It’s not at all evident to me why SCOTUS felt the need to grant review of in Lamps Plus, Inc. v. Varela. But it did. And the majority decision, authored by Chief Justice Roberts, did precisely what I think that everyone who looked at the case expected: it held that courts cannot find the necessary consent to class arbitration in an ambiguous arbitration clause. (See Liz’s prediction, for instance (“In my view, the issue of class arbitration has largely been hammered out.”)
Still, the case has reverberations that may be far more significant than its simple holding.
As a reminder, the case involved an employee who had filed a class action against his employer, Lamps Plus. Lamps responded by seeking to compel arbitration on an individual rather than a classwide basis. The district court compelled arbitration but on a class basis and dismissed the employee’s case. Lamps appealed and the Ninth Circuit upheld the district court. SCOTUS reversed.
Critical to SCOTUS’s decision, the Ninth Circuit’s reasoning hinged on the fact that the employment arbitration agreement was ambiguous about the availability of class arbitration. The Ninth Circuit thus distinguished Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010), arguing that in Stolt-Nielsen the parties had stipulated to the fact that the agreement was silent about class arbitration. In contrast, in Lamps Plus, the parties had no such stipulation.
Because the agreement was ambiguous, the Ninth Circuit turned to California’s contra proferentem rule – a general rule of contract law that serves as a tie-breaker when a contract of adhesion is ambiguous, reading the adhesive contract against the drafter.
A majority of SCOTUS disagreed. The reasons why matter. Quite a lot, I think.
As the majority frames it, the real issue is “the interaction between a state contract principle for addressing ambiguity and a ‘rule of fundamental importance’ under the FAA, namely, that arbitration ‘is a matter of consent, not coercion.”
The state contract principle at issue, of course, was the contra proferentem rule, which again, everyone admits is a generally applicable rule. In other words, it applies not just to adhesive arbitration contracts but to all adhesive contracts. Thus, it would have seemed that this generally applicable contract rule could apply to the arbitration agreement under FAA § 2’s “savings clause.” But here’s where the majority threw a curve ball.
Justice Roberts reiterated that class arbitration constitutes a radically different and more risky form of adjudication than traditional bilateral arbitration. Citing to AT&T Mobility LLC v. Concepcion and Epic Systems Corp. v. Lewis, Justice Roberts highlighted the fact that, given the differences and extra risks of class arbitration – including the due process risks to absent parties – it’s incumbent on courts to make darned sure that parties are actually consenting to class proceedings.
But the contra proferentem rule does not make any pretense of uncovering the actual intentions of the parties. Instead, it’s just a tie-breaker: “Unlike contract rules that help to interpret the meaning of a term, and thereby uncover the intent of the parties, contra proferentem is by definition triggered only after a court determines that it cannot discern the intent of the parties.” Accordingly, “contra proferentem seeks ends other than the intent of the parties.” Basically, the doctrine reads against the drafter for public policy reasons, implicitly concluding that weaker parties should be protected in close calls.
That understanding of the doctrine in place, the majority ties a bow on its reasoning: “[c]lass arbitration, to the extent it is manufactured by [state law] rather than consen[t], is inconsistent with the FAA.”
Of course, this is not the first time that SCOTUS has rejected the application of what appears to be a generally-applicable contract rule to arbitration agreements. (Most recently, the Court did so in Kindred Nursing Centers L. P. v. Clark (2017).) But the Court’s transparent elevation of the “object preemption” rule of the FAA merits attention. (By object preemption, I mean the Court’s view that state law not only cannot expressly interfere with the parties’ recourse to arbitration, but it cannot stand as an obstacle to the fundamental attributes of arbitration.)
Finally, it’s worth mentioning Justice Ginsberg’s trenchant dissent, especially in light of my recent post on mutual assent in arbitration. Basically, Justice Ginsberg recognizes the “irony of invoking ‘the first principle’ that ‘arbitration is strictly a matter of consent’ . . . to justify imposing individual arbitration on employees who surely would not choose to proceed solo.” In short, she puts her finger on a critical and increasingly significant point: boilerplate presents a “Hobson’s choice”: accept the terms and conditions offered, whether you know about them or not, or give up on the transaction. That framework may make practical sense, but it hardly amounts to “assent” in any traditional sense.