On Wednesday, April 24, 2019, the Supreme Court of the United States issued an important decision regarding class-action arbitration. The 5-4 decision held that under the Federal Arbitration Act, a court cannot compel arbitration on a class-wide basis if an arbitration agreement between parties does not clearly authorize such arbitration. This ruling is consistent with a recent trend of cases favoring companies’ interests in avoiding class-action lawsuits and class arbitrations through arbitration provisions.
The case, Lamps Plus, Inc., et al. v. Varela, 587 U.S. ___ (2019), stems from a 2016 data breach, in which a hacker obtained the tax information of approximately 1,300 Lamps Plus employees. Following the breach, a fraudulent federal tax return was filed in the name of a Frank Varela, a Lamps Plus employee. Varela reacted to the fraudulent filing by suing Lamps Plus in the Federal District Court in California on behalf of himself and a class of employees whose information had been breached. In reviewing the lower court decision, the Supreme Court noted that class arbitration undermines the principal advantage of arbitration—its informality—making the process slower and more costly and complex. The Court held that courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so. Because there was no contractual basis for concluding that Lamps Plus agreed to submit to class arbitration, Varela was only entitled to individual arbitration.
What is the significance of this ruling? In theory, companies can potentially avoid all employee or customer class-action claims by requiring arbitration on an individual basis for all disputes. If all potential class members have to arbitrate individually, there is no opportunity for any class-wide claims. Is that a good thing? Maybe. All companies should be aware that the absence of a potential class forecloses the possibility of dealing with a specific problem at one time and therefore may actually create inefficiencies. Further, in situations like this, especially where the applicable agreement states that the company will pay for the cost of filing the arbitration and/or the cost of arbitration, Plaintiff counsel has filed thousands of individual arbitrations on a single issue against a single company.
KJK publications are intended for general information purposes only and should not be construed as legal advice on any specific facts or circumstances. All articles published by KJK state the personal views of the authors. This publication may not be quoted or referred without our prior written consent. To request reprint permission for any of our publications, please use the “Contact Us” form located on this website. The mailing of our publications is not intended to create, and receipt of them does not constitute, an attorney-client relationship. The views set forth therein are the personal views of the author and do not necessarily reflect those of KJK.