Supreme Court Strikes Down Classwide Employment Arbitration Claim

Author: David B. Weisenfeld, XpertHR Legal Editor

April 29, 2019

The Supreme Court has held that employees may not compel their employer to face classwide arbitration when an agreement is ambiguous as to whether the parties agreed to submit to class arbitration. The Court's 5-4 ruling in Lamps Plus, Inc. v. Varela, which divided along ideological lines, is the latest in a series of close decisions permitting companies to bar class actions both in court as well as in arbitration.

The case involved a hacker tricking an employee into disclosing the tax information of about 1,300 company employees. After a fraudulent federal income tax return was filed in the name of Lamps Plus employee Frank Varela, he filed a class action lawsuit in federal district court.

Varela had signed an arbitration agreement when he starting working at the company. But Lamps Plus sought to compel arbitration on an individual - rather than classwide - basis. Varela's arbitration agreement stated:

Arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.

The 9th Circuit Court of Appeals read that language against the employer. But in reversing, the Supreme Court finds the agreement to be ambiguous and holds there was no contractual basis for compelling class arbitration.

Writing for the majority, Chief Justice John Roberts said, "Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis." He added that the principal advantages of arbitration - speed, simplicity and inexpensiveness - would be lost if the Court inferred consent and allowed class arbitration.

During the arguments in the case, Chief Justice Roberts had called class arbitration a "poison pill" that is fundamentally inconsistent with arbitration.

In dissent, Justice Ruth Bader Ginsburg said the Federal Arbitration Act (FAA) was not designed to govern contracts in which one of the parties, the employee, has little bargaining power. Addressing the employer's negligence that led to the data breach, she wrote, "The widely experienced neglect he [Varela] identified cries out for collective treatment."

In May 2018, the Supreme Court ruled in Epic Systems v. Lewis that companies may compel their employees to arbitrate workplace disputes individual rather than as part of a class action.

But in a separate arbitration case this year, the Court handed a rare victory to workers in ruling that while a court's authority to compel arbitration under the FAA may be considerable, it is not unconditional and does not extend to all private employment contracts.