The Court ruled that the FAA forecloses courts from applying neutral state law principles in the face of ambiguous contract language if doing so would result in allowing arbitration to proceed on a class-wide basis.

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Lamps Plus, Inc. v. Varela, No. 17-988 (U.S. Apr. 24, 2019)
 

Relevant Facts: An employee of Lamps Plus fell prey to a phishing scheme and accidentally released the tax information of thousands of the company’s workers. After Frank Varela discovered a fraudulent tax return had been filed in his name, he filed a putative class action lawsuit in federal court against Lamps Plus on behalf of the employees whose information was compromised. Lamps Plus responded by filing a motion to compel individual arbitration. The District Court granted the order to compel arbitration, but denied the company’s effort to break the class. Under the state law doctrine contra proferentem, ambiguous language in a contract should be interpreted in a favor of the non-drafting party. Because the language in the arbitration clause drafted by Lamps Plus was ambiguous, the court allowed class arbitration proceedings to move forward. The appellate court affirmed.

 

Question Before The Court: Whether the Federal Arbitration Act bars courts from applying a neutral principle of state contract interpretation to an ambiguous contract term when doing so would result in the authorization of class arbitration proceedings.

 

The Opinion: Under California law, the doctrine of contra proferentem provides that ambiguous contract terms should be interpreted against the drafter. Because the arbitration provision at issue here was ambiguous, the Ninth Circuit interpreted it in a way most favorable to the non-drafting employee required to accept it, allowing class arbitration to move forward. Relying on precedent from only the last decade, the U.S. Supreme Court reversed, holding that an arbitration contract must expressly authorize class arbitration in order for parties to access the arbitral forum collectively. In the Court’s view, the “traditional individualized arbitration contemplated by the FAA”—and the benefits the Court has assigned to it—are undermined by class arbitration. For that reason, the Court held that “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration provision agreed to ‘sacrifice the principal advantage of arbitration.’

 

Additionally, the Court addressed the appellate court’s use of contra proferentem, and ruled that the FAA’s predilection for individual arbitration prevents courts from applying a state’s general contract principles to ambiguous contract terms if doing so would result in the authorization of class arbitration. The Court explained, “The FAA provides the default rule for resolving certain ambiguities in arbitration agreements. . .. Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis. The doctrine of contra proferentem cannot substitute for the requisite ‘contractual basis’ for concluding that the parties agreed to class arbitration.”

 

All four justices in the minority authored separate dissents. Justice Breyer focused on jurisdictional issues. Justice Ginsburg lambasted the majority’s woeful straying from the legislative purpose of the FAA at the expense of employees and consumers. “Piling Pelion on Ossa,” she wrote, “the Court has hobbled the capacity of employees and consumers to band together in a judicial or arbitral forum.” Justice Kagan, too, excoriated the majority’s blatant anti-class action judicial activism that lay at the heart of their decision to render the state’s “plain-vanilla rule of contract interpretation” inapplicable to arbitration contracts.

 

In her dissent, Justice Sotomayor expressed her dismay as to the effect the majority’s rule would have on states, providing, “This Court normally acts with great solicitude when it comes to possible preemption of state law, but the majority today invades California’s contract law without pausing to address whether its incursion is necessary. Such haste is as ill advised as the new federal common law of arbitration contracts it has begotten.”

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