Supreme Court Sides Against Class Arbitration

In a continuing trend, the Supreme Court limits the ability of signatories to arbitration agreements to pursue class actions rather than individual arbitrations.

** LEGAL UPDATE **

For the past decade, the U.S. Supreme Court has been expanding the scope of arbitration agreements, making them easier to enforce. Part of that expansion has involved limiting the ability of people who sign arbitration agreements to pursue subsequent disputes in the form of class actions rather than individual arbitrations.

In the 2019 case of Lamps Plus Inc. v. Varela, the Court continued its pro-employer trend.

How Lamps Plus Ended Up in Court

Lamps Plus is a company that sells light fixtures and related products. Because of a cyber-hacking incident, the company was defrauded into sharing certain tax information of over 1,000 employees. One of those employees was a man named Frank Varela.

Like many employees, Varela had signed an arbitration agreement when he first began working for Lamps Plus. This is essentially a contract saying that two parties won't take any future disputes to court, but will instead entrust the resolution of their dispute to a third-party neutral, who can render a binding decision.

Despite the arbitration agreement, Varela was frustrated over the leaded data, and sued Lamps Plus in a federal trial court in California. He did so together with other similarly situated employees whose data was also leaked, in the form of a class action.

Lamps Plus filed a motion to compel (force) arbitration to be conducted on an individual basis, arguing to the court that each employee would need to arbitrate its claims against the company rather than proceeding en masse as a class of all employees.

The trial court agreed that Varela had signed an arbitration agreement, and dismissed the lawsuit. However, the court also rejected the notion that arbitrations had to be conducted individually; instead, the court reasoned, the case could proceed in arbitration on a class-wide basis. On other words, all the employees could arbitrate against Lamps Plus in a single proceeding.

Lamps Plus appealed to the U.S. Court of Appeals for the Ninth Circuit, which affirmed the trial court's decision. Because the arbitration agreement did not prohibit class arbitration, the court felt it could proceed.

Lamps Plus took the case to the Supreme Court, arguing that the Ninth Circuit’s decision contravened established precedent on arbitration law.

Supreme Court Decision a Victory for Employers

In a 5-4 decision, authored by Chief Justice Roberts, the Supreme Court reversed the Ninth Circuit and took the opposite approach, reasoning that because the arbitration agreement signed by Varela and fellow employees did not explicitly authorize class-wide arbitration, a court could not force that process.

Chief Justice Roberts pointed out that parties choose to incorporate arbitration into contracts because of the "lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” Compared to one-on-one arbitration "[c]lass arbitration lacks those benefits."

Justice Roberts further reasoned that such a cumbersome process is not what the parties would have agreed to when the contract was initiated: "Neither silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself."

The decision represents a victory for employers, establishing a default rule against class actions and class arbitrations that can create significant liability risks for companies.

Employees such as Varela will henceforth need to undertake the time and expense of hiring attorneys and proceeding against the employer through individual arbitrations, which many claimants are unlikely to actually do.

Once again, the Supreme Court has enforced and expanded the scope of arbitration. This decision fits within its past decade of similar decisions interpreting the Federal Arbitration Act to make it more difficult for parties to file class actions if they have agreed to privately arbitrate their disputes.

Effective Date: April 24, 2019