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Arbitration; classwide arbitration; doctrine of contra proferentum

by | May 16, 2019 | Cybersecurity & Data Privacy

LAMPS PLUS, INC. v. VARELA, ___ U.S. ___, No. 17-988 (24 April 2019).

The Federal Arbitration Act (FAA), 9 U.S.C. §2, requires courts to enforce arbitration agreements according to their terms.  In Stolt-Nielsen, S.A. v. AnimalFeeds, Int’l Corp., 559 U.S. 662 (2010), the Court held that a court may compel class-wide arbitration only if the parties affirmatively agree to class-wide arbitration.  If an agreement is silent on class-wide arbitration, then a court cannot order class-wide arbitration. Id. at 684.  What if the agreement is not silent, but rather is ambiguous on the issue of class-wide arbitration?  In that case, can a court order class-wide arbitration?  That is the issue presented by Lamps Plus, Inc. v. Varela.

Lamps Plus sells light fixtures and related products.  In 2016, a hacker impersonating a company official tricked a Lamps Plus employee into disclosing the tax information of 1300 other employees.  Soon after, a fraudulent income tax return was filed in the name of Frank Varela, a Lamps Plus employee.  Like most Lamps Plus employees, Varela had signed an arbitration agreement when he started work at the company.  Notwithstanding his agreement to arbitrate, after the data breach, he sued Lamps Plus in U.S. District Court, bringing state and federal claims on behalf of a putative class of employees whose tax information had been compromised.  Lamps Plus moved to compel arbitration on an individual rather than class-wide basis, and to dismiss the lawsuit.

The District Court granted the motion to compel arbitration and dismissed the lawsuit.  However, the court rejected Lamps Plus’s request for individual arbitration and instead authorized class-wide arbitration.  The Ninth Circuit affirmed even though Varela’s employment agreement did not expressly mention class arbitration.  The Court of Appeals reasoned that the fact that an agreement does not expressly refer to class arbitration is not the “silence” contemplated in Stolt-Nielsen.  In Stolt-Nielsen, the parties had stipulated that their agreement was silent about class arbitration, but in the instant case there was no such stipulation.  Therefore, the Ninth Circuit determined that the agreement was ambiguous on the issue of class arbitration.  The Ninth Circuit followed California law to construe the ambiguity against the drafter of the agreement, a rule under California law that applies with peculiar force in the case of a contract of adhesion.  This rule is often called the rule of contra proferentum.  Because Lamps Plus drafted the agreement, the court adopted Varela’s interpretation authorizing class arbitration.

Under California law, an agreement is ambiguous when it is capable of two or more constructions, both of which are reasonable.  Following its normal practice, the Supreme Court deferred to the Ninth Circuit’s interpretation of state law and accepted that the agreement should be regarded as ambiguous. See, e.g., Expressions Hair Design v. Schneiderman, 581 U.S. ___, ___ (2017)(slip op., at 7).

The FAA requires courts to enforce arbitration agreements according to their terms. Epic Systems Corp. v. Lewis, 584 U.S. ___, ___ (2018)(slip op. at 5).  Courts ordinarily accomplish that end by relying on state contract principles.  However, if state law is an obstacle to the full accomplishment of the purposes and objectives of the FAA, then the FAA preempts state law. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 352 (2011).  Does class arbitration impede the fundamental purposes and objectives of the FAA?  If an agreement is ambiguous as to whether the parties agreed to class arbitration, then does the FAA preempt the rule of contra proferentum?

The Court said that the first principle underscoring all its arbitration decisions is that arbitration is strictly a matter of consent.  Granite Rock Co. v. Teamsters, 561 U.S. 287, 299 (2010).  Consent is essential under the FAA because arbitrators wield only the authority they are given.  The task for courts and arbitrators remains the same: to give effect to the intent of the parties.  In carrying out that task, it is important to recognize the “fundamental” difference between class arbitration and the individual form of arbitration envisioned by the FAA.  Epic Systems, 584 U.S. at ___ (slip op., at 8).  In individual arbitration, the parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution.  Class arbitration lacks those benefits and sacrifices the principal advantage of arbitration – its informality – and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. Concepcion, 563 U.S. at 348.  The Court said that class arbitration is not consistent with the purposes and objectives of the FAA.

Because of the crucial differences between individual and class arbitration, absent, clear unambiguous language in the agreement, there is reason to doubt the parties’ mutual consent to resolve disputes through class-wide arbitration.  The Court said that there must be an affirmative contractual basis for concluding that the parties agreed to class arbitration.  Like silence, ambiguity does not provide a sufficient basis to conclude that the parties to an arbitration agreement agreed to sacrifice the principal advantage of arbitration. Concepcion, 563 U.S. at 348.

In the present context, the rule of contra proferentum is preempted by the FAA.  Contra proferentum is triggered only after a court determines that it cannot discern the intent of the parties.  When a contract is ambiguous, contra proferentum provides a default rule based on public policy considerations; it is not designed to ascertain the meanings attached by the parties.  Contra proferentum seeks ends other than the intent of the parties.  If class arbitration is manufactured by state law via the public policy doctrine of contra proferentum, rather than by the mutual agreement of the parties, then it is inconsistent with the FAA. Concepcion, 563 U.S. at 348.  Courts may not infer from an ambiguous agreement that the parties have consented to arbitrate on a class-wide basis.  The doctrine of contra proferentum cannot substitute for the requisite affirmative contractual basis for concluding that the parties agree to class arbitration.  The Court reversed and remanded.

This is a five-to-four decision.  Chief Justice Roberts authored the Court’s opinion.  Justices Ginsburg, Breyer, Sotomayor and Kagan each wrote dissenting opinions.

John Polk is a Special Counsel at Berenzweig Leonard, LLP. John can be reached at [email protected].