Supreme Court Upholds Express Class Action Waivers Regardless of Individual Claim's Value

Italian Colors restaurant challenged American Express's fees as violating anti-trust laws by filing a class action. But Colors signed an arbitration clause excluding class claims.   Colors argued that the cost of proving its case would be multiples of whatever it might recover.  Therefore, Colors contended, the class waiver impermissibly interfered with its ability to sue under federal law.  The Second Circuit court of appeals agreed with this premise, citing what is known as the "effective vindication" rule.  Under that rule, courts have held that arbitration agreements are invalid under the Federal Arbitration Act unless they permit "effective vindication" of federal statutory rights.

The Supreme Court, 5-3 with Justice Sotomayor recused, held that Colors is bound by its agreement to arbitrate, regardless of whether it is economically feasible to arbitrate its individual claim.  The majority's point is that Congress did not say in the anti-trust laws that a litigant must be able to bring a class action, or that litigation must be economically feasible.  Nothing in the arbitration agreement precluded or limited Colors' rights under the anti-trust law.  Further, anti-trust lawsuits and the Sherman Act predated the class action device.

The Court wrote:

Respondents argue that requiring them to litigate their claims individually—as they contracted to do—would contravene the policies of the antitrust laws. But the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.

The dissent (penned by Justice Kagan, with Ginsburg and Breyer concurring) essentially wrote that when the cost of bringing a claim under a federal statute significantly outweighs the potential recovery, then a class action right must be preserved as well.  The dissent stated that the majority opinion all but doomed Colors' case by rendering it prohibitively expensive to arbitrate.  Justice Kagan characterized the majority's response to that contention as, "Too darn bad."

This decision addresses class action waivers under federal law, not state law.  However, the majority does not appear to consider it a big difference whether the issue is if the FAA preempts state law or conflicts with federal law:

In dismissing AT&T Mobility [v. Concepcion] as a case involving pre-emption and not the effective-vindication exception, the dissent ignores what that case established—that the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low value claims. The latter interest, we said, is “unrelated” to the FAA. 563 U. S., at ___ (slip op., at 17). Accordingly, the FAA does, contrary to the dissent’s assertion, see post, at 5, favor the absence of litigation when that is the consequence of a class-action waiver, since its “ ‘principal purpose’ ” is the enforcement of arbitration agreements according to their terms.

This last point undermines the California Supreme Court's focus on "low value" claims (like wage-hour matters) as a factor in determining if a class action waiver is valid.   We are waiting to see what the California high court plans to do with its decision in Gentry v. Superior Court, which the court is reconsidering.

This decision is American Express Co. v. Italian Colors Rest.  and the opinion is here.

U.S. Supreme Court: Arbitrator Had Power to Interpret Whether Arbitration Agreement Allowed Class Actions

The Supreme Court infrequently issues unanimous decisions in matters that concern employers and employees. So, it was a bit of a surprise to see Oxford Health Plans v. Sutter, the Court's 9-0 decision today.  Then I noticed that the substantive claims are not employment law-related.  Still, this opinion  will affect class action arbitration, employment law and otherwise.

Sutter was a doctor. He and a class of doctors sued Oxford for failing to reimburse adequately under the insurance reimbursement contract. Oxford required Sutter to arbitrated his claim under this arbitration clause:

No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of the American Arbitration Association with one arbitrator.

Once in arbitration, the parties agreed to let the arbitrator  decide whether the above language authorized classwide arbitration. The arbitrator held that it did.  When the Supreme Court issued Stolt Nielsen v. AnimalFeeds (when arbitration agreement is silent regarding class action arbitration, the default is to hold individual arbitrations), Oxford asked the arbitrator again to exclude class claims. The arbitrator again refused.

So, for a second time Oxford moved to vacate that finding under the Federal Arbitration Act.  The trial court, the court of appeals and the Supreme Court unanimously said, no can do:

Here, the arbitrator did construe the contract (focusing, per usual, on its language), and did find an agreement to permit class arbitration. So to overturn his decision, we would have to rely on a finding that he misapprehended the parties’ intent. But [Federal Arbitration Act] §10(a)(4) bars that course: It permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly.

