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Supreme Court strikes down classwide arbitration ruling

Supreme Court ruling

A Supreme Court ruling that says companies need not submit to class action arbitration in cases where their workers’ arbitration agreements do not explicitly allow it is a victory for employers, say experts.

In 2016, a hacker impersonating a Chatsworth, California-based Lamps Plus Inc. company official tricked a company employee into disclosing the tax information of about 1,300 other employees, according to the 5-4 ruling in Lamps Plus Inc. et al. v Frank Varela.

Soon after, a fraudulent federal income tax return was filed in the name of Lamps Plus employee Frank Varela. Like most Lamps Plus employees, Mr. Varela had signed an arbitration agreement when he started work at the company.

After the data breach, he sued Lamps plus in U.S. District Court in Pasadena, California, on behalf of a putative class of employees whose tax information had been compromised.

The District Court granted the motion to compel arbitration and dismissed Mr. Varela’s claim. But it rejected Lamps Plus’ request for individual arbitration and instead authorized arbitration on a classwide basis.

The ruling was affirmed by the 9th U.S. Circuit Court of Appeals in San Francisco. It referred to the Supreme Court’s 2012 ruling in Stolt-Nielsen SA v. AnimalFeeds International Corp., which held that imposing class arbitration on parties who have not agreed to authorize it is inconsistent with the Federal Arbitration Act. The 9th Circuit’s ruling held that the agreement was ambiguous on the issue of class arbitration.

The Supreme Court’s majority opinion, which was delivered by Chief Justice John Roberts, cited Stolt-Nielsen and said the question is whether — consistent with the Federal Arbitration Act — an ambiguous agreement can provide the necessary “contractual basis” for compelling arbitration.

“We hold that it cannot — a conclusion that follows directly from our decision in Stolt-Nielsen,” said the ruling. The statute “requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis,” said the ruling, in overturning the 9th Circuit decision, and remanding the case for further proceedings. Justice Clarence Thomas issued a concurring opinion’

In her dissenting opinion, Justice Elena Kagan, said “even if the Court is right to view the agreement as ambiguous, a plain-vanilla rule of contract interpretation, applied in California, as in every other state, requires reading it against the drafter.”

Dissenting opinions in the case were also issued by justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor.

Lamps Plus attorney Andrew J. Pincus, a partner with Mayer Brown LLP in Washington, said the ruling “made clear that to subject parties to class arbitration, they have to actually agree to it, and that you can’t use a public policy rule whose application isn’t based on the parties’ intent” to subject someone to class arbitration who has not actually agreed to it.

Mr. Varela’s attorney could not immediately be reached for comment.

Scott J. Witlin, a partner with Barnes & Thornburg LLP in Los Angeles, who was not involved in the case, said the ruling was “correctly decided in terms of the principles that were outlined in Stolt-Nielsen almost a decade ago.”

“I think the plaintiffs in this case were trying to construe some ambiguity out of what I thought was some fairly clear language and tried to create and cobble together an argument which the majority dispatched, I thought, in a pretty concise opinion,” he said. “It took three different dissents to come up with why the majority was incorrect.”

Mr. Witlin said the ruling is “going to require employers to go back and review their arbitration provisions and tweak them so that they squarely fall under the language of the court’s opinion. But I think, plainly, it was a victory for employers who generally don’t want to be enmeshed in arbitrations on a classwide basis.”

Robert F. Friedman, office managing shareholder with Littler Mendelson P.C. in Dallas, who was not involved in the case, said the ruling “was a very big victory for shareholders.”

“It was an important decision for employers because it reiterates that parties can’t be forced to class arbitration without consenting to class arbitration,” he said.

He said also, “This does not change the best practice that arbitration agreements should include express class and collective action waivers, so as to avoid any argument that somehow class arbitrations should be permitted.”



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