The Supreme Court Speaks on Class Action Waivers in Arbitration Agreements

Oxford Health

In Oxford Health, the plaintiff sued Oxford, an insurance company, for failing to pay him and other similarly situated medical professionals for providing medical services to Oxford’s managed care network. The contract between the plaintiff and Oxford required resolving all disputes through arbitration. But after the arbitrator decided that the arbitration clause, which was silent on the topic of class and collective actions, nonetheless allowed “class arbitration,” the case eventually made its way to the Supreme Court.

At the Supreme Court, Oxford argued that the arbitrator’s decision must be vacated because the parties never explicitly agreed to class arbitration in their contract. On the other hand, the plaintiff argued that the arbitrator based his decision on the terms of the contract and therefore acted within the scope of his powers. Ultimately, the Court agreed with the plaintiff, holding that when an arbitrator finds that parties to an arbitration intended to authorize class-wide arbitration, that determination survives judicial review under section 10(a)(4) of the Federal Arbitration Act (FAA) as long as the arbitrator was arguably construing the contract.

American Express

Just a few weeks after Oxford Health, the Supreme Court provided direction to employers to avoid the potentially troubling situation that had stymied Oxford from avoiding class arbitration. Specifically, in American Express, Justice Antonin Scalia, writing for the majority, stressed the FAA’s overarching principle that arbitration is a contractual issue, and therefore courts cannot invalidate a contractual waiver of class arbitration unless another statute overrides that principle.

In particular, American Express’s arbitration agreement with merchants contained a class arbitration waiver. The merchants brought an antitrust class action against American Express opposing American Express’s motion to compel individual arbitration. The Court held that the class arbitration waiver could not be invalidated in spite of the high expense of individually proving the merchants’ antitrust claims against American Express. The Court’s decision provides important guidance on how the FAA is applied to agreements to arbitrate all types of federal statutory claims, not just antitrust claims. Consequently, employers may benefit from this ruling by crafting arbitration agreements that limit an employee’s right to pursue employment claims on behalf of a class of employees.

D.R. Horton

Even though the recent decisions permitting class action waivers in arbitration agreements provide much needed clarification to employers, it may be a little too soon to celebrate. Specifically, with the National Labor Relation Board’s (NLRB) D.R. Horton, Inc. decision pending on appeal before the U.S. Court of Appeals for the Fifth Circuit, the question of whether employers can require employees to sign an arbitration clause that waives the right to bring class or collective actions against employers regarding the terms and conditions of employment remains unsettled.

In D.R. Horton, the board held that employers may not require as a condition of employment that employees agree to a blanket waiver of rights to pursue their employment claims by means of class actions. The board allowed the waiver of class and collective actions in employment arbitrations only where the employer permitted employees to bring these actions in court. The board reasoned that requiring such a waiver in a mandatory arbitration agreement is an unfair labor practice under the National Labor Relations Act because it restricts the right of employees to engage in concerted activity affecting their working conditions.

Subsequently, D.R. Horton appealed to the Fifth Circuit, which held oral argument on February 5, 2013. Meanwhile, numerous other federal and state courts—including the U.S. Supreme Court—have rejected the D.R. Horton reasoning in litigation involving the enforceability of class waivers in arbitration agreements. Nonetheless, the NLRB has and likely will continue to challenge blanket class and collective actions waivers in mandatory arbitration agreements until ordered to do otherwise. As such, the D.R. Horton ruling and NLRB enforcement are still obstacles that employers need to consider even in the post-American Express landscape.

What Do Oxford and American Express mean for employers?

In the aftermath of the Supreme Court’s recent decisions, employers should consider whether to adopt a mandatory arbitration agreement and whether or not this agreement should include a class and collective action waiver. In mulling over these considerations, employers must keep in mind several factors, including the pros and cons of arbitration and class actions.

Pros

• Arbitration can be less costly than litigating in court.
• The waiver of the employees’ right to participate in collective or class actions limits the employer’s liability exposure in the arbitration proceeding to that of the individual employee’s claims. Instead of having to pay to defend against a whole class, the employer’s expenses relate to defending against a single claim in arbitration.
• Arbitrations can be more confidential as most arbitration filings are not public records.
• Arbitration allows employment cases to be heard by arbitrators, not juries, thereby reducing the risk of juries that empathize with plaintiffs.
• In arbitration, the parties jointly select an arbitrator, who is usually selected for their expertise in the field.
• In arbitration, discovery can be limited, and hearings can be scheduled and completed more quickly as well. The process is also more informal.

Cons

• Unlike class actions, individual arbitrations will not resolve a dispute affecting an entire class of persons. Consequently, employers may have to worry about defending a series of identical claims individually. Of course, the reverse holds true as well, and an employer who gets a positive result in the initial individual arbitration case may be able to dissuade others from bringing the same claim.
• The arbitrator’s decision is final and binding, with no right of appeal. This can mean that the employer may effectively be stuck with a bad decision without any ability to appeal.
• Unlike in court proceedings, cases are not usually decided on dispositive motions.