Supreme Court Says Parties Must Agree or Intend to Agree to Class Arbitration: Silence and Ambiguity Are Not Enough
On April 24, 2019, almost a year after the Supreme Court granted certiorari, the Court handed down its third important decision this term regarding arbitrations. At issue in this case was whether ambiguity in an employment agreement as to class arbitration permitted a district court to use state law contract interpretation principles to compel class arbitration. The majority, with Justice Thomas concurring, determined that the ambiguous arbitration clause could not be interpreted as an agreement by the parties to class arbitration.
To come to its conclusion, the Court relied on the maxim that the Federal Arbitration Act (“FAA”) dictates that arbitration is a matter of consent. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010). In that case, the Supreme Court had held that silence could not be construed as consent to class arbitration. Relying on that earlier decision, the Court determined that ambiguity, like silence, doesn’t provide a basis for the Court to determine that the parties consented to arbitration. As a result, Courts could not “infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.” Lamps Plus, Inc. v. Varela, 587 U.S. _, _ (2019) (slip op., at 12). The Court emphasized that class arbitrations fundamentally differ from individual arbitrations because of the lack of appellate review and due process concerns regarding adjudicating the rights of absent class members. Because class arbitration raises additional risks and costs for both sides, the Court said there was reason to doubt that the parties mutually consented to resolve disputes through class arbitration. Thus, there must be an affirmative contractual basis to conclude that the parties had actually agreed to class arbitration.
The District Court had determined that the contract was ambiguous. Using tools of contract interpretation under state law, that court applied the rule of contra proferentem — that contracts should be interpreted against the drafter — and construed the contract written by the employer as permitting class arbitration. The Ninth Circuit affirmed. The Supreme Court majority assumed that the contract was ambiguous but said that this state law rule of contract interpretation applies only as a “last resort.” Because that rule does not actually determine the parties’ contractual intent, the Court said it was inconsistent with the FAA principle that “arbitration is a matter of consent.”
Justice Thomas concurred with the decision, but differed in whether the employment contract actually contained ambiguity — he believed the agreement was silent as to class arbitration. Justice Kagan, with the lengthiest dissent, disagreed with Justice Thomas, believing that the contract expressly permitted class arbitration. Further, even if the contract was not ambiguous, Justice Kagan opined that contra proferentem is a neutral rule of contract interpretation that should be applied, just as with any other circumstance under the FAA. She argued that there should not be a class arbitration exception to the requirement to apply state rules of contract interpretation.
This decision may put employers — and all contracting parties — at ease that class arbitration cannot be inferred from agreements that are silent or ambiguous on class arbitration. It seems unlikely that courts will approve class arbitration unless the contract explicitly authorizes it. Further, it is unclear whether the Court would leave the decision of class arbitration to an arbitrator rather than a court. In Henry Schein, decided earlier this term, the Court stated that arbitrability was so important that courts should make the decision, rather than an arbitrator (unless the parties agreed) — in Lamps Plus, the Court indicated that it may view class arbitration similarly.
However, the Supreme Court recently affirmed an arbitrator’s interpretation of a contract as permitting class arbitration in Oxford Health Plans LLC v. Sutter, 569 U. S. 564, 569, (2013). The Court barely mentioned that case in Lamps Plus, where the parties submitted the question to the district court. Nevertheless, employers and other contracting parties would be well advised to draft arbitration agreements to clearly state whether class arbitration is permitted. The Court left unresolved the question of whether ambiguity in agreements to arbitrate could be resolved under another rule of contract interpretation that more clearly tries to ascertain the parties’ contractual intent. Given the Court’s willingness to consider cases of arbitration agreement interpretation, companies should continue to pay attention.
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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.