November 21, 2011 Articles

Consumer Protection and Employment Cases after Concepcion

Class-action prohibitions in arbitration clauses have become commonplace not only in consumer agreements but also in the employment context.

By Kirsten Scott and Nicole D. Reynolds

In April 2011, the U.S. Supreme Court issued an opinion of such potential breadth that commentators immediately posed the question, “Has the Supreme Court killed the class action?” The case, AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), involved AT&T Mobility’s allegedly false advertising that it would provide customers with “free” phones when it in fact charged a sales tax of approximately $30 on each phone. Like many companies providing services and products to consumers, AT&T Mobility inserts in its customer agreements an arbitration clause prohibiting customers from suing it in court. More significantly, the arbitration clause forbids customers from bringing claims against the company as part of a class action. The issue presented in Concepcion was whether AT&T Mobility’s arbitration clause, with its class-action prohibition, was enforceable.

The district court and the Ninth Circuit found AT&T Mobility’s arbitration agreement to be unconscionable pursuant to the California Supreme Court’s holding in Discover Bank v. Superior Court, 36 Cal. 4th 148 (Cal. 2005). Under the Discover Bank rule as interpreted by the Supreme Court, class-action prohibitions are unenforceable when found in consumer adhesion contracts and where small amounts of individual damages are at stake. The rule recognizes that in such contexts, absent a class mechanism, consumers would be unlikely to obtain any redress for the wrongs alleged.

The Supreme Court, however, reversed the lower courts’ decisions, with a 5–4 majority holding that the Discover Bank rule is preempted by the Federal Arbitration Act (FAA). The FAA contains a “savings clause” allowing arbitration clauses to be invalidated by general state-law contract defenses. Nevertheless, since the 1980s, the Supreme Court has steadily expanded the preemptive scope of the FAA to disallow any state law that is applied in a manner that disfavors arbitration. Writing for the majority in Concepcion, Justice Scalia broadened the FAA’s preemptive reach by finding that the FAA’s principle purposes are to “ensure that private arbitration agreements are enforced according to their terms” and to allow for informal, efficient, and relatively inexpensive procedures for resolving disputes. Justice Scalia concluded that the Discover Bank rule conflicts with these objectives by allowing a party, who has purportedly “agreed” to an arbitration clause with a class-action prohibition, to demand ex post class-wide arbitration.

While there is no question that Concepcion handed a victory to businesses, interpretations of Concepcion and views on whether it actually does sound in the “death knell” of class actions are wide-ranging. Defense counsel representing corporate interests have unsurprisingly insisted that Concepcion forbids applying any state unconscionability or public policy analysis to arbitration clauses. The plaintiff’s bar, on the other hand, has emphasized various reasons why Concepcion should be narrowly construed, including the unique consumer-friendly features of AT&T’s arbitration clause. Class-action prohibitions in arbitration clauses have become commonplace not only in consumer agreements, but also in the employment context, where they are typically found in employee handbooks.

Concepcion’s Impact on Consumer-Protection Cases
Because Concepcion was a consumer-protection case, it predictably has had the most direct impact on such cases including those brought under the states’ various unfair and deceptive acts and practices (UDAP) laws. Many courts in UDAP actions have applied Concepcion broadly, holding that arbitration agreements with class-action prohibitions may no longer be defeated on substantive unconscionability or public policy grounds. Other courts have disagreed with this approach, determining that Concepcion “simply does not go that far.” Mission Viejo Emergency Med. Assoc. v. Beta Healthcare Group, No. G043815, 2011 WL 2565363 at *7, n.4 (Cal. Ct. App. June 29, 2011). Courts have disagreed over whether Concepcion has any impact on procedural unconscionability, with some holding that adhesiveness is no longer enough by itself to support a finding of procedural unconscionability and others solely evaluating substantive unconscionability. The courts have almost universally a greed, however, that an arbitration clause may no longer be declared unenforceable based on the fact that, without a class action, individuals will likely not be able to pursue their small-dollar claims.

