Supreme Court Bulldozes Classwide Arbitration Route

WASHINGTON (CN) – In a new boost to corporate might, the Supreme Court ruled 5-4 Wednesday that ambiguous contract terms do not pave the way to classwide arbitration.

The case comes from a phishing scam against California-based Lamps Plus. After hackers tricked an employee into releasing the tax information about 1,300 other people at the company, worker Frank Varela saw a fake income tax return filed in his name and shot back at Lamps Plus with a federal class action.

Lamps Plus succeeded in moving Varela’s suit to arbitration, but the District Court still kept the door open to classwide relief based on ambiguous arbitration language in Varela’s contract.

The Ninth Circuit later affirmed, applying a California rule that allows courts to interpret ambiguous contract language against the entity that drafted the contract.

But the Supreme Court called this interpretation incorrect Wednesday, with the the conservative majority saying a reversal is the logical follow-on to an earlier decision that curbed judges from finding that parties have consented to classwide arbitration if a contract is silent on the issue.

Penned by Chief Justice John Roberts, the decision emphasizes class arbitration is fundamentally different than individual arbitration and does not come with some of the benefits that might make the signers of a contract interested in an arbitration clause. Therefore, Roberts wrote, the language of a contract must be clear before courts send a case to classwide arbitration.

“Neither silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself,” Roberts wrote for the majority.

Again citing past decisions on arbitration, Roberts also said the California rule requiring ambiguous contracts to be interpreted against the drafter cannot substitute for the consent courts must look for when interpreting arbitration agreements.

“The same reasoning applies here: The general contra proferentem rule cannot be applied to impose class arbitration in the absence of the parties’ consent,” Roberts wrote, referring to the California rule the Ninth Circuit applied.

All four of the dissenting justices filed separate opinions. Justices Stephen Breyer and Sonia Sotomayor joined the first, penned by Justice Ruth Bader Ginsburg, which says today’s holding shows that the court has strayed “treacherously” far from its holding that arbitration is a matter of consent. 

Ginsburg said the court’s rulings on arbitration in recent years have blocked people from joining forces against large and powerful companies. 

“Piling Pelion on Ossa, the court has hobbled the capacity of employees and consumers to band together in a judicial or arbitral forum,” Ginsburg wrote.

Justice Elena Kagan took on the other side of the majority opinion in her dissent. She said that, even if she agreed with the majority that the Lamps Plus agreement is ambiguous, the Ninth Circuit was correct to use the California rule when interpreting the contract.

Kagan wrote that the Federal Arbitration Act does not prohibit courts from applying state laws such as California’s, which is neutral and not inherently anti-arbitration. She said the lower courts would have allowed Lamps Plus to compel individual arbitration if Varela had been the one who drafted the agreement.

In a footnote, Kagan took particular aim at Justice Clarence Thomas, saying the decision should be “a hard pill to swallow” for a justice so concerned about federal pre-emption of state law. Thomas joined the majority opinion, but said he did so only “because it correctly applies our FAA precedents'”

Echoing Ginsburg, Kagan further said the ruling is the latest in a line of cases in which the court has tried to cinch down on both class action lawsuits and class-wide arbitration.

“In this case, the result is to disregard the actual contract the parties signed,” Kagan wrote. “And to dismiss the neutral and commonplace default rule that would construe that contract against the drafting party. No matter what either requires, the majority will prohibit class arbitration.”

Breyer and Ginsburg joined Kagan’s dissent fully, while Sotomayor joined in part.

In yet another dissent, Breyer wrote that the order from the trial court directing the parties to arbitration was not a final ruling in the case, meaning that the Ninth Circuit did not have jurisdiction over the case.

Jutice Sotomayor dissented separately as well.

Mayer Brown attorney Andrew Pincus hailed the court’s decision in a statement Wednesday afternoon.

“Today’s decision applies the already-established principle that parties must agree to class arbitration, because it is fundamentally different from the individualized arbitration protected by the Federal Arbitration Act – and that a contract interpretation based on public policy rules, not agreement by the parties, does not suffice,” Pincus said. “The Supreme Court also once again made clear that lower courts may not use unjustified reasoning to circumvent the court’s prior rulings – the very judicial hostility to arbitration that led Congress to enact the FAA.”

Michele Vercoski, an attorney with the firm McCune Wright Arevalo who argued for Varela, did not immediately respond to a request for comment.

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