Shining the Light on Ambiguous Arbitration Agreements

We have previously analyzed employers’ ability to arbitrate class-wide claims on an individual basis, see here, but what happens if an arbitration agreement is ambiguous as to whether class arbitrations are permitted? The U.S. Supreme Court’s recent decision in Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019) provides guidance.

In Lamps Plus, an employer moved to compel a class action complaint to individual arbitration.  The plaintiff argued that if the case was going to arbitration, the class claims—not merely the individual plaintiff’s claims—should be heard there.  The district court held, and the Ninth Circuit affirmed, that due to an ambiguity in the arbitration agreement regarding potential class arbitration, California’s contra proferentem doctrine required construing the agreement against the drafter (the employer in this case). Thus the district court dismissed the class action and compelled class-wide arbitration.

The Supreme Court majority rejected this reasoning, finding that the Federal Arbitration Act (“FAA”) requires consent to class arbitration, deeming it a “foundational FAA principle.” In the majority’s view, this foundational principle preempts California’s contra proferentem doctrine and meant that no class arbitration could proceed.

The Bottom Line

There are two takeaway points from this holding.

First, employers may rest easier because the Lamps Plus decision minimizes the risk that a court will find, absent a clear statement of intent, that the parties intended to arbitrate on a class-wide basis. In most instances, employers are protected by the Lamps Plus decision without having to make any changes to their existing arbitration agreements unless they unambiguously consented to class-wide arbitration in their existing agreements.

Second, a best practice in arbitration agreements is to say what you mean. Even though Lamps Plus rejected the contra proferentem doctrine due to FAA preemption, courts still must analyze the parties’ intent in arbitration agreements under state contract law.  For example, in Texas, “[a]mbiguity is determined by examining the contract as a whole in light of the circumstances existing when the contract was entered into.” ReadyOne Indus., Inc. v. Flores, 460 S.W.3d 656, 663 (Tex. App.—El Paso 2014, pet. denied). To avoid even having to rely on Lamps Plus in the first place, employers may want to include a direct statement in their arbitration agreements removing any ambiguity, such as that the parties agree to arbitrate claims under this agreement on an individual basis only and do not consent to arbitration on a class basis.