Supreme Court Dims The Light On Class-Action Arbitrations
The U.S. Supreme Court recently held that an employer could not be compelled to submit to a class-action arbitration proceeding where the underlying arbitration agreement was “ambiguous” as to whether class-wide claims were arbitrable.
In Lamps Plus, Inc. v. Varela, the Supreme Court concluded that the Federal Arbitration Act (“FAA”) required “more than ambiguity to ensure that parties actually agreed to arbitrate on a class-wide basis.” Rather, the Court held, a party can be obligated to engage in a class-action arbitration only if it affirmatively agreed to do so.
The Varela case arose out of a data security breach involving a company known as Lamps Plus, Inc. In 2016, a hacker obtained private information relating to certain Lamps Plus employees, and a fraudulent federal income tax return was filed in the name of Frank Varela, a Lamps Plus employee. Subsequently, Varela filed suit in court against Lamps Plus, on his own behalf and on behalf of a proposed class of Lamps Plus employees whose personal information had also been compromised.
In response to the lawsuit, Lamps Plus moved to compel arbitration, citing an arbitration agreement Varela had entered into as a condition of his employment. The arbitration agreement provided, in pertinent part, that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to [Varela’s] employment.”
The district court granted Lamps Plus’s motion to compel arbitration, but rejected Lamps Plus’s request that the arbitration be limited to Varela’s individual claims. Instead, the court found that Varela could proceed with arbitrating the matter on a class-wide basis.
On appeal by Lamps Plus, the Ninth Circuit affirmed the district court’s decision. Concluding that the arbitration agreement was ambiguous on the issue of class-wide arbitration, the court applied state-law principles of contract interpretation and determined that the ambiguity should be construed against the drafter of the agreement, Lamps Plus. As a result, the Ninth Circuit concluded, the arbitration agreement authorized class-wide arbitration.
Lamps Plus then petitioned the Supreme Court, which granted certiorari.
Supreme Court’s Decision
In a 5-4 decision written by Chief Justice John Roberts, the Supreme Court reversed the Ninth Circuit, concluding that Lamps Plus could not be compelled to arbitrate the dispute on a class-wide basis.
In its decision, the Court emphasized that arbitration is “strictly a matter of consent,” and that “[c]onsent is essential under the FAA because arbitrators wield only the authority they are given.” Chief Justice Roberts further stressed that there is a “fundamental difference” between class arbitration and individualized arbitration, as class arbitration eliminates many of the advantages of arbitration, such as efficiency, speed, and lower costs.
Accordingly, the Supreme Court concluded, ambiguity in an arbitration agreement is an insufficient basis for compelling class-wide arbitration, and parties cannot be compelled to submit to a class-action arbitration proceeding absent an affirmative agreement to do so.
Implications For Employers
As a result of the Varela decision, employers can be confident that they will not be obligated to participate in a class-wide arbitration proceeding unless they have expressly agreed to do so.
Deciding, however, whether to require employees to agree to arbitrate all employment-related disputes is a complex matter for employers. While arbitration carries some advantages over litigation, there are also some disadvantages, including the general unavailability of pre-hearing discovery and dispositive motions, as well as extremely narrow avenues for appeal. In addition, some employers have recently faced adverse publicity and backlash from employees after seeking to enforce arbitration agreements, particularly in the context of sexual-harassment claims.
Thus, before requiring employees to sign arbitration agreements requiring them to bring employment-related disputes before an arbitrator rather than a court, employers should carefully evaluate, with the assistance of experienced counsel, the likely pros and cons of doing so.
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Schwartz Hannum’s employment lawyers have extensive experience in advising employers on the advantages and disadvantages of arbitration, drafting arbitration agreements, and representing employers in arbitration proceedings. We would be happy to help your organization with any of these issues.