By Rob Gilmore, Brett Krantz & Andrew Wilber
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.
For more information on this decision or arbitration agreements, feel free to contact Litigation Partners Rob Gilmore at rsg@kjk.com or 216.736.7240, or Brett Krantz at bk@kjk.com or 216.736.7238.
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