U.S. Supreme Court: Class Arbitration Must Be Explicitly Authorized

May 6, 2019

The U.S. Supreme Court delivered a victory to business owners on April 24, 2019, ruling that class arbitration must be explicitly authorized in arbitration agreements for employees to invoke classwide arbitration proceedings against an employer. The Court’s 5-4 decision, authored by Chief Justice John Roberts, overturns the Ninth Circuit’s conclusion that consent to arbitrate on a classwide basis can be inferred when an arbitration agreement is ambiguous, and follows directly from the Court’s previous decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), that a court may not compel classwide arbitration when an agreement is silent on the availability of such arbitration.

The case, Lamps Plus, Inc. v. Varela, stems from an employee data breach affecting approximately 1,300 employees of Lamps Plus, Inc., a California company. In 2016, a hacker tricked an employee of Lamps Plus into disclosing the tax information of approximately 1,300 Lamps Plus employees. Soon after the disclosure, Lamps Plus employee Frank Varela discovered that a fraudulent federal income tax was filed in his name. Like most employees, Varela signed an employment agreement when he began work at the company. The agreement contained an arbitration clause but was silent regarding whether the clause allowed for class arbitration. Varela filed suit against Lamps Plus on behalf of employees whose information had been compromised.

Lamps Plus sought to compel arbitration, on an individual rather than classwide basis, and to dismiss the suit. While the district court held that Varela’s complaint had to be handled via arbitration, it rejected Lamps Plus’s request for individual arbitration, and instead authorized classwide arbitration. Lamps Plus appealed, but the Ninth Circuit affirmed. The Ninth Circuit held that because the agreement was ambiguous rather than silent on the issue of class arbitration, the Supreme Court’s holding in Stolt-Nielsen was not controlling.

By a slight margin of 5-4, the Supreme Court overturned the Ninth Circuit. Applying the same reasoning set forth in Stolt-Nielsen, the Court held that, like silence, ambiguity does not provide the necessary contractual basis for concluding that parties agreed to submit to class arbitration. Chief Justice John Roberts, speaking for the majority, noted that class arbitration is “markedly different” from traditional individual arbitration, and “undermines the most important benefits” of individual arbitration. Individual arbitration provides for lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve private disputes — benefits class arbitration lacks. Because of these “crucial differences” between individual and class arbitration, the Court held that courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis — thus foregoing the benefits of individual arbitration — without an explicit contractual basis for concluding that the parties agreed to do so.

The Court’s decision reaffirms the long-standing principle underpinning the Federal Arbitration Act that consent to arbitrate — not coercion — controls. Parties cannot be forced to arbitrate claims on a classwide basis, unless explicitly authorized in unambiguous terms of the arbitration agreement.

If your business utilizes arbitration agreements, this decision illustrates the necessity of including unambiguous language in employment agreements regarding whether class arbitration is available.

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