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Did You Agree to Class-Wide Arbitration? Only If Your Agreement Clearly Says So, According to the U.S. Supreme Court

Publisher: Day Pitney Employment and Labor Quarterly Update
June 28, 2019

Employers often look to resolve claims through private arbitration rather than public litigation. When arbitration agreements are challenged, courts must interpret their terms. Last year, the Supreme Court ruled that employers could require employees to sign arbitration agreements waiving their right to class and collective litigation. More recently, the Supreme Court has ruled that class claims can only be arbitrated if class-wide arbitration is clearly authorized in the arbitration agreement.

In Varela v. Lamps Plus, Inc., Frank Varela signed an arbitration agreement at the start of his employment. After a hacker obtained the tax information of approximately 1,300 employees, Varela, despite having signed the arbitration agreement, filed a class action against his employer in federal court in California on behalf of all employees affected by the data breach. In response, the employer moved to compel arbitration of Varela's claims on an individual basis.

The district court agreed that arbitration was mandatory, but held there could be a class-wide arbitration of Varela's claim. On appeal, the U.S. Court of Appeals for the Ninth Circuit agreed with the district court's decision. Under a 2010 U.S. Supreme Court decision—Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp.—a court may not compel class-wide arbitration where the arbitration agreement is "silent" on its availability. However, the Ninth Circuit reasoned that Stolt-Nielsen did not apply because the arbitration agreement was not silent on the issue, but rather merely "ambiguous." Following a California state-law rule that ambiguity in contracts should be construed against the party who wrote the contract (in this case, the employer), the Ninth Circuit held in favor of Varela and required the arbitration to proceed on a class-wide basis. The U.S. Supreme Court then agreed to review the case.

The Supreme Court accepted the Ninth Circuit's finding that the arbitration agreement was "ambiguous," but it did not agree that the ambiguity required class-wide arbitration. The Court grounded its analysis in the "fundamental difference" between class-wide arbitration and individual arbitration. While individual arbitration accomplishes the goals of "lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes," class-wide arbitration sacrifices those goals with a slower, more costly process that more closely resembles litigation than arbitration. For that reason, in the 2010 Stolt-Nielsen case, the Court held that there must be a "contractual basis for concluding that the party agreed to [class-wide arbitration]," and silence on the issue would not suffice. In Lamps Plus, the Court applied and expanded on this same reasoning, holding that "[n]either silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself." (emphasis added).

The Supreme Court's decision will likely be welcomed by employers, as it helps curtail the threat of large, class-wide arbitrations and the extreme risk and exposure associated with them. However, as previously reported, public opinion currently weighs against mandatory arbitration (causing some employers to abandon their arbitration policies altogether), and certain states—including New Jersey and New York—have attempted to limit mandatory arbitration through legislation. Accordingly, employers should revisit their arbitration agreements to ensure that they comply with both federal and state law, and to ensure that the language in those agreements does not permit arbitration on a class-wide basis.



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