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Supreme Court's conservatives limit workers' ability to resolve disputes collectively through arbitration

Key Points
  • The Supreme Court on Wednesday handed a victory to business in a 5-4 ruling along ideological lines that held that workers are not entitled to resolve disputes through class arbitration in cases where their arbitration agreement is ambiguous.
  • The closely-watched case is the latest in a long string of rulings at the top court strengthening the power of firms to compel their employees to resolve disputes through individual arbitration, a relatively informal practice that businesses argue is more efficient and worker advocates say enables abuse to go unchecked.
Mark Wilson | Getty Images

The Supreme Court on Wednesday handed a victory to business in a 5-4 ruling along ideological lines that held that workers are not entitled to resolve disputes through class arbitration in cases where their arbitration agreement is ambiguous.

The closely-watched case is the latest in a long string of rulings at the top court strengthening the power of firms to compel their employees to resolve disputes through individual arbitration, a practice that businesses argue is more efficient and worker advocates say enables abuse to go unchecked.

Arbitration is a dispute resolution mechanism that is less formal than the court system which generally favors employers. 

The decision follows the court's landmark ruling on the issue in the 2018 case Epic Systems Corp. v. Lewis, which held, also 5-4, that arbitration agreements requiring workers to submit to individual arbitration must be enforced.

The opinion drew a flurry of criticism from the court's liberal wing, with each of the four Democratic appointees penning a dissent. But Chief Justice John Roberts, in his opinion for the court, downplayed the criticism, arguing that the "opinion today is far from the watershed" the dissenters claimed it to be.

Roberts argued that under the court's precedent arbitration is a matter of "consent," and that consent cannot be inferred from an agreement that is ambiguous. The decision overturned a ruling from the U.S. 9th Circuit Court of Appeals, which held that, under state law, ambiguity in a contract should be resolved against the party that drafted the agreement.

Read more: The Supreme Court could make it harder for workers to sue over issues like sexual harassment and pay discrimination

Justice Elena Kagan said the 9th Circuit's reasoning was based on "a plain-vanilla rule of contract interpretation."

"Today's opinion is rooted instead in the majority's belief that class arbitration 'undermine[s] the central benefits of arbitration itself,' she 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 case involved Frank Varela, an employee at a lighting company, Lamps Plus. In 2016, Varela's tax information was stolen by a hacker in a breach that affected hundreds of other employees.

Varela filed a lawsuit against the company on behalf of himself and others whose data was stolen. A federal court in California permitted Lamps Plus to force Varela into arbitration, but granted his request for class arbitration. That decision was affirmed by the Ninth Circuit.

"This is a win for employers," said Lauren Novak, a partner at the law firm Schiff Hardin. "The decision provides clear guidance to the lower courts – the right to proceed as a class cannot be inferred, it will be permissible only if the employer expressly consented to it in the arbitration agreement."

Justice Ruth Bader Ginsburg, in a dissent, said the court was straying "treacherously" from the court's previous rulings on what was meant by consent in arbitration cases. She wrote that it was ironic to use the principle of consent "to justify imposing individual arbitration on employees who surely would not choose to proceed solo."

"The widely experienced neglect [Varela] identified cries out for collective treatment," Ginsburg wrote. "Shut from the Court's sight is the 'Hobson's choice' employees face: 'accept arbitration on their employer's terms or give up their jobs.'"

Arbitration cases have taken on increased significance in recent years because of added attention to worker disputes over sexual harassment in the workplace. A 2018 report by the Economic Policy Institute, a left-leaning think tank, found that the share of workers subject to forced arbitration agreements has doubled in recent decades and now includes more than half the country's workforce.

Emily Martin, vice president for education and workplace justice at the National Women's Law Center, told CNBC in the fall that workers are less likely to come forward with such complaints if they are forced to resolve them as individuals, rather than groups. Raising the funds, and gathering the necessary information, are among the hurdles.

"If you feel like you are the only one, you are much less likely to come forward and say, I deserve better, you can't treat me like this," she said.

A number of companies in recent years, including Google and Facebook, have sought to address the issue by ending forced arbitration in cases involving sexual harassment. Ginsburg said those efforts "ameliorate some of the harm" caused by the court's arbitration decisions, but re-iterated her stance that congressional action is "urgently in order."