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Supreme Court Makes Class Arbitration Decision More Difficult

5-4 decision rejects traditional principles of contract interpretation

In a very recent decision, the United States Supreme Court made class-action arbitration more difficult for plaintiffs to achieve. The 5-4 ruling, Lamps Plus, Inc. v. Varela (decided on April 24, 2019), did not allow a group of employees to arbitrate on a class basis because their employment contract was ambiguous on the issue of class arbitration.  This ruling declined to apply the general common law principle that ambiguous terms in a contract should be construed against the party that drafted the contract (in this case, the drafter was the employer).

Here are the underlying facts of the case: Lamps Plus sells light fixtures and related products. In 2016, a hacker successfully impersonated a Lamps Plus company official and tricked a real employee into divulging the tax information of approximately 1,300 Lamps Plus employees. The hacker used this information to file a fraudulent federal income tax return in the name of plaintiff Frank Varela and presumably other Lamps Plus employees as well.

Varela’s employment contract contained an arbitration agreement, but the agreement said nothing about class-wide arbitration.  Despite the arbitration clause, Varela sued Lamps Plus in federal court in California, bringing state and federal claims on behalf of a putative class of employees whose confidential information had been exposed. Lamps Plus moved to compel individual arbitration. The district court compelled arbitration and dismissed the lawsuit without prejudice. However, the district court authorized class arbitration, not the individual arbitration that Lamps Plus sought .

The Ninth Circuit affirmed this ruling, reasoning that the agreement was ambiguous as to class arbitration, and therefore class arbitration should be allowed because ambiguities are to be construed against the drafting party. Lamps Plus’ appeal to the Supreme Court followed.

The Supreme Court delivered a 5 to 4 decision reversing the Ninth Circuit’s decision and remanding the case for further proceedings.  In the majority opinion, Chief Justice John G. Roberts Jr. wrote that ambiguity, as is the case with silence, does not provide “a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself.” Chief Justice Roberts reasoned that class arbitration attracts new risks and costs for both parties, which were not contemplated by the ambiguous arbitration agreement.

Justice Clarence Thomas delivered a concurring opinion, and all four dissenting justices filed their own dissenting opinions. In dissent, Justice Ruth Bader Ginsberg sought to emphasize how, in her view, the Court has once again “treacherously . . . strayed from the principle that arbitration is a matter of consent, not coercion.” In Justice Ginsberg’s opinion, the facts of this case “cry out for collective treatment.”

Takeaway: Going forward, only agreements specifically and clearly providing for class arbitration should be able to serve as the basis for class arbitration. Businesses are unlikely to find class arbitration desirable for inclusion in their employer or consumer agreements. Nonetheless, the four dissenting opinions show some judicial hostility will exist to this ruling, so businesses should consider it an opportunity to review the language of their agreements to ensure clarity with respect to accepting or rejecting class arbitration.

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