Supreme Court backs businesses, curbs class arbitration in tax fraud case
An ideologically divided U.S. Supreme Court gave businesses more power to channel disputes into individual arbitration proceedings, siding with a lighting retailer trying to prevent its employees from pressing group claims stemming from a phishing attack.
The 5-4 ruling said courts shouldn’t allow class arbitration unless an agreement clearly authorizes that type of proceeding. It’s the latest in a line of Supreme Court decisions that have backed arbitration and helped companies avoid the prospect of costly class actions filed by workers and consumers.
"Neither silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself," Chief Justice John Roberts wrote for the court.
President Donald Trump’s two appointees, Justices Neil Gorsuch and Brett Kavanaugh, joined the majority, along with Justices Clarence Thomas and Samuel Alito. As with the earlier rulings, Roberts pointed to the 1925 Federal Arbitration Act, which says arbitration agreements must be enforced like any other contract.
In dissent, Justice Elena Kagan said the majority had gone well beyond those previous rulings. She said the majority had nullified a "plain-vanilla rule of contract interpretation" that in California and other states requires an ambiguous agreement be read to favor the side that didn’t write it.
"Today’s opinion is rooted instead in the majority’s belief that class arbitration ‘undermines the central benefits of arbitration itself,’" Kagan wrote. "But that policy view — of a piece with the majority’s ideas about class litigation — cannot justify displacing generally applicable state law about how to interpret ambiguous contracts."
The ruling is a victory for Lamps Plus Inc., reversing an appeals court ruling that interpreted its accord with its workers as allowing class arbitration.
The phishing attack took place in 2016, when a Lamps Plus employee received what appeared to be an email from a colleague requesting copies of worker W-2 tax withholding forms. The duped employee responded by sending the forms of 1,300 workers. The company told the workers about the attack and offered a year of credit-monitoring services and identity counseling.
But one of the workers, Frank Varela, said a fraudulent 2015 federal income tax return was filed in his name. Varela sued in federal court in California and sought class-action status on behalf of his fellow workers.
A federal trial judge said Varela had to take his claims to arbitration but could do so on a class basis. A federal appeals court affirmed, saying California state law required reading the contract to include the possibility of class arbitration.
The case is Lamps Plus v. Varela, 17-988.