In the wake of data breaches, companies may find themselves targets of class actions by customers or employees whose personal information was compromised in the breach. The exposure is considerable, with an estimated 765 million people impacted by data breaches between April and June of 2018. As we previously reported, some courts have allowed consumer and employee data breach cases to proceed despite threshold challenges – leading to multi-million-dollar settlements. And in Dittman, Pennsylvania’s Supreme Court recently held that an employer owed an affirmative duty to exercise reasonable care to protect employees’ personal nonpublic data from data breaches.
Supreme Court precedent suggests that use of consumer and employee arbitration agreements may significantly limit a company’s class action exposure in the wake of a data breach. The Court’s April 24th opinion in Lamps Plus v. Varela arose in the wake of a phishing scheme targeting the plaintiff’s employer, who allegedly disclosed the tax information of over a thousand of the company’s employees to the perpetrator of the scheme. After a fraudulent tax return was filed in his name, Frank Varela sued his employer on behalf of a class of all employees whose information was compromised in the breach. The employer moved to compel individual arbitration and to dismiss the lawsuit; the district court agreed to compel arbitration, but did so on a classwide basis. The Ninth Circuit affirmed, finding that the arbitration agreement was ambiguous on the permissibility of classwide arbitration, and applied California’s general rule of contra proferentem to construe contractual ambiguities against the drafter. The Supreme Court granted the employer’s petition for certiorari.
The majority opinion was emphatic: “Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis.” The majority thus recognized (as it has in several prior cases) that permitting arbitration to proceed on a classwide basis fundamentally undermines the benefits of arbitration – “lower costs, greater efficiency and speed.” The Court thus remanded to allow employees to pursue claims regarding theft of their personal nonpublic financial information in individual arbitration. The decision extends existing Supreme Court precedents enforcing arbitration agreements despite efforts by plaintiffs to undermine the force of those agreements. Those decisions include Stolt-Nielsen, in which the Court held that a court cannot compel class arbitration when the arbitration agreement in question is “silent”, as well as Concepcion and Epic Systems – which, respectively, upheld the use of class action waivers in consumer and employment arbitration agreements.