For years, individuals and businesses wanting to reserve a right to bring class claims in arbitration could do so under arbitration agreements that were silent or ambiguous as to whether class arbitration was available. But in a series of three cases, the United States Supreme Court has demanded increasingly express terms agreeing to class arbitration.
Courts encourage individual arbitration because it usually lowers costs and resolves disputes more quickly. The Supreme Court has reiterated these virtues in its recent opinions, but it has asserted that class arbitration diminishes them. Class arbitration can involve hundreds or thousands of claimants arguing complex issues and asserting various damages amounts. Ultimately, Chief Justice John Roberts has written, class arbitration begins to look “like the litigation it was meant to displace.”
The Court began restricting access to class arbitration in 2010. That year, in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.
, the Supreme Court considered whether shipping companies could bring class claims against a manufacturer under an arbitration agreement that did not mention class arbitration. The Supreme Court emphasized that arbitration agreements, like all contracts, are a matter of consent. Parties can choose the rules under which arbitration occurs, who is entitled to arbitrate, and to arbitrate only certain disputes. Importantly, they cannot be required to arbitrate disputes in a manner to which they did not consent. The Supreme Court ruled that, because the shipping companies stipulated that their arbitration agreement with the manufacturer did not mention class arbitrability, it was improper to assume that the manufacturer had consented to class arbitration.
Last year, in Epic Systems Corp. v. Lewis
, the Court again limited parties’ right to class arbitration by embracing a narrow construction of the Federal Arbitration Act (or “FAA”). There, a group of employees claimed that a court could refuse to enforce their individual-only arbitration agreements because the National Labor Relations Act protects employees’ right to engage in “concerted activity.” The employees admitted that they had signed their arbitration agreements, but they relied on the FAA’s “saving clause,” which allows courts to refuse to enforce arbitration agreements on grounds that are “generally applicable contract defenses, such as fraud, duress, or unconscionability.” The Supreme Court held that the plaintiffs’ claim was not a “generally applicable contract defense”—it could apply only to arbitration agreements. The Court therefore ruled that the plaintiffs were not permitted to assert class claims in arbitration.
Then, earlier this year, the Supreme Court expanded on its approach in Stolt-Nielsen
. In Lamps Plus Inc. v. Varela
, an individual filed class claims against his employer, a lighting fixture manufacturer. The district court ordered the parties to engage in individual and class arbitration. The manufacturer appealed, claiming that the arbitration agreement was silent as to class arbitrability and class arbitration was therefore not allowed under Stolt-Nielsen
. The court of appeals affirmed the district court, holding that the arbitration agreement was ambiguous on the question of class arbitrability, and it employed a state law rule construing contractual ambiguities against the contract’s drafter. The appeals court concluded that the manufacturer could have expressly resolved the ambiguity in drafting the agreement and, because it failed to do so, indicated its willingness to engage in class arbitration.
The manufacturer appealed to the United States Supreme Court, asking the Court to reverse the court of appeals’ ruling and hold that ambiguous arbitration agreements cannot provide the necessary “contractual basis” for compelling arbitration. The Supreme Court embraced the manufacturer’s view. It repeated Stolt-Nielsen’s
admonition that arbitration agreements are strictly matters of consent, which “is essential under the FAA, because arbitrators wield only the authority they are given.” And it emphasized the “fundamental difference between class arbitration and the individualized form envisioned by the FAA.” Class arbitration’s added expense and time make it less favorable than individual arbitration, and ambiguous language cannot signal the necessary consent to engage in such a practice.
Taken together, Stolt-Nielsen, Epic Systems
, and Lamps Plus
counsel that any party that might want to engage in class arbitration must make sure clear language to that effect appears in its arbitration agreement. As always, all parties to any arbitration agreement should express their intentions in clear language, not only as to their willingness to participate in class arbitration, but also as each term of the agreement. It is critical that parties review the language of their arbitration agreements to be sure they adhere to new court precedents. Clarity is the key to an enforceable arbitration agreement.
The next issue in class arbitrability that the Supreme Court will likely address is the question of who gets to decide whether an arbitration agreement includes an agreement to arbitrate class claims—courts or arbitrators. In cases published last year, the Eleventh Circuit held that question requires a court to weigh in because class arbitrability is a fundamental, or “gateway,” question. But the Tenth Circuit has held that arbitrators can be the proper authority for determining class arbitrability if the parties have agreed to use standardized arbitration rules allowing arbitrators to determine their own jurisdiction. In Lamps Plus
, the Supreme Court acknowledged the appeals courts’ dispute in a footnote, but it asserted that it had “no occasion to address that here because the parties [in Lamps Plus
] have agreed that a court, not an arbitrator, should resolve the question . . . .”
The principal takeaway from this series of cases is that each party must clearly define the types of claims that are covered by an arbitration agreement. If a party wants to retain its right to class arbitration, or exclude it entirely, it must state so clearly. It should also state clearly who should decide class arbitrability questions—a judge or an arbitrator—and rules for other specific substantive claims.