SCOTUS Decision Regarding Classwide Arbitration in an Employment/Data Security Case

On April 24, the U.S. Supreme Court issued its decision in Lamps Plus Inc. v. Varela, holding that under the Federal Arbitration Act, courts may not infer from an ambiguous agreement that parties consented to arbitrate on a classwide basis. The decision was 5-4 with Chief Justice Roberts writing for the majority.
 
In 2016, a hacker tricked one of Lamp Plus’s employees into disclosing the tax information for 1,300 employees. A fraudulent income tax return was then filed in the name of one of those employees, Frank Varela. Varela filed a class action in federal court on behalf of himself and all other employees whose information had been stolen. Lamp Plus moved to dismiss the suit and compel arbitration on an individual basis, relying on an arbitration provision in Varela’s employment contract.
 
The Supreme Court found that the parties’ contract was ambiguous and the ambiguity had to be resolved against the employer, who drafted the document. The majority accepted the concept that courts may ordinarily rely on state contract principles to enforce arbitration agreements according to their terms consistent with the FAA. But, it reasoned that state law is preempted to the extent it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA. Classwide arbitration, the majority explained, is fundamentally different than individual arbitration and sacrifices the key benefits of arbitration: lower costs, greater efficiency and speed. It also introduces due process concerns by adjudicating the rights of absent class members with only limited judicial review.
 
So “[a]t issue in this case is the interaction between a state contract principle for addressing ambiguity and a rule of fundamental importance under the FAA, namely that arbitration is a matter of consent, not coercion.” Viewed through that lens, the majority concluded that the FAA preempted the state law rule, as applied to classwide arbitration, and that an ambiguity must be resolved against the drafter. The Court found that the state law rule of construing a contract against the drafter was not a rule designed to reveal the parties’ intent—but was instead born of a policy preference. The rule therefore could not operate to conclude that Lamp Plus had consented to classwide arbitration.
 
So, Lamp Plus continues a recent line of important decisions on the arbitrability of class claims. While employers are increasingly attentive to finding arbitration solutions that reduce risk and control expenses, at the same time, counsel for employees will continue to search for loopholes. The lesson is that great care should be taken when drafting agreements and older agreements should be reviewed and, if possible, modified to account for the evolving case law.
 
If you have any questions about how to best ensure compliance with employment obligations in your workplace, please contact Jim Davidson at 614-462-2286 or James.Davidson@icemiller.com or Derek Molter at 317-236-2193 or Derek.Molter@icemiller.com.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.