Federal Arbitration Act

After recently hearing oral argument in Lamps Plus Inc. v. Varela, the United States Supreme Court is set to decide whether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would result in permitting class arbitration. Arbitration is a function of contract, and therefore parties may agree to aggregated arbitrations in theory, though many questioned their practicality given the principal aims of arbitration – efficiency, speed, and finality. The question before the Court, however, is whether state-law contract interpretative principles should control when arbitration agreements are silent on the issue of class arbitration.

In the underlying decision, the Ninth Circuit held that, under California law, when an arbitration agreement is silent on the issue of class arbitration, it may be ambiguous, and therefore subject to interpretation against the drafter, i.e., interpreted to permit class arbitration. Lamps Plus, however, argues that federal law demands clearer language before a party can be required to arbitrate on an aggregated basis.

This case follows the heels of Stolt-Nielsen, where the United States Supreme Court held that a party may not be compelled to submit to class arbitration under the Federal Arbitration Act, unless there is a contractual basis for concluding that the party agreed to do so. As a practical matter, the Court’s ruling in Lamps Plus Inc. v. Varela may have limited practical impact because of the ever-growing prevalence of class action waiver clauses in arbitration agreements, the use of which the Court has repeatedly affirmed as legally enforceable.