A divided U.S. Supreme Court recently gave businesses more power to send disputes into individual arbitration proceedings, siding with an employer trying to prevent its employees from pressing group claims stemming from a phishing attack. The 5-4 ruling held that courts shouldn’t allow class arbitration unless an agreement clearly authorizes that type of proceeding. It’s the latest in a string of Supreme Court decisions that have backed arbitration and helped employers avoid the costly class actions filed by employees and consumers.
In 2016, Lamps Plus fell victim to a data breach when an employee was tricked into disclosing the tax information of approximately 1,300 employees to a hacker. Subsequently, an employee, Frank Varela had a fraudulent federal income tax return filed in his name. He sued the Lamps Plus in federal district court in California alleging claims on behalf of himself and a putative class of employees. Lamps Plus moved to compel arbitration and while its motion was granted by the district court, it was on a classwide rather than individualized basis. Lamps Plus appealed to the Ninth Circuit, which affirmed utilizing a principle of California contract law based on public policy concerns. The Ninth Circuit held that because the agreement was ambiguous on the issue of class arbitration, rather than silent, that ambiguity should be construed against the drafter of the arbitration agreement.
The Supreme Court reversed the Ninth Circuit, noting the issue was whether a state contract principle, grounded in public policy, for addressing ambiguity should trump a rule of fundamental importance under the FAA that arbitration is a matter of consent. The Court underscored that “arbitration is strictly a matter of consent” when finding silence did not authorize classwide arbitration.
All four of the court’s liberal members wrote dissents. Justice Elena Kagan wrote that the majority had created a body of law whose purpose was to frustrate class actions and classwide arbitrations.
The Court’s decision is another big win for companies seeking to enforce class action waivers in their arbitration agreements or move forward with individualized arbitrations if their agreements are silent or ambiguous. Although this decision offers protection to employers with arbitration agreements silent or ambiguous as to class proceedings, employers should carefully review these agreements to ensure they include express class and collective action waivers.
For more information, contact attorney Karl Schlecht at KSchlecht@tresslerllp.com.