Employment Class Action Blog - Information and Commentary on Employment Class Action Cases Affecting Employers

Co-Authored by: Dustin Dow

A unanimous Supreme Court held on Monday that when a party agrees that an arbitrator should decide if an agreement authorizes class arbitration, that party cannot later seek judicial intervention if it disagrees with the resulting award.  Because even if the arbitrator makes a “grave error” in interpreting a contract to authorize class arbitration, a court may not correct that error “[s]o long as the arbitrator was ‘arguably construing’ the contract.”  The Court’s ruling disappointed some who expected an expansion of its 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. which held that an arbitration panel exceeded its authority when class procedures were imposed based on an agreement that was silent on whether the procedures were authorized. 

The ramifications of Monday’s opinion in Oxford Health Plans, LLC v. Sutter, No. 12-135, 569 U.S. ___ (2013), are unlikely to profoundly impact arbitration or class action law.  But the case does offer a clear lesson in what not to do.  A party hoping to avoid class arbitration should not agree that it is for the arbitrator to decide whether the parties agreed to class arbitration.  Yet, respondent Oxford Health Plans did just that and then attempted to rely on Stolt-Nielsen to argue that the arbitrator “exceeded his powers” under the Federal Arbitration Act when he decided that the parties agreed to it.  Thus, Oxford Health Plans reached the Court under significantly different circumstances than the Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), and the resulting opinion was constrained by them.

In Stolt-Nielsen, the Court held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  559 U.S. at 684.  In that case, the parties stipulated to the absence of an agreement on class arbitration.  And because there was no underlying agreement, the Court held that an arbitrator exceeded his authority in ordering a party to class arbitration without evidence of any agreement to participate in class arbitration. 

In contrast, Oxford Health Plans did not argue that class arbitration was outside the arbitrator’s jurisdiction.  Instead, as the Supreme Court stated in a footnote, Oxford Health did quite the opposite.  It “agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures.”  Once Oxford Health agreed to an arbitral determination (and renewed it a second time in the wake of the Stolt-Nielsen decision), its fate was controlled by the arbitrator who determined that the parties had agreed to class arbitration.  Writing for the Court, Justice Elena Kagan noted that “Oxford chose arbitration, and it must now live with that choice.” 

Oxford Health Plans allowed Justice Kagan to emphasize the limited judicial review of arbitration awards.  As she reaffirmed, “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”

A concurring opinion by Justice Samuel Alito addressed the viability of class-action arbitration.  The clause from which the Oxford Health Plans arbitrator construed intent to agree to class arbitration was far from explicit, stating generally:

“No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rule of the American Arbitration Association with one arbitrator.”

Because Oxford had agreed that the arbitrator should decide whether there was an agreement to class arbitration, the Court was limited in its ability to review the arbitrator’s decision.  As Justice Alito commented:  “[i]f we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred “[a]n implicit agreement to authorize class-action arbitration . . . from the fact of the parties’ agreement to arbitrate.’ ” (quoting Stolt-Nielsen, 559 U.S. at 685.)  Justice Alito expressed particular concern about absent class members who obviously did not stipulate for an arbitrator to decide the class arbitration issue and had never agreed to class arbitration.  Accordingly, “it is far from clear that they will be bound by the arbitrator’s ultimate resolution of this dispute,” Justice Alito cautioned,  “[A]n arbitrator’s erroneous interpretation of contracts that do not authorize class arbitration cannot bind someone who has not authorized the arbitrator to make that determination.”

Bottom Line:  The unanimous opinion in Oxford Health Plans does not expand Stolt-Nielsen but in footnote 2 gives a clue that future cases may hinge upon whether class arbitration is a gateway question of arbitrability for the court to decide.  And, that an arbitrator’s determination on such an issue may be subject to de novo review by a court.  Justice Alito’s concurrence also highlights the potentially limited benefits of agreements for class arbitration when they are found to exist.

After Stolt-Nielsen and Oxford Health Plans, employers that want to avoid class arbitration should not stipulate that the issue of whether the parties agreed to class arbitration is for the arbitrator to decide.  Further, most arbitration clauses now have class action waivers and employers should at least consider their potential impact.  Finally, employers should be aware that several key decisions on the validity of those waivers are expected shortly.

Authored by: Ericka Spears

Much like a war where each side steadily amasses victories and defeats, the federal courts and the National Labor Relations Board (NLRB) continue to have diverging opinions on the enforceability of class action waivers in arbitration agreements.

Federal courts have won the most recent battle in the war. In Owen v. Bristol Care, Inc., No. 12-1719, 2013 WL 57874 (8th Cir. Jan. 7, 2013), the Eighth Circuit held that class action waivers are enforceable in Fair Labor Standards Act (FLSA) cases, and became the first court of appeals to explicitly reject the National Labor Relations Board’s (NLRB’s)  stance against class waivers in the employment context as established in  In re D. R. Horton, Inc., 357 NLRB No. 184,2012 WL 36274 (N.L.R.B. Jan 03, 2012), appeal pending, No. 120600031 (5th Cir.  Jan. 13, 2012) (oral argument is scheduled for February 5, 2013), which held that class action waivers violated employees’ rights to engage in protected concerted activity under Sections  7 and 8(a)(1) of the National Labor Relations Act (NLRA).

The Owen Decision

In 2009, Bristol Care, Inc. hired Sharon Owen as a nursing home administrator.  Both parties signed a Mandatory Arbitration Agreement in which they agreed to resolve all claims or controversies, including claims arising from the FLSA, by binding arbitration.  The agreement also contained a class action waiver prohibiting parties “from arbitrating claims subject to [the] Agreement as, or on behalf of, a class.” The agreement, however, did not waive the right to file a complaint with a federal, state or local agency designed to investigate statutory violations or similar claims. 

