November 21, 2011 Articles

Employment Law and Class-Action Waivers

Despite the flood of new pro-arbitration decisions, courts have declined to extend Concepcion in some contexts, and the decision's lasting impact is unclear.

By David A. Prahl

Prior to the U.S. Supreme Court’s recent decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), the validity of arbitration agreements containing class-action-waiver provisions—which provide that disputes subject to arbitration agreements may only be arbitrated on an individual basis, not on a class-wide basis—varied widely by jurisdiction. Under California law, for example, class-action waivers were prohibited in most employment law contexts prior to Concepcion. New York and Texas law, however, appeared to allow for the enforcement of class-action waivers.

Concepcion has the potential to settle much of the uncertainty regarding the validity of class-action waivers in arbitration agreements. In striking down California’s rule prohibiting class-action waivers in most consumer contracts, the Supreme Court in Concepcion used broad, forceful language that could extend the impact of its decision well beyond the consumer law context. This continued the Court’s trend of upholding arbitration agreements and emphasizing, above all else, the agreement of the parties. Indeed, the Court decided Concepcion only a year after deciding Stolt-Neilsen S.A. v. Animalfeeds International, Corp., 130 S. Ct. 1758 (2010), in which it restricted the imposition of class-wide arbitration where a valid arbitration agreement is silent on the issue.

Not surprisingly, Concepcion has already led to significant new pro-arbitration decisions by the lower courts in several different areas of law. Whether Concepcion causes the sea change that many are predicting, however, remains to be seen. Indeed, despite the flood of new pro-arbitration decisions, courts have declined to extend Concepcion in certain specific contexts, and the lasting impact of the decision will surely take years to solidify. Nowhere is this clearer than the employment law context.

The Decision
Concepcion involved a proposed class action asserting claims of fraud and false advertising stemming from the plaintiffs’ purchase of cellular telephone service from AT&T. The plaintiffs claimed that they purchased the service having relied on advertising by AT&T promising a “free” telephone, only to discover that they were later required to pay sales tax on the retail value of the phone. The phone service agreement included a broadly worded arbitration provision that required any disputes between AT&T and the customer to be submitted to arbitration and prohibited customers from bringing any claims in a class action or other representative proceeding. On the plaintiffs’ filing of the lawsuit, AT&T moved to compel arbitration.

The district court denied AT&T’s motion to compel arbitration, holding that the arbitration agreement’s class-action waiver was unconscionable and therefore unenforceable under Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), a California Supreme Court decision that, in effect, held most class-action waivers in consumer contracts to be unconscionable. Notably, however, the district court simultaneously observed that the terms of the arbitration agreement were so favorable to plaintiffs that they would likely be better off proceeding through arbitration than as plaintiffs in a class action. Indeed, the arbitration provision provided, among other things, that AT&T was required to pay all arbitration costs for nonfrivolous claims; arbitration was to take place in the county of the customer’s billing address; as to claims for $10,000 or less, the customer could choose whether the arbitration would proceed in person, by phone, or based on submissions; and AT&T was unable to seek reimbursement for its attorney fees, and, in the event the customer received an arbitration award in an amount greater than AT&T’s last settlement offer, AT&T would be required to pay a $7,500 recovery fee and double the amount of the customer’s attorney fees.

In affirming the district court, the Ninth Circuit held that the class-action waiver was “exculpatory” and void as a matter of public policy because it protected AT&T against all types of class actions. The Ninth Circuit further found that the Federal Arbitration Act (FAA) did not preempt the so-called Discover Bank rule that most class-action waivers in consumer contracts are unconscionable. In this regard, the Ninth Circuit relied on section 2 of the FAA, which permits arbitration agreements to be invalidated “upon such grounds as exist at law or equity for the revocation of any contract.” The Ninth Circuit reasoned that the Discover Bank rule fell within the ambit of section 2 because it constituted the California Supreme Court’s “refinement” of California’s unconscionability doctrine—a ground existing under California law for the revocation of contracts—in the context of consumer class-action waivers.

The Supreme Court reversed, and, in a 5–4 decision authored by Justice Scalia, held that the FAA preempts the Discover Bank rule. The Court emphasized that “[t]he overarching purpose of the FAA . . . is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings” and that the FAA reflects a “liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” In light of the purposes and policies behind the FAA, the Court further found that the Discover Bank rule’s prohibition of class-action waivers presented “an obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA.

