Executive Summary: Approximately one year ago, in Epic Systems Corp., the United States Supreme Court upheld the enforceability of mandatory arbitration agreements that prohibit employees from bringing employment claims on a class or collective basis – settling a longstanding circuit split over whether such provisions violate federal labor law. Just this week, the Supreme Court issued another important ruling in Lamps Plus, Inc., which clarifies that an employer cannot be compelled to arbitrate class and collective claims, unless the express language of its arbitration agreement authorizes such action. This decision marks the continued approval of arbitration agreements that require employees to individually arbitrate claims against their employers.

The plaintiff in the case, Frank Varela, filed a class action lawsuit in California federal court against his employer after a hacker duped one of its employees into disclosing tax information for about 1,300 of the company’s workers. Citing the arbitration agreement Varela signed as a condition of his employment, the company moved to compel arbitration on an individualized basis. Varela opposed the motion, and the trial court rejected the company’s request. Instead, it authorized Varela to pursue class claims in arbitration. The Ninth Circuit affirmed.

The trial and appellate courts’ decisions stemmed from ambiguity contained in the arbitration agreement. In particular, the courts focused on the fact that the agreement contained no express statement as to how class proceedings would be treated. Therefore, the courts surmised, the agreement was ambiguous as to whether the parties had, in fact, agreed to arbitrate claims on a class-wide basis. And, because contractual ambiguity is construed against the drafter pursuant to California law (as is the law in most states), the employer could be forced to arbitrate Varela’s claims on a class basis.

The Supreme Court reversed. Citing the Federal Arbitration Act (FAA), the Court noted that courts are compelled to “enforce arbitration agreements according to their terms.” Stated differently, it wrote:

Parties may generally shape [arbitration] agreements to their liking by specifying with whom they will arbitrate, the issues subject to arbitration, the rules by which they will arbitrate, and the arbitrators who will resolve their disputes. Whatever they settle on, the task for the courts and arbitrators at bottom remains the same: to give effect to the intent of the parties.

(citations omitted; emphasis added). The Supreme Court went on to explain that the FAA preempted California law to the extent it authorized class arbitration because the FAA requires affirmative consent from a party before it can be compelled to arbitrate class claims.

The Supreme Court also justified its decision based upon the differences between individual and class arbitration. In particular, the Court opined that class arbitration “sacrifices the principal advantage of arbitration – its informality – and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” Noting those differences and the purpose of the FAA, the Court reasoned:

Courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so. Silence is not enough.

(citations omitted, emphasis in original). In other words, without an express provision that authorizes class claims in arbitration, an employer cannot be compelled to arbitrate its employees’ claims on a class basis.

Bottom Line:

Lamps Plus makes explicit that class arbitration shall not occur unless the parties expressly agree to do so. Even with this decision, however, every employer should review its arbitration agreement language carefully to ensure it contains clear and unambiguous language disclaiming an employee’s right to arbitrate class claims. Doing so forecloses any argument that arbitration could occur on a class-wide basis.

Whether to arbitrate all or some types of employment claims (or using a jury waiver to accomplish a similar goal) remains at the forefront of “hot topic” employment issues.