Supreme Court Says Agreements To Arbitrate Classwide Claims Must Be Clear

The U.S. Supreme Court sided with an employer on April 24, 2019 by ruling that a worker needs to individually arbitrate his claim against the company rather than bring a classwide claim.

In an arbitration agreement, employers and workers can agree in advance to have a neutral third party (an arbitrator) decide legal claims rather than suing in court.  Arbitration is sometimes viewed as faster and more cost-effective than litigation.

In Lamps Plus Inc. v. Varela, the Supreme Court held that, under the Federal Arbitration Act, an ambiguous arbitration agreement can’t provide the contractual basis necessary to conclude that the parties agreed to submit to class arbitration.

The shift from individual to class arbitration is a fundamental change that sacrifices the principal advantage of arbitration and greatly increases risks to defendants, the high court said.

A Win for Employers

The Supreme Court held that the FAA requires courts to “enforce arbitration agreements according to their terms.”  Courts may rely on state contract principles to interpret such agreements, but state law is pre-empted if it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA.

Drafting Agreements

Employers will now have more confidence that they can require individual arbitration and that their intention to do so will be upheld by the courts.  However, employers should be clear if they don’t intend to arbitrate claims on a classwide basis and careful not to inadvertently authorize it.  Some judges are hostile to arbitration in general and may look for a way to invalidate the agreement.  Thus, employers should have an explicit class-action waiver.