In September 2011, Owen initiated an action against Bristol Care, alleging that her employer intentionally misclassified her and other similarly situated individuals as exempt employees in order to avoid paying proper overtime compensation under the FLSA.  In response, Bristol Care moved to stay district court proceedings and compel arbitration in accordance with the agreement and the Federal Arbitration Act (FAA).

The District Court in Owen v. Bristol Care, Inc., NO.11-04258-CV-FJG, 2012 WL 1192005 (W.D. Mo. Feb 28, 2012), denied the motion to compel arbitration, holding that class action waivers are invalid in FLSA cases because the FLSA provides for the right to bring a collective action.  In reaching this conclusion, the Court distinguished the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which upheld the enforceability of a class action waiver in a consumer contract, stating that the holding was not controlling in an employment context.  Instead, the District Court relied on the NLRB’s decision in D.R. Horton and the Southern District of New York’s decision in Chen-Oster v. Goldman, Sachs & Co., 785 F. Supp. 2d 394, 398-408 (S.D.N.Y. 2011), stating that “[i]n the employment context, waivers of class arbitration are not permissible.”

On appeal, the Eighth Circuit Court of Appeals reversed the District Court’s ruling and held that mandatory arbitration agreements containing class action waivers are valid and enforceable in cases arising under the FLSA.   The appeals court stated several reasons for their reversal including:

• The Supreme Court’s decision in Concepcion applies to employment as well as consumer cases.
• Nothing in the text or legislative history of the FLSA indicates a congressional intent to bar employers and employees from agreeing to arbitrate FLSA claims.
• The FAA created a strong public policy in favor of arbitration and nothing in the FLSA overrides this.
• Unlike the agreement in D.R. Horton,   the agreement did not bar all concerted action—under the agreement employees had the right to file a complaint with administrative bodies such as the U.S. Department of Labor or Equal Employment Opportunity Commission.
• The Court declined to defer to the NLRB’s interpretation of Supreme Court precedent and stated that the NLRB did not have special competence or experience in interpreting the FAA.
• The conclusion that class action waivers are enforceable is consistent with two decades of Supreme Court precedent and the majority of federal courts that have ruled on this issue.

Federal Courts:  Class Action Waivers in Arbitration Agreements Are Enforceable

The Eighth Circuit has many allies that oppose the NLRB’s holding in D.R. Horton. The general trend among federal courts at all levels is that class action waivers in arbitration agreements are enforceable.

Courts of Appeal in the Third (Vilches v. The Travelers Companies, Inc., 413 F. App’x  487 (3rd Cir. 2011)), Fourth (Adkins v. Labor Ready, Inc. , 303 F.3d  496 (4th Cir.  2002)), Fifth (Carter v. Countrywide Credit Industry, Inc., 362 F.3d 292 (5^th Cir 2004)), Ninth (Horenstein v. Mortgage Market, Inc. , 9 F. App’x 618 (9^th Cir. 2001)), and Eleventh Circuits (Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359 (11^th Cir. 2005)) have concluded that arbitration agreements containing class waivers are enforceable in FLSA cases.  However, since these cases pre-date D.R. Horton, the Eighth Circuit in Owen was the first federal court of appeals case to directly refuse to follow the NLRB’s ruling in D.R. Horton.

Similarly, a majority of federal district courts, including those in New York (LaVoice v. UBS Financial Services, Inc., NO. 11 CIV. 2308 BSJ JLC,  2012 WL 124590 (S.D.N.Y.  Jan. 13, 2012); Cohen v. UBS Financial Services, Inc., NO. 12 CIV. 2147 BSJ JLC, 2012 WL 6041634 (S.D.N.Y. Dec . 4, 2012)), California (Morvant v. P.F. Chang's China Bistro, Inc., 870 F. Supp. 2d 831 (N.D. Cal. 2012); Reyes v. Liberman Broadcasting, Inc., 146 Cal. Rptr. 3d 616 (C.D. Cal. 2012); Swift Transp. Co. of Ariz., LLC, No. 10-cv-03739, 2012 WL 523527 (N.D. Cal. Jan. 17, 2012)); Johnmohammadi v. Bloomingdales, Inc., No. CV 11-6434 (C.D. Cal. Feb. 23, 2012)), Arkansas (Delock v. Securitas Sec. Services USA, Inc., NO. 4:11-CV-520-DPM, 2012 WL 3150391 (E.D. Ark.  Aug 1, 2012)), Florida (De Oliveira v. Citicorp North America, Inc., NO. 8:12-CV-251-T-26TGW, 2012 WL 1831230 (M.D. Fla. May 18, 2012)), Kansas (Spears v. Mid-America Waffles, Inc., NO. 11-2273-CM, 2012 WL 2568157 (D. Kan. Jul 02, 2012)), Pennsylvania (Tenet HealthSystem Philadelphia, Inc. v. Rooney, NO. CIV. A. 12-MC-58, 2012 WL 3550496 (E.D.Pa. Aug. 17, 2012); Brown v. Trueblue, Inc., NO.  1:10-CV-0514, 2012 WL 1268644 (M.D. Pa. Apr. 16, 2012)), Texas (Carey v. 24 Hour Fitness USA, Inc., Civil Action No. H–10–3009, 2012 WL 4754726 (S.D. Tex. Oct.4, 2012); Johnson v. TruGreen Ltd. Partnership, Cause No.  A-12-CV-166-LY (Oct. 25, 2012)), and Georgia (Palmer v. Convergys Corp.,No. 7:10-CV-145 HL, 2012 WL 425256, at *3 (M.D. Ga. Feb. 9, 2012)), have expressly declined to follow D.R. Horton, repeatedly observing that the NLRB’s ruling conflicts with Supreme Court precedent.

California state courts have also expressly rejected D.R. Horton, as in Truly Nolen of America v. Superior Court,  208 Cal. App. 4th 487 (Cal. App. 4 Dist. 2012), and Nelsen v. Legacy Partners Residential, Inc., 207 Cal. App. 4th 1115 (Cal. App. 1 Dist. 2012).

