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Financial Services Law Insights and Observations

Divided Supreme Court says class arbitration is invalid without explicit permission

Courts U.S. Supreme Court Arbitration Class Action

Courts

On April 24, the U.S. Supreme Court in a 5-4 vote held that because an arbitration agreement did not explicitly permit class arbitrations, only individual arbitrations are allowed. The case began when an employee of a lighting retailer (petitioner) filed a class-action suit against the company after a hacker—who posed as a company official—persuaded an employee at the company to disclose the tax information of roughly 1,300 workers and then file a fraudulent tax report in the petitioner’s name. The company moved to dismiss the case, arguing that the petitioner was required to bring his claims in individual arbitration under the Supreme Court’s 2010 ruling in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., which bars class arbitration when there is no “contractual basis for concluding” that the parties agreed to it. The district court granted the motion to compel arbitration but rejected the company’s request for individual arbitration and authorized arbitration on a classwide basis. On appeal, the 9th Circuit affirmed the district court’s decision—agreeing that the ambiguous agreement permitted class arbitration—and “followed California law to construe the ambiguity against the drafter”—in this instance, the company who drafted the agreement.

The company petitioned the Supreme Court to consider, consistent with the Federal Arbitration Act (FAA), whether an ambiguous agreement can provide the “contractual basis” required for compelling class arbitration. The majority deferred to the 9th Circuit’s conclusion that the arbitration agreement in question was ambiguous as to whether class arbitration was an option, and wrote that the lack of clarity cannot provide the “contractual basis” required under Stolt-Nielsen to compel class arbitration. Notably, the majority highlighted that “shifting from individual to class arbitration is a ‘fundamental’ change. . .that ‘sacrifices the principal advantage of arbitration’ and ‘greatly increases risks to defendants.” Citing to “crucial differences” between individual and class arbitration, the majority wrote that “courts may not infer consent to participate in class arbitration absent an affirmative ‘contractual basis for concluding that the party agreed to do so.’” The majority also stated that the 9th Circuit's decision to rely upon California’s contra proferentem doctrine to interpret contractual ambiguities against the drafter is “flatly inconsistent with ‘the foundational FAA principle that arbitration is a matter of consent.’”

The four justices who voted against the decision all wrote dissents. Among other things, Justice Kagan wrote that the FAA stipulates that state law governs the interpretation of arbitration agreements, provided the law handles other types of contracts in the same way. “Today’s opinion is rooted instead in the majority’s belief that class arbitration ‘undermine[s] the central benefits of arbitration itself. [] But that policy view—of a piece with the majority's ideas about class litigation—cannot justify displacing generally applicable state law about how to interpret ambiguous contracts,” Justice Kagan stated. Justice Breyer, who joined Justices Ginsburg’s and Kagan’s dissents in full, also wrote that the 9th Circuit lacked jurisdiction over the company’s appeal, and consequently, the Supreme Court lacks jurisdiction as well.

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