Supreme Court to Further Clarify Class Arbitration Issues

Appeals court relied on California law to resolve perceived ambiguities

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​Frank Varela fell victim to a phishing scheme at work. Hackers pretending to be his employer got an employee to send workers' private information and then filed fraudulent tax returns. Varela sued his employer, Lamps Plus, on behalf of himself and other victims.

Lamps Plus fought the suit, saying Varela should bring his claims in arbitration as an individual, not a class, and pointed to an agreement Varela signed when he started working there. But Varela says he didn't waive the right to bring class claims under the arbitration agreement.

So who's right?

"The question is whether or not an employer can be forced into class arbitration simply because there is broad language in the arbitration agreement that appears to cover all claims," noted Edward Berbarie, an attorney with Littler in Dallas. 

The 9th U.S. Circuit Court of Appeals said Varela could bring his class claims in the arbitration setting, and the U.S. Supreme Court has decided to weigh in.  

The case is mostly about how arbitration agreements are drafted, said Scott Witlin, an attorney with Barnes & Thornburg in Los Angeles.

In addition to hearing this issue, the high court is expected to deliver an opinion soon in another set of cases that ask whether class-action waivers in arbitration agreements violate the National Labor Relations Act. [Update: The U.S. Supreme Court ruled 5-4 on May 21 that arbitration agreements waiving class actions and providing for individualized arbitration proceedings are enforceable.]

"At the end of the day, I don't think the Supreme Court is going to say employers can't have arbitration agreements; the question is about how to properly draft the agreements so that employers are not inviting class arbitration," Witlin added.

As case law evolves in this area, employers will need to review their arbitration agreements to ensure compliance with federal and state law.

Broad Language

Varela filed a class-action lawsuit alleging that the data breach resulted in violations of California law.

The company argued that Varela should have to arbitrate his claims individually—not on behalf of a class—in accordance with a valid arbitration agreement. Varela argued that, if the agreement was enforceable, he should be allowed to seek class representation (though it would ultimately be up to the arbitrator to decide whether to certify the class).

Through the agreement, the plaintiff:

  • 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 U.S. Circuit Court of Appeals affirmed.

The 9th Circuit said it's possible to interpret the agreement in more than one way, and under California contract law, ambiguities must be interpreted against the party who drafted the agreement—which is Lamps Plus in this case.

High Court Precedent

On appeal, Lamps Plus asked the Supreme Court to decide "whether the Federal Arbitration Act [FAA] forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements."

Federal law strongly favors arbitration, and several other appellate courts have held that the FAA pre-empts state law on this issue.

Lamps Plus argued that the 9th Circuit's opinion departed from a prior Supreme Court decision, which held that a party can't be compelled to submit to class arbitration "unless there is a contractual basis for concluding that the party agreed to do so." The high court has said that there is a fundamental difference between individual and class arbitration, and so courts may not presume such consent from "mere silence on the issue of class arbitration" or "from the fact of the parties' agreement to arbitrate."

The 9th Circuit reasoned that the "contractual basis" for concluding that the parties consented to class arbitration is the California contract principle that ambiguities should be construed against the drafter.

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

The big issue in the present case is whether a court can elevate state contractual principles above the FAA, Berbarie said. On a practical level, he said, if the court finds that state contract principles can override the mandates of the FAA, it would be very difficult for employers with multistate operations to use one arbitration agreement nationwide.

Employers should note, however, that the Supreme Court justices could issue a ruling essentially saying that they already decided this issue in the prior case, Witlin noted. 

The case is Lamps Plus Inc. v. Varela, U.S., No. 17-988 (petition granted on April 30, 2018).

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