Three UDAP cases against DirecTV, involving an identical arbitration clause and nearly identical claims, illustrate several post-Concepcion arguments asserted by consumers seeking to avoid individual (non-class) arbitration and the contradictory judicial reactions to such arguments. One court denied DirecTV’s motion to compel, another granted the motion in full, and a third granted the motion in part but denied the motion with respect to the plaintiffs’ injunctive relief claims.

In the first case, Murray v. Pro Sat and Home Entertainment and DirecTV, Inc., No. CV 2010-093-3 (Ark. Cir. Ct. June 30, 2011), the plaintiff alleged that DirecTV failed to disclose early cancellation fees. The court found DirecTV’s arbitration clause with a class-action prohibition to be unenforceable for several reasons, most notably for lack of mutuality. The court determined that, while the customers waived their right to sue in court, DirecTV retained the right to sue in many instances. And, while customers were prohibited from asserting claims together as a class, no practical equal limitation was imposed on DirecTV. The court concluded that the customer agreement containing the arbitration clause was “merely an exhaustive list of self-serving disclaimers and obligations imposed on DIRECTV’s customers,” without any corresponding obligations placed on DirecTV. A Florida court similarly found lack of mutuality to prevent the enforcement of an arbitration clause, although that court based its holding on aspects of the clause other than the class action prohibition. See In re Checking Account Overdraft Litig., No. 09-MD-02036-JLK (S.D. Fla. Sept. 1, 2011).

In a second DirecTV case, Murphy v. DirecTV, Inc., No. 2:07-cv-06465-JHN-VBKx, 2011 WL 3319574 (C.D. Cal. Aug. 2, 2011), the court analyzed the same arbitration agreement, but granted DirecTV’s motion to compel arbitration. In Murphy, the plaintiffs alleged that DirecTV failed to disclose that its receiving equipment, for which consumers paid hundreds of dollars, was leased and that a consumer must return the equipment on cancellation or face hefty fees. The plaintiffs made several arguments, including that the “blow-up” clause in the arbitration agreement rendered it unenforceable. That clause provided that if the law of the customer’s state would find the class-action prohibition to be unenforceable, then the entire arbitration agreement was unenforceable. The plaintiffs argued that because class action prohibitions were unenforceable in California at the time the parties contracted, the mutual intention of the parties was that their claims would be litigated. The court disagreed, holding that Concepcion clarifies what the FAA has always meant and must be applied retroactively.

The plaintiffs additionally argued that, pursuant to Gentry v. Superior Court, 42 Cal. 4th 443 (Cal. 2007), their claims under California’s Consumer Legal Remedies Act (CLRA) were not arbitrable. As further discussed below, Gentry was an employment case in which the court held that class-action prohibitions may impermissibly undermine the enforcement of unwaivable California Labor Code claims. The plaintiffs argued that, as the court found in Arguelles-Romero v. Superior Court, 184 Cal. App. 4th 825 (2010), Gentry articulates a “vindication of statutory rights” test that is distinct from an unconscionability analysis. Because the CLRA has an anti-waiver provision, the plaintiffs in Murphy argued that requiring individual arbitration of their CLRA claims would undermine their ability to vindicate their unwaivable statutory rights under Gentry. The court disagreed, holding without analysis that Concepcion overruled Gentry.

The plaintiffs also argued that DirecTV waived its right to move to compel arbitration. The court was not persuaded, finding that because DirecTV took action immediately after the Concepcion ruling, there was no waiver. Thus far, courts have nearly universally agreed that because it would have been “futile” for defendants to move to compel in certain states prior to Concepcion, they could not have voluntarily “waived” any known right. See, e.g., Swift, 2011 WL 3419499, at *10; Sakalowski v. Metron Servs., Inc., No. 4:10CV02052 AGF, 2011 WL 4007982, at *3 (E.D. Miss. Sept. 8, 2011). At least one state court, however, has ruled to the contrary. Natalini v. Import Motors, Inc., No. CIV500678 (San Mateo Sup. Ct. June 30, 2011).