And, most recently, the United States District Court of Appeals for the District of Columbia  determined that President Obama’s recess appointments in January 2012 were illegal. Therefore the NLRB has not had a working quorum since the end of Member Becker’s term at the end of December, 2011, and  its decisions since then have been invalid.  See Noel Canning v. NLRB – F.3d. – (D.C. Cir. 2013). This ruling places D.R. Horton in doubt and the issue may ultimately be determined by the U.S. Supreme Court.

NLRB:  Class Action Waivers in Arbitration Agreements are Unenforceable

Despite the wave of attacks from the federal courts, the NLRB continues to fight back and apply its holding in D.R. Horton, striking down the use of class action waivers as unfair labor practices.  The NLRB has upheld and extended D.R. Horton in Administrative Law Judge Opinions (24 Hour Fitness USA, INC. and Alton  J. Sanders, NO. 20-CA-035419, 2012 WL 5495007 (N.L.R.B. Div. of Judges Nov 06, 2012); Convergys Corporation  and  Hope Grant, NO. 14-CA-075249, 2012 WL 5494972 (N.L.R.B. Div. of Judges Oct 25, 2012); Advanced Services, Inc., NO. JD(ATL)-16-12,2012 WL 2562584, *1+ (N.L.R.B. Div. of Judges July 2, 2012)); a NLRB Board Decision ( SUPPLY TECHNOLOGIES, LLC AND TEAMSTERS LOCAL 120, 359 NLRB 1 (N.L.R.B. Dec.  14, 2012)); and in a General Counsel Memorandum  (Concord Honda, 2012 WL 5942369 (N.L.R.B.G.C. 2012)). 

In addition to the NLRB’s rulings, there are a minority of federal district courts that share the view that class action waivers are unenforceable and could be potential NLRB allies.  For example, in Herrington v. Waterstone  Mortg. Corp., NO.11-CV-779-BBC, 2012 WL 1242318 (W.D. Wis. Mar 16, 2012), the district court  applied D.R. Horton to strike down a class action waiver in an arbitration agreement stating that it violated the NLRA and distinguished the Concepcion decision as not being controlling. Pre D.R. Horton, in Raniere v. Citigroup, Inc., 827 F. Supp. 2d 294 (S.D.N.Y. 2011), the court held FLSA class action waivers unenforceable as a matter of law.  Most recently, in Ryan v. Event Operations Group, Inc., No. 2:12-cv-0070-MHH (N.D. Ala. Jan. 7, 2013), the judge opined that a written arbitration clause that encompassed the plaintiffs’ FLSA claims would not be enforceable.

Bottom Line:  The law regarding the enforceability of class action waivers in arbitration agreements is still in flux, and federal courts will continue to enforce the same arbitration agreements that the NLRB would strike down. 

A National Labor Relations Board (“NLRB”) Administrative Law Judge (“ALJ”) found a company’s mandatory arbitration agreement violated the National Labor Relations Act (“NLRA”) despite the fact that its arbitration procedure permitted employees to act concertedly to challenge the terms of the agreement and provided the parties could jointly agree to class claims.

On July 2, 2012 ALJ Margaret Brakebusch followed the Boards’ oft-criticized decision in D.R. Horton, Inc., 357 NLRB No. 184 (2012) (discussed here in a January 9, 2012 post) by determining that Advanced Services Inc. (“Advanced”), an affiliate of General Electric, had violated the Act in two ways that will be of concern to companies with arbitration procedures.  See Advanced Services, Inc. and Tabita Sheppard Howard, Case Nos. 26-CA-6318 and 26-CA-71805.pdf.  Advanced, which runs a call center for appliance customers in Memphis, Tennessee, had mandatory arbitration procedures which prohibited class claims and also required confidentiality in the procedures. 

The Arbitration Procedures Involving Class Waivers

The Advanced procedures do contain a class action waiver but also have provisions different than those in D.R. Horton.  The procedures state:

Covered Employees and the company waive their right to bring any covered claims as, or against a representative or member of a class or collective action (whether opt-in or opt-out) or a private attorney general capacity, unless all parties agree to do so in writing.  All covered claims must be brought on an individual basis only . . . .  Without waiving the Company’s right to enforce this Procedure’s provisions regarding class and collective action waivers, nothing in this Procedure prohibits employees from acting concertedly to challenge the terms of the [arbitration agreement] by pursuing class or collective actions and they will not be subject to discipline or retaliation by the Company for doing so.   (Emphasis added).

Advanced argued that the D.R. Horton decision was wrongly decided and inapplicable because its arbitration agreement language was “sufficiently dissimilar” to that in D.R. Horton.  Indeed, the Advanced language specifically authorizes collective challenges to the agreement itself.  And, the class-waiver provision could be waived if both parties agreed.  Yet, the ALJ found that the language “does not eliminate the requirement for employees to bring their claims individually rather than collectively.” 

The ALJ also found the agreement did not specify when the class action waiver provision can be avoided:

The agreement does not clarify the circumstances in which [Advanced] would enter into such [a waiver agreement].  Without these written assurances, the language is hollow.  Employees may reasonably conclude that there are few, if any, circumstances in which [Advanced] would agree to relinquish the class waiver clause.”

Given these conclusions, the ALJ found that the agreement’s language “is likely to have a chilling effect on employees’ Section 7 rights and violates Section 8(a)(1), even in absence of enforcement.”

The Agreement’s Confidentiality Language

The Advanced arbitration agreement also contains confidentiality procedures, which are relatively common in these type of procedures.  The language provided:

I understand and agree that all proceedings under this Agreement . . . including the arbitration hearing and record, all documents exchanged in discovery or otherwise used, and all communications in connection with the resolution or arbitration of my covered claims shall be confidential and not disclosed to the public, except (a) to the extent that the company and I agree in writing otherwise; (b) as may be appropriate in subsequent proceedings to enforce or invalidate the arbitrator’s decision under this Agreement; or (c) as may be appropriate in response to a government agency or legal process. 

