Supreme Court Deals Another Blow to Class Arbitration of Employment Claims

| Jason M. Knott

A class action allows a plaintiff to sue not only on his own behalf, but also on behalf of others similarly affected by a defendant’s misconduct. In the employment context, for example, plaintiffs can bring class actions against employers for violations of labor codes, wage and hour laws, and discrimination laws.

Over the past decade, however, the Supreme Court has limited the availability of class actions for employees who have agreed to arbitrate their claims. This week, in Lamps Plus, Inc. v. Varela, the Court drove the latest nail into the coffin of employment class actions, holding that an employee could not pursue class arbitration even though his arbitration agreement was ambiguous as to whether it permitted him to proceed on behalf of a class.
The case originated from a hacking scheme that tricked Lamps Plus into disclosing the tax information of Frank Varela and 1,300 other employees. Following the disclosure, a fraudulent tax return was filed in Varela’s name. Varela sued Lamps Plus in federal court on his own behalf and on behalf of the other employees whose information was compromised.
But Varela had signed an arbitration agreement when he joined the company, and Lamps Plus moved to compel him to arbitrate his claims, on an individual rather than a classwide basis. The district court granted the motion to arbitrate but authorized a classwide arbitration. 
Lamps Plus appealed that decision, and the Ninth Circuit affirmed. It held that the arbitration agreement was ambiguous as to whether class arbitration was prohibited, and that California’s rules for interpreting contracts required that the agreement be construed against the drafter—Lamps Plus—and in favor of class arbitration.
The Supreme Court disagreed. In a decision authored by Chief Justice Roberts and joined by the Court’s four other conservatives, it held that the Federal Arbitration Act (FAA) barred the courts below from requiring class arbitration when Lamps Plus had not clearly agreed to that procedure. Even though California’s contract interpretation rules would have led to a contrary conclusion, those state law rules were superseded by the FAA’s “foundational … principle that arbitration is a matter of consent.”
In her dissent, Justice Ginsburg warned that the Court’s decision, coupled with other opinions limiting the availability of class actions, would deprive employees of “effective relief against powerful economic entities.” She urged Congressional action to correct the Court’s “elevation of the FAA” over employees’ rights to sue in court and bring class actions.

Meanwhile, Justice Kagan disagreed that the agreement was ambiguous in the first place. The agreement said that the parties mutually consented to “the resolution by arbitration of all claims that may hereafter arise in connection with [Varela’s] employment.”  This phrasing was broad enough to cover both individual and class actions, she said.
Regardless, the majority’s decision in Lamps Plus gives employers another powerful tool for constraining class actions. Even when employers’ arbitration agreements do not specifically prohibit class arbitration, they can argue that those agreements preclude class arbitration if they do not include an express consent to that procedure. To be proactive, employers should review the Lamps Plus decision and the Court’s other recent arbitration decisions to ensure that their agreements are as clear as possible as to what claims must be arbitrated and whether class arbitration is permitted.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.