In contrast to either of the other DirecTV cases, the court in the third DirecTV case, In re DirecTV Early Cancellation Marketing and Sales Practice Litig., No. ML 09-2093 AG (ANx), 2011 WL 4090774 (C.D. Cal. Sept. 6, 2011), granted DirecTV’s motion to compel individual arbitration in part and denied it in part. Like Murray, this case involved early cancellation fees. The plaintiffs made many of the same arguments asserted in the Murray and Murphy cases, most of which the court rejected. The court did, however, hold that the plaintiffs’ CLRA and Unfair Competition Law (UCL) claims for injunctive relief were not arbitrable. The court based its decision on two California Supreme Court decisions, Broughton v. Cigna Healthplans of California, 21 Cal. 4th 1066, 1080 (Cal. 1999) and Cruz v. PacificCare Health Systems, Inc., 30 Cal. 4th 303, 320 (Cal. 2003), which hold that arbitration is not suitable to CLRA and UCL claims where the plaintiff is seeking injunctive relief as a “private attorney general.” Some federal courts sitting in diversity jurisdiction have found Broughton and Cruz to be overruled by Concepcion. See, e.g., Arellano v. T-Mobile USA, Inc., 2011 WL 1842712, at *1 (N.D. Cal. May 16, 2011). The court expressly rejected Arellano, finding that Cruz and Broughton do not outright prohibit the arbitration of all UCL and CLRA claims, only those seeking injunctive relief for the good of the public. Moreover, the court found “compelling reasons” as to why arbitration is not appropriate for vindicating broad public rights, including the fact that arbitrators are not bound by earlier arbitration decisions that could cause inconsistency.

These three DirecTV cases demonstrate that the impact of Concepcion on consumer protection cases is by no means certain. Although it is true that a majority of courts have broadly applied Concepcion to completely foreclose class litigation of state consumer protection claims, a steadily growing minority of courts are nevertheless declining to force consumers into individual arbitration for reasons purportedly unrelated to the “fact of a class action waiver.”

The Impact of Concepcion on Employment Cases
As with consumer-protection cases, courts have grappled with what impact Concepcion has on employment cases and have been just as varied in their opinions.

As discussed above, Concepcion overruled California’s Discover Bank rule. Although Discover Bank was squarely a consumer case, Gentry v. Superior Court arguably applied similar logic to employment cases in California. Under Gentry, an agreement that requires the arbitration of employment disputes but disallows class or collective actions cannot be enforced if class adjudication would be a significantly more effective way for employees to vindicate their unwaivable statutory rights. 42 Cal. 4th 443 (Cal. 2007). The question, then, is this: After Concepcion, is Gentry still good law?

A few California courts that have addressed this issue have concluded that Concepcion effectively overruled Gentry. In Valle v. Lowe’s HIW, Inc., for example, the court granted an employer’s motion to compel individual overtime claims, concluding that Gentry is no longer valid law because it, just like Discover Bank,provided an unconscionability rule that applied only to arbitration provisions and was therefore preempted by the FAA. 11-1489 SC, 2011 WL 3667441 (N.D. Cal., Aug. 22, 2011); see also Morse v. ServiceMaster Global Holdings, Inc., C 10-00628 SI, 2011 WL 3203919 (N.D. Cal., July 27, 2011) (stating, in a footnote, that Concepcion rejected the reasoning and precedent behind Gentry).

However, other courts have concluded the exact opposite, holding that Gentry is distinguishable from Discover Bank and remains good law. For example, in Anderson v. Apple American Group, LLC, the court found that while Discover Bank addressed whether a class-action prohibition in a consumer arbitration agreement was unconscionable, the question in Gentry was whether a class-action prohibition would undermine the statutory rights of employees. No. 2010-0009375 (Sacramento Cal. Sup. Ct. Aug. 16, 2011). The court then applied the Gentry factors to the facts of the case and determined that the employees’ California Labor Code rights must be addressed on a class-wide basis, notwithstanding the class-action prohibition, so as to allow the employees to vindicate such rights. Similarly, in Plows v. Rockwell Collins, Inc., the court found that Gentry is still valid law after Concepcion and permitted further discovery for the parties to brief the issue of whether the arbitration agreement, which prohibited class actions, was enforceable under Gentry. No. SACV 10-01936, 2011 WL 3501872 (C.D. Cal. Aug. 9, 2011).

