Supreme Court Says Agreement to Arbitrate Classwide Claims Must Be Clear

 

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The U.S. Supreme Court sided with an employer on April 24 by ruling that a worker needs to individually arbitrate his claim against the company rather than bring a classwide claim.

In an arbitration agreement, employers and workers can agree in advance to have a neutral third party (an arbitrator) decide legal claims rather than suing in court. Arbitration is sometimes viewed as faster and more cost-effective than litigation.

In Lamps Plus Inc. v. Varela, the agreement between the employee and employer included broad language but did not specifically address class claims. The employer interpreted the agreement to require individual arbitration under the Federal Arbitration Act (FAA). The 9th U.S. Circuit Court of Appeals, however, sided with the California-based employee. California contract law requires ambiguities to be interpreted against the party who drafted the agreement, which is Lamps Plus in this case, the 9th Circuit held.

The Supreme Court reversed the appeals court ruling in a 5-4 decision and held that, under the FAA, an ambiguous arbitration agreement can't provide the contractual basis necessary to conclude that the parties agreed to submit to class arbitration.

The shift from individual to class arbitration is a fundamental change that sacrifices the principal advantage of arbitration and greatly increases risks to defendants, the high court said.

A Win for Employers

"The Lamps Plus decision is a clear win for employers," said Lauren Novak, an attorney with Schiff Hardin in Chicago. "The decision is important because it means that employers will maintain the benefits of individual arbitration and avoid the risks of class arbitration unless they agree to it."

"If the parties wish to consent to class arbitration, then such consent ought to be included expressly in the parties' agreement," said Bryan Keane, an attorney with Dorsey & Whitney in Minneapolis.

Many states, not just California, have contract interpretation rules providing that an ambiguity in a contract can be held against the drafter. In other words, under those rules, if a court finds that there is an ambiguity as to whether the parties intended an arbitration agreement drafted by the employer to include class claims, courts could compel class arbitration, explained Darcey Groden, an attorney with Fisher Phillips in San Diego. "The Supreme Court has cut off that argument for employees seeking to compel arbitration of class claims."

Ambiguous Agreement

Frank Varela fell victim to a phishing scheme at work. Hackers pretending to be from Lamps Plus got an employee to send workers' private information and then filed fraudulent tax returns. So Varela sued Lamps Plus on behalf of himself and other victims, alleging that the data breach resulted in violations of California law.

The company argued that Varela should have to arbitrate his claim individually—not on behalf of a class. Under the terms of the agreement, Varela:

  • Waived any right to file a lawsuit or other civil action or proceeding relating to his employment.
  • Waived any right to resolve employment disputes through trial by judge or jury.
  • Acknowledged that arbitration would be in lieu of any and all lawsuits or other civil legal proceedings relating to his employment.

A district court agreed that the parties entered into a valid agreement and that the case should be decided by an arbitrator instead of a court. However, the district court permitted Varela to seek classwide arbitration, and the 9th Circuit affirmed.

High Court Reverses

The Supreme Court disagreed with the 9th Circuit. The FAA requires courts to "enforce arbitration agreements according to their terms," the majority said. Courts may rely on state contract principles to interpret such agreements, but state law is pre-empted if it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives" of the FAA.

In a prior case, the high court ruled that because of the "crucial differences" between individual and class arbitration, there is "reason to doubt the parties' mutual consent to resolve disputes through classwide arbitration."

In that case, the justices held that when an agreement is silent about class arbitration, courts may not infer consent. "Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to sacrifice the principal advantage of arbitration," wrote Chief Justice John Roberts Jr. for the court. Justices Samuel Alito Jr., Neil Gorsuch, Brett Kavanaugh and Clarence Thomas joined the majority.

The benefits of individual arbitration include "lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes," according to the court.

The "decision is a big win for employers and for the critical principle that class arbitration requires consent," said Robert Friedman, an attorney with Littler in Dallas.

Justice Ruth Bader Ginsburg wrote in dissent that the Supreme Court "has routinely deployed the law to deny to employees and consumers effective relief against powerful economic entities." Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor also disagreed with the majority.

"[T]he majority today invades California contract law without pausing to address whether its incursion is necessary," Sotomayor wrote in her dissent against the ruling.

Drafting Agreements

Employers will now have more confidence that they can require individual arbitration and that their intention to do so will be upheld by the courts, said Scott Witlin, an attorney with Barnes & Thornburg in Los Angeles. However, he noted, employers should be clear if they don't intend to arbitrate claims on a classwide basis and careful not to inadvertently authorize it. Some judges are hostile to arbitration in general and may look for a way to invalidate the agreement, he said.

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Groden also recommends having an explicit class-action waiver. The law could change, or the Supreme Court could change its view. "While employers seem to be safe now even absent such a waiver as long as they have not agreed to class arbitration, better safe than sorry," she said. 

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