Emergence of Class-Wide Arbitration
Prior to the Supreme Court’s decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), there was a split among the courts as to whether arbitration agreements could prohibit class actions and whether class actions could proceed in arbitration. In Bazzle, a highly fragmented plurality decision, the Court determined that class arbitration was not an oxymoron. Class actions could proceed in arbitration when the agreement between the parties was silent on the issue. “Where class arbitration is not clearly prohibited in the arbitration clause, whether it is permissible in a particular arbitral proceeding is a matter of contract interpretation applying state law.” See Kindred Nursing Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017) (the applicable state law must, however, directly or indirectly treat an arbitration agreement no differently than any other agreement or it violates the FAA and will be preempted).
The dissenters in Bazzle argued that the intent of the signers not to engage in class arbitration was evident from the fact that the agreement provided for the selection of an arbitrator to render a decision in each individual arbitration case and not in a class of cases. In addition, the availability of class arbitration in effect determines the parties to an arbitration proceeding and therefore was a gateway issue that needed to be decided by a court and not by an arbitrator.
Because the parties had delegated the decision to the arbitrator, the case was remanded for consideration of the parties’ intent concerning the availability of class-wide arbitration in the proceedings. The Court did not address the key issue of whether arbitration agreements can preclude class actions.
Mere Silence Does Not Constitute Consent
In 2010, the Court addressed the issue as to whether mere silence on the issue of class actions in an arbitration agreement was sufficient to imply agreement by the parties. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010). The Court held that the parties’ mere agreement to arbitrate was not a basis on which to infer that they had also authorized class-wide arbitration. Under the Federal Arbitration Act (FAA), a party may not be compelled to submit to class arbitration unless “there is a contractual basis concluding that the party agreed to do so.”
Who Decides?
In First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995), the Supreme Court established the general rule that courts—not arbitrators—decide gateway questions, such as whether there is a valid arbitration agreement, unless there is “clear and unmistakable” evidence that the parties delegated that authority to an arbitrator. In Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79 (2002), the Court clarified the general rule enunciated in First Options. Questions of arbitral procedure are presumptively for an arbitrator to decide. In Rent-A-Center, West Inc. v. Jackson, 561 U.S. 130 (2010), the Court concluded that arbitrators may decide gateway questions if the parties have “clearly and unmistakably” so provided in their arbitration agreement.
Prior to 2013, most federal appellate courts would have agreed that whether the parties authorized class-wide arbitration was normally a question for the arbitrator to decide if the parties had incorporated a set of arbitration rules of the American Arbitration Association (AAA) that included a delegation clause. When ascertaining intent, adoption by the parties of such arbitration rules could be construed by the arbitrator as “clear and unmistakable” evidence of consent, provided the clause was otherwise silent regarding class-wide arbitration. See Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013).
In 2013 and 2014, however, two circuits—the Sixth and the Third, respectively—issued opinions that held that the availability of class-wide arbitration was a gateway question for a court to decide and that adoption of a set of AAA rules did not provide unmistakable evidence that the parties had consented to class arbitration or to delegation of the decision making on that issue to an arbitrator. Reed Elsevier Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), cert. denied, 134 S. Ct. 229 (2014); Opalinski v. Robert Half Int’l, Inc., 761 F.3d 326 (3d Cir. 2014), cert. denied, 135 S. Ct. 1530 (2015).
The circuit split regarding who decides has yet to be resolved by the Supreme Court.
Enforcement of Class Waivers
In American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the Court held that a class-wide waiver in an arbitration agreement is generally enforceable under the Federal Arbitration Act. Citing AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Court rejected the argument that “federal law secures a non-waivable opportunity to vindicate federal policies” by class arbitration using the procedures in the Federal Rules of Civil Procedure or some other informal class mechanism in arbitration. In Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), the Court cemented the practice of employers including arbitration agreements requiring individual arbitration when it held that class-wide or collective action waivers are enforceable.
In Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019), the arbitration provision was silent regarding class arbitration but included vague references that arbitrators and courts had decided implied party consent. For example, “any and all claims” were subject to arbitration, and the arbitrator could grant “all relief that a court could award.” In Lamps Plus, the Supreme Court held that an ambiguous agreement did not provide the necessary “contractual basis” for compelling class arbitration. In reaching its decision, the Court focused on the “fundamental difference between class arbitration and the individualized form of arbitration envisioned by the FAA.” For example, parties agree to forgo rules of court and appellate review available in class actions for the speed, reduced cost, and procedural flexibility available in individual arbitration. The benefits available in individual arbitration are not available in class-wide arbitration, which is “slower, more costly, and more likely to generate procedural morass than final judgment.” “Like silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice’ the principal advantages of arbitration.” To be enforceable, such waivers must be explicit.
