High Court To Mull Class Arbitration In Data Breach Suit

Posted May 2nd, 2018.

As It Appeared On

By Braden Campbell

Law360 (May 2, 2018, 8:53 PM EDT) — The U.S. Supreme Court recently decided to wade into a data breach lawsuit that hinges on what arbitration agreements have to say for workers to be able to bring class arbitration claims, giving the justices a chance to clarify the high court’s 2010 Stolt-Nielsen ruling and tackle an issue with major implications for employers looking to fend off class actions.

On Monday, the high court granted a petition for review from lighting retailer Lamps Plus, which is challenging the Ninth Circuit’s ruling that worker Frank Varela could pursue class arbitration even though the language in the arbitration agreement he signed didn’t explicitly allow for class proceedings.

The Stolt-Nielsen ruling said parties can’t be forced into class arbitration “unless there is a contractual basis for concluding [they] agreed to do so.” How that 2010 decision gets interpreted is key to the Lamps Plus case as well as an array of would-be class actions brought by workers who signed ambiguous arbitration pacts.

“There are a lot of arbitration agreements out there that are silent on this issue,” said Richard Heppner, a senior associate in Reed Smith LLP’s appellate group. “It’s a big issue, because the possibility of classwide arbitration obviously radically changes the nature of a case.”

Many employers make their workers sign contracts agreeing to argue legal claims in arbitration, which management-side attorneys say is more convenient for both parties because it’s cheaper and faster than court. Workers’ attorneys dispute that arbitration benefits their clients, contending it puts employees at a disadvantage because it limits discovery and decisions are harder to appeal.

Employers also try to avoid class arbitration, which they argue defeats the point of arbitration by raising litigation costs and delaying resolution.

The relevant portion of the agreement the justices will interpret in Varela has three parts. First, Varela waived his “right … to file a lawsuit or other civil action or proceeding relating to [his] employment with the company.” Second, he waived “any right” he has “to resolve employment disputes through trial by judge or jury.” Third, he agreed arbitration is “in lieu of any and all lawsuits or other civil legal proceedings relating to” his employment.

Varela filed a proposed class action in California federal court in 2016 alleging Lamps Plus handled workers’ data carelessly ahead of a phishing attack that yielded their IRS information. Lamps Plus persuaded the Central District of California to send Varela’s suit to arbitration, though the court let the case go forward on a class basis.

A Ninth Circuit majority that included Judge Stephen Reinhardt, who died in March, said in a brief August order that the lower court got it right. The Supreme Court in Stolt-Nielsen did not mean for “silence” on the issue of class arbitration to necessarily block workers from pursuing their claims as a group, it said, and the Lamps Plus contract can reasonably be read to let workers do so.

Specifically, the majority said it is “perhaps the most reasonable” interpretation of the contract that it allows class arbitration because “lawsuits or other civil legal proceedings” include class actions. Judge Ferdinand Fernandez wrote in a two-sentence dissent that his colleagues had helped Varela in a “palpable evasion” of Stolt-Nielsen.

The Varela case presents the justices with an opportunity to fill in a gap in the court’s views on class arbitration left open by Stolt-Nielsen, said Gerald Maatman, a partner at Seyfarth Shaw LLP who studies class action trends.

At the end of the 5-3 Stolt-Nielsen ruling penned by Justice Samuel Alito, the Supreme Court majority said in a footnote that the case didn’t let it “decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.” But Varela will.

“This is … an incredible nuts and bolts, practical, fundamental issue of importance to all litigations, especially employment, about just what are the markers, what are the touchstones whereby parties if they want to can participate in class arbitration,” Maatman said, adding the ruling will show businesses “what steps … they need to take to avoid [class arbitration].”

Plaintiffs attorney Jeremy Heisler said he’s not optimistic the high court will leave judges much room to find arbitration agreements allow class arbitration. The Sanford Heisler Sharp LLP vice chairman said he’s worried the court will continue “fetishizing” and “worshipping arbitration” over litigation, as he argued it did in Stolt-Nielsen and also in AT&T Mobility LLC v. Concepcion.

In Concepcion, the court said the Federal Arbitration Act preempts state laws that block employers from making workers waive their class action rights. In a portion of the ruling, the justices said forcing employers to undergo “class arbitration … interferes with fundamental attributes of arbitration.”

“There were a number of years, pre-Concepcion, pre-Stolt-Nielsen, where there were many, many classwide arbitrations, and there was no problem,” Heisler said. “The idea there is something ‘fundamental’ to arbitration that doesn’t allow you to do it on a classwide basis … is just an anti-employee, pro-employer position.”

The high court is expected to rule soon in another arbitration-related case known as Epic Systems v. Lewis, which asks whether the National Labor Relations Act’s guarantee of workers’ rights to engage in concerted activity blocks employers from making them waive their class action rights. Paul Hastings LLP attorney Marc Bernstein said the court may have tipped its hand in Epic Systems with Monday’s decision to grant certiorari in Varela.

“If the court were to say in [Epic Systems] that you can’t waive class actions, then that would totally moot this case,” Bernstein said. “It very likely means that the court in Epic Systems will permit class action waivers and say that the FAA trumps the NLRA.”

Assuming the justices allow class action waivers, Varela will answer an important question about them. Maatman said it’s hard to tell how the justices will rule, especially as rumors swirl that Justice Anthony Kennedy is considering retirement. But the court probably won’t make the Ninth Circuit’s analysis the law of the land.

“It wasn’t accepted to simply affirm it, so I think the writing is on the wall,” Maatman said.

–Editing by Pamela Wilkinson and Aaron Pelc.

Share this News Article

Back to Top