Supreme Court Limits Reach of Class Arbitration

Class arbitration requires express agreement, according to the court

U.S. Supreme Court

Class arbitration is a rare proceeding in employment disputes. Thanks to a recent U.S. Supreme Court decision, it will likely stay that way.

On April 24, the Supreme Court held in Lamps Plus v. Varela that courts can’t compel parties to classwide arbitration, as opposed to individual arbitration, unless their agreement specifically allows for it. The 5-4 decision, which fell across the Supreme Court’s conservative-liberal divide, upheld its 2010 precedent that “an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.”

Employment attorneys say that while the decision is favorable to employers, they still need to think about whether they would really prefer individual arbitration to class litigation in certain cases.

Light fixture retailer Lamps Plus and its employees fell victim to a phishing scheme that compromised the tax information of 1,300 of its workers. When one of the employees, Frank Varela, discovered that a false tax return was filed in his name, he sued his employer in federal court. Varela brought the claims on behalf of a putative class of employees, but Lamps Plus moved to have the claims arbitrated, pointing to the mandatory arbitration agreement that Varela and other employees had signed. The district court pushed the claims into arbitration, but for the putative class rather than the individual arbitration that Lamps Plus wanted.

The 9th Circuit Court of Appeals affirmed. Lamps Plus argued that its arbitration agreement didn’t expressly allow for classwide arbitration as an option and that under the Supreme Court’s precedent in Stolt-Nielsen v. AnimalFeeds, a court can’t compel class arbitration when an agreement is silent on that proceeding. But the appellate court found that the agreement was “ambiguous” on the matter of class arbitration. It then gave priority to California’s state law that says ambiguous contract clauses should be interpreted in favor of the non-drafter — in this case, the plaintiff employee class.

In its majority opinion, the Supreme Court rebuked the 9th Circuit for applying the California policy to supersede the Federal Arbitration Act. The majority also criticized the very concept of class arbitration, which it said forfeited the efficiency of arbitration under the FAA.

“Class arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration,” wrote Chief Justice John Roberts for the majority. “The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.”

Micah Dawson, an associate at the Denver office of labor and employment firm Fisher Phillips, said the Lamps Plus decision is “beneficial for employers who have arbitration agreements that do not explicitly outline class arbitration as an option, or [who] have questions about it.”

Prior to the high court ruling, the 9th Circuit’s decision had some employers adding language to their consumer or employment arbitration agreements to explicitly bar classwide arbitration, Dawson said. 

But now it appears employers can leave those provisions silent on classwide arbitration and still avoid it if they choose.

“It’s kind of odd in that the practical takeaway [from Lamps Plus] is you can be lazy,” said John Doran, a member at the Phoenix and Scottsdale offices of Sherman & Howard. “Employers don’t need to run back and revise their arbitration agreements to ensure that classwide arbitration is not an option.”

Class arbitration is rare, and “it unfortunately works a lot like class action litigation,” Doran said. While class arbitration generally forfeits the speediness and cost-savings of individual arbitration for employment claims, there are situations in which an employer would prefer to have that avenue open. If classwide arbitration or litigation is blocked off, “is the employer ready to withstand a deluge of individual arbitration claims instead of litigating them?” Doran said. “We hear from time to time from very experienced plaintiffs’ counsel saying, ‘Fine, if you don’t want class arbitration, we’re going to file 50,000 individual arbitrations against you.’”

Doran said “the smart takeaway” for employers is to sit down and take a look at their legal risk, deciding whether or not it makes sense to arbitrate certain cases as opposed to letting them go to court.

Dawson said Lamps Plus is another Supreme Court decision that “highlights the importance to ensure that your arbitration agreements are specific to your needs or anticipated needs.” That’s true of any agreement between employers and employees, he added, including offer letters and those pertaining to trade secrets.

— Doug Chartier

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