In addition to deciding whether Gentry remains good law, courts have addressed other arguments plaintiffs have made in urging courts to narrowly construe Concepcion in employment cases. In Brown v. Ralphs Grocery Co, the court declined to reach the issue of whether Concepcion overruled Gentry (although it suggested that it did not), but then it held that Concepcion did not apply to representative actions brought under California’s Private Attorney General Act (PAGA). 197 Cal. App. 4th 489 (Cal. Ct. App. 2011). Under PAGA, an aggrieved employee can act as a private attorney general by suing to recover civil penalties against an employer for violations of the California Labor Code. The individual can collect penalties not only for himself, but also for other current and former employees, with 75 percent of the recovery going to the Labor and Workforce Development Agency for Enforcement of Labor Laws and Education. In Brown, the court found that regardless of the effect of Concepcion on Gentry, the Supreme Court did not address whether state laws applicable to waivers of statutory representative actions are preempted by the FAA. The court distinguished PAGA cases, indicating that a representative action under PAGA is “fundamentally a law enforcement action designed to protect the public and not to benefit private parties.” Id. at 502. PAGA claims, the court held, do not conflict with the purposes of the FAA, and so Concepcion is simply inapposite. Several other courts have followed Brown for this proposition. See, e.g., Teimouri v. Macy’s, Inc., 37-2010-00093577 (San Diego Cal. Super. Ct. Aug. 19, 2011). But see Valle, supra, 2011 WL 3667441 (rejecting the plaintiffs’ argument that a PAGA claim is inarbitrable and finding it preempted by the FAA).

Looking outside of California, courts have struggled with how to apply the unconscionability defense—which the Supreme Court in Concepcion specifically held remains a permissible ground for challenging an arbitration agreement (131 S. Ct. at 1746)—in a manner that does not “disfavor arbitration.” In Green v. SuperShuttle Int’l, Inc., the Eighth Circuit summarily rejected the plaintiffs’ challenge to the enforceability of a class-action prohibition under Minnesota law simply because it was a state-law-based unconscionability challenge to a class-action prohibition without considering whether Minnesota’s unconscionability law impermissibly disfavored arbitration. No. 10-3310, 2011 WL 3890326 (8th Cir., Sept. 6, 2011). In cases that do not involve class-action prohibitions, several courts have concluded that the analysis of unconscionability under state laws remains unchanged. See, e.g., Kanbar v. O’Melveny & Myers, No. C-11-0892, 2011 WL 2940690 (N.D. Cal., July 21, 2011) (a class-action, sex-discrimination case where the court found a shortened statute of limitations and overly broad confidentiality provisions are unconscionable); Carrell v. L&S Plumbing P’ship, Ltd., No. H-10-2523, 2011 WL 3300067 (S.D. Tex., Aug. 1, 2011) (a Fair Labor Standards Act collective action where the court acknowledged that the Texas unconscionability law is unchanged, but found that cost sharing where there were minimal costs is not unconscionable). In contrast, in another case that did not involve a class-action prohibition, the court altered its application of Colorado’s unconscionability law in light of the Supreme Court’s “clear message” in Concepcion, rejecting the argument that the adhesive nature of the contract was unconscionable. Daugherty v. Encana Oil & Gas (USA), Inc., No. 20-CV-02272, 2011 WL 2791338 (D. Colo., July 15, 2011). In fact, the court stated outright that although it likely would have found the arbitration agreement at issue to be unconscionable pre-Concepcion, the altered legal landscape post-Concepcion necessitated a different decision. These cases are of great concern because they suggest a trend of courts interpreting Concepcion as frowning upon unconscionability defenses to arbitration agreements generally.

