This article has been written by Ashendra Mani Pandey, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Introduction

When a company hires an employee, an employer-and-employee relationship is established based on the contract and an arbitration agreement is signed, which can be triggered in future cases where both parties are in dispute. But what if the same dispute arises at the class level? The arbitration has to be performed at the individual level for all employees, which would break the concept of arbitration as a speedy trial. Now, the question arises as to why we shouldn’t make the arbitration proceeding a class action against the employer, so you are right that’s possible totally on the contract with clarity on the class action arbitration, which must be carefully drafted by both parties. So, we’ll be discussing this peculiar issue where companies can make their employees arbitrate disputes individually. This article will analyse the Lamps Plus case, one of the leading cases in class arbitration and discuss further the implications of the court’s decision for both employers and employees.

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Facts of the case

Lamps Plus is a California-based lighting company where Frank Varela, an employee of Lamps Plus, In 2016, Varela was in his course of employment when he fell victim to a hacker. Through phishing, the tax information of nearly 1300 company employees was led into the hands of a hacker who fraudulently filed tax information  using the name of Frank Varela. This has caused Frank Varela and other employees to suffer financial harm. Varela brought a class-action lawsuit against Lamps Plus for himself and other affected employees. Lamps Plus breach of trust against  Varela’s class arbitration demanded a class action arbitration suit.

Contentions of both parties

However, Lamps Plus argued that the arbitration clause in Varela’s employment contract only allowed him to arbitrate his claim individually rather than as part of a class action and the arbitration clause stated that any disputes between the company and its employees would be resolved through an individual rather than a court system. Varela argued that the arbitration clause was ambiguous and did not clearly state if class action arbitration was allowed or not. He also argued that he should be allowed to present his case with a class action because it would incur a lot of expenses for him as well as the individual aggrieved. He requested to litigate his claim individually, which was allowed by the Court of California, but later, due to appeal, the case made its way up to the Supreme Court (Apex Court of the US). Which ultimately favoured Lamps Plus.

Writing for the majority, Chief Justice John Roberts held that “the arbitration clause did not allow for class arbitration, as it mentioned individual arbitration.” The Court found that Varela’s argument that the clause was ambiguous and unpersuasive, as any ambiguity should be resolved in favour of arbitration.

Observation of Lamps Plus vs. Varela

The Court also rejected Varela’s argument that he should be allowed to proceed with a class action because it would be too expensive for him to litigate his claim individually. The court found that the Federal Arbitration Act, which governs arbitration agreements based on the cost of individual arbitration, has important implications for employees and employers who are subject to arbitration agreements. Employers who went to prevent class actions will likely include explicit language in their arbitration agreements to prohibit class arbitration. Employees who want to bring class actions will need to carefully review their arbitration agreements to determine whether they are allowed to do so.

The decision also highlights the importance of understanding the terms of any contract before signing it. Employees who sign contracts with arbitration clauses should understand that they are waiving their right to sue in court and are instead agreeing to have their arbitration clauses clear and unambiguous to avoid potential legal challenges.

The dissenting justices in the case argued that the majority’s decision was unfair to employees and would prevent them from effectively vindicating their rights. Justice Ruth Bader Ginsburg, writing for the dissent, noted that individual arbitration can be a costly and time-consuming process that is not practical for many employees. She argued that employees should be allowed to proceed with class actions if the cost of individual arbitration would effectively prevent them from vindicating their rights. The dissenting judges also argued that the majority decision was innocent, that the Court’s previous decisions on arbitration agreements should be interpreted in the same manner as other contracts and that any ambiguity should be resolved against the party who drafted the agreement. They argued that the majority’s decision in Lamps Plus originated from this principle and by interpreting the arbitration clause that was in the agreement, it favoured the employers rather than the employee.

The court’s final decision

The Supreme Court passed the judgement in a 5-4 ratio, holding that the arbitration agreement did not permit class arbitration. The Court reasoned that under the Federal Arbitration Act (FAA), arbitration is a matter of contract and that parties are free to agree to the terms of their arbitration agreements. Therefore, the court held that the absence of clear language in the contract indicates that the parties were having mutual cohesion in sole arbitration rather than a class action.

