The Supreme Court Closes Another Door to Class Arbitration
ATTORNEY: AATIF IQBAL
POMERANTZ MONITOR: JULY/AUGUST 2019
In Lamps Plus, Inc. v. Varela, the Supreme Court issued the latest in a series of recent 5-4 decisions that have transformed arbitration law so as to make it much more difficult for plaintiffs to pursue claims as a class, whether in court or before an arbitrator. Following this decision, if an arbitration agreement is ambiguous about class arbitration, courts cannot rely on state contract law to interpret it in a way that best effectuates the contracting parties’ bargain. Instead, courts are now required to adopt a heavy presumption that arbitration agreements always prohibit class actions unless they include explicit authorization for class arbitration.
These cases involved the Federal Arbitration Act (the “FAA”), a 1925 law intended “to enable merchants of roughly equal bargaining power to enter into binding agreements to arbitrate commercial disputes.” Arbitration offers contracting parties procedural flexibility to tailor a dispute resolution process to their specific commercial needs, which may include the efficient resolution of simpler disputes as well as expert resolution of technical disputes using procedural and evidentiary rules tailored to the industry. The FAA sought to overcome judicial hostility to arbitration by requiring courts to interpret and enforce arbitration agreements the same as any other contract—i.e., to apply the same state law governing all other contracts and to effectuate the bargain of the parties instead of imposing courts’ own views of pro-cedural fairness and efficiency.
However, commercial contracts are very different from most consumer and employment contracts. Procedural flexibility is less likely to be abused in commercial contracts because both parties have a shared incentive to structure a neutral process that can efficiently provide real relief. But in consumer and employment contexts, companies know they will be defendants and so have strong incentives to design and impose arbitral procedures that are one-sided at best and sometimes even deliberately inefficient in order to deter plaintiffs from bringing claims. (For example, prohibiting class actions essentially mandates individualized proceedings, which can be prohibitively costly and inefficient for many employee and consumer claims.) And in the past decade, the Supreme Court’s conservative wing—driven by its own hostility towards class actions—has not only approved of this practice but has increasingly used the FAA to create its own special rules for arbitration agreements, overriding state laws governing every other type of contract.
Lamps Plus, Inc. v. Varela illustrates this perfectly. The arbitration agreement in that case was part of an employment contract. Unlike commercial contracts, employment and consumer contracts are usually written entirely by the company and then offered on a take-it-or-leave-it basis. Ordinarily, under the law of all 50 states, any ambiguities in a contract written entirely by a company are interpreted against the company and in favor of the employee or consumer. The rationale is that the company had every opportunity to protect its interests by writing clearer contractual language and so should not be able to benefit from any ambiguities it created.
But the Supreme Court did not apply this rule. The arbitration agreement did not explicitly authorize or waive class arbitration, but it did suggest in several places that class arbitration was available. First, it stated that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings”—and “any and all lawsuits” plainly includes class actions. Second, it allowed the arbitrator to “award any remedy allowed by applicable law”—which plainly includes a judgment on behalf of a class. Third and most importantly, the agreement provided for arbitration “‘in accordance with’” the rules of a specific arbitral forum whose rules allowed for class arbitration. As Justices Kagan and Sotomayor pointed out in their dissents, an employee reading the contract would have little reason to think they were waiving the right to proceed as a class. Thus, under ordinary contract law, an ambiguous contract like this should be interpreted in favor of the employee. If the employer cared about avoiding class arbitration, it had every opportunity to be clearer.
Nevertheless, the Supreme Court held that arbitration agreements did not have to be clear in order to prohibit class arbitration. The majority’s stated rationale was that “shifting from individual to class arbitration is a ‘fundamental’ change … that ‘sacrifices the principal advantage of arbitration’ and ‘greatly increases risks to defendants” and therefore was so “markedly different from the traditional individualized arbitration contemplated by the FAA” that ambiguity was not enough. However, this rationale had no basis in the FAA, which never specifies any primary “advantage” of arbitration nor favors any particular kind of arbitral proceeding. (If anything, the whole point of the FAA was that contracting parties get to decide what they consider the “principal advantage” of arbitration for themselves, and courts can’t use their own procedural views as excuses to treat arbitration agreements differently from other contracts.) Rather, as Justice Kagan pointed out in dissent, the Court simply used its “policy view … about class litigation” to “justify displacing generally applicable state law about how to interpret ambiguous contracts.” Moreover, while the conservative majority took great pains to protect corporate defendants from “increased risk,” it ignored the risks that its ruling will create for the other contracting parties, i.e., consumers and employees, who will have no practical remedy to vindicate their contractual rights.
Notably, class-action waivers outside arbitration agreements rarely receive such special treatment, and their enforceability is much less clear. So after Lamps Plus, an arbitration agreement that is silent or deliberately vague about class arbitration is more reliable at blocking class claims than an explicit class-action waiver in a normal non-arbitration contract. This creates some strange incentives for companies that might otherwise have no interest at all in arbitration.