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First Class or No Class? U.S. Supreme Court Says “No Class!” and Rules Ambiguous Language in Arbitration Agreement Does Not Authorize Class Arbitration

On April 24, the U.S. Supreme Court decided, in a 5-4 decision, that ambiguous language in an arbitration agreement within an employment contract could not serve as a basis to compel class arbitration under the Federal Arbitration Act (FAA).

The case is Lamps Plus, Inc. v. Varela, a suit out of California filed by an employee who alleged his employer mishandled tax information belonging to the employee and others.  The alleged mishandling supposedly led to the information becoming compromised.  The employee who filed the suit signed an employment contract containing an arbitration agreement, under the terms of which the employer sought to compel individualized arbitration.

The Federal District Court compelled arbitration, and held since the agreement was ambiguous as to whether class arbitration was available, it was free to compel arbitration on a class-wide basis. The Ninth Circuit Court of Appeals affirmed, basing its ruling on California law.

The Supreme Court of the United States disagreed. Chief Justice Roberts wrote the opinion, which noted the question of whether a particular arbitration agreement is ambiguous is dependent on application of state law contract principles.  However, the opinion goes on to say that state law is preempted “to the extent it ‘stands as an obstacle to the accomplishment and the execution of the full purposes and objectives’ of the FAA [Federal Arbitration Act].” Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275, at *5.  The Court noted arbitration “is a matter of consent, not coercion;” which is a “rule[ ] of fundamental importance” under the FAA. Id.

In making its ruling, the Court reasoned parties which agree to arbitration are agreeing to participate in a less formal, and more efficient resolution of disputes, and ambiguity does not provide a sufficient basis to conclude that they agree to “sacrifice[] the principal advantage of arbitration.” Id.

Employers wishing to avoid class arbitration should always include an express class action waiver in their agreements.  However, the Supreme Court’s employer-friendly decision in Lamps Plus can act as a backstop for those who do not include such express language. As always, before you implement any sort of arbitration agreement in your employment contracts, you should contact competent counsel.  Sometimes it isn’t the language that gets you in trouble, its what’s missing from the language. Working with an attorney can help you navigate some of these unforeseen issues.

Brody and Associates regularly provides counseling on employment law issues, including employment contract arbitration agreements, non-competes and restrictive covenants.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560.