The United States Supreme Court has repeatedly upheld arbitration agreements which include waivers of the right to pursue class action remedies in court. Just one year ago, in the landmark
Epic Systems
case, a 5-4 conservative majority of the Court ruled that arbitration agreements waiving an employee's right to pursue or participate in a class action lawsuit are enforceable under the Federal Arbitration Act, and do not violate federal labor law.
But in some instances where arbitration agreements were not clearly written, lower courts have ordered businesses to defend class action claims in arbitration. This can be even more expensive, and less desirable, than fighting class actions in court. In so-called "class arbitration," the arbitrator's fee alone can quickly become cost-prohibitive for small to mid-sized businesses - and the company must pay the arbitrator's entire fee in most employment cases.
Last month, however, the High Court issued another business-friendly decision which will make it more difficult for plaintiffs to compel class arbitration. In Lamps Plus, Inc. v. Varela, another 5-4 conservative majority ruled that if an arbitration agreement is "ambiguous" about the availability of class arbitration, then a court cannot order class arbitration under the Federal Arbitration Act.
In 2016, a computer "hacker" impersonating a Lamps Plus official tricked a company employee into disclosing the tax information of about 1,300 other employees. Soon after, a fraudulent tax return was filed in the name of a Lamps Plus employee named Frank Varela. Although Varela had signed a mandatory arbitration agreement, he sued the company in a Los Angeles federal district court, on behalf of himself and a class of other employees whose tax information had been compromised by the computer hack.
Lamps Plus asked the district court to order Varela to arbitrate his claims on an individual basis, rather than as a class action. The district court agreed the case had to go to arbitration, but rejected the company's request for individual arbitration, and instead authorized arbitration on a class-wide basis. After Lamps Plus appealed, our Ninth Circuit U.S. Court of Appeals upheld the district court's order.
The U.S. Supreme Court reversed the Ninth Circuit, and ruled that Lamps Plus could not be compelled to defend against class claims in arbitration. The Court found the case was governed by a 2010 decision which declared that class arbitration cannot be ordered if an agreement is "silent" on the subject.
Notably, the Lamps Plus arbitration agreement was not silent, but was "ambiguous" - some phrases in the agreement suggested only individual claims could be arbitrated, while other language was broad enough to allow class arbitration. However, this did not make any difference as far as the Supreme Court was concerned. It ruled that an ambiguous agreement cannot be the basis for ordering class arbitration in cases involving the Federal Arbitration Act.
The Court explained that class arbitration is very different from the typical individual arbitration claims originally envisioned when the Federal Arbitration Act was adopted in 1925. As the Court has ruled in other cases, class arbitration is permissible only if both parties agree, and cannot be forced upon a party by state law.
What This Means For You
The Lamps Plus decision is good news for employers. If an arbitration agreement is covered by the Federal Arbitration Act, the Lamps Plus opinion will make it easier for employers to avoid class arbitration, even if the agreement contains ambiguous language.
However, to take full advantage of cases like Lamps Plus and Epic Systems, employers should enlist counsel to make sure their arbitration agreements are clear on the subject of class claims. If an arbitration agreement explicitly states that class actions in court and class arbitrations are not permitted, then the employer will be well-positioned to avoid costly class-wide proceedings.
Of course, even individual arbitration remains risky for employers. California law requires the employer to pay 100% of the arbitrator's fees and costs in most cases. These expenses can run up into many thousands of dollars in a hotly-contested case. And the losing party usually has no right to appeal the arbitrator's decision, no matter how poorly reasoned it is.
In addition, California employers remain covered by our state's Labor Code Private Attorneys General Act (PAGA), which allows employees to bring so-called "representative claims" to recover penalties for wage-hour violations on behalf of other "aggrieved employees," without having to satisfy legal requirements for class actions. Under current law, an arbitration agreement cannot limit an employee's right to bring PAGA claims on behalf of other current and former employees - although the agreement can specify that PAGA claims must be decided in court after an arbitrator decides the individual plaintiff's own claims.