Advanced justified the confidentiality provisions as fostering trust and protecting personal information from distribution to other employees or the public in general.  Nevertheless, the ALJ determined the confidentiality provisions were unlawful:

[T]he total record evidence reflects that the confidentiality language in issue would reasonably bar employees from discussing the issues or circumstances related to the arbitration process in which they are involved.  Inasmuch as this prohibition would reasonably be construed by employees to bar them from discussing matters concerning their conditions of employment, employees are thus prohibited from engaging in activity that is protected by Section 7 of the Act.

So, the ALJ found the confidentiality language violates 8(a)(1) of the Act.

The Advanced decision illustrates the fact that the Board and its ALJs will follow D.R. Horton and find any agreement requiring individual arbitration to violate the Act.  Carefully drafted provisions allowing employees collectively to challenge the terms of the procedure will not make a difference.  Hence, if D.R. Horton stands, class action waivers in arbitration agreements subject to Board jurisdiction will be problematic. 

The Bottom Line:  The Board and its ALJs will continue to enforce D.R. Horton as written and likely will reject class waiver provisions regardless of language that preserves employees’ rights to challenge the class waiver, as long as the agreement at issue generally provides that claims must be brought individually.  This makes the challenge to the D.R. Horton decision pending in the Fifth Circuit (D.R. Horton, Incorporated v. NLRB, Case No. 12-60031) critically important.

On February 1, 2012, a two-judge panel of the Second Circuit reaffirmed its holding in an antitrust action brought against American Express (“AMEX”) that class action waivers involving federal statutory rights were unenforceable.  Largely based on an expert’s affidavit, the panel concluded that “the only economically feasible means for Plaintiffs enforcing their statutory rights is via a class action.”  See In Re American Express Merchants' Litigation.pdf., 667 F.2d 204 (2d Cir. 2012) (“AMEX III”).  (We covered AMEX III extensively on February 6, 2012).

The Second Circuit has now declined AMEX’s petition for rehearing en banc with five judges dissenting – some vigorously.  (The May 29, 2012 order.pdf denying rehearing, including concurring and dissenting opinions can be found here).

I.          Judge Pooler Concurring

Judge Rosemary Pooler, the author of AMEX III, concurred in the denial of rehearing en banc, emphasizing the “limited holding” in AMEX III and that its “analysis . . . rests squarely on a vindication of statutory rights analysis – an issue untouched in [AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011)].”  (The Concepcion decision, also covered extensively in this blog, held that the Federal Arbitration Act (“FAA”) preempted California law barring the enforcement of class action waivers in the consumer context.)

Judge Pooler argued that “[w]hile Concepcion addresses state contract rights, AMEX III deals with federal statutory rights – a significant distinction.”  And, she also distinguished Coneff v. AT&T Corp.pdf, 673 F.3d 1155 (9th Cir. 2012), because it “like Concepcion – examines when the FAA preempts state contract law. Unlike AMEX III, the Coneff court was not focused on individual plaintiffs lacking an effective means of enforcing their rights.”

Judge Pooler’s concurrence ended with a bold shot at those who disagreed: “AMEX III gives full effect to a long line of Supreme Court precedent preserving plaintiffs’ ability to vindicate federal statutory rights, rather than eviscerating more than 120 years of antitrust law by closing the courthouse door to all but the most well-funded plaintiffs.”

II.         The Donnybrook Begins!

Chief Judge Dennis Jacobs, joined by Judges José Cabranes and Debra Ann Livingston, delivered a forceful rejoinder, detailing the need for en banc review.  “The panel opinion . . . impairs the [FAA’s] strong federal policy favoring the enforcement of arbitration agreements, and frustrates the goal of arbitration by multiplying claims, lawsuits and attorneys’ fees.”

Chief Judge Jacobs identified three areas supporting the need for en banc review: (1)  AMEX III “is unbounded and can be employed to defeat class-action waivers altogether”; (2) “it makes the district court the initial theater of arbitral conflict on the merits . . . ”, and, (3) “it is already working mischief in the district courts.”

In support of his first reason, Chief Judge Jacobs argued that AMEX III is “a broad ruling that . . . can be used to challenge virtually every consumer arbitration agreement that contains a class-action waiver -- and other arbitration agreements with such a clause.”  Indeed, “every class counsel and every class representative who suffers small damages can avoid arbitration by hiring a consultant . . . to opine that expert costs would outweigh a plaintiff’s individual loss.”

As to the second basis for en banc review, Chief Judge Jacobs found that AMEX III required district judges, rather than arbitrators, to consider the merits of the case for a variety of reasons.  The threshold consideration of expert testimony and discovery issues:

“Effectively displaces arbitration with a trial court proceeding whenever lawyers assert a class claim . . . .  Even if arbitration is given a green light at the end of the judicial proceeding, the party seeking to arbitrate may have already spent many times the cost of an arbitral proceeding just enforcing the arbitration clause. * * * The predictable upshot is that AMEX III will render arbitration too expensive and too slow to serve any of its purposes.”

A third basis for en banc review is the unwarranted expansion of the decision.  Three district courts within the Second Circuit already have applied the AMEX decision to federal employment claims.  The panel opinion, according to Chief Judge Jacobs, also created a split with the Ninth Circuit’s holding in Coneff v. AT&T Corp.  In Coneff, a group of AT&T wireless customers brought a class action raising a number of claims including a violation of the Federal Communications Act.  The Ninth Circuit enforced the class action waiver in the arbitration agreement finding that the FAA was not concerned with whether customers “have sufficient incentive to vindicate their rights.”

