In a victory for employers, the U.S. Supreme Court ruled Wednesday in Lamps Plus, Inc. v. Varela that courts cannot order an arbitration to be conducted on a class-wide basis unless there is an arbitration agreement that expressly authorizes class arbitration.
In 2016, a hacker tricked an employee of Lamps Plus, Inc., into disclosing tax information of about 1,300 company employees. After a fraudulent federal income tax return was filed in his name, Lamps Plus employee Frank Varela filed a putative class action against Lamps Plus in federal court on behalf of all affected employees. Lamps Plus sought to compel arbitration—on an individual rather than a classwide basis— based on the company’s arbitration agreement with Varela and to dismiss the suit. The district court rejected the individual arbitration request, but authorized class arbitration and dismissed Varela’s claims. Lamps Plus appealed, arguing that the district court erred by compelling class arbitration, but the Ninth Circuit (which covers California and Arizona) affirmed. The Ninth Circuit ruled that because the agreement in this case was ambiguous on the issue of class arbitration, and California contract law holds that contractual ambiguities should be construed against the drafter, the district court did not error in compelling class arbitration.
In a 5-4 decision split along partisan lines, the Supreme Court affirmed that courts may not infer consent to participate in class arbitration; there must be an express agreement of the parties. The Supreme Court found that the Ninth Circuit’s approach is inconsistent with the “foundational [Federal Arbitration Act] principle that arbitration is a matter of consent.”
The decision is a welcome one to be sure for employers. Nevertheless, employers are encouraged to include clear language expressly prohibiting class arbitrations in their arbitration agreements.
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