circuit’s ruling could be reconciled with the Supreme Court’s 2010 decision in Stolt-Nielsen (see our discussion of oral argument in this case).

This decision is the most recent example of the Supreme Court wading into employment arbitration agreements, following last year’s decision in Epic Systems (see our discussion of Epic Systems).

For more information, contact a member of the firm's Labor & Employment Practice Group.

W. Eric Baisden | | 216.363.4676

Daniel J. Cianchetta | | 216.363.6227

Adam Primm | | 216.363.4451