Employers Hope Supreme Court Will Close the Door on Class Arbitration
Mandatory arbitration long has been a fixture in many employment agreements but there has been confusion over whether this includes the right to bring claims by a class. The consequences are immense because once class certification is granted, settlements almost always follow with plaintiffs’ lawyers pocketing millions of dollars in fees while their class clients get pennies and coupons. You might think of class certification as the poison pill of arbitration.
But relief for employers may be forthcoming. I believe the U.S. Supreme Court is about to close the door on class arbitration in a potentially groundbreaking case, Lamps Plus v. Varela. The high court heard arguments in the case Oct. 29, 2018, and a decision is expected in the spring of 2019.
Hacked W-2s led to employee claim
Lamps Plus, a California lighting manufacturer and retailer, was the victim of a phishing attack in 2016 in which a hacker obtained copies of employees’ W-2 forms. Frank Varela, an employee, filed a claim against the company in U.S. District Court in California and sought class certification for employees affected by the breach. Lamps Plus told the court that Varela had signed an employment contract where he agreed that all disputes with his employer would be decided in arbitration, which the company interpreted as individual, or bilateral, arbitration.
The legal problem is that Varela’s arbitration agreement was silent on whether employees have the right to class or collective arbitration. As the District Court saw it, that silence amounted to ambiguity and under California law any ambiguity must be construed against the drafter of an agreement. An arbitration agreement that does not expressly prohibit class actions is presumed to allow it, the court ruled. Subsequently, the U.S. Court of Appeals for the Ninth Circuit affirmed the District Court and in April 2018 the U.S. Supreme Court agreed to hear the case.
The question before the Supreme Court then is whether the Federal Arbitration Act – which never contemplated class actions when it was passed in 1925 – forecloses a state law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements. The FAA imposes certain rules on arbitration while generally deferring to state law for interpretation of such agreements. One fundamental aspect of the FAA is that arbitration must be a matter of consent by both parties. Lamps Plus argues that means affirmative consent, not inferred consent.
Another point of contention is the meaning of a phrase of legalese in Varela’s arbitration agreement that said “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.” As Varela and the Ninth Circuit see it, that means that arbitration should include any remedies available in court, such as class action. Again, it is reading a lot into the agreement to interpret that phrase as inferring that any procedure available in court should be available in arbitration.
The case has far-reaching implications. There likely are tens of thousands of employment agreements in force where the drafters failed to consider the possibility of a class. If the California interpretation holds sway, every one of those agreements can be inferred as authorizing a class.
Precedent suggests court will issue business-friendly decision
While it’s always risky to predict the mind of the Supreme Court, I can say that precedent heavily supports a business-friendly decision in favor of Lamps Plus. A line of decisions reinforces the principle that arbitration is between individuals or between an employee and employer. Other U.S. circuit courts have said repeatedly that arbitration waivers must be explicit, not inferred. Prior decisions also have resisted arguments that “adhesion” employment contracts – agreements that are signed as a condition of employment – coerce employees to sign, reasoning that they are free not to take the job.
Earlier this year, the Supreme Court firmly nixed the argument that federal labor laws trump arbitration waivers. In May 2018, the high court said in Epic Systems v. Lewis that businesses can enforce employee agreements that explicitly waive the right to class arbitration. The Epic court dismissed arguments that arbitration waivers can’t be enforced because they run afoul of the National Labor Relations Act. Instead, said the court, an agreement should be enforced according to its terms.
Several other precedents seem to favor the Lamps Plus position. In Stolt-Nielsen S.A. v. AnimalFeeds International Corp., the Supreme Court ruled in 2010 that the FAA does not allow the imposition of class arbitration on nonconsenting parties. In AT&T Mobility LLC v. Concepcion – another case from the Ninth Circuit, the Supreme Court ruled in 2011 that the FAA preempts state laws that make class action waivers unenforceable. In light of these precedents, it would be remarkable if the Supreme Court created a right to class arbitration where the parties’ agreement was silent on the topic. .
Even if the high court rules against Lamps Plus, I believe businesses will come away with a win. The court likely will lay down clear guidelines on class arbitrations, and we can then write agreements that follow the court’s instructions.
What employers can do now
In the meantime, employers should be certain that new employee agreements state explicitly that employees waive the right to class arbitrations. A reading of the Epic decision offers clear instructions on the language to use. In Florida, I also like to add a clause that says nothing in the agreement gives preference for or against the drafter – the employer – because the Lamps Plus case rests on the legal maxim that any ambiguity has to be interpreted against the drafter of the agreement. A waiver preempts that presumption.
I also recommend that companies audit existing agreements to see whether they are explicit in waiving class arbitration. But if the Supreme Court follows its prior ruling that an agreement means exactly what it says, that won’t be necessary. Regardless of which way the court goes, employers will gain clarity in writing agreements going forward. The court is likely to lay down clear guidelines on class arbitrations and employers will be able to write agreements that avoid costly litigation.