February 23, 2021 Articles

Class Arbitration and the Enforceability of Class Action Waivers in Arbitration Agreements

Careful attention to the agreement—including, for example, whether a court or an arbitrator must make threshold arbitrability decisions—is essential.

By Sara Anne Ford, R. Ashby Pate, and Jeffrey P. Doss

In AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), the U.S. Supreme Court upheld a class action waiver in a standard consumer contract, first finding that the Federal Arbitration Act (FAA) preempted state law on the issue of whether such contractual provisions are unconscionable. Concepcion concerned a class action waiver in AT&T’s standard contract for cellular service. The company’s advertising stated that, if a customer signed up for service, then he or she would receive a free phone. The plaintiffs signed up, received their free phone, but were charged sales tax; so they sued.

Faced with a class action challenging the sales tax charges, AT&T filed a motion to compel the plaintiffs to arbitrate on an individual basis. It did so based on a provision in its contract calling for arbitration but requiring that it be brought in an “individual capacity, not as a plaintiff or class member in any purported class or representative proceeding.” Id. at 336–37.

The district court, in a decision affirmed by the Ninth Circuit, denied AT&T’s motion, concluding that under California law, the class action waiver was unconscionable. The Supreme Court reversed and held that a state law “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Id. at 344.

Since Concepcion, the Supreme Court has not only solidified but also expanded its approach to class action waivers. In 2012, the Court held that the FAA preempted a state law declaring unenforceable pre-dispute arbitration agreements in the context of claims against nursing homes for personal injury or wrongful death. Marmet Health Care Ctr., Inc. v. Brown, 565 U.S. 530 (2012). A year later, the Court held that the FAA prohibits courts from invalidating a class action waiver on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery. Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228 (2013). And, in 2018, the Court held that an agreement to use “individualized rather than class or collective action procedures” is “pretty absolutely” protected by the FAA. Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018).

In 2019, the Supreme Court further limited the availability of class arbitration when it decided Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019). In Lamps Plus, the plaintiff, an employee of the defendant company, was tricked by a hacker impersonating one of the defendant’s officials into disclosing his personal tax information, as well as that of other company employees. After a fraudulent federal income tax return was filed in the plaintiff’s name, he filed a putative class action against the company. His employment agreement required arbitration but was silent regarding the availability of class arbitration. The district court and the Ninth Circuit concluded that, because the agreement did not expressly preclude class arbitration, the agreement was ambiguous and, therefore, class arbitration was permissible.

The Supreme Court reversed and held that an ambiguous arbitration agreement does not provide a sufficient “contractual basis” to conclude that the parties agreed to class arbitration. Id. at 1415. Thus, Lamps Plus extends the Court’s trend in an important way: Not only can an arbitration agreement waive the availability of class arbitration; an agreement that is silent or ambiguous as to the availability of class arbitration does not permit class arbitration. By the Court’s logic, unless parties agree to class arbitration, it is unavailable.

But Lamps Plus leaves unresolved an important procedural consideration: What happens when an arbitrator, rather than a court, decides that class arbitration is permissible based on an agreement’s silence on the matter? In Jock v. Sterling Jewelers, Inc., current and former female employees of the defendant company filed a putative class action, and the defendant successfully compelled arbitration. Once in arbitration, the arbitrator (1) determined that “an arbitration clause silent on class arbitration may be construed to permit such arbitration,” (2) “devoted her analysis to determining whether there was any indication that the parties intended to preclude class arbitration,” and (3) “ultimately concluded that the agreements ‘do not prohibit’ class arbitration.” Jock v. Sterling Jewelers, Inc., 725 F. Supp. 2d 444, 448 (S.D.N.Y. 2010). Based on that analysis—comparable to the framework used by the district court and the Ninth Circuit in Lamps Plus—the arbitrator certified a class action.

Finding that the arbitrator had exceeded her authority, the district court vacated that decision, but the Second Circuit reversed in Jock v. Sterling Jewelers, Inc., 942 F.3d 617 (2d Cir. 2019). The defendant contended, among other arguments, that the arbitrator’s decision violated the holding of Lamps Plus. But the Second Circuit distinguished that decision by finding that the agreement in Lamps Plus authorized “a court, not an arbitrator, [to] resolve the question about class certification.” Id. at 626 (quoting Lamps Plus, 139 S. Ct. at 1417 n.4). Thus, the court reasoned, class arbitrability in Lamps Plus was subject to “de novo scrutiny,” rather than “the deferential standard of review” a court applies to an arbitrator’s decision. Id. After the Second Circuit’s decision, the Supreme Court denied the defendant’s petition for certiorari. Sterling Jewelers, Inc. v. Jock, 141 S. Ct. 255 (2020).

Beginning with Concepcion and continuing through Lamps Plus, the Supreme Court’s skepticism toward class actions certified through arbitration proceedings is unmistakable. With decisions like Sterling Jewelers, however, applying the rule in Lamps Plus may become difficult if arbitrators, whose decisions are nearly unreviewable, make contrary findings. Accordingly, careful attention to the arbitration agreement—including, for example, whether a court or an arbitrator must make threshold arbitrability decisions—is essential.

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Sara Anne Ford, R. Ashby Pate, and Jeffrey P. Doss are with Lightfoot, Franklin & White, LLC.


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