As in other cases, the Court's decision in part turned on the litigation strategy of one of the parties. Possibly to garner more votes, Justice Kagan was pretty negative about the arbitrator's decision.  She suggested that a court might well have ruled a different way if Oxford had chosen to ask the district court to interpret the agreement instead of the arbitrator:

We would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called “question of arbitrability.” Those questions—which “include certain gateway matters, such as whether parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy”—are presumptively for courts to decide. Green Tree Financial Corp. v. Bazzle, 539 U. S. 444, 452 (2003) (plurality opinion). A court may therefore review an arbitrator’s determination of such a matter de novo absent “clear[] and unmistakabl[e]” evidence that the parties wanted an arbitrator to resolve the dispute. AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 649 (1986). StoltNielsen made clear that this Court has not yet decided whether the
availability of class arbitration is a question of arbitrability. See 559 U. S., at 680. But this case gives us no opportunity to do so because Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures. See Brief for Petitioner 38, n. 9 (conceding this point). Indeed, Oxford submitted that issue to the arbitrator not once, but twice—and the second time after StoltNielsen flagged that it might be a question of arbitrability.

So, lesson learned.  If you think a court will follow Stolt-Nielsen more faithfully than an arbitrator, seek construction of your arbitration clause in court.

Bonus - the Court said this right up front:  "Class arbitration is a matter of consent: An arbitrator
may employ class procedures only if the parties have authorized them."  That does not bode well for those who would like the California Supreme Court to hold that class action waivers are illegal.

This case Oxford Health Plans LLC v. Sutter and the opinion is here.

California Court Upholds Arbitration Agreement...(Pinch Me)

Let's start the new year off with a rare bird - a California court upholding an arbitration agreement in an employment case. 

Maribel Baltazar sued her former employer, Forever 21 and three employees, for sexual harassment, wage hour violations, and a variety of other claims.  The defendants moved to compel arbitration.

The court first decided that the California Arbitration Act, rather than the Federal Arbitration Act, applied. The defendants apparently took for granted that Forever 21 was "in interstate commerce" to secure FAA coverage.  The court of appeal ruled that proof is required.   The court also noted that the agreement was silent regarding the FAA's applicability.   So, if you want the pro-arbitration Federal Arbitration Act to apply, it is better to say so in the Agreement.  And counsel must affirmatively establish interstate commerce in the motion to compel.

Anyway, the court of appeal moved to the enforceability of the agreement. The plaintiff argued that the agreement was "unconscionable" under California law.  But the court of appeal disagreed.

The plaintiff first claimed the agreement was not "mutual," meaning that the employer did not have to arbitrate, but the plaintiff did.  The key issue was whether the agreement's permitting either party to go to court to obtain "provisional" relief (such as temporary restraining orders and preliminary injunctions) rendered the agreement one-sided.  The court noted that the California Arbitration Act itself permits parties to an arbitration agreement to seek provisional relief in court.  So, it is permissible for an arbitration agreement to authorized either party to seek provisional remedies (such as injunctions) in court.

The court also held that a provision protecting the employer's confidential information contained in the arbitration agreement did not render the agreement unconscionable. 

Finally, the court held that it was lawful for the agreement to provide for the AAA employment dispute rules, but also to provide that the California Arbitration Act would apply if the rules were held invalid.  The Court did not mention whether the AAA rules were attached to the arbitration agreement.  (Other opinions have held that failure to attach a copy of the rules render the agreement unconscionable.  Silly, IMO). Why silly? As the court of appeal pointed out in this case, many courts have already held that the AAA rules are fair. How can it be "unconscionable" to not attach a copy.

The case is Baltazar v. Forever 21, Inc. et al. and the opinion is here.   Oh - what does an enforceable arbitration agreement look like?   Behold!

AGREEMENT TO ARBITRATE

FOR CALIFORNIA STORES ONLY 

This Agreement to Arbitrate (hereinafter "Agreement‘) is entered into by and between Forever 21, Inc., and its subsidiary and affiliated companies, and each of their officers, directors, agents, benefit plans, insurers, successors, and assigns (hereinafter collectively "the Company‘) and [handwritten name of plaintiff], hereinafter "Employee" located at Warehouse . . . .

It is the desire of the parties to this Agreement that, whenever possible, "Disputes‘ relating to employment matters will be resolved in an expeditious manner. Each of the parties hereto is voluntarily entering into the Agreement in order to gain the benefits of a speedy, impartial dispute-resolution procedure. 