Chief Judge Jacobs further condemned the panels’ legal analysis as proceeding “by selective quotation from Supreme Court dicta, and by aggressive measures to distinguish away the Supreme Court’s recent holding in Concepcion.”

Judge Cabranes filed a separate dissenting opinion “to underscore that the issue at hand is indisputably important, creates a circuit split, and surely deserves further appellate review.”  Tellingly, he added, “[t]his is one of those unusual cases where we can infer that the denial of in banc review can only be explained as a signal that the matter can and should be resolved by the Supreme Court.”  So, the analytical Donnybrook now may move to a broader venue.

The final dissent was authored by Judge Reena Raggi and joined by Judge Richard Wesley.  Judge Raggi maintained that the panel decision holding a class action waiver unenforceable was “at odds” with Coneff v. AT&T Corp., and based on applicable Supreme Court precedent, created an unnecessary circuit split, as “forcefully advanced by Judge Chief Judge Jacobs.”

III.        The Next Battle?

As the dissents suggest, this dispute likely will find its way to the U.S. Supreme Court.  AMEX III’s “vindication of statutory rights analysis” is not confined to anti-trust cases.  As Chief Judge Jacobs noted, the decision’s elastic principles have been applied to federal employment claims and could be used with respect to any federal claim.  Indeed, three employment-related class action waiver cases are currently before the Second Circuit, two involve alleged violations of the Fair Labor Standards Act, and the third is premised on Title VII gender discrimination.  They involve Citigroup, Inc., Ernst & Young LLP and Goldman Sachs & Co.

The Bottom Line:  The AMEX III decision warrants U.S. Supreme Court review.  Until then, it remains a potential impediment to enforcing class action waivers involving federal claims, at least in the Second Circuit.  Its “vindication of federal statutory rights analysis,” provides plaintiff’s lawyers with a weapon to attack class action waivers. 

Once again a court has been required to consider whether a federal statutory claim might limit the reach of the Federal Arbitration Act, 9 U.S.C. § 1 et. seq. (“FAA”), and prevent arbitration of an individual discrimination claim.  This twenty-two-page decision reflects the on-going struggle by plaintiffs to discover potential exceptions to the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion.

On April 18 a Massachusetts district court held that a plaintiff must arbitrate gender discrimination claims despite alleging that her employer engaged in a pattern-or-practice of sex discrimination violative of Title VII of the 1964 Civil Rights Act and state law.

In Karp v. CIGNA Healthcare Inc.pdf (Case No. 11-CV-10361, D. Mass, 04/18/2012), Judge F. Dennis Saylor, IV compelled arbitration of Bretta Karp’s individual sex discrimination claim despite her arguments that she never waived her rights to a class action or class arbitration proceeding and that individual arbitration would deny her statutory rights under Title VII to bring a pattern-or-practice claim.

The Dispute Resolution Procedure

Karp, a former Provider Contract Manager, began working for CIGNA in 1997 and in early 1998 signed a receipt acknowledging that she received the Company’s 1998 Employment Dispute Arbitration Policy requiring employees to arbitrate their disputes with the company instead of going to court.  The 1998 policy did not reference class actions or class arbitration.

In 2005, CIGNA revised its Employee Handbook to reflect changes in its policies and procedures and circulated an e-mail to advise employees. The e-mail provided a link to an electronic version of the Handbook and required employees to complete an electronic receipt.  Karp checked “yes” on the Handbook receipt, which acknowledged that she reviewed the 2005 Handbook and agreed that disputes would be resolved through CIGNA’s Employment Dispute Arbitration Program.  Neither the Handbook, CIGNA’s e-mails nor the electronic receipt mentioned class arbitration or a class action waiver.  However, as noted above, the Handbook referred to the company’s Employee Dispute Arbitration Policy, Rules and Procedures which clearly provided that no class-wide arbitrations were allowed and “no class or representative actions permitted.”  And, while the court expressed concerns that the Company policies and procedures could be enforced against Karp, there was “no doubt that [CIGNA] did not agree to permit class arbitration.”  Thus based on AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1840, 1750 (2011), the court held that CIGNA “could not be compelled to submit to class arbitration.”

Is Litigation an Option?

While the District Court found Karp could not arbitrate her class claims, “it did not necessarily follow that she may litigate those claims in a judicial forum.”  Indeed, it ultimately found she could not.  The Opinion found that “by agreeing to arbitrate her individual claims, [Karp] cannot serve as a class representative in a litigated class action.”  But, Karp had contended that if she was compelled to arbitrate her claims individually, she would not be able to vindicate her statutory right under Title VII to pursue pattern-or-practice claims.  Thus, according to Karp, the arbitration clause could not be enforced because it was not a viable alternative to litigation.  The Court disagreed after considering the history, potential viability and practical impact of those claims. 

According to the Court, the pattern-or-practice “claim” under Title VII was in reality “merely a method of proof.”  The District Court would not permit “a procedural device – a burden-shifting rule contained within a method of proof – to trump the arbitration agreement and the FAA.”

Based upon that analysis, the District Court granted CIGNA’s Motion to Compel arbitration and stayed Karp’s action pending arbitration.

The Bottom Line:  Another lower court enforces U.S. Supreme Court precedent supporting arbitration.  An individual cannot assert a pattern-or-practice discrimination claim to defeat arbitration.

Is the Supreme Court’s January 10th opinion in CompuCredit Corp v. Greenwood.pdf a potential antidote for the National Labor Relations Board’s (“NLRB”) decision in D.R. Horton? Perhaps. CompuCredit Corp. considered whether the Credit Repair Organizations Act (“CROA”), 15 U.S.C. § 1679 et seq., foreclosed enforcement of an arbitration agreement in a class action filed in the Northern District of California alleging CROA violations stemming from alleged misrepresentations made by CompuCredit in marketing its Aspire Visa credit card.

