From Lexology, Eric R. Magnus, Samia M. Kirmani, David E. Nagle, Brendan Sweeney, Collin O’Connor Udell, Stephanie L. Goutos and Abraham N. Saiger discuss the recent United States Supreme Court case in which the Court said that parties to an arbitration agreement must expressly consent to class arbitration. They write:
Class action arbitration is such a departure from ordinary, bilateral arbitration of individual disputes that courts may compel class action arbitration only where the parties expressly declare their intention to be bound by such actions in their arbitration agreement, the U.S. Supreme Court has ruled in a 5-4 decision. Lamps Plus, Inc. v. Varela, No. 17-988 (Apr. 24, 2019). The Supreme Court said, “Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.”
Following the Supreme Court’s decision, arbitration agreements must clearly and unmistakably state that the parties agree to resolve class and collective actions through arbitration. Without such a clear agreement, a party cannot be compelled to class arbitration.
“Under the Federal Arbitration Act [FAA], an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to a class arbitration,” the Court held. “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice the principal advantage of arbitration.’ This conclusion aligns with the court’s refusal to infer consent when it comes to other fundamental arbitration questions.”
Reaffirming that arbitration is a matter of consent, the Court announced that ambiguity regarding class and collective actions must be resolved in favor of ordinary, bilateral arbitration, regardless of which party drafted the agreement.
The Court also ruled that the FAA forecloses a state-law interpretation of an arbitration agreement authorizing class action based solely on general or ambiguous language in the agreement.
Accordingly, the Court concluded that the U.S. Court of Appeals for the Ninth Circuit erred when it affirmed class action arbitration, reversing and remanding to the Ninth Circuit for further proceedings consistent with its opinion.
On the merits, the Supreme Court reversed the Ninth Circuit, holding that an ambiguous agreement cannot provide the necessary “contractual basis” for compelling class arbitration. The Court noted this conclusion follows directly from its decision in Stolt-Nielsen. The Court continued, “Class arbitration is not only ‘markedly different’ from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration. The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a class wide basis.”
The Court reiterated that the FAA imposes certain fundamental rules with regard to arbitration agreements, including that arbitration is “a matter of consent, not coercion.” Relying on the reasoning in Stolt-Nielsen, the Court held courts may not infer consent to participate in class arbitration absent an affirmative “contractual basis for concluding that the party agreed to do so.” The Court emphasized that silence or ambiguity is not enough, the “FAA requires more.” The Court determined that the lower court’s approach was flatly inconsistent with the “foundational principle that arbitration is a matter of consent.”
The rule against coercing parties into arbitration is particularly important in the class action context. Class actions are substantively different from the ordinary, bilateral arbitration contemplated by most parties to an employment arbitration agreement. Among other things, class actions expose the employer to exponentially greater liability and risk, while eliminating the safeguard of an appeal. Class actions also purport to speak for employees who may not want to participate in the action, but nonetheless find themselves bound by an arbitration award. They also introduce complex and time-consuming litigation practices into the arbitration forum, which is intended to be faster, cheaper, and more efficient than ordinary litigation in courts.