The Company and Employee mutually agree that any dispute or controversy arising out of or in any way related to any "Dispute,‘ as defined herein, shall be resolved exclusively by final and binding arbitration. Such arbitration shall be held in Los Angeles, California pursuant to the Model Rules for Arbitration of Employment Disputes of the American Arbitration Association then in effect. 

For purposes of this Agreement, the term "Disputes‘ means and includes any claim or action arising out of or in any way related to the hire, employment, remuneration, separation or termination of Employee. The potential Disputes which the parties agree to arbitrate, pursuant to this Agreement,
include but are not limited to: claims for wages or other compensation due; claims for breach of any employment contract or covenant (express or implied); claims for unlawful discrimination, retaliation or harassment (including, but not limited to, claims based on employment benefits (except where an Employee‘s benefit or pension plan contains a claims procedure which expressly provides for a final and binding arbitration procedure different from this one)), and Disputes arising out of or relating to the termination of the employment relationship between the parties, whether based on common law or statute, regulation, or ordinance.

Each of the parties voluntarily and irrevocably waives any and all rights to have any Dispute heard or resolved in any forum other than through arbitration as provided herein. This waiver specifically includes, but is not limited to, any right to trial by jury. 

This Agreement does not cover claims that Employee my have for worker‘s compensation benefits or unemployment compensation benefits. . . .

Pursuant to California Code of Civil Procedure 1281.8 either party hereto may apply to a California court for any provisional remedy, including a temporary restraining order or preliminary injunction. 

Both parties agree that the Company has valuable trade secrets and proprietary and confidential information. Both parties agree that in the course of any arbitration proceeding all necessary steps will be taken to protect from public disclosure such trade secrets and proprietary and confidential information. [¶] . . . [¶]

The provisions of this Agreement are severable, and if any one or more are determined to be void or otherwise unenforceable, the remaining provisions shall continue to be in full force and effect. If, in any action to enforce this Agreement, a Court of competent jurisdiction rules that the parties agreement to arbitrate under the Model Rules for Arbitration of Employment Disputes of the American Arbitration Association is not enforceable, then the parties agree that such Dispute shall be resolved by final and binding arbitration under the California Arbitration Act, California Code of Civil Procedure Section 1280, et seq.

The promises of the parties herein to arbitrate differences, rather than litigate them before courts or other bodies, provide consideration for each other.‖ (Capital letters, underscoring, and boldface in original.)

California Supreme Court Takes Up Arbitration Again

I posted in detail about Iskanian v. CLS Transportation here.  (This is one of the post-Concepcion cases that address arbitration. )  The California Supreme Court just granted review here.  The Court eventually will explain how Concepcion affects California arbitration law.  But that could take some time... Unfortunately for employers, the Court's grant of review means the Iskanian decision is uncitable going forward.
DGV

Court of Appeal: No Waiver of Arbitration and No Class Action Either

The Court of Appeal overturned a trial court's denial of the employer's motion to compel arbitration.  Here are some key points:

1.  The Court of Appeal expressly recognized that an arbitration agreement that is silent regarding class actions cannot be read to require classwide arbitration.

[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. . . . As the Arbitration Agreement explicitly covers the type of claims that are the subject of Reyes‘s lawsuit and provides only for bilateral arbitration, there is no contractual basis for concluding the parties agreed to submit to class arbitration. Therefore, we conclude that the Arbitration Agreement does not authorize class arbitration.

2. The court held that the employer did not waive the right to arbitrate, even though it did not cite the arbitration agreement in the answer, and though it conducted lots of discovery in court.  The reason is that the employer likely would not have prevailed on a motion to compel arbitration until the U.S. Supreme Court issued its decision in AT&T Mobility v. Concepcion  (2011) 563 U.S. ___ [131 S.Ct. 1740, 179 L.Ed.2d 742].  Therefore, the employer did not "waive" the right to arbitrate, when seeking arbitration would have been futile.

3.  Like pretty much every other court, the court here refused to follow the National Labor Relations Board's decision in DR Horton (holding that arbitration agreements cannot require class action waivers unless the employee can bring a class action in court). 

