In AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court upheld the validity of an arbitration agreement waiving consumers’ right to bring contractual claims as a class, instead requiring such claims to be resolved through arbitration. The Court did so by holding that the Federal Arbitration Act preempted a state rule providing that class action waivers in arbitration agreements were unconscionable and, therefore, unenforceable. 131 S. Ct. 1740, 1753 (2011). Since Concepcion became the law of the land, the Supreme Court and other federal courts have announced, through holdings and dicta, that not all arbitration and class waiver provisions will be enforceable. Their decisions provide further guidance and warnings for drafters of arbitration and class waiver provisions.
For instance, the Supreme Court has warned that high fees associated with arbitration may render arbitration agreements unenforceable. Opt-out clauses have been noted with favor in decisions enforcing class waivers in arbitration agreements. Most recently, in refusing to review a California Supreme Court case carving out an exception to the general enforceability of class waivers, the Supreme Court may have signaled that such waivers are not enforceable to preclude class proceedings on certain claims. It is also still unsettled whether a court or an arbitrator decides whether a claim may proceed as a “class arbitration,” absent a clear selection in the arbitration agreement.
High Administrative Fees May Make Arbitration Agreements Unenforceable
More than a decade before the Court decided Concepcion, it warned that “[i]t may well be that the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights,” and, therefore, an arbitration agreement could itself be unenforceable. Green Tree Fin. Corp.–Ala. v. Randolph, 531 U.S. 79, 90 (2000). After Concepcion, consumers and employees sought to apply this reasoning to invalidate class waivers in arbitration agreements. In American Express Co. v. Italian Colors Restaurant, however, the Supreme Court expressly rejected this effective-vindication exception. 133 S. Ct. 2304, 2310 (2013). The Court reasoned that the exception “would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable. But the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Id. at 2311.
Indeed, some courts have continued to use the “effective vindication exception” to invalidate arbitration agreements. See, e.g., Nesbitt v. FCNH, Inc., 2014 WL 6477636, at *4 (D. Colo. Nov. 19, 2014) (citing, inter alia, Italian Colors in holding that an arbitration agreement was wholly unenforceable due to cost of arbitration and duty that each side bear its own expenses, effectively depriving plaintiff of an accessible forum to resolve her statutory Fair Labor Standards Act rights). For this reason, many companies now include language in their arbitration agreements to limit, split, or assume the burden of arbitration filing fees. Courts considering challenges to arbitration agreements containing fee-limiting or fee-shifting provisions have enforced arbitration. See, e.g., Monserrate v. Hartford Fire Ins. Co., 2014 WL 4101684, at *2 (M.D. Fla. Aug. 20, 2014) (“[T]he Court cannot strike the cost-splitting language for the same reason it cannot invalidate the arbitration provisions because of its inclusion—Plaintiffs have not provided any evidence that splitting the cost of arbitration would be prohibitively expensive in this case.”); Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294, 300 (5th Cir. 2004) (declining to address the enforceability of a “Fee and Costs” provision in an arbitration agreement, but enforcing arbitration because the defendant agreed to pay all arbitration costs).
Meaningful Opt-Out Provisions Will Protect Against an Arbitration or Class Waiver Provision from Being Found Unenforceable as a Contract of Adhesion
Although the Concepcion Court pronounced that “the times in which consumer contracts were anything other than adhesive are long past” (131 S. Ct. at 1750 and n.6), some post-Concepcion courts have not been quick to agree. In some jurisdictions, arbitration provisions contained in agreements required as part of a purchase of a good or as a condition of employment that do not provide an opportunity to opt out of the arbitration requirement are still considered adhesion contracts and, as such, are held to be procedurally unconscionable. See, e.g., Cayanan v. Citi Holdings, Inc., 928 F. Supp. 2d 1182, 1204 (S.D. Cal. 2013) (applying Nevada, California, and South Dakota law, and finding that arbitration provisions without the opportunity to opt out were procedurally unconscionable but those with that opportunity were not procedurally unconscionable). Other courts have not gone so far as to declare agreements not containing an opt-out provision to be unconscionable but have favorably noted the opportunity to opt out. See, e.g., Rosciano v. Experian, 2014 WL 7335693, at *3 (D. Ariz. Dec. 22, 2014) (finding the arbitration clause at issue not unconscionable and noting that “unlike a typical take-it-or-leave-it contract of adhesion, the Agreement signed by Plaintiff gave him the opportunity to retain the benefits of his phone service even after opting out of the arbitration provision”).
While procedural unconscionability may not render the arbitration agreement per se unenforceable in all jurisdictions, opt-out clauses provide a good defense against unconscionability claims. Particularly when an agreement containing an arbitration provision will be used in many different states, the inclusion of a provision providing consumers or employees a meaningful opportunity to opt out of the arbitration requirement will help ensure that those who do not opt out will be required to arbitrate any disputes.
The Enforceability of General Class Waivers Is Not Yet Universal
Although Concepcion generally confirms the enforceability of class waivers in arbitration agreements, the Supreme Court muddied the waters by refusing to review Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (Cal. 2014), cert. denied, 2015 WL 231976 (U.S. Jan. 20, 2015).
