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US Supreme Court Holds No Class Arbitration Absent Express Consent: Four Things to Know

April 30, 2019

The US Supreme Court’s recent decision in Lamps Plus means that parties with arbitration agreements governed by the Federal Arbitration Act may now compel arbitration without worrying that the court will order class arbitration if they did not expressly agree to it, among other important implications from this decision.

The US Supreme Court issued its decision in Lamps Plus v. Varela on April 24, holding that under the Federal Arbitration Act (“FAA”) courts may not compel class arbitration unless the parties clearly consent to it. In the decision under review, the US Court of Appeals for the Ninth Circuit had affirmed an order compelling the parties to participate in class arbitration when the agreement was ambiguous as to whether they had actually agreed to class arbitration. The court of appeals reasoned that, under California law, contractual ambiguity must be construed against the drafter, and the defendant (who wanted individual arbitration) had drafted the agreement. The Supreme Court reversed, reasoning that the doctrine of construing ambiguity against the drafter cannot substitute for the requisite affirmative contractual basis for concluding under the FAA that the parties agreed to class arbitration. There are four key things to know about the Court’s decision.

1. Parties May Compel Arbitration Without Undue Fear of Class Arbitration

Class arbitration sacrifices most of the benefits of individual arbitration—speed, efficiency, informality, and reduced costs—by dramatically raising the stakes of arbitration. Class arbitration also might violate the due process rights of absent class members, whose claims can be resolved with barely any judicial review. Lamps Plus, No. 17-988, slip op. at 8, 587 U.S. __ (2019). Before Lamps Plus, those risks made some defendants hesitant to move to compel arbitration in a putative class action when the agreement did not have an express class action waiver, lest the court order class arbitration. But after Lamps Plus, a defendant who wants to arbitrate under an agreement governed by the FAA that is silent or ambiguous about class arbitration need not fear that the court will order class arbitration.

2. A Rule’s ‘General Applicability’ May Not Save It from FAA Preemption

Since AT&T Mobility v. Concepcion, it has been clear that a state law contract rule is not immune from preemption simply because it is generally applicable to both arbitration agreements and other types of contracts. Even a generally applicable rule is preempted if it is applied in a way that conflicts with the FAA, such as by interfering with the fundamental attributes of arbitration. Lamps Plus expands that principle and finds conflict preemption in the way the lower court applied state law rules for interpreting contracts. The FAA mandates that courts enforce arbitration agreements in accordance with the parties’ intent. But the state law rule of interpreting contracts against the drafter—known as contra proferentem—is not a rule designed to identify the parties’ intent. On the contrary, it is a public policy rule designed to tilt the scales against the party with greater bargaining power. When applied to arbitration provisions, contra proferentem cannot be used to force the parties to arbitrate in ways that they did not intend. This is a potentially powerful holding. Lamps Plus was about class arbitration, yet its logic extends further, potentially to any use of contra proferentem in connection with interpreting ambiguous arbitration agreements. For instance, after Lamps Plus, a court might not be able to use contra proferentem to hold that a plaintiff’s claim does not clearly fit within the scope of an arbitration agreement.

3. There Are Expansive Appeal Rights Available Under the FAA

Under FAA Section 16, an immediate appeal is typically available from an order denying a motion to compel arbitration, but not necessarily from an order granting a motion to compel arbitration. In Lamps Plus, the Supreme Court held that it had appellate jurisdiction to review the order granting the defendant’s motion to compel arbitration because the district court dismissed the plaintiff’s claims outright in addition to ordering the parties to arbitrate. See Lamps Plus, slip op.at 4 & n.1. It did not matter that the appellant defendant was the party who had moved to compel arbitration because the defendant had sought individual arbitration and the district court had compelled class arbitration—fundamentally different relief. Note, however, that Section 16 might not afford an immediate appeal when a district court orders class arbitration and stays the case instead of dismissing it. In that scenario, mandamus or appellate review under another statute might be an option, depending on the circumstances of the particular case.

4. Arbitration Agreements Should Expressly Provide for Individual Arbitration

If your or your client’s arbitration agreement does not expressly provide for arbitration on an individual basis, i.e., contain an express class action waiver, you should review it and consider changes. The Supreme Court emphasized the importance of careful drafting: Arbitrators “derive their powers from the parties’ agreement,” which can generally be shaped “to their liking by specifying with whom they will arbitrate, the issues subject to arbitration, the rules by which they will arbitrate, and the arbitrators who will resolve their disputes.” Id. at 7. While an agreement’s ambiguity about class arbitration should be sufficient to avoid it when the FAA applies, the better practice is to make the agreement express. This express agreement for individual arbitration might prevent otherwise unnecessary argument and expense in connection with a motion to compel arbitration, and one could avoid being stuck in a class arbitration without an immediate right to appeal should the trial court compel class arbitration without dismissing the plaintiff’s claims. Also, be aware that not all arbitration agreements are governed by the FAA.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Chicago
Greg T. Fouts
Scott T. Schutte

Los Angeles
John S. Battenfeld
J. Warren Rissier

New York
Christopher A. Parlo
Samuel S. Shaulson 

Orange County
Barbara J. Miller

Philadelphia
Ezra D. Church
J. Gordon Cooney, Jr.
Michael J. Puma

Princeton
Thomas A. Linthorst

San Francisco
Molly Moriarty Lane

Washington, DC
David B. Salmons
Bryan M. Killian