Employers May Not Be Forced Into Class Arbitration

Last week, the United States Supreme Court ruled that employees may not force employers into class arbitration unless their arbitration agreements explicitly provide for class arbitration. The decision in Lamps Plus v. Varela overturned the Ninth Circuit’s ruling that allowed an employee to pursue class arbitration where his agreement was ambiguous on that point. This decision adds to recent Supreme Court case law that establishes arbitration agreements as powerful tools against large-scale class and collective actions by employees.

In this recent Supreme Court case, employee Frank Varela alleged he was a victim of a data breach at his employer, Lamps Plus, that disclosed his tax information and resulted in the filing of a fraudulent income tax return. Varela filed a putative class action on behalf of himself and 1,300 other employees. Lamps Plus moved to dismiss the lawsuit and compel individual arbitration based on an arbitration agreement Varela had signed as a condition of his employment. The trial court agreed to dismiss the case and compel arbitration but held that arbitration should be conducted on a class-wide basis. Affirming, the Ninth Circuit Court of Appeals held that, because the arbitration agreement was ambiguous, it would be construed against the drafter and be read to allow for class arbitration.

The Supreme Court reversed. It held a party could not be subject to class arbitration unless there is an affirmative contractual basis for ordering class arbitration. The Court further held that ambiguity in the contract was insufficient to create that obligation, stating that “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to sacrifice the principal advantage of arbitration.”

This decision marks another win for employers. Last year, the Supreme Court ruled in Epic Systems Corp. that businesses can require employees to sign arbitration agreements with class and collective action waivers. Now, employers with arbitration agreements that are silent or ambiguous on the issue of class arbitration are also protected from the expense and pitfalls of class arbitration.

If you have any questions about this decision, please contact one of Honigman’s Labor and Employment attorneys.