The District Court denied CompuCredit’s motion to compel arbitration, finding that claims under CROA were non-arbitrable based on its language. The Ninth Circuit affirmed and the Supreme Court reversed.

I. The Arbitration Provision

The arbitration provision in CompuCredit Corp. required individual arbitration of all claims. It provided:

Any claim, dispute or controversy (whether in contract, tort or otherwise) at any time arising from or relating to your Account . . . will be resolved by binding arbitration . . . .

* * *

In addition, you will not have the right to participate as a representative or member of any class of claimants relating to the claim subject to arbitration.

II. The CROA’s Provisions

The CROA regulates the practices of credit repair organizations and provides a private cause of action for violations as well as federal and state administrative enforcement. The CROA also has disclosure and nonwaiver provisions, which were focused upon by the District Court and the Ninth Circuit. The required disclosure statement, stated in pertinent part: “You have a right to sue a credit repair organization that violates the Credit Repair Organization Act.” (Emphasis added). The non-waiver provision declares:

“Any waiver by any consumer of any protection provided by or any right of the consumer under their subchapter – (1) shall be treated as void; and (2) may not be enforced by any Federal or State court or any other person.” (Emphasis added).

III. The FAA and Federal Statutory Claims

As a threshold matter, Justice Antonin Scalia, writing for the Court, examined the Federal Arbitration Act (“FAA”) as background for resolution of the case. He found that the FAA’s “liberal policy favoring arbitration agreements” applied to federal statutory claims “unless the FAA’s mandate has been ‘overridden by a contrary Congressional Command.’” With that understanding, Justice Scalia reviewed CROA’s provisions to determine if the Act contained such a Congressional command.

IV. CROA’s Provisions and The Duty to Arbitrate

The opinion found that the disclosure provision did not give consumers a right to bring an action in court. Instead, Justice Scalia concluded “[t]he only consumer right it creates is the right to receive the statement, which is meant to describe the consumer protections that the law elsewhere provides.”

The opinion went on to note that it was common for statutes creating civil causes of action to detail the claims, and relief available in a judicial context. Yet, the mere reference to a cause of action is insufficient to establish a “’contrary congressional command’ overriding the FAA.”

The opinion commented that in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991), an arbitration agreement was enforced as to an Age Discrimination in Employment Act of 1967 (“ADEA”) claim despite language that declared: “Any person aggrieved may bring a civil action in any court of competent jurisdiction for such legal or equitable relief as will effectuate the purpose of this chapter.” Justice Scalia emphasized that the court had “repeatedly recognized that contractually required arbitration of claims satisfies the statutory prescription of civil liability in court.”

The opinion reasoned that at the time of CROA’s enactment in 1996, arbitration provisions in agreements were not unusual. So, if Congress intended to prohibit arbitration of CROA claims it would have done so with greater clarity. This reasoning led Justice Scalia to conclude “[b]ecause the CROA is silent on whether claims under the Act can proceed in an arbitral form, the FAA requires the arbitration agreement to be enforced according to its terms.” (Emphasis added). In her concurring opinion, Justice Sotomayor attempted to place the majority opinion in the context of existing precedent. She wrote: “I do not understand the majority opinion to hold that Congress must speak so explicitly in order to convey its intent to preclude arbitration of statutory claims.”

V. The Antidote or Just Another Pro-Arbitation Opinion?

Does CompuCredit Corp. signal an even more aggressive enforcement of arbitration procedures with class action waivers? Does the silence of the 1930’s vintage National Labor Relations Act on the key “congressional command” needed to foreclose arbitration mean that D.R. Horton is destined to be overturned? Or, as Justice Sotomayor states, can the Congressional will be “discovered in the history or purpose of the statute in question?” Too soon to tell. Yet, the CompuCredit Corp. opinion plainly raises additional doubts about the future viability of D.R. Horton.

The Bottom Line: Only time will tell what role the CompuCredit Corp. opinion will play in the future development of the law on mandatory arbitration. But, the opinion certainly provides at least one basis to challenge the NLRB’s decision in D.R. Horton.

In the much anticipated ruling in D.R. Horton, Inc. and Michael Cuda.pdf, released Friday, January 6, the National Labor Relations Board (“NLRB”) held that the Company violated Section 8(a)(1) of the National Labor Relations Act (“NLRA”) by “requiring employees to waive their right to collectively pursue employment-related claims in all forums, arbitral and judicial.” The decision, which will have a far-reaching impact on all employers, also concluded that recent United States Supreme Court rulings on the Federal Arbitration Act and class arbitration were not implicated. To many management observers, the ruling elevates a procedural device, a class or aggregate proceeding, to the status of an individual statutory right applicable to any employment claim. The decision reasoned:

“an individual who files a class or collective action regarding wages, hours or working conditions, whether in court or before an arbitrator, seeks to initiate or induce group action and is engaged in conduct protected by Section 7.”

The Company and the Arbitration Agreement

The Company, D.R. Horton, Inc., builds homes and operates in more than 20 states. Starting in 2006, the Company required employees to sign a Mutual Arbitration Agreement (“MAA”) that essentially provided that all employment-related disputes be resolved through individual arbitration. The Charging Party Michael Cuda worked for the Company as a superintendent and had signed the MAA. His attorney later informed the Company that it was misclassifying superintendents as “exempt” under the Fair Labor Standards Act and that he had been retained to represent Cuda and a nationwide class of superintendents. Cuda’s attorney also attempted to give notice of intent to arbitrate on a class or collective basis. When the Company resisted, Cuda filed an unfair labor practice charge with the NLRB.

A Necessary Substantive Right?

