Supreme Court Rules on Employee Data Breach Class Arbitration Suit
In June of 2018 we reported that the U.S. Supreme Court granted a petition for review of a data breach lawsuit addressing the issue of whether parties can pursue class arbitration when the language in the arbitration agreement does not explicitly allow for such, Lamps Plus, Inc. v. Varela , No. 17-988, certiorari granted April 30, 2018. By granting the petition for certiorari, the Court afforded itself the opportunity to clarify its 2010 decision in Stolt-Nielsen v. AnimalFeeds International Corp., 559 U.S. 662 (2010) in which the Court ruled that parties cannot be forced into class arbitration, “unless there is contractual basis for concluding [they] agreed to do so”. The Supreme Court has finally issued its decision, ruling on April 24 2019, that arbitration agreements must explicitly include a class arbitration clause for parties to arbitrate class action claims.
The Supreme Court, in a 5-4 ruling, authored by Chief Justice Roberts, held that the 9th Circuit panel erred in ruling that Lamps Plus, a lighting retailer, must participate in a class arbitration of an employee’s claims when the employment agreement did not state that class arbitration was available. The employee’s claims arise from an incident of identity theft, as the result of a phishing attack, in which a third party impersonating a Lamps Plus employee convinced a fellow Lamps Plus colleague to send copies of W-2 forms for multiple Lamps Plus employees.
The employment agreement between the named plaintiff, Frank Varela, and his employer, Lamps Plus, included an arbitration clause, however it was silent on whether the clause also allowed for class arbitration. The 9th Circuit majority ruling stated that “perhaps the most reasonable” interpretation of that agreement allows for class arbitration. The circuit court analogized how Varela waiving his “right…to file a lawsuit or other civil action or proceeding” and “any right…to resolve employment disputes through trial by judge or jury,” clearly also includes waiving his right to class action lawsuits, even though the agreement does not explicitly state such.
The Supreme Court overturned the 9th Circuit and ruled that Stole-Neilsen does not permit a lower court to make such an “inference” from an ambiguous arbitration agreement. “Under the Federal Arbitration Act, an ambiguous agreement cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration,” the opinion stated. “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice the principal advantage of arbitration.”
In addition, the Court emphasized that the use of class arbitration “undermines the most important benefits” of the individual arbitration process, “lower costs, greater efficiency and speed and the ability to choose expert adjudicators to realize specialized disputes”.
The Supreme Court’s decision in Lamps Plus has significant implications for employers, well beyond the data breach context. This case is considered a “win” for employers, as lower courts will lack the ability to “infer” class arbitration clauses in arbitration agreements. Nonetheless, companies are advised to include unambiguous language in their employment agreements on whether class arbitration is available.