Unintended Consequences of Lamps Plus
DoorDash classifies its delivery drivers as independent contractors rather than employees—a classification that is being challenged by over 5,000 couriers who deliver food orders. DoorDash required the couriers to sign arbitration agreements that prohibited class-wide or collective arbitration. When over 5,000 individual arbitration demands were filed with the AAA, DoorDash was required to pay arbitration fees of $12 million to $20 million. In response, DoorDash began to require that couriers, in order to sign in for new work, click through to a new agreement that required arbitration at a smaller ADR service provider, CPR. CPR had recently adopted mass arbitration rules that called for 10 test cases to be arbitrated to completion before other cases could move ahead. The plaintiffs filed a motion to compel the individual arbitrations before the AAA, and DoorDash filed a motion to stay, arguing that class treatment was appropriate despite the existence of the class action waivers in the contracts drafted by DoorDash.
On February 10, 2020, Judge Alsup in the U.S. District Court for the Northern District of California issued a blistering denial of DoorDash’s motion to stay:
DoorDash, faced with having to actually honor its side of the bargain, now blanches at the cost of the filing fees it agreed to pay in the arbitration clause. No doubt, DoorDash never expected that so many would actually seek arbitration. Instead, in irony upon irony, DoorDash now wishes to resort to a class-wide lawsuit, the very device it denied to the workers, to avoid its duty to arbitrate. This hypocrisy will not be blessed, at least by this order.
Abernathy v. DoorDash, Inc., No. C 19-07545 WHA, related to No. C 19-07646 WHA (N.D. Cal. Feb. 10, 2020).
Postmates, another food delivery service, is also the subject of thousands of individual arbitrations filed on behalf of couriers who were allegedly misclassified as independent contractors. The facts were similar to the facts in the DoorDash case. The couriers were required to sign arbitration agreements that included class action waivers, and when faced with a flood of individual claims, Postmates refused to pay over $10 million dollars in filing fees to the AAA. The plaintiffs filed a motion to compel arbitration, and Postmates filed a motion to stay arbitration. The U.S. District Court for the Northern District of California, Oakland Division, issued an order compelling arbitration, and Postmates filed a motion to stay pending appeal. Adams v. Postmates, Inc., No. 19-3042 SBA (N.D. Cal. Mar. 5, 2020).
In its motion, Postmates erroneously claimed the court had compelled Postmates to engage in class arbitration. As pointed out in footnote 7 of the March 5, 2020, order denying the motion, the court compelled Postmates to arbitrate the individual demands as it had agreed to do under the arbitration agreement—which all parties agreed required individual arbitration. The court also disagreed with Postmates’ argument that it would suffer “irreparable harm” if forced to pay the AAA administrative fees. As the court noted, prior decisions have held that “[m]ere litigation expense, even substantial and unrecoupable cost, does not constitute irreparable injury.” The court went on to state, “It strains credulity for Postmates to argue that the amount of filing fees due constitute irreparable harm when that ‘harm’ is entirely of its own making.” In addition, prior binding decisions have found that unnecessarily undergoing arbitration proceedings does not constitute “irreparable harm.” “The mere fact that Petitioners filed over 5,000 demands within a short span of time does not transform those individual demands into a de facto class arbitration.”
In a final attempt to delay the inevitable, Postmates requested that the court stay the order compelling arbitration for 60 days while Postmates sought an appeal. Postmates argued that the petitioners would not be harmed from a temporary stay, given that it is unlikely all 5,000-plus arbitrations could proceed simultaneously. The court in its March 5, 2020, order denying both the stay and the temporary stay noted that “tellingly, Postmates cites no authority holding that potential logistical challenges in managing a large number of arbitration demands justifies a stay pending appeal.”
On March 25, 2020, Postmates filed a lawsuit in the U.S. District Court for the Central District of California seeking declaratory and injunctive relief determining that attempts to pursue de facto class arbitration against Postmates through coordinated individual arbitration violate the parties’ agreement to resolve the disputes in individual arbitration. The appeal was denied. Postmates v. 10,356 Individuals, No. CV 20-2783 (C.D. Cal. Apr. 15, 2020).
Conclusion
When reviewing existing arbitration agreements and drafting new ones, counsel need to have an insightful discussion with their clients regarding the following key issues:
- Should the arbitration agreement expressly preclude class-wide or collective arbitration? Currently, the risks of including such a provision might be greater if there is a possibility that thousands of individual demands could be filed simultaneously, as in the pending DoorDash and Postmates cases.
- Who should make decisions concerning the applicability, scope, enforceability, and operation of class-wide arbitration—a court or an arbitrator? The Supreme Court has yet to address the implications of an arbitrator’s potential auto-expansion of his or her jurisdiction by issuing an award that binds noncontracting, nonparticipating “class” members. In addition, the limited review permitted under the FAA does not include a determination as to whether an arbitrator construed the parties’ contract correctly, but whether the arbitrator conducted an analysis in accordance with the test laid out in prior Court decisions regarding the availability of class-wide arbitration.