The decision is Reyes v. Liberman Broadcasting and the opinion is here.

DGV

Court of Appeal Upholds Arbitration Agreement

Nelsen v. Legacy Partners (opinion here) is the latest decision from the court of appeal to address the validity of arbitration agreements in California, after recent federal developments (Concepcion, DR Horton, etc.). 

The issues, as usual, are whether the arbitration agreement is "unconscionable," or violates public policy, and therefore is unenforceable as a contract.

The arbitration agreement was located at the end of a long handbook. Not surprisingly, the court first found that the agreement was "procedurally unconscionable,"  because

It was part of a preprinted form agreement drafted by LPI that all of LPI‘s California property managers were required to sign on a take-it-or-leave-it basis. The arbitration clause was located on the last two pages of a 43-page handbook. While the top of page 42 contains a highlighted prominent title ―TEAM MEMBER ACKNOWLEDGMENT AND AGREEMENT,‖ the title makes no reference to arbitration and the arbitration language itself appears in a small font not set off in any way to stand out from the rest of the agreement or handbook. Moreover, unless Nelsen happened to be conversant with the rules of pleading in the Code of Civil Procedure, the law and procedure applicable to appellate review, and the rules for the disqualification of superior court judges, the terms and rules of the arbitration referenced in the clause would have been beyond her comprehension.

So, now the courts say that failing to attach the Code of Civil Procedure makes an agreement procedurally unconscionable.  What happened to "everyone is bound to know the law?" or "ignorance is no excuse?"  Also, by saying that the agreement is not in a different font, the court is imposing a requirement that does not apply to other contracts.  That's not supposed to be allowed, demonstrating once again that the unconscionability doctrine is just an end run around Federal Arbitration Act preemption.

However, the court then turned to "substantive" unconscionability, which must also exist for an arbitration agreement to be invalidated.  In this case, though, the arbitration agreement was pretty much lifted verbatim from a California Supreme Court decision. (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064.)  So, the Court did not find substantive unconscionability.

But Nelsen then argued that, regardless of unconcsionability, the arbitration agreement violated "public policy" under the California Supreme Court's decision in  Gentry v. Superior Court (2007) 42 Cal.4th 443.  In particular, Nelsen argued that the arbitration agreement barred her from bringing a class claim in arbitration because the agreement was silent as to class claims.

The court of appeal held that, indeed, the silent agreement did not encompass class-based claims.
However, the court then decided that Gentry did not invalidate the arbitration agreement because Nelsen did not adequately support the argument to the trial court.  That is, Gentry does not invalidate "all" class action waivers, so you have to establish the Gentry "factors," which Nelsen did not do.  In ruling this way, the court sidestepped whether Gentry remains good law.

Finally, the court decided that the National Labor Relations Board's decision in DR Horton was not binding and that the court would not follow it. The court noted that the decision was issued by just 2 Board members and that the issue of whether class action waivers are enforceable are beyond the Board's normal expertise.

So, another arbitration agreement survives. 

Court of Appeal: Concepcion Kills Gentry

It's hard to keep up with arbitration law in California.  Can you waive class actions? Must you attach the entire rule set to the arbitration agreement?  Must you serve a nutritious meal when you provide the arbitration agreement?  It never ends. 

The tension between California case law and case law interpreting the Federal Arbitration Act causes these problems. Last year the U.S. Supreme Court decided in ATT Mobility v. Concepcion that the Federal Arbitration Act allows parties to limit arbitration agreements to single-plaintiff claims.  The Court overruled the Califoria Supreme Court's decision in Discover Bank v. Superior Court.  We posted about that here.

Discover Bank was about a consumer class action for small dollars / cents per claim. In Gentry v. Superior Court (2007) 42 Cal.4th 443, the California Supreme Court extended Discover Bank  to wage-hour class actions. The Court held that a class waiver should not be enforced if "class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration."

The U.S. Supremes never mentioned Gentry. So what happened to it after Concepcion?