The Court rejected the claim that the Discover Bank rule constituted a “ground . . . at law or equity for the revocation of any contract” under section 2 of the FAA. In doing so, the Court drew an important distinction between “generally applicable” contract defenses—which section 2 allows to be utilized to invalidate arbitration agreements—and “state law rules” (such as the Discover Bank rule) that employ such “generally applicable” contract defenses in a manner that specifically targets particular types of contracts such as arbitration agreements. The Court held that such “state law rules” conflict with the FAA’s purpose of ensuring the enforcement of arbitration agreements according to their terms because they inevitably fail to place arbitration agreements “on equal footing” with other types of contracts.

In the context of this discussion, the Court strongly emphasized the difficulties of implementing class-wide arbitration procedures in arbitration agreements that are, by their terms, “bilateral.” As the Court observed, “[c]lasswide arbitration includes absent parties, necessitating additional and different procedures . . . involving higher stakes,” “[c]onfidentiality becomes more difficult,” and “arbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification, such as the protection of absent parties.” The Court thus concluded that “manufactured” class arbitration is inconsistent with—and preempted by—the FAA because it makes the arbitration “slower, more costly, and more likely to generate procedural morass than final judgment,” it requires the very procedural formality that bilateral arbitration is intended to minimize, and it “greatly increases risks to defendants” and is “poorly suited to the higher stakes of class litigation” due to the inherent risk in arbitration that errors go uncorrected due to the lack of an appeals process. As the Court noted, “Requiring the availability of classwide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

The Impact
Though it will take years to ascertain the lasting legal effect of Concepcion, it is sure to have immediate practical impacts. For example, Concepcion will inevitably cause entities that do not utilize arbitration agreements with class-action waiver provisions to seriously consider adding them to their contracts. Concepcion will likewise cause entities with class-action waiver provisions already in their arbitration agreements to attempt to compel bilateral arbitration more frequently than they otherwise would have. The latter impact has already become apparent, as there has been a notable uptick in the number of arbitration-related decisions since Concepcion came down.

Predictably, this uptick in arbitration-related decisions has not been limited to the consumer context in which Concepcion arose. This makes sense, given the breadth of the Court’s decision. Though the core holding of Concepcion addressed a consumer contract, the rationale supporting its holding was not limited to the consumer contract context and was generally hostile to the class-action process. Indeed, because the Concepcion Court drew such a stark contrast between class-wide arbitration and the FAA’s dual purposes of enforcing the terms of arbitration agreements and promoting efficiency, it is not unreasonable to read the decision as generally prohibiting the addition of class procedures to arbitration agreements that are expressly bilateral. As the Court flatly noted, “States cannot require a procedure that is inconsistent with the FAA, even if it is undesirable for unrelated reasons.”

The employment context is one area in which Concepcion has had a quick and significant impact. In California, for example, Concepcion has resulted in a growing body of authority holding that the California Supreme Court’s decision in Gentry v. Superior Court, 42 Cal. 4th 443, 463 (2007)—historically the basis for invalidating class-action waiver provisions in employment agreements in California—is no longer good law. The Northern District of California held in this manner in Valle, et al. v. Lowe’s HIW, Inc., No. 11-1489-SC (N. D. Cal. Aug. 22, 2011), a putative class action involving alleged wage-and-hour violations under California law. The Court reasoned that Gentry, much like the Discover Bank decision addressed in Concepcion, articulated a “rule of enforceability that applies only to arbitration provisions” and, as such, is overruled by Concepcion. Valle is one of at least three decisions holding that Gentry is no longer good law. See also Murphy v. DIRECTV, No. 07-6465, 2011 WL 3319574, at *4 (C.D. Cal. August 2, 2011) (holding Concepcion overruled Gentry); Morse v. ServiceMaster Global Holdings, Inc., No. 10-0628, 2011 WL 3203919, at *3, n.1 (N.D. Cal. July 27, 2011) (Concepcion rejected the reasoning and precedent behind Gentry).

Courts outside of California have issued similar decisions in the employment context. In D’Antuono v. Service Road Corp., 2011 U.S. Dist. LEXIS 57367 (D. Conn. May 25, 2011), the U.S. District Court for the District of Connecticut granted the defendant’s motion to compel arbitration in a wage-and-hour class action in which the plaintiffs claimed they were misclassified as independent contractors. Though the court based its decision largely on the fact that the arbitration agreement was not unconscionable under Connecticut law (which did not prohibit class-action waivers to begin with), it did address Concepcion at length, noting that the decision “cast[s] significant doubt on virtually any ‘device [or] formula’ which might be a vehicle for ‘judicial hostility toward arbitration.’”