In Iskanian, the California Supreme Court held that the right of an employee or former employee to assert representative claims under the Private Attorneys General Act (PAGA) cannot be waived in an employment arbitration agreement. 59 Cal. 4th at 384. Under PAGA, current or former employees may bring representative suits to seek penalties on behalf of California’s Labor and Workforce Development Agency and split the damages recovery with the state. The California Supreme Court acknowledged that mandatory class waivers in arbitration agreements are generally enforceable pursuant to the U.S. Supreme Court’s ruling in Concepcion, but it carved out PAGA representative actions: “Where . . . an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.” Iskanian, 59 Cal. 4th at 384. Nevertheless, the majority of federal courts in California to consider the issue since have held that Concepcion does not permit such an exception and, therefore, have declined to apply it. See, e.g., Lucero v. Sears Holdings Mgmt. Corp., 2014 WL 6984220, at *3–6 (S.D. Cal. Dec. 2, 2014) (declining to follow Iskanian and following the majority of California federal district courts in holding waivers of PAGA actions were enforceable pursuant to Concepcion). In its petition to the U.S. Supreme Court, CLS Transportation of Los Angeles argued that the California Supreme Court’s decision conflicted with Concepcion.
The Supreme Court denied certiorari. Proponents of limits on class waivers may argue that, in declining to review Iskanian, the Court concluded it did not conflict with Concepcion in that Concepcion holds only that judicial rules declaring class waivers unconscionable are preempted by the Federal Arbitration Act. Thus, they may argue that Concepcion does not require that class waivers be enforced to preclude class claims brought pursuant to statutes that include a right to bring, or portend a public policy in favor of bringing, such claims on behalf of a class. On the other hand, those in favor of class action waivers may argue that there was no conflict with Concepcion because, as the California Supreme Court expressly stated, a PAGA action, “whether seeking penalties for Labor Code violations as to only one aggrieved employee—the plaintiff bringing the suit—or as to other employees as well, is a representative action on behalf of the state.” Iskanian, 59 Cal. 4th at 387. As such, the rights and procedures provided by the statute cannot be waived in an agreement between an employer and employee.
To the extent the U.S. Supreme Court’s refusal to review Iskanian may be a signal that general class waivers may not be enforceable where they preclude the ability to bring a claim on behalf of a class for violation certain statutes, such as certain consumer protection statutes, a more specific waiver may be effective. That is, drafters of arbitration agreements may include provisions under which the parties waive the right to bring representative or class claims under specific statutes. Of course, whether a specific statutory right can be waived will depend on the statute and the jurisdiction. See Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 704–5 (1945) (“[T]he question of whether the statutory right may be waived depends upon the intention of Congress as manifested in the particular statute.”).
Whether Class Claims Will Proceed in Court or Arbitration, and Who Makes That Decision, Are Questions Not Subject to Uniform Answers
In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 684 S. Ct. 1758, 1775 (2010), the U.S. Supreme 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.” While the Court has concluded that it is for courts, not arbitrators, to decide the issue of arbitrability (i.e., whether the parties have agreed to arbitrate), the “Court has not yet decided whether the availability of class arbitration is a question of arbitrability.” Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2067–68 n.2 (2013). The circuits remain split on whether the decision of the availability of class arbitration is for the court or the arbitrator. See Marriott Ownership Resorts, Inc. v. Flynn, No. 14-00372, 2014 WL 7076827, at *11–12 (D. Haw. Dec. 11, 2014) (noting split among the circuits). The U.S. Supreme Court and the vast majority of circuits, however, respect and enforce terms in agreements that specify who will make that decision. See, e.g., Sutter, 133 S. Ct. at 2067–68 (stating that the case did not give the Court an opportunity to decide whether the availability of class arbitration is a question of arbitrability because the petitioner “agreed that the arbitrator should determine whether its contract with [the respondent] authorized class procedures”).
If an agreement is silent on who determines the availability of class arbitration, the parties may unwittingly empower the arbitrator with the decision. Courts have routinely found that parties have “clearly and unmistakably” authorized the arbitrator to make the decision where their arbitration agreement is silent on who is to make it but provides for a selection of governing rules that permit the arbitrator to do so. See, e.g., Emilio v. Sprint Spectrum L.P., 508 F. App’x 3, 5 (2d Cir. 2013) (holding that the parties “clearly and unmistakably intended for the arbitrator to decide the gateway issue of enforceability of class action waiver” by selecting JAMS rules). Accordingly, companies should be sure to include in their arbitration provisions clear designations on both whether they agree to class arbitration and whether the court or the arbitrator is to decide whether they have agreed to class arbitration.
The arbitrability of claims and the scope and enforceability of class waiver provisions are constantly being challenged. Companies should ensure that their arbitration agreements are up-to-date and take into account differences in state law and the most recent guidance provided by the courts.
Keywords: litigation, class actions, derivative suits, arbitration agreement, enforcement, class waiver