News
May 2, 2019

Supreme Court Further Limits Class Arbitration

Advisory

On April 24, 2019, the Supreme Court held that class arbitration may only be invoked in arbitration agreements with express consent, further limiting employees' and consumers' ability to bring class actions where they have signed arbitration agreements.

Background

The case, Lamps Plus Inc. et al. v. Varela, No. 17-988, 2019 WL 1780275 (U.S. Apr. 24, 2019) involved a dispute between an employee, Frank Varela, who alleged that his employer, Lamps Plus, failed to protect his and other co-workers' personal data from a 2016 hacking of their tax and income statements.

The Ninth Circuit ruled that ambiguous language relating to class arbitration in Varela's arbitration agreement with Lamps Plus did not prevent Varela from seeking class arbitration to resolve the dispute because California state contract principles interpret any ambiguous language against the drafter of the agreement, which in this case was Lamps Plus.

A divided 5-4 Supreme Court overruled the Ninth Circuit's decision, holding instead that consent to class arbitration could not be inferred from ambiguous language. The court cited policy justifications favoring individual arbitration, noting that individual arbitration is less expensive and more efficient as compared to class arbitration. Justices Ginsburg, Breyer, Sotomayor, and Kagan all filed vigorous dissents.

This decision comes on the heels of two other recent Supreme Court decisions favoring arbitration. In Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 200 L. Ed. 2d 889 (2018), the Supreme Court ruled that employers may include in employment contracts a requirement that employees arbitrate their disputes individually, and not as part of a class. Then, earlier this year, the court ruled in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 202 L. Ed. 2d 480 (2019) that when an agreement specifies that the question of the arbitrability of a dispute must be decided by an arbitrator, a court may not override that provision, even if it is the court's view that the argument that the arbitration agreement applies to a dispute is wholly groundless.

In response to the recent trend toward expanding companies' ability to require arbitration of disputes, several states and cities have adopted laws limiting or prohibiting mandatory arbitration of certain types of claims, such as sexual harassment claims. See, e.g., N.Y. C.P.L.R. 7515 ("Except where inconsistent with federal law, no written contract, entered into on or after the effective date of this section shall contain . . . any clause or provision in any contract which requires as a condition of the enforcement of the contract or obtaining remedies under the contract that the parties submit to mandatory arbitration to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment.").

Analysis

The Supreme Court's decision in Lamps Plus is viewed as a victory for businesses, as it allows them to avoid the risks of class arbitration unless they expressly include it in their agreements with employees and consumers.

Still, the Lamps Plus decision, in conjunction with the other Supreme Court arbitration decisions discussed, raises many interesting issues for business determining whether to enter into mandatory arbitration agreements with employees, customers or others.

For example, in the wake of Lamps Plus, it may no longer be necessary for companies to include class action waivers in their agreements—and there may be public relations reasons for excluding such clauses. Nevertheless, to avoid doubt, some companies may decide to continue to include them, as employees and consumers will almost certainly continue to find new avenues for challenging arbitration provisions as unenforceable.

Additionally, the decision has broad implications in the general dispute resolution arena, as companies have increasingly turned to arbitration to resolve their disputes. A 2018 Economic Policy Institute report, for example, found that the number of workers subject to arbitration agreements has recently doubled and now comprises more than half the nation's labor force.1This ruling may also potentially affect workplace sexual harassment claims, for which the issue of arbitration has been increasingly legislated.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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