The rule of contra preferentem cannot be applied absent the parties' consent to class arbitration

Date published

02/05/2019

Services

Sectors

Locations

On April 24, 2019, the Supreme Court of the United States issued its third opinion concerning arbitration during this term, holding that the doctrine of contra preferentem cannot be applied to an ambiguous arbitration agreement to impose class arbitration in a commercial contract. Lamps Plus, Inc. v. Varela, 587 U.S. ___ (slip op. at 12-13)(2019). In reaching this decision, the court made clear that ambiguities in arbitration agreements should be resolved in favor of arbitration. Slip Op. at 12.

The Lamps Plus decision

Lamps Plus, a seller of light fixtures and related products, was conned in 2016 into disclosing the tax information of approximately 1,300 employees. Because of this data breach, a fraudulent tax return was filed in the name of Frank Varela, a Lamps Plus employee. Like most employees of the company, Mr Valera signed an arbitration agreement when he started work at the company. After the data breach he sued the company in Federal District Court in California asserting state and federal claims on behalf of a putative class of employees whose tax information was compromised. Lamps Plus moved to compel arbitration on an individual rather than a class basis. In a single order, the District Court granted the motion to compel arbitration and dismissed Mr Valera’s claims without prejudice.

The Ninth Circuit affirmed the District Court’s ruling compelling arbitration. However, the court found that the arbitration agreement was ambiguous. While Lamps Plus argued that the agreement did not contain a clear adoption of class arbitration, Mr Valera argued that the agreement contained sufficient indicia to conclude that class arbitration was authorized by the agreement. The Ninth Circuit followed California law to construe the ambiguity against the drafter, adopting Mr Valera’s interpretation authorizing class arbitration.

In reviewing the Ninth Circuit’s decision, the majority of the Supreme Court couched the issue being decided as “whether, consistent with the [federal arbitration Act (“FAA”)], an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.” Slip. Op. 6. The majority held that it cannot. The majority reasoned that 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. Slip. Op. 6. The court concluded that the FAA requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a class wide basis.

In explaining its decision, the majority analysed the interaction between state contract principles for addressing ambiguity and a “rule [] of fundamental importance” under the FAA – that arbitration “is a matter of consent, not coercion.” The court reasoned “[c]onsent is essential under the FAA because arbitrators wield only the authority they are given.” Relying on the distinctions between individual arbitration and class arbitration, the court explained that there is “ reason to doubt the parties’ mutual consent to resolve disputes through [class-wide] arbitration.” Slip Op. at 8. Following Stolt Nielsen, the court held that “[l]ike silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice [] the principal advantage of arbitration.’” Slip Op. 8).

In reversing the Ninth Circuit’s ruling, the majority opinion noted that when a contract is ambiguous, the doctrine of contra preferentem provides a default rule based on public policy considerations and cannot be said to ascertain the meanings attached by the parties. Slip Op. 10. The court further reasoned that courts may not rely on state contract principles to reshape traditional, individualized arbitration by mandating class-wide arbitration procedures without the parties’ consent. In as much as the Ninth Circuit violated this prohibition, the circuit court’s ruling was in error. The majority further held that where ambiguities in arbitration agreements are presented, the contract should be read in favor of arbitration noting “we did not seek to resolve the ambiguity by asking who drafted the agreement.” Slip Op. 12.

Comment

While most insurance and reinsurance contracts do not involve issues of class arbitration, the decision in Lamps Plus is significant in that it affirms that ambiguities in arbitration agreements should be resolved in favor of arbitration. State law contract principles cannot operate to circumvent the intent of the FAA to favor individual parties’ agreements to arbitrate.