The Supreme Court has issued a set of decisions that may seriously affect the utility of arbitration in the employment context and may make arbitration an effective defense against employment class actions.

On April 27, 2010, the Supreme Court decided the case of Stolt-Nielsen v. AnimalFeeds Int’l Corp.pdf 2010 U.S. LEXIS 3672 (Apr. 27, 2010). The case itself involved a class action claim of price fixing in the shipping industry, and it was undisputed that the underlying claim itself was subject to an arbitration agreement. The issue presented to the court was whether a class action was available in arbitration when the arbitration agreement was silent as to the availability of class actions. The Court concluded that absent an express agreement to provide for class actions in arbitration, no class action was available. Further, because arbitrators possess a financial conflict of interest as to whether to permit class action claims, the court, not the arbitrator, must decide the issue.

The Stolt-Nielsen case resolved an issue largely left open by the plurality decision seven years ago in Green Tree Financial Corp. v. Bazzle.pdf, 539 U.S. 444 (2003), which had seemed to indicate that class actions might be available in arbitration, but did not definitively address the question. Further, the court’s broad language and reliance on its prior employment arbitration authority leaves no doubt that its holding will apply to employment actions.

A handful of courts, most notably in California and the Ninth Circuit, have taken the position in the past that an arbitration agreement is “substantively unconscionable” if it does not provide for class actions. These courts rely upon the implicit premise that that ability to pursue a class action is somehow a substantive right. The Supreme Court is now poised to address that issue. Shortly after Stolt-Nielsen, the Court vacated a Second Circuit case ordering the arbitration of a consumer class action against American Express. American Express Co. v. Italian Colors Restaurant, 176 L. Ed. 2d 920 (May 3, 2010). Most importantly, on May 24, 2010, the Court accepted certiorari in AT&T Mobility LLC v. Concepcion.pdf, 584 F.3d 849 (2009), in which the Ninth Circuit invalidated an arbitration provision because it did not provide for class actions.

The bottom line: The Supreme Court has now recognized that class actions are not available in arbitration unless the agreement specifically provides for them. The Court has also accepted cert. in an case that could spell the end for holdings that condition arbitration on the availability of class actions. If the Court holds that arbitration agreements that do not provide for class actions are enforceable, employers can dramatically limit their class action exposure through arbitration.