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Don’t Get Caught in the Ambiguity Trap: SCOTUS Ruling Highlights Need to Clarify Arbitration Agreements

April 25, 2019

Yesterday the Supreme Court issued a ruling in Lamps Plus, Inc. v. Varela that reaffirmed the need for employers to ensure that binding arbitration provisions within their employment agreements are clear and unambiguous. And while this decision involved an employment situation, the rationale could be applied to many other relationships (e.g., consumer transactions) involving arbitration clauses.

In Lamps, an employee sought to represent other employees and arbitrate his claim on a class-wide basis. Lamps, the employer, objected and argued that there was no agreement to arbitrate on a class-wide basis, only on an individual basis.

The Court held that, because the agreement to arbitrate was ambiguous as to the applicability of class arbitration, it could not be enforced to require class arbitration. Relying on prior precedent, Justice Roberts emphasized in the majority opinion that “arbitration is a matter of consent, not coercion” and as such “a party may not be compelled … to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” In holding that “Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a class-wide basis,” the case teaches that agreements which limit employee remedies under the Federal Arbitration Act should explicitly address the types of disputes which are, and which are not, subject to mandatory arbitration.

This is simply good practice. While the ambiguity of the arbitration clause resulted in an outcome favorable to the employer in this case, ambiguity or omission in these types of contracts can lead to varied interpretations by courts and company expenses defending lawsuits which were intended to be routed to arbitration for less expensive and quicker resolution. Conversely, when facing class actions, employers may prefer to litigate those within the court system, which may in fact be less costly and more orderly, as was argued in Lamps. This same principle would apply to agreements to waive class action rights entirely.

Don’t get caught in the ambiguity trap. Be sure your arbitration agreements are clear and outline your litigation preferences. Mistakes and omissions, in the employment context and elsewhere, can be very costly.