SCOTUS Restricts Class Arbitrations

By John Alan Doran

In yet another pro-arbitration, employer-friendly decision, the U.S. Supreme Court ruled this morning that an individual cannot pursue claims in arbitration on behalf of a class unless the arbitration clause involved clearly and unequivocally permits class treatment of claims. Lamps Plus v. Varela, 17-988 (April 24, 2019).

Varela worked for Lamps Plus when a hacker successfully obtained tax information from Lamps Plus for some 1,300 employees, including Varela.  Varela filed a class action in federal court.  Lamps Plus moved to compel arbitration under Varela’s employment agreement, which included mandatory arbitration.  The District Court compelled arbitration, but did so on a class basis, forcing Lamps Plus to defend Varela’s entire class action in an arbitral forum, rather than simply defending Varela’s own personal claim.  The Ninth Circuit predictably upheld the District Court’s ruling, concluding that because Varela’s arbitration agreement was ambiguous with respect to class arbitration, the agreement must be construed against Lamps Plus and class arbitration must be inferred. 

In a 5-4 decision, the Supreme Court reversed the decisions below.  The Court criticized the Ninth Circuit for applying California contract law doctrines that undermine the powerful presumption that parties are bound to arbitrate only in the manner to which they specifically agreed.  The Court noted the significant problems posed by class-wide arbitration, most of which undermine the very purposes of arbitration in the first place.  Against this background, the Court held that parties to an arbitration agreement can only be forced into arbitration of class claims when the arbitration agreement unambiguously provides for class arbitration.  Neither silence nor ambiguity on the subject will suffice to infer the parties’ agreement to class arbitration. 

At a time when Congress, many states (especially California, over, and over, and over…), the media, and some large employers are questioning the future viability of mandatory arbitration outside the collective bargaining setting, our Supreme Court continues to emphasize the values of, and strong federal policy favoring arbitration agreements.  Lamps Plus stands for the proposition that a court cannot infer consent to class arbitration when an arbitration agreement is silent or ambiguous on the topic.  That being said, employers can avoid the question altogether by simply prohibiting class claims in their arbitration agreements.