U.S. Supreme Court Restricts Class Arbitration

The U.S. Supreme Court has issued another favorable and important decision on arbitration, declaring that an employer’s arbitration agreement cannot be read to permit class arbitration unless the parties clearly agree to class arbitration. In recognizing “a crucial difference” between class and individual arbitration claims, the Court has significantly strengthened arbitration as a viable dispute resolution mechanism.

The case, Lamps Plus, Inc. v. Varela, began when an employee filed a class action lawsuit against his employer over a data breach. The employer argued that the employee’s lawsuit must be dismissed because of its arbitration agreement with the employee and sought to compel arbitration of the employee’s claims on an individual basis. The trial court dismissed the lawsuit but permitted the employee to proceed to arbitration on a class-wide basis. The Ninth Circuit Court of Appeals agreed with the trial court, finding that the employer’s arbitration agreement was ambiguous as to whether class arbitration claims were permitted.

The Supreme Court overturned the Ninth Circuit Court. The Court found that “[c]lass arbitration is not only markedly different” from individual arbitration, “it also undermines the most important benefits of that familiar form of arbitration.” It explained that class arbitration “sacrifices the principal advantage of arbitration-its informality-and makes the process slower, more costly, and more likely to generate procedural morass than final judgment” — i.e., more like “the litigation it was meant to displace.” Moreover, it “introduce[s] new risks and costs for both sides,” and “raises serious due process concerns by adjudicating the rights of absent members of the plaintiff class- again, with only limited judicial review.” Given these facts and because arbitration is “strictly a matter of consent,” a court “may not infer consent to participate in class arbitration absent an affirmative contractual basis” for concluding that the parties agreed to class arbitration. Silence and ambiguity in the arbitration agreement is not enough; instead, to require class arbitration, a court must find that the parties’ arbitration agreement expressly authorizes class claims.

This common-sense decision is incredibly important to restoring arbitration as a viable dispute resolution mechanism. While an employer can choose to agree to class arbitration, those wishing to avoid such complexities in arbitration have a solid path to follow in drafting their agreements. If you have questions about this decision or would like us to review your arbitration agreements, please contact a KZA attorney.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.