Several groups that filed Amici Curiae briefs with the NLRB urged that employees’ Section 7 rights were not impacted because they could jointly discuss their claims, pool their resources to hire a lawyer, seek litigation advice and support from a union, seek support from other employees and coordinate the filing of claims. The Board majority was unpersuaded, responding,

“if the Act makes it unlawful for employers to require employees to waive their right to engage in one form of activity it is no defense that employees remain able to engage in other concerted activities.”

The decision also categorically rejected arguments that the right to bring a class or collective action was “procedural” rather than substantive.

“Any contention that the Section 7 right to bring a class or collective action is merely ‘procedural’ must fail.”

According to the decision, the salient issue is:

“Whether [the Company] may lawfully condition employment on employees’ waiving their right under the NLRA to take the collective action inherent in seeking class certification . . . .. Rule 23 may be a procedural rule but the Section 7 right to act concertedly by invoking Rule 23 . . . or other legal procedures is not” (emphasis added).

Supreme Court Precedent Found Not Implicated

The ruling also found that the U.S. Supreme Court’s opinions in Stolt-Nielsen v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), and AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011) (discussed in detail in other blog articles here and here) were not implicated. The Board majority reasoned that “[n]either involved the waiver of rights protected by the NLRA or even employment agreements.” AT&T Mobility (which arose in a consumer context) was distinguished by the majority because it involved a conflict between the Federal Arbitrator Act (“FAA”) and state law not where two federal statutes potentially conflict. The FAA did not preempt the NLRA which gave employees a federally protected right to engage in concerted action. And, the Cuda decision emphasized it did not require class arbitration to protect employees’ rights under the NLRA. Instead, it held “only that employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral and judicial.

Impact and Next Steps

The decision was completed last Tuesday and signed by the two Democratic Board members, before one, Craig Becker, had his recess appointment expire. The Board’s sole Republican member, Brian Hayes, recused himself, without explanation.

The decision, which applies both to union and non-union workforces, will undoubtedly be appealed to a federal court of appeal.

The Bottom Line: The controversial NLRB has created another potential obstacle to the enforcement of class action waivers. A federal appellate court or the Supreme Court will likely resolve these important issues.

The enforcement of arbitration agreements in the employment context has been maddeningly inconsistent, with different jurisdictions creating their own requirements and rules that might render such an agreement unenforceable. Predictably, California courts were in the vanguard of invalidating employment arbitration agreements. California courts created their own rules that, among other things, largely required class action procedures to be available if a claim was to be arbitrated. Six months ago, the Supreme Court held that the Federal Arbitration Act ("FAA"), 9 U.S.C. section 2, preempts state laws that would condition arbitration agreements on the availability of class action arbitration procedures. AT&T Mobility v. Concepcion.pdf, 563 U.S. ____ (April 27, 2011). This holding overturned prior holdings from California as well as other jurisdictions, and made arbitration agreements a much more attractive prospect for employers. Indeed, in the wake of Concepcion, many employers revised their arbitration agreements to contain express class action waivers.

One concern arising from the Concepcion decision was how closely courts would follow it and, equally importantly, whether courts hostile to arbitration would find new means to avoid enforcing otherwise valid arbitration agreements. So far, we have seen cautious acceptance by a number of courts. Commentary on several of these decisions can be accessed under the "topics" heading to this blog. A recent case, however, represents the clearest sign that the Concepcion decision will not only result in more cases being referred to arbitration, but that they will be arbitrated on an individual basis if that is what the contract provides. In Dauod v. Ameriprise Financial Services, Inc.pdf, Inc., Case No. 8:10-cv-00302-CJC(MANx) (C.D. Cal. Oct. 12, 2011), the plaintiffs were financial advisors whose employment agreements required arbitration of disputes before the Financial Industry Regulatory Authority ("FINRA"). FINRA is the successor to the National Association of Securities Dealers, better know by the acronym "NASD." The arbitration agreement also prohibited the employee from pursuing claims on a representative basis on behalf of other employees.

The Dauod case had an interesting procedural posture. One of the plaintiffs received a large loan from the employer at the outset of her employment, with a related agreement that provided for bonuses over the course of five years that could be used to retire the debt. When her employment ended less than a year later, however, the employer commenced FINRA arbitral proceedings to recover the loan amount outstanding. While that arbitration was pending, the plaintiffs filed a putative class action in court asserting violations of California's wage and hour laws. They also successfully moved to stay the FINRA proceedings, and the district court's 2010 ruling granting the stay was most likely correct under the pre-Concepcion California law. Thus, prior to Concepcion, the plaintiffs appeared to have won a procedural victory, with the arbitration stayed and the putative class action proceeding in federal court in southern California.

In the wake of Concepcion, however, the defendant moved to lift the stay and for summary judgment on the class allegations. The court found that Concepcion dictated enforcement of the arbitration provisions. Rejecting the argument that Concepcion should be limited to consumer cases, the court had no difficulty in disposing of the argument that a class action waiver rendered the agreement unconscionable. It also rejected arguments relating to the California Private Attorney General Act ("PAGA") as the plaintiffs did not assert any PAGA claims. Thus, the court vacated the stay, directed arbitration on an individual (not class basis) and dismissed the case. Almost overnight, what had been a procedural victory for the plaintiffs only a year ago had become a complete victory for the employer, with arbitration compelled on an individual basis.

The Bottom Line: The Concepcion decision can be used to compel arbitration of employment class action claims on an individual basis even in jurisdictions traditionally hostile to arbitration.

The battle between California courts and the U.S. Supreme Court over arbitration agreements wages on. Though California courts frequently make perfunctory statements about the strong public policy in favor of arbitration agreements, these statements are undercut by the many cases in which the courts appear to bend over backwards to find arbitration agreements unconscionable or otherwise unenforceable. This is particularly true where the arbitration agreements attempt to waive or limit class action or representative claims.