At least one court has addressed a different question regarding the effect of Concepcion on employment cases: Is an arbitration agreement precluding class claims enforceable if it would preclude a plaintiff from enforcing a federal statutory right? In Chen-Oster v. Goldman, Sachs & Co., the court refused to enforce an arbitration agreement in a class case where the plaintiffs alleged that the defendants had engaged in a pattern or practice of gender discrimination in violation of Title VII. 2011 WL 2671813 (S.D.N.Y. July 7, 2011). The court reasoned that mandating individual arbitration would preclude the plaintiff from bringing a pattern or practice case at all because in that circuit, as is the case in the majority of circuit courts, pattern or practice claims may only be brought as class claims. Title VII is a federal statute, and the court held that the FAA cannot preclude an individual from enforcing a federal statutory right.

As the above demonstrates, the application of Concepcion to employment cases, much like its application to consumer protection cases, is by no means certain.

Strategies for Avoiding Non-Class Arbitration
As case law develops, the impact of Concepcion in consumer and employment cases will no doubt become clearer. In the meantime, we offer the following suggestions as ways in which counsel for consumers and employees may attempt to avoid forced non-class arbitration.

• Limit the holding of Concepcion. In the employment context, consider arguing that Gentry remains good law, that it is inapplicable to a potential PAGA claim, or that applying Concepcion would unlawfully forbid “concerted action” as meant by the National Labor Relations Act. Additionally, in the consumer-protection context, consider arguing that claims for injunctive relief are made on behalf of the general public and are therefore inarbitrable.

• Consider whether an arbitration agreement might be unconscionable for reasons unrelated to class-action prohibition, including requirements that consumers or employees pay the costs of arbitration, limitations on recoverable damages, a shortened statute of limitations, or confusing or misleading terms. If multiple terms are unconscionable, consider an argument that the entire arbitration agreement should be stricken.

• Consider other contract defenses, such as lack of mutuality or fraudulent inducement, that may void an arbitration clause.

• A motion to compel arbitration may fail due to a defendant’s inability to put forth good evidence showing an agreement to arbitrate.

• The FAA is not applicable in state court. Justice Thomas has repeatedly asserted that the FAA sets procedural rules and is therefore not applicable in state court. See, e.g., Preston v. Ferrer, 552 U.S. 346, 363 (Thomas, J., dissenting). Some courts have accordingly suggested that Concepcion has no effect on actions brought in state court.

• The FAA is not applicable when it conflicts with federal law. Where a federal statute or regulation bars arbitration of federal claims, the statute or regulation may override the FAA.

• The scope of the arbitration clause does not cover claims. Closely analyze the agreement to determine if the alleged claims arguably fall outside of its scope.

• A party seeking to enforce is not a party to the agreement. A third party may attempt to enforce an arbitration clause as an “agent” or “beneficiary” of a contracting party. Such arguments are often not tenable.

One additional approach is to pursue tens, hundreds, or even thousands of individual arbitrations simultaneously. Although this effort may be cost-prohibitive, it is also costly and time-consuming for defendants and could encourage companies to reconsider class-action prohibitions in arbitration agreements. To illustrate, after succeeding in forcing customers into arbitration through Concepcion, AT&T is now suing customers that filed multiple arbitration demands seeking to stop AT&T’s merger with T-Mobile, accusing the customers’ law firms of encouraging the arbitrations and “taking a thousand bites at the apple.” See AT&T Mobility, LLC v. Gonnello, No. 11-cv-05636-PKC (S.D.N.Y.).

As the case law develops, the most successful approaches will become clearer. Ultimately, however, the best hope for allowing consumers and workers to vindicate their rights may be reinvigorated legislative efforts, such as the proposed Aribitration Fairness Act, which seeks to ban arbitration clauses in consumer and employment contracts, and the successful Franken Amendment to the 2010 Defense Appropriations Act, which withholds money from government contractors who require their employees to arbitrate disputes.

Keywords: litigation, class actions, derivative suits, arbitration clauses, consumer protection, employment

Kirsten Scott and Nicole D. Reynolds – November 21, 2011

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