Break Out Those Arbitration Agreements: United States Supreme Court Issues Another Pro-Arbitration Decision

Wednesday, October 5, 2011 - 12:16

The United States Supreme Court last year held in Stolt-Nielsen v. Animalfeeds Int’l Corp., 130 S. Ct. 1758 (2010), that parties could not be compelled to submit class antitrust claims to class arbitration when the arbitration clauses in their agreements were silent on the question of class arbitration.  Earlier this year, in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court considered whether the Federal Arbitration Act (the “FAA”) prohibits states from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures and ruled that the FAA does in fact do so.

In AT&T Mobility, the parties entered into an agreement for the sale and servicing of cellular telephones.  The phones were advertised as free, but the plaintiffs were charged $30.22 in sales tax based on the phones’ retail value.  The plaintiffs filed a complaint in federal court in California; the complaint was later consolidated with a putative class action alleging, among other things, that the company had engaged in fraud and false advertising by charging sales tax on phones advertised as free.  The company moved to compel arbitration under its contract with the plaintiffs.

The agreement in dispute in AT&T Mobility provided for arbitration of all disputes between the parties and required that claims be brought in the parties’ “individual capacity and not as a plaintiff or class member in any purported class or representative proceeding.”  Other provisions in the agreement were pro-consumer, including (i) customers could initiate dispute proceedings by completing a one-page Notice of Dispute form available on the defendant’s website; (ii) if the customer initiated proceedings, the defendant could offer to settle the claim and if it did not or if the dispute was not resolved within thirty days, the customer could then invoke arbitration by filing a separate Demand for Arbitration also available on the company’s website; (iii) in the event the parties proceeded to arbitration, the company was required to pay all costs for non-frivolous claims; (iv) the arbitration had to take place in the county in which the customer was billed and for claims of $10,000 or less, the customer could choose whether the arbitration would proceed in person, by telephone or based only on submissions; (v) either party could bring a claim in small claims court in lieu of arbitration; (vi) the arbitrator could award any form of individual relief; (vii) the company was not permitted to seek reimbursement of its attorneys’ fees; and (viii) in the event the customer received an arbitration award greater than the company’s last written settlement offer, the company was required to pay a minimum recovery of $7,500 (later increased to $10,000) and twice the amount of the customer’s attorneys’ fees.

The district court and the Ninth Circuit Court of Appeals refused to compel arbitration of the plaintiffs’ claims, each finding a class waiver in a consumer arbitration agreement to be unconscionable under California’s Discovery Bank rule.  In Discovery Bank v. Superior Court, 36 Cal. 4th 148, 113 P.3d 1100 (2005), the California Supreme Court had ruled that class action waivers in arbitration agreements were unconscionable “[w]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.”

In a 5-4 decision, the United States Supreme Court held that the FAA preempted California’s Discover Bank rule.  In so holding, the Supreme Court ruled that “[t]he overarching purpose of the FAA . . . is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings” and that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  Although the Discover Bank “rule [did] not require classwide arbitration, it allowed any party to a consumer contract to demand it ex post” and thus the rule interfered with arbitration.  Among other concerns cited by the United States Supreme Court in permitting such non-consensual class arbitration were (i) “the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration – its informality – and makes the process slower, more costly, and more likely to generate procedural morass than final judgment;” (ii) “class arbitration requires procedural formality;” and (iii) “class arbitration greatly increases the risks to defendants” and “[f]aced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims.”

What Should Employers Do?

Although AT&T Mobility was not in the employment context, its reasoning should be fully applicable to class waivers of employment-related disputes.  As a result of the Stolt-Nielson and AT&T Mobility decisions:

1. Those employers that enter into arbitration agreements with their employees should include class arbitration waivers in their agreements.  By way of example only, such a provision could provide in words or in substance that “[a]ny claims filed by the parties in arbitration must be brought in the parties’ individual capacity and not as a plaintiff or class member in any purported class, collective or representative proceeding.”  Doing so will substantially reduce the risk that class claims will be adjudicated by an arbitrator and the likelihood of the employer being subject to employment-related class claims in a judicial action. 

2. Employers who do not currently utilize arbitration for dispute resolution with their employees should reconsider whether they should do so.  Many employers do not utilize arbitration because of their belief that arbitration is inconsistent with their cultures or due to certain drawbacks of arbitration, such as (i) the willingness of certain arbitrators to ignore the law and do “equity;” (ii) the virtual elimination of any effective appeal procedure; (iii) a potential increase in employee claims due to the relative ease of commencing an arbitration proceeding compared to a court proceeding; and (iv) the risk that an arbitrator will “split the baby” when issuing an award.  The benefits of arbitration include (i) lower cost in terms of both dollars and expenditure of time; (ii) increased flexibility in scheduling discovery and hearing dates; (iii) a reduced chance of excessive awards often associated with juries; and (iv) less publicity.  The Supreme Court’s pronouncement that employers may contractually restrict or limit the availability of class actions is an important additional benefit that may tip the scales in favor of utilizing arbitration for employers who were previously against such a dispute resolution mechanism.

Some Caveats

The Supreme Court’s support of class waivers does not end the story:

1. Employees will continue to attack arbitration agreements on unconscionability grounds.  Indeed, while not largely relied on by the Supreme Court in AT&T Mobility, the favorable pro-consumer elements of the company’s arbitration agreement likely played a significant role in the decision.  While employers do not need to include all the favorable provisions AT&T Mobility did, they should beware of the following “red flag” provisions that increase the risk of challenges and judicial scrutiny:  (i) provisions limiting the arbitrator’s ability to award remedies available in court; (ii) provisions shortening statutes of limitations; (iii) fee-shifting provisions requiring that attorneys’ fees must be awarded to the prevailing party; and (iv) clauses that forbid any court review of an arbitrator’s award.

2. Another potential avenue of judicial attack posits that class action waivers may in certain circumstances interfere with substantive rights of employees.  In Chen-Oster v. Goldman, Sachs & Co., ___ F. Supp. 2d ___, 2011 WL 1795297 (Apr. 28, 2011), motion for reconsideration denied, 2011 WL 2671813 (S.D.N.Y. July 7, 2011), the plaintiffs brought a putative class action alleging that their employer had engaged in a pattern of gender discrimination against its female professional employees in violation of Title VII.  The defendants moved to stay the action with respect to one representative plaintiff and to compel arbitration of her individual claims on the basis of an arbitration clause in her employment agreement; the agreement was silent with respect to the availability of class arbitration.  The court denied the defendants’ motion to compel arbitration, ruling that a consensus had formed among courts in the Southern District of New York that pattern or practice claims may not be brought by a single individual, but rather must be pursued by class action; the court ruled that compelling arbitration under such circumstances would thus interfere with the vindication of statutory rights.

3. While congressional action seems unlikely at the current time, regulatory agencies have or will likely be considering the issue of the use of class action waivers.  This summer, the National Labor Relations Board invited the filing of amicus briefs with respect to the issue of whether an employer violates the National Labor Relations Act by requiring employees to sign an arbitration agreement prohibiting the consolidation of employment claims or using a class or collective action procedure to resolve them.

 

 

Kevin B. Leblang is a Partner and head of Kramer Levin’s Employment Law department and concentrates exclusively on representing management on employment law litigation and advisory matters. Robert N. Holtzman, also a Partner, concentrates exclusively on representing management in employment law matters.

Please email the authors at kleblang@kramerlevin.com or rholtzman@kramerlevin.com with questions about this article.