While the Supreme Court held in AT&T Mobility v. Concepcion.pdf ("Concepcion"), 563 U.S. __, 131 S. Ct. 1740 (2011), that a class action waiver is enforceable in the arbitration context, cynical observers believed that some courts, particularly in California, would try to find a way around its clear holding: that the scrutiny applied to arbitration agreements should be no different than the scrutiny applied to all other contracts and that an arbitration agreement must be enforced according to its terms. (We wrote about the Concepcion decision in a post on April 27.) In a divided ruling, the California Court of Appeal took its first swing at Concepcion, and held that arbitration agreements cannot be applied to claims brought under the California Private Attorney General Act of 2004 ("PAGA").

In Brown v. Ralphs Grocery Co.pdf., the Court of Appeal considered the enforceability of an arbitration agreement that contained the following provision: "there is no right or authority for any Covered Disputes to be heard or arbitrated on a class action basis, as a private attorney general, or on bases involving claims ort disputes brought in a representative capacity on behalf of the general public." The primary question presented was whether the Concepcioncase--which had invalidated another California decisional rule forbidding certain kinds of class action waivers--also preempted California law that PAGA claims cannot be subject to an arbitration agreement.

The majority acknowledged the long history of the U.S. Supreme Court overturning California law contravening enforcement of arbitration agreements (on various ground), but it concluded that "United States Supreme Court authority does not address a statute such a the PAGA."

The Court’s basis for distinguishing PAGA claims from other employment claims was that PAGA claims are "in large part 'for the benefit of the general public rather than the party bringing the action.'" Therefore, the Court (citing past cases) determined that PAGA waivers are contrary to California law. The Court found that making PAGA claims unarbitrable did not contradict the Federal Arbitration Act (“FAA”) because, unlike class actions which require a formal certification process and other procedural requirements, PAGA does not have any such requirements. Therefore, reasoned the Court, taking PAGA off the list of arbitrable disputes did not frustrate the FAA in the same way as the rule at issue in Concepcion.

This reasoning is more than arguably contrary to several pages of the analysis in Concepcion, which pointed to numerous problems with compelling the arbitration of class-wide claims, including the issue of absent parties and the fact that representative and class claims often involve much higher stakes for the employer than individual claims. Moreover, because of CCP section 1281.2 which grants courts the discretion refuse arbitration on all claims rather than split a case between civil court and arbitration (where a complaint alleges both arbitrable and non-arbitrable claims), a court might refuse arbitration merely because Plaintiff has alleged PAGA claims among a slew of other arbitrable claims. (Note: after Concepcion, there is a strong argument that the discretion afforded courts under CCP section 1281.2 is preempted by the FAA, but so far this issue has not been ruled on.)

In light of the Browndecision, employers should be aware that California courts will likely not send PAGA claims to arbitration. Further, a court may also find that a PAGA provision in an arbitration agreement is not severable (an issue left open in the Brown case) and therefore hold that the entire agreement is not enforceable. To that end, employers may consider revising existing arbitration agreements to make any PAGA provisions clearly severable.

The Bottom Line: California courts remain hostile to arbitration agreements that purport to limit class/representation claims despite the strongly worded Concepcion opinion. Employers will therefore need to exercise caution in this arena.

Authorship credit: Alastair Gamble

In the wake of the Supreme Court’s April 27th decision in AT&T Mobility v. Concepcion.pdf, Senator Al Franken (D-Minn) and others re-introduced legislation (S.987, H.R. 1873.pdf) that would forbid pre-dispute mandatory arbitration agreements in employment, consumer or civil rights disputes. 

The Concepcion opinion (reviewed in Greg Mersol's April 27, 2011 post on this blog and in the May 5, 2011 Baker Hostetler Employment Class Action newsletter) involved a consumer class action but will impact the enforcement of many types of arbitration agreements. 

The Concepcions, customers of AT&T Mobility LLC (“AT&T”), brought suit after they were charged sales tax on a phone that had been advertised as “free” with the purchase of an AT&T service plan.  The service contract included an arbitration agreement requiring that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”

When AT&T moved to compel arbitration, the Concepcions successfully had the class waiver provision declared invalid under a California rule (the so-called “Discover Bank rule”, named for the seminal case on the issue: Discover Bank v. Superior Court, 36 Cal. 4^th 148 (2005)), which held that class waiver provisions, like that contained in the AT&T arbitration agreement, are unconscionable and in violation of the state’s public policy against exculpation.  AT&T appealed, and the Ninth Circuit affirmed.

The Supreme Court reversed.  Justice Antonin Scalia, writing for the majority, held that the Discover Bank rule conflicted with the purpose and language of the Federal Arbitration Act (“FAA”) and therefore was preempted as an improper challenge to the enforcement of arbitration agreements.  The Concepcion decision means that an employer now can avoid class action liability by providing for mandatory arbitration of employment claims and restricting that arbitration to individual disputes.

The reintroduced bill, entitled “the Arbitration Fairness Act of 2011” (the original was introduced in 2009), is intended to counter that outcome.  It contains a number of “findings” including that “[a] series of decisions by the Supreme Court . . . have changed the meaning of the [FAA] so that it now extends to consumer disputes and employment disputes.”  Another finding declares that “mandatory arbitration undermines the development of public law because there is inadequate transparency and inadequate judicial review . . . . ”

This bill was not unexpected but has no Republican support and little chance of passage at this time.  But, never say never.  Senator Franken did succeed with earlier legislation, known as the “Franken Amendment”, which required withholding defense contracts if companies required their employees or independent contractors to enter mandatory arbitration agreements.  (See Section 8816 of the Department of Defense Appropriation Act for 2010, and the implementing regulations at 48 C.F.R. Section 222.7401).

The Bottom Line: We have not seen the last of the opposition to the Concepcion decision or to mandatory arbitration for employees or consumers.  Many pro-employee and consumer groups would like to take a bite out of all non-commercial arbitration and give every American an inalienable right to present their claims in a class action or other aggregate proceeding.