This Court’s decision was based on prejudiced decisions backing AT&T Mobility LLC vs. Concepcion (2011) and Epic Systems Corp. vs. Lewis, which held that the FAA preempts state laws that invalidate class action waivers in arbitration agreements. These decisions have been seen as favourable to employers who wish to require their employees to arbitrate disputes individually.

Now coming to implications, there are the following implications for both employers and employees:

Employees

The Lamps Plus ruling from the court was less favourable towards employees that were in pursuit of filing a class action suit. Essentially, the Court’s decision implies that employees who have signed arbitration agreements are unable to collectively file a suit against Lamps Plus. It is less favourable for employees who wish to pursue their claims as part of a class action. The Court’s decision directly puts the employees in the corner, as it means that employees who have signed arbitration agreements cannot bring class-action claims against their employers in arbitration. Instead, they must arbitrate their claims individually, which can be more difficult and expensive to proceed with.

Employees who wish to pursue their claims as part of a class action may be limited in their ability to do so as a result of the court’s decision. This may be particularly problematic for low-wage workers who lack finances and proceeding with the court proceedings may result in a financial toll on their pocket.

Employers

The Court decision was not in favour of employees and gave a direct victory to employers. The Lamp Plus decision is a victory for employers who were mandating their employees to arbitrate disputes individually. The Court’s decision reaffirms the importance of arbitration agreements as a way to avoid costly and time-consuming litigation. By requiring employees to sign arbitration agreements, companies can ensure that disputes are resolved more efficiently and cost-effectively. It is still the most effective way to solve the disputes individually as a means of alternate dispute resolution, whereas considering the agreement, it was bound to happen. Furthermore, the court makes it clear that companies can limit the scope of arbitration agreements to individual disputes only. This means that employees cannot bring class-action claims against their employer in arbitration, which can be beneficial for companies facing the prospect of expensive class-action lawsuits.

Class action suit or arbitration in India

There is no such defined concept of class arbitration in India in relation to employer and employee relations, but there is a scope of such action under Section 245 of the Companies Act, 2013 that emphasises situations where class action suit is still a scope of action where aggrieved is not an individual but different individuals aggrieved of the same action or any resolution that is contrary to their rights as an employee or against any statute or labour laws, then it  becomes a path to remedy for all. There are some decisions made by companies that are prejudicial to the interests of the company or its members to creditors. Such creditors can apply to the Tribunal on behalf of the members or creditors, seeking all or any remedy. In India, there are also some class-action arbitration options that are available in securities fraud cases. As we know, we have exhaustive labour laws and different acts like the Employee’s Compensation Act of 1923, the Industrial Employment (Standing Orders) Act of 1946, the Trade Unions Act of 1926, and many others that are balanced acts in the sense that their respective positions do not favour one party but provide protection to the right cause, and that can be determined by going through the objectives deriving from the preamble, which provide substantial protection to both employer and employee.

Conclusion

The Lamps Plus case is one of the cases that is very ambiguous and that can conflict the rights of both parties in a dispute. Any agreement that is too ambiguous can ultimately lead to circumstances where one party takes advantage of the other. Similar circumstances have previously occurred when parties asserted that they had incorporated a clause that allowed them to choose class arbitration in the case of a dispute. Several decisions on class arbitration have consistently favoured the parties who deliberately drafted an ambiguous contract. Since the Lamps Plus case, we have observed that the act requires more than uncertainty to confirm that the parties intended for the arbitration to apply to the entire class action suit. In ambiguous agreements, that could be used as justification. On the contrary, an agreement’s ambiguity could not be used as justification for requesting a class action suit. A clause explicitly allowing for class representation before an arbitral tribunal should be present for any class arbitration procedure to begin with, which can be considered an essential factor that makes it crystal clear for both parties and reduces disputes in the future.

The Supreme Court in the case of Transmission Corporation of Andhra Pradesh Limited vs. GMR Vemagiri Power Generation Limited (2018) said that while a contract can either be expressed or implied depending upon the circumstances, it is important to consider all relevant circumstances when determining the construction and interpretation of the contract. If a factor is ambiguous, it is preferable to consider all relevant circumstances, which will give a bigger picture of who and how the party should be held liable for the interpretation of unambiguous terms.

References

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