U.S. Supreme Court Rules Against Class Action Relief in an Arbitration Contract Employees Argued was Ambiguous
by Jonathan W. Macklem, Partner
On April 24, 2019, the U.S. Supreme Court published its opinion in the Lamps Plus v. Varela case, where the Court determined that class actions are not an avenue for resolving disputes in arbitration when the arbitration provision is ambiguous as to whether the procedure is allowed. This U.S. Supreme Court decision is in furtherance of recent decisions where the Court has determined that class actions are only available through arbitration when the parties explicitly agree to that procedural mechanism. Just as recently as 2018, a majority of the Court in the Stolt-Nielsen S.A. case determined that class actions are not available in arbitration when the agreement at issue is silent as to the availability of that process.
In the Lamps Plus case, employees of Lamps Plus sued the company alleging that it was negligent in securing their personal information, which was compromised during a data breach. The attorneys for the employees did not take the position that the agreement was silent as to arbitration. Rather, the employees argued that the arbitration agreement was ambiguous as to availability of class actions. The employees used a doctrine of contract construction where ambiguities are to be construed against the party that drafted the agreement. This principle is prevalent throughout the country, especially in the context of ambiguities in insurance policies, where those ambiguities are construed against the insurance company and in favor of coverage for the insured. In Lamps Plus, the Ninth Circuit Court of Appeals determined that the ambiguity doctrine applied to the arbitration provision with Lamps Plus’s employees, and the Court determined that resolution of the claims arising from the data breach could proceed on a class-wide basis in arbitration. By a vote of 5-4, a majority of the U.S. Supreme Court overturned the Ninth Circuit’s ruling, determining that the Ambiguity Doctrine cannot serve as a valid basis in which a party can claim that class action treatment is available in arbitration.
The Supreme Court’s decision in Lamps Plus makes it increasingly difficult for class actions to be maintained where an arbitration provision exists. In light of this most recent decision, class actions would only be available in arbitrations where the arbitration agreement specifically allows for class-wide arbitration, or where the parties otherwise later consent to have a class action procedure in arbitration. There are certainly circumstances when a company may wish to proceed with resolving a claim on a class-wide basis. Notwithstanding, Court’s decision should cause businesses to evaluate the need to have agreements with employees or its vendors to include an arbitration provision. Given the slim margin of these Supreme Court decisions, a company wishing to avoid class actions would still be wise to draft an arbitration provision that specifically excludes class action resolution of claims.