The Supreme Court put tighter limits on classwide arbitration Wednesday, making it easier for businesses to avoid claims by groups of employees or consumers.
Workers and consumers bound by arbitration clauses automatically waive the right to pursue classwide claims unless their contracts specifically provide for such proceedings, the court held, dividing 5-4 along its conservative-liberal line.
Writing for the court, Chief Justice John Roberts said that private arbitration, which many companies impose as a condition of employment or doing business, offers “lower costs, greater efficiency and speed” over lawsuits in state or federal court. “Class arbitration lacks those benefits,” he wrote, joined by Justices Clarence Thomas, Samuel Alito, Neil Gorsuch and Brett Kavanaugh.
The case is the latest in a string of decisions that have given the 1925 Federal Arbitration Act wide powers to displace traditional legal remedies, prioritizing business interests in reducing liability over providing redress to consumers and employees alleging injuries.
Last year, for example, the court ruled 5-4 that employer-imposed arbitration clauses superseded employee rights to “concerted activities for…mutual aid or protection” under the National Labor Relations Act, which some lower courts had held include classwide remedies.
Liberal dissenters in Wednesday’s decision accused the majority of going far beyond the arbitration act’s role in resolving commercial disputes to tilt the playing field in business’s favor.
The court “has routinely deployed the law to deny to employees and consumers ‘effective relief against powerful economic entities,’” Justice Ruth Bader Ginsburg wrote, joined by Justices Stephen Breyer and Sonia Sotomayor. Justice Elena Kagan wrote a separate dissent joined in whole or part by the other liberals.
Wednesday’s case came from California, where a hacker tricked a Lamps Plus Inc. employee into disclosing W-2 forms and other tax information for about 1,300 of the retail chain’s workers. Frank Varela, an employee who had a fraudulent tax return filed in his name, sought to file a class action on behalf of the affected workers.
A federal district court in California sent the case to private arbitration, citing the clause Lamps Plus imposed on its employees. But over the company’s objection, the court allowed arbitration to proceed for the entire class, a decision upheld by the Ninth U.S. Circuit Court of Appeals in San Francisco.
In a 2010 decision, the Supreme Court said that class arbitration is barred when a clause is silent on the matter. But the Ninth Circuit found the Lamps Plus clause was ambiguous, and applied state contract law principles that construe ambiguity against the party that drafted the provision.
Chief Justice Roberts said Wednesday that was an error. “Class arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA [the arbitration act], it also undermines the most important benefits of that familiar form of arbitration. The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis,” he wrote.
The ruling underscores “that parties must agree to class arbitration, because it is fundamentally different from the individualized arbitration protected by the Federal Arbitration Act,” said Andrew Pincus, who argued the case for Lamps Plus. He added that the company took steps to help employees affected by the data breach, “including providing employees free identity-theft protections and credit-monitoring services among other measures.”
An attorney for Mr. Varela couldn’t immediately be reached.
The chief justice described arbitration clauses as voluntary agreements between the parties that should not be read to include provisions such as class proceedings they had not expressly bargained for.
Justice Ginsburg wrote that such rules make sense for businesses of roughly equal bargaining power, which the 1925 act was adopted to cover. She contended, however, that it was less consent than coercion that bound workers and consumers to the boilerplate contracts written by employers, banks and other companies they rely upon.
Her dissent noted, however, that public pressure has led some businesses to relent, at least in part, on mandatory arbitration for certain claims such as sexual-harassment.