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U.S. Supreme Court Decision Significantly Affects Whether an Arbitration Clause Compels Class Arbitration

Mandatory arbitration clauses are omnipresent in contracts between businesses and their customers and employees and can have a major impact on how disputes are resolved. While arbitration clauses are sometimes viewed as a way to simplify the dispute resolution process and control costs, a poorly written arbitration clause can have the opposite effect.

Many standard form contracts that you or your company will encounter include mandatory arbitration clauses that prevent the parties from litigating their disputes in court. A wide variety of disputes, from a product's price to an employee's termination and more, that may arise from a given contract may be subject to arbitration proceedings. Many businesses view arbitration as a cost-effective alternative to traditional litigation because arbitration proceedings usually have more flexible procedures, proceed more quickly than a case in court, and involve less extensive discovery. These potential benefits may be especially important when businesses are faced with a putative class action by customers or employees, which can be particularly complex and expensive to litigate. However, as a recent U.S. Supreme Court case illustrates, businesses that want the benefits of arbitration should take care when drafting arbitration clauses.

The U.S. Supreme Court recently addressed whether an ambiguous arbitration clause may be used to compel class arbitration rather than an individual arbitration. In Lamps Plus, Inc. v. Varela, No. 17-988 (U.S. 2019), the Court was faced with an arbitration clause in an employment contract that the lower courts had previously found to be ambiguous. In 2016, a hacker had obtained the tax information of about 1,300 employees by deceiving a Lamps Plus employee. Thereafter, a separate Lamps Plus employee filed a putative class action in federal district court. Lamps Plus sought to compel an individual arbitration of the employee's claims based on an arbitration provision contained in his employment contract.

While the arbitration clause referred to submitting "any and all disputes, claims, or controversies" to arbitration, both the district court and the Ninth Circuit found that the use of singular nouns like "I", "me", and "my" in the contract rendered the provision ambiguous as to whether it required arbitration of class "disputes, claims, or controversies." In the face of that ambiguity, the lower courts compelled class arbitration, construing the provision against the drafter.

The Supreme Court, however, did not construe the ambiguity against the drafter. While the Ninth Circuit had used state rules of contract interpretation to resolve the ambiguity, the Supreme Court held that doing so was "flatly inconsistent with 'the foundational [Federal Arbitration Act] principle that arbitration is a matter of consent." Courts "may not rely on state contract principles to reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties' consent." The Supreme Court thus was unwilling to look beyond the four corners of the agreement to infer the intent of the parties.

In short, the Supreme Court has made clear that any requirement of classwide arbitration must be specified in the terms of the contract and not left open to interpretation.

The Court's reluctance to impose classwide arbitration even when mandatory arbitration is specifically provided for in a contract creates a potential gap in many contracts in the marketplace. Businesses that are creating and entering into new contracts with mandatory arbitration provisions or reviewing previously executed agreements should consider:

  • Whether the contract details the applicability of arbitration to putative class actions.
  • Whether the contract's arbitration provision could be interpreted as ambiguous under prevailing state and federal laws.

Standard, boilerplate arbitration clauses may not provide for arbitration of "all" disputes between the parties. Before entering into contracts, businesses and individuals should determine what they have agreed to arbitrate, and those litigating claims should review arbitration provisions carefully for potential loopholes.

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