Concepcion’s impact has not all been employer-friendly, however. In Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), California’s Second District Court of Appeal held a class action waiver to be unenforceable as to the plaintiffs’ representative claims under the California Labor Code’s Private Attorneys General Act of 2004 (PAGA). The court reasoned that PAGA actions, which enable plaintiffs to seek statutory penalties for wage-and-hour violations on behalf of other employees, are designed to enforce public rights and, therefore, are not subject to the holding of Concepcion, which arose in the context of private actions seeking damages. Brown is also notable for a footnote in which it suggests, but does not hold, that the California Supreme Court’s Gentry decision may still be good law despite Concepcion. This, of course, suggests the potential for future decisions that are at odds with Valle’s holding that Concepcion overruled Gentry.

Though decisions like Valle, D’Antuono, and Brown are significant, they represent just the tip of the Concepcion iceberg in the employment context. As more employers seek to implement and enforce their arbitration agreements, more substantial challenges to state-law arbitration standards will mount. In California, for example, employers will likely rely on Concepcion to challenge not just Gentry and its prohibition of class-action waiver provisions in employment arbitration agreements, but also Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal. 4th 83 (2000), the California Supreme Court’s most significant articulation of unconscionability standards for employment arbitration agreements. Indeed, though Concepcion does not uniformly ban states from imposing limitations on arbitration agreements, it does restrict them from utilizing “generally applicable” contract defenses in a manner that targets or discriminates against arbitration agreements or that otherwise fails to put arbitration agreements “on equal footing” with other contracts. Armendariz and its progenyare therefore potentially problematic to the extent that they articulate unconscionability standards pertaining specifically to arbitration agreements.

Until such challenges are fleshed out, employers seeking to add arbitration agreements with class-action waivers to their employment agreements (or beef up existing agreements) are likely to be conservative in their approaches to doing so. For example, Brown, in which the court held that class-based PAGA actions in California are not subject to the holding of Concepcion, has given employers pause in this regard. Brown shows that some courts are willing to draw distinctions between types of claims in evaluating the reach of Concepcion, despite the Concepcion Court’s seemingly claim-neutral rationale. Employers are therefore likely to think long and hard about which claims to include in their class-action waiver provisions.

Employers also face the interesting question of whether to make their class-action waiver provisions applicable to pending class actions. While it would seem defensible for employers to do so from an arbitration-centric perspective in light of Concepcion, at least one court has looked at the issue from a different perspective and concluded it is not. In Williams v. Securitas Security Services USA, Inc., C.A. No. 2:2010-7181, 2011 WL 2713741 (E.D. Pa. July 13, 2011), the Eastern District of Pennsylvania rejected an employer’s attempt to implement a new class-action waiver as to proposed class members in a pending Fair Labor Standards Act (FLSA) collective action. The court held that the employer’s attempt to implement the agreement did not implicate Concepcion because it constituted an improper attempt to influence the litigation through communication with proposed class members and, as a result, interfered with the court’s authority to control communications with potential plaintiffs under the Supreme Court’s decision in Hoffman La Roche, Inc. v. Sperling, 493 U.S. 165, 171 (1989). The court focused in particular on the fact that the communication was not well drafted and was therefore likely to confuse those putative class members who read it. Williams thus provides another cautionary tale that will cause employers to ensure that their class-action waiver provisions are clear and easily understandable, particularly those that may apply to pending, putative class actions.

But employers are not the only ones who are busy following Concepcion. Just as employers rush to implement arbitration provisions with class-action waivers in their employment agreements, employees will mount new attacks designed to limit Concepcion’s impact in different employment contexts. Employees have already challenged Concepcion under the National Labor Relations Act (NLRA) by arguing that compelled, bilateral arbitration violates section 7 of the act, which guarantees all employees, including those who are not represented by a union, the right to engage in “concerted activities.” As more motions to compel are filed and more challenges are mounted, the impact will become much clearer.

But courts may not have the final word in this fight. On the day of the Concepcion decision, Senator Al Franken of Minnesota issued a press release criticizing the decision and promising to reintroduce the Arbitration Fairness Act (AFA), which had previously been proposed in 2009 and, if passed, would eliminate forced arbitration clauses in employment, consumer, and civil rights cases. It would also allow consumers and workers to choose arbitration in the event of a dispute. Franken, along with Senator Richard Blumenthal and Congressman Hank Johnson, has since reintroduced the AFA. While the current makeup of Congress makes it unlikely that the AFA will gain much traction in the near term, its reintroduction serves as a reminder that the issue of the validity of class-action waivers is controversial and unlikely to be resolved any time soon.

Keywords: litigation, class actions, derivative suits, class-action waivers, arbitration agreements

David A. Prahl – November 21, 2011


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