Ambiguous Arbitration Clause Does Not Mean Consent to Class Arbitration Says SCOTUS

By Styskal, Wiese & Melchione

Recently, a divided Supreme Court held that the Federal Arbitration Act (FAA) bars classwide arbitration when an agreement contains ambiguous language about the availability of such arbitration. In other words, the arbitration language must expressly indicate that the parties consent to class arbitration. Although the district court compelled class arbitration and the Ninth Circuit affirmed and applied state contract law which construes ambiguous language against the drafter, the Supreme Court disagreed based on the following principles: (1) there is a fundamental difference between class arbitration and the individualized form of arbitration envisioned by the FAA, (2) the parties must expressly agree to class arbitration and courts must enforce arbitration agreements according to their terms, and (3) the state rule of construction applied by the Ninth Circuit conflicts with the FAA and therefore is preempted.

While previously, the Supreme Court has held that a court may not compel class arbitration when an agreement is silent on the availability of such arbitration, the Lamps Plus, Inc. v. Varela decision marks another big win for financial institutions that use arbitration agreements with its consumers. The upshot: a carefully drafted arbitration clause is vital in protecting institutions against class actions. Consequently, a periodic review of your arbitration clause is recommended to ensure that it remains valid and clearly conveys the parties’ intentions.