High Court Cases Could Continue to Shape Employment Arbitration

Justices heard oral argument in two arbitration cases

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​The U.S. Supreme Court decided last term that class-action waivers in arbitration agreements don't run afoul of federal labor law—and, this term, the justices will continue to shape the scope of arbitration agreements. Employers that use such agreements should periodically review their policies as this area of law continues to develop.

The high court heard oral arguments Oct. 29 in two arbitration cases. One case concerns whether an arbitration agreement that doesn't specifically mention class claims can be interpreted under state contract law to authorize classwide arbitration. The other case deals with whether a judge or an arbitrator should decide if a dispute is covered by an arbitration agreement.

The answers could have a significant impact on employment arbitration. Employers seeking to compel arbitration generally prefer to get the whole case to arbitration as quickly as possible, said Adam Sencenbaugh, an attorney with Haynes and Boone in San Antonio and Austin, Texas.

"Many employers determined that arbitration agreements are economical because they purportedly reduce the cost of litigation, and class-action waivers have become a key component of arbitration agreements," said Lauren Novak, an attorney with Schiff Hardin in Chicago.

"On a big-picture level, defending a class action in arbitration can be daunting because there are typically fewer procedural safeguards than are available in court," noted Megan Walker, an attorney with Fisher Phillips in San Diego. Employers who wish to avoid class arbitration should include a waiver in their agreements to avoid the question, she suggested.

Class Arbitration

Though the Supreme Court gave the green light to class-action waivers, it's not always clear what happens if the arbitration agreement doesn't include a waiver. Can the court allow a case to proceed to arbitration on a classwide basis? The Supreme Court justices are considering this question in Lamps Plus Inc. v. Varela, U.S., No. 17-988.

The plaintiff in this case brought a data-breach class action against his employer, Lamps Plus, but the employer argued that the plaintiff signed an arbitration agreement requiring him to bring his claims in arbitration as an individual, not a class.

The agreement contained general language stating that "arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings."

The 9th U.S. Circuit Court of Appeals found that the plaintiff signed a valid arbitration agreement but could bring the classwide claim in arbitration, particularly because the agreement stated that it applied to all claims that "would have been available to the parties by law," and class claims are available by law. Lamps Plus challenged that ruling and is looking to enforce one-to-one arbitration.

Federal law generally favors arbitration, but such agreements must be valid under the applicable state's contract laws and should be evaluated like any other contract.

In this case, the plaintiff worked in California and, under California contract law, the party that drafted the agreement, Lamps Plus, must word the terms clearly for the other party to be bound by them, the 9th Circuit reasoned.

[SHRM members-only HR Q&A: What are the California rules regarding mandatory arbitration agreements, and how do they differ from federal law?]

The state-law interpretation rules that allowed for this case to be compelled to class arbitration are not unique to California or to arbitration agreements, Walker said. They are standard contract interpretations that courts across the country apply to all types of contracts. However, under the Federal Arbitration Act (FAA), courts can't treat arbitration provisions less favorably than other contract terms.

"Usually ... the Federal Arbitration Act [comes] into play when you're afraid that the state law is discriminating against arbitration agreements," said Justice Elena Kagan at oral argument.

Chief Justice John Roberts Jr. opposed an interpretation that would expand the availability of class arbitration, Sencenbaugh noted. Roberts mused that the FAA would not require enforcing agreements that were "fundamentally inconsistent with arbitration itself."

A win for Lamps Plus would give employers another tool to evade classwide arbitration, especially if their arbitration agreements were not carefully drafted to prohibit class procedures, Sencenbaugh said.

Drafting is the key for employers. As pointed out by Justice Ruth Bader Ginsburg, if employers work with their attorneys to draft arbitration agreements with enforceable class-action waivers, a finding for the employee in Lamps Plus will likely have little impact on future litigants, Walker noted.

'Wholly Groundless' Claims

Some arbitration agreements include a clause stating that an arbitrator must decide the threshold question of whether a dispute should be heard by an arbitrator or a court. But what if the answer is clear that the issue is not covered by the arbitration agreement? Do judges have the power to decide to keep the case in court? In Henry Schein Inc. v. Archer and White Sales Inc., U.S. No. 17-1272, the justices will consider what happens if the claim that the case should be arbitrated is "wholly groundless."

Despite being a commercial arbitration case, the court's interpretation of the FAA is equally applicable in the employment context, said Joshua Nadreau, an attorney with Fisher Phillips in Boston.

The court struggled at oral argument with what it means to delegate decisions about arbitrability to the arbitrator, Sencenbaugh said. Justices Stephen Breyer and Sonia Sotomayor questioned what remedies were available to parties who were subject to an arbitrator's groundless decision that a particular dispute was subject to arbitration. Several justices were skeptical that the court could ever articulate a standard for when a dispute over arbitrability was wholly groundless, he added.

In the last decade, the court has ruled in favor of expansive readings of the FAA and limited attempts to curtail the use of arbitration, Nadreau said. "My guess is that the court will continue to do so here and reject the 'wholly groundless' exception."

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