Last year we told you about the Supreme Court’s holding in Epic Systems v. Lewis, which held that employers can require employees to arbitrate disputes with the employer individually and waive their right to pursue or participate in class or collective actions against their employer. This week the Supreme Court handed another victory to business owners in a 5-4 decision in Lamps Plus, Inc. v. Varela, holding that workers cannot join together in arbitration proceedings unless their employment contracts expressly allow it.
The case involved Frank Varela, an employee of California company, Lamps Plus, Inc. In 2016, a hacker obtained the tax information of around 1,300 employees, including Varela, who shortly thereafter found that a fraudulent federal income tax return had been filed in his name.
At the start of his employment, Varela had signed an arbitration agreement, agreeing to submit “any and all disputes, claims, or controversies” to arbitration. However, he filed suit in federal court on behalf of himself and others whose information was taken. The court found that the complaint must be handled through arbitration but could proceed as a class. The Ninth Circuit concurred, finding the arbitration agreement ambiguous and thus, according to California law, such ambiguities should be resolved against the party who drafted the contract.
The Supreme Court, however, reversed. Justice Roberts, for the majority, relied on three main concepts. First, parties must agree to arbitrate, and, pursuant to the Federal Arbitration Act (FAA), courts must enforce arbitration agreements according to their terms. Second, while courts will generally interpret arbitration agreements by applying state contract law, the FAA preempts any state law that treats arbitration contracts differently from other contracts. The Court explained that the FAA preempted California law to the extent it authorized class arbitration because the FAA requires affirmative consent from a party before it can be compelled to arbitrate class claims. Third, Justice Roberts stated that there is a “‘fundamental’ difference between class arbitration and the individualized form of arbitration envisioned by the FAA.” In particular, class arbitration “sacrifices the principal advantage of arbitration – its informality – and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” Therefore, the Court held that, without an express provision authorizing class claims in arbitration, an employer cannot be compelled to arbitrate claims on a class basis.
Justice Kagan wrote the principal dissent, disputing the ambiguity of the arbitration contract at issue and finding that Varela’s agreement to submit “any and all disputes, claims, or controversies” to arbitration included both individual and class actions. Further, even if ambiguous, the contract should have been interpreted against the drafter under California law.
In her own dissent, Justice Ginsburg stated: “in relatively recent years, [the Court] has routinely deployed the law to deny employees and consumers ‘effective relief against powerful economic entities.’” She continued: “[a]rbitration clauses, the court has decreed, may preclude judicial remedies even when submission to arbitration is made a take-it-or-leave-it condition of employment or is imposed on a consumer given no genuine choice in the matter.”
Given the continued division on this issue, employers should expect to see this topic come up again. To avoid uncertainty, employers should review their arbitration agreements to ensure they contain unambiguous language regarding class arbitration.