Supreme Court Rules Class Arbitration Not Allowed Unless Clearly Authorized

Supreme Court Rules Class Arbitration Not Allowed Unless Clearly Authorized

April 26, 2019

On Wednesday, April 24, 2019, the U.S. Supreme Court struck another blow to employees who seek to arbitrate class claims against their employer under employment arbitration agreements.  In a 5-4 decision, the Court ruled that class arbitration should not be allowed unless the arbitration agreement clearly authorizes class claims. 

This case stems from a 2016 phishing attack against Lamps Plus, Inc., which resulted in the theft of employee tax and income statements. Frank Varela, a Lamps Plus employee, filed suit in federal court on behalf of himself and a putative class of approximately 1,300 employees, alleging that Lamps Plus failed to adequately protect employees’ personal data. 

Lamps Plus moved to compel arbitration and dismiss the lawsuit on the basis that Varela signed an arbitration agreement, which required that all claims between Varela and Lamps Plus be arbitrated.  The company also asked the court to order that the case be arbitrated on an individual basis rather than on a class basis because the arbitration agreement did not explicitly authorize class claims.  The district court granted the motion to compel arbitration and dismissed the lawsuit, but ruled that the case would proceed on a class-wide basis.  On appeal brought by Lamps Plus, the Ninth Circuit affirmed the lower court’s ruling, finding that the arbitration agreement was ambiguous on the issue of class arbitration and, thus, should be interpreted against the drafter—Lamps Plus.

The Supreme Court disagreed.  In its opinion authored by Chief Justice John Roberts, the Court explained that the first principle of arbitration is that it "is strictly a matter of consent."  Parties may "shape [arbitration] agreements to their liking," the Court noted, "specifying with whom they will arbitrate, the issues subject to arbitration, the rules by which they will arbitrate, and the arbitrators who will resolve their disputes." 

The majority then emphasized the differences between individual and class arbitration.  While individual arbitration provides for "lower costs, greater efficiency and speed and the ability to choose expert adjudicators to resolve specialized disputes," class arbitration "lacks those benefits.   It 'sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgement.'"

These "crucial differences" have given the Court "’reason to doubt the parties' mutual consent to resolve disputes through classwide arbitration,"  the Chief Justice explained.  As a result, in previous decisions, the Court has "held that courts may not infer consent to participate in class arbitration absent an affirmative ‘contractual basis for concluding that the party agreed to do so.’  Silence is not enough.’"

The Court concluded that this reasoning controls in a case where the arbitration agreement is unclear as to whether the parties agreed to arbitrate the claims on a class basis.   "Like silence," the Court reasoned, "ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice[ ] the principal advantage of arbitration.'"

Lamps Plus v. Varela, 17-988, is the latest decision by the Supreme Court upholding employment arbitration agreements and employers’ efforts to avoid the prospect of arbitrating costly class actions. In Epic Systems Corp. v. Lewis, decided last year, the Supreme Court allowed employers to include class action waivers in arbitration agreements that their employees were required to sign. We reported on that case here.

As these cases establish, arbitration agreements can be an effective means to resolve employee claims efficiently and relatively less expensively than court litigation.  Critically, employers can avoid extensive and very costly class-wide litigation with a properly drafted employment arbitration agreement.  There are pros and cons to arbitration agreements, with no right answer for all employers.  Saul Ewing Arnstein & Lehr LLP’s labor and employment attorneys assist employers in understanding the issues and options, so they can make a considered decision that works for their business and workforce.  Our attorneys, moreover, have extensive experience in drafting employment arbitration agreements.