Supreme Court Blocks Class-Wide Employment Arbitration Due to Vague Contract Language

May 1, 2019 | By

Over the past several years, the U.S. Supreme Court has been expanding the enforceability of arbitration agreements and making it easier for employers to keep employment claims out of court.  In its landmark Epic Systems ruling in 2018 (discussed by HR Legalist here), the Court approved contract language that would require employees to arbitrate their employment disputes individually, and would prevent them from joining a class action arbitration claim.  On April 24, 2019, the Court issued another opinion rejecting an employee’s attempt to arbitrate claims on behalf of a broader class of employees.

The case, Lamps Plus, Inc. v. Varela, was originally filed by an employee of Lamps Plus, a company that sells lighting fixtures and related products, as a class action lawsuit in federal court in California.  The underlying claim involved a 2016 incident when a hacker used social engineering to obtain the tax information of approximately 1,300 Lamps Plus employees.  Mr. Varela sought to bring his lawsuit on behalf of all of the employees whose information was disclosed.  However, Lamps Plus filed a motion to compel arbitration, on an individual basis, based on the arbitration agreement contained in Mr. Varela’s employment agreement.  The trial court granted the motion to compel arbitration, but originally allowed the arbitration to proceed on a classwide basis.  In other words, while Mr. Varela and his fellow employees could not pursue their claims in court, they would still be permitted to pursue their claims together through arbitration.

On appeal, the U.S. Court of Appeals for the Ninth Circuit affirmed the trial court’s decision allowing classwide arbitration.  The Ninth Circuit reasoned that the agreement that Mr. Varela signed was ambiguous regarding whether employees could arbitrate their claims together as part of a class.  Therefore, the Ninth Circuit applied a common rule of contract interpretation: that “all ambiguities are construed against the drafter” (in this case, Lamps Plus).  Furthermore, the Ninth Circuit held that the Supreme Court’s 2010 ruling in the Stolt-Nielsen case (which held that a party to an arbitration agreement cannot be forced into classwide arbitration proceedings unless the contract shows that the party agreed to do so) did not apply to Mr. Varela’s claims.

The Supreme Court granted Lamps Plus’s petition to review the case, reversed the Ninth Circuit’s ruling, and ruled that Mr. Varela could not force Lamps Plus to participate in classwide arbitration.  In a 13-page opinion, a 5-member majority of the Court, led by Chief Justice John Roberts, held that the Stolt-Nielsen case controlled, and that an ambiguous agreement could not be used to compel class arbitration.  The Court pointed to the Federal Arbitration Act (“FAA”) which contemplates “traditional individualized arbitration,” and disfavors class arbitration.  The majority stated that where state law contract interpretation rules conflict with the FAA, the FAA controls.  Otherwise, the Court reasoned that the parties would lose the “principal advantages” of arbitration: speed, simplicity and inexpensiveness.

Notably, each of the four dissenting justices in Lamps Plus filed separate dissenting opinions, totaling 31 pages.  Justice Ginsburg’s dissent characterized the majority’s ruling as an effort to deny employees and consumers “effective relief against powerful economic entities” such as employers and large corporations.  If the balance of the Court shifts away from its current conservative majority, Lamps Plus could be overturned or limited.  Thus, employers who wish to prevent class arbitration should ensure that their arbitration agreements are clear and unambiguous.