Companies can generally push for individual arbitration unless their arbitration agreement explicitly allows a group, or a class of people, to collectively arbitrate their claims against it, the Supreme Court ruled Wednesday. The ruling is the high court’s latest over the past decade to bolster the enforcement of arbitration provisions, an increasingly prevalent and controversial feature of consumer and employment contracts.
The court’s 5-4 ruling came down in a case involving lighting retailer Lamps Plus Inc., where one of its employees, Frank Varela, sued the company over a hacking breach that apparently compromised the tax information of some 1,300 employees. But Varela, like a growing number of private sector employees, had signed an arbitration agreement with the company when he started his job there, which requires employees to arbitrate any claims they may have against the company and its leaders.
The California federal court that first heard Varela’s case agreed with Lamps Plus that his suit should be arbitrated instead, given the agreement, but it allowed him to bring in others into the dispute to arbitrate as a class. Lamps Plus objected and took the case up to the Ninth Circuit appeals court, but the panel there only upheld the lower court.
In his majority opinion Wednesday, Chief Justice John Roberts wrote that class arbitration changes the dynamic within a dispute significantly enough that it could hurt defendants in these cases. The purpose of individual arbitration, under the Federal Arbitration Act of 1925, is to offer a cheaper and quicker way to resolve disputes than going through the courts, he wrote, reasoning that class arbitration could potentially gum the works. And when it is “ambiguous” whether an arbitration provision would allow class proceedings, the provision should be interpreted to mean individual arbitration, the ruling held.
“Class arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration,” he wrote in the opinion.
Andrew Pincus, a partner at Mayer Brown LLP who represents Lamps Plus, said in a statement Wednesday that the ruling affirms the idea that class arbitration is something that the parties involved must explicitly agree to.
“Today’s decision applies the already-established principle that parties must agree to class arbitration, because it is fundamentally different from the individualized arbitration protected by the Federal Arbitration Act — and that a contract interpretation based on public policy rules, not agreement by the parties, does not suffice,” he said in the statement.
An attorney for Varela could not immediately be reached for comment.
The court’s liberal wing vehemently objected to the majority, arguing that the FAA was meant to apply to contracts between parties with “equal bargaining power” and not to be used to further undercut the leverage of outmatched parties like employees challenging an employer.
“The court has relied on the FAA, not simply to overcome once-prevalent judicial resistance to enforcement of arbitration disputes between businesses,” Justice Ruth Bader Ginsburg wrote in her dissent. “In relatively recent years, it has routinely deployed the law to deny to employees and consumers ‘effective relief against powerful economic entities.’”
One of the high court’s most notable arbitration rulings in recent years was in AT&T Mobility LLC v. Concepcion, the 2011 case in which the court’s 5-4 majority similarly found that the FAA generally legitimizes individual arbitration clauses, and that state laws cannot really restrict them. That case involved a class action against AT&T by consumers accusing the service provider of false advertising, saying they had been charged sales taxes on “free” phones provided as part of cell phone contracts. But the consumers’ contracts with AT&T required them to arbitrate all disputes.