May 06, 2019 Practice Points

Contractual Ambiguity Does Not Provide a Sufficient Basis to Compel Class Arbitration under the Federal Arbitration Act

SCOTUS rules in Lamps Plus Inc. v. Varela.

By Scott Carlton

On April 24, 2019, the U.S. Supreme Court issued a decision in Lamps Plus Inc. v. Varela, No. 17-988, 587 U. S. ____, 2019 WL 1780275 (U.S. Apr. 24, 2019), holding that under “the Federal Arbitration Act, an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.” The Court’s 5-4 majority found that it is improper for courts to infer that the contracting parties agreed to class arbitration based on ambiguous contractual terms.

In 2016, Lamps Plus, a California-based company, suffered a data privacy breach which exposed its employees’ personal information to hackers. Following the data breach, Frank Varela, an employee of Lamps Plus, sued the company on behalf a class of employees harmed by the data breach. The complaint was filed in federal district court and included both federal and state claims. Lamps Plus moved to compel arbitration based on the arbitration provision in Mr. Varela’s employment agreement. However, Lamps Plus argued that the agreement authorized the arbitration to proceed only on an individual basis, and not as a class action.  

“The district court found that the Agreement is a contract of adhesion and ambiguous as to class arbitration. It construed the ambiguity against the drafter, Lamps Plus, and compelled arbitration of all claims, allowing class-wide arbitration to proceed.” Varela v. Lamps Plus, Inc., 701 F. App'x 670, 671 (9th Cir. 2017). Before the Ninth Circuit, Lamps Plus argued that “the parties did not agree to class arbitration” under the terms of the contact. Id. at 672. The Ninth Circuit panel rejected Lamps Plus’s argument and affirmed the district court’s ruling in a 2-1 decision. Relying on California’s contra proferentem doctrine, the Ninth Circuit also determined that the ambiguity in a contract should be construed against the drafter (i.e., Lamps Plus).

The Supreme Court reversed and remanded. While the Court accepted the Ninth Circuit’s finding that the arbitration agreement was ambiguous, the Court stated that under the Federal Arbitration Act (FAA) courts are required to “‘enforce arbitration agreements according to their terms.’” To that end, the Court reiterated the foundational principle set forth in Stolt-Nielsen v. AnimalFeeds Int’l Corporation that “arbitration is a matter of consent.” 559 U.S. 662, 684 (2010). Courts therefore cannot “infer consent to participate in class arbitration absent an affirmative ‘contractual basis for concluding that the party agreed to do so.’” And since “contra proferentem seeks ends other than the intent of the parties,” reliance on the doctrine should be avoided when determining consent to arbitration under the FAA. As such, the Court held “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice[] the principal advantage of arbitration.’”

Scott Carlton is an attorney with Paul Hastings LLP in Los Angeles, California.

Copyright © 2019, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).