Supreme Court Limits Use of Class Action Arbitrations

By Alan M. Levy - Lindner & Marsack, S.C.

April 25, 2019

On April 24, 2019 the United States Supreme Court held that an employee cannot expand an individual claim to a class action arbitration unless both parties have explicitly agreed to that process. Arbitration is created by contract; the parties must agree to waive their statutory right to have a court determine whether their employment contract or other relationship terms were breached.

In recent years the courts have held that an employee who is not subject to a union contract can be required to arbitrate a personal dispute pursuant to an employment contract, acceptance of a company rule, or other form of agreement instead of taking their claim to a court or to an agency such as the EEOC. At the same time, some employee claims have been presented on a class-wide basis, the complainant arguing that a significant number of fellow employees all had the same issue, such as the method for calculating overtime or obtaining a promotion. These complainants often argued that individual arbitrations were not economically viable for employees, and that the same remedy should apply to all similarly situated employees. What had been described as a speedy, inexpensive dispute-resolution process through arbitration for individuals could become a full-scale class action lawsuit if the single employee could expand the potential remedy this way.

In Lamps Plus, Inc. v. Varela, the United States Supreme Court held 5-4 that claims by individual employees could not be expanded into class arbitrations unless the arbitration agreement (typically in the person’s employment contract) specifically provided that the larger process was permissible. The Court found that the shift from individual to class arbitration was such a “fundamental change” that it “sacrifices the principal advantage of arbitration” and “greatly increases risks to defendants.”

The employee had argued that the parties’ agreement to arbitrate was ambiguous and any choice of process possible under that ambiguity should be interpreted against its author – the party that had drafted the (employment) agreement requiring arbitration to the exclusion of court or agency actions. Chief Justice Roberts stated for the majority that “Arbitration is strictly a matter of consent,” and an affirmative agreement to both the subject-matter and the procedure for arbitration is necessary to require use of that process. A class arbitration is fundamentally different from the individualized form envisioned in the Federal Arbitration Act; 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.” Use of this process requires an affirmative “contractual basis for concluding that the party agreed to do so,” and silence or ambiguity in the language of the underlying agreement to arbitrate cannot be taken as that affirmative consent to this expanded process.

This decision reiterates the contractual basis and limits of arbitration. Waiving the right to court or agency decision-making and accepting the determination of a private arbitrator require the affirmative consent of a clear contract to do so.

Should you have any questions about the elements of a binding arbitration agreement, its implementation, and its scope, please contact one of the attorneys here at Lindner & Marsack, S.C.