The United States Supreme Court has overruled a Ninth Circuit decision allowing an employee to arbitrate his data breach claims on a classwide basis, holding that an ambiguous agreement cannot provide the basis for concluding that parties agreed to submit to class arbitration. The ruling marks yet another significant decision by the high court limiting the ability of plaintiffs bound by arbitration agreements to pursue their claims on a classwide basis in arbitration

In Lamps Plus, Inc. v. Varela, 587 U.S. ___ (2019), the plaintiff asserted claims arising out of a 2016 incident in which a hacker impersonated a company official in order to trick a Lamps Plus employee into disclosing the tax information of approximately 1,300 other employees. Soon after the incident, a fraudulent federal income tax return was filed in the name of Frank Varela, whose personal information was compromised in the incident.

Varela, a Lamps Plus employee, signed an arbitration agreement when he started to work at the company. After the data breach, he attempted to bring a putative class action against Lamps Plus in federal court in California. Lamps Plus moved to compel arbitration on an individual rather than classwide basis and to dismiss the lawsuit. The District Court granted the motion to compel arbitration, but ordered that the plaintiff's claims be arbitrated on a classwide basis.

The decision was subsequently affirmed on appeal in an unpublished decision by the Ninth Circuit. While the Ninth Circuit acknowledged that the Supreme Court's precedent in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010) precluded a court from forcing a party "to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so," 701 Fed. Appx. 670, 672 (2017), the Ninth Circuit nevertheless concluded that arbitration could be compelled on a class wide basis because the arbitration clause at issue did not "express[ly] mention . . . class proceedings." The Ninth Circuit reasoned that the parties' failure to expressly mention class proceedings in the arbitration agreement created an ambiguity which, under California law, should be construed against the drafter under traditional principles of contract interpretation. Id.

Although the Supreme Court accepted the Ninth Circuit's premise that the arbitration agreement was ambiguous, the Supreme Court nevertheless concluded in a 5-4 decision that this ambiguity could not provide "the necessary 'contractual basis' for compelling class arbitration." Echoing the words of the Supreme Court's decision in Stolt-Neilsen, the Court reiterated that class arbitration is both "markedly different from the 'traditional individualized arbitration contemplated by the FAA,'" and "undermines the most important benefits of that familiar form of arbitration." The Court reasoned that any ambiguities in an arbitration agreement must be resolved through consultation of the FAA, rather than the contract canons of construction, such as the canon of construction that requires ambiguities to be construed against the draft. With this backdrop in mind, the Supreme Court concluded that arbitration could not be compelled based on the existing ambiguity because the FAA "requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis." Instead, the Supreme Court held that the parties must explicitly state their intent to arbitrate claims on a classwide basis.

The Supreme Court’s decision provides corporate defendants with further clarity regarding the language that must be used if they wish to ensure class arbitration of claims that fall within the scope of an arbitration agreement and depending on the language utilized, may obviate the need explicitly to invoke class action waivers in order to avoid the arbitration of class claims (although such will continue to provide added protections). It also gives corporate defendants comfort that legacy arbitration agreements that existed prior to the use of class action waiver clauses may still operate to preclude class arbitration.

Nevertheless, the Court declined to determine whether the availability of class arbitration is a so-called "question of arbitrability," because the Lamps Plus arbitration agreement called for the Court, not an arbitrator, to decide questions of arbitrability. Depending on the language of the arbitration agreement, some arbitrators may be called upon to resolve the question whether claims may be arbitrated on a class wide arbitration. Thus, utilization of class action waivers in arbitration agreements may still be preferred.

In any event, the ruling is a significant win for employers who wish to see employee claims arbitrated on an individual basis and reinforces the significant benefit arbitration agreements can afford to companies who face class action exposure, particularly those who face the ever growing number of data privacy and security class actions.