Supreme Court Gives Employers Another Tool to Fend Off Class Actions

Earlier this week, the U.S. Supreme Court held that an arbitration agreement cannot be read as permitting class arbitration unless the agreement clearly and explicitly so provides; it is not enough that the agreement is susceptible to the interpretation that it permits class arbitration. This holding gives employers another tool to fend off class actions and compel alleged class claims to individual arbitration.

The Facts

In 2016, an employee of lighting retailer Lamps Plus allegedly fell victim to a phishing scheme and unwittingly disclosed the tax information of over 1,000 of the company’s employees to the perpetrator of the scheme. The plaintiff in the underlying lawsuit, Frank Varela (“Varela”), was one of numerous employees who had a fraudulent tax return filed in his name in the wake of the incident.

Although Varela had signed an arbitration agreement as part of his employment, he nevertheless filed suit against his employer in federal court in California, seeking to represent a putative class of other Lamps Plus employees. Lamps Plus moved to compel individual arbitration and to dismiss the lawsuit; the district court agreed to compel arbitration, but did so on a classwide basis.

The Ninth Circuit affirmed, finding that the arbitration agreement was ambiguous on the permissibility of classwide arbitration, and applied California’s general rule of contra proferentem to construe contractual ambiguities against the drafter. The Supreme Court granted the employer’s petition for certiorari.

The Decision

In a 5-4 decision, the Supreme Court reversed and held that: “[c]ourts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.” The majority recognized that permitting arbitration to proceed on a classwide basis fundamentally undermined the benefits of arbitration – “lower costs, greater efficiency and speed.” The Court thus remanded to allow employees to pursue claims regarding theft of their personal nonpublic financial information in individual arbitration.

The decision extends Supreme Court precedents enforcing arbitration agreements despite efforts by plaintiffs to undermine the force of those agreements. Those decisions include Stolt-Nielsen, in which the Court held that a court cannot compel class arbitration when the arbitration agreement in question is “silent”, as well as Concepcion and Epic Systems – which, respectively, upheld the use of class action waivers in consumer and employment arbitration agreements.

Takeaway for Employers 

Lamps Plus is a clear victory for employers. The Supreme Court has now imposed a clear statement rule where class arbitration is concerned: an agreement that is ambiguous or silent as to whether class arbitration is available cannot provide the necessary contractual basis for concluding that the parties agreed to class arbitration. Now, an employee who signs an enforceable arbitration agreement will be bound to arbitrate on an individual basis unless the agreement explicitly authorizes the employee to arbitrate on a class-wide basis.  Nonetheless, this case serves as a good reminder for employers to review their arbitration agreements for clarity and to include class action waivers in such agreements.

This article is re-printed from an article that appeared in the National Law Review Irene M. Rizzi an Mark D. Taticchi on April 26, 2019.