GENTRY

The Court of Appeal in Iskanian v. CLS Transportation- Los Angeles  (opinion here) decided that Gentry is no more. The real news here, though, is that this decision may dispose of - or severely restrict -- the entire body of anti-arbitration case law that has been developed over the past 10 years in California.  The language I've quoted below seems to sound the death knell to California courts' hostility to arbitration on "public policy" grounds (assuming this case remains on the books):

Now, we find that the Concepcion decision conclusively invalidates the Gentry test.  . . . Concepcion thoroughly rejected the concept that class arbitration procedures should be imposed on a party who never agreed to them. ... This unequivocal rejection of court-imposed class arbitration applies just as squarely to the Gentry test as it did to the Discover Bank rule. 

Second, Iskanian argues that the Gentry rule rested primarily on a public policy rationale, and not on Discover Bank‟s unconscionability rationale. While this point is basically correct, it does not mean that Gentry falls outside the reach of the Concepcion decision. ....

Third, the premise that Iskanian brought a class action to "vindicate statutory rights" is irrelevant in the wake of Concepcion. As the Concepcion court reiterated, "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." (131 S.Ct. at p. 1753.) ....

PAGA
 This Court then decided that Concepcion applies to PAGA claims too. The Court disagreed with
Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489. "Brown held that the Concepcion holding does not apply to representative actions under the PAGA, and therefore a waiver of PAGA representative actions is unenforceable under California law."
This Court disagreed and held that Concepcion would not allow courts to invalidate arbitration agreements merely because they preclude PAGA claims:

Respectfully, we disagree with the majority‟s holding in Brown. We recognize that the PAGA serves to benefit the public and that private attorney general laws may be severely undercut by application of the FAA. But we believe that United States Supreme Court has spoken on the issue, and we are required to follow its binding authority.

HORTON

The Court then went for the Tri-Fecta and disagreed with the National Labor Relations Board's decision in DR Horton, too. D. R. Horton  (2012) 357 NLRB No. 184

In D.R. Horton, the NLRB held that a mandatory, employer-imposed agreement requiring all employment-related disputes to be resolved through individual arbitration (and disallowing class or collective claims) violated the National Labor Relations Act (NLRA) because it prohibited the exercise of substantive rights protected by section 7 of the NLRA.

 The Court decided that it was not bound to follow DR Horton:

We decline to follow D.R. Horton. In reiterating the general rule that arbitration agreements must be enforced according to their terms, Concepcion (which is binding authority) made no exception for employment-related disputes. Furthermore, the NLRB‟s attempt to read into the NLRA a prohibition of class waivers is contrary to another recent United States Supreme Court decision. In CompuCredit Corp. v. Greenwood (2012) __ U.S. __, __ [132 S.Ct. 665, 668] (CompuCredit), plaintiff consumers filed suit against a credit corporation and a bank, contending that they had violated the Credit Repair Organizations Act (CROA) (15 U.S.C. § 1679 et seq.).5 The plaintiffs brought the matter as a class action, despite having previously agreed to resolve all disputes by binding arbitration. The Supreme Court rejected their efforts to avoid arbitration, finding that unless the FAA‟s mandate has been "„overridden by a contrary congressional command,‟" agreements to arbitrate must be enforced according to their terms, even when federal statutory claims are at issue. (CompuCredit, at p. 669, citing (1987) 482 U.S. 220, 226.) The Supreme Court held: "Because the CROA is silent on whether claims under the Act can proceed in an arbitrable forum, the FAA requires the arbitration agreement to be enforced according to its terms." (CompuCredit, at p. 673.)

The D.R. Horton decision identified no "congressional command" in the NLRA prohibiting enforcement of an arbitration agreement pursuant to its terms. D.R. Horton’s holding—that employment-related class claims are "concerted activities for the purpose of collective bargaining or other mutual aid or protection" protected by section 7 of the NLRA, so that the FAA does not apply—elevates the NLRB‟s interpretation of the NLRA over section 2 of the FAA. This holding does not withstand scrutiny in light of Concepcion and CompuCredit.

ARMENDARIZ?

Well, all that is left is Armendariz.  This Court did not touch it expressly. So, stay tuned.... The California Supreme Court is considering related issues. My bet is that the Court will take this case up as well if the parties seek review.

DGV

New U.S. Supreme Court Opinion May Signal End of California Courts' Arbitration Jurisprudence

In West Virginia, the state Supreme Court held that, as a matter of "public policy," pre-dispute arbitration agreements covering claims for personal injury arising from nursing home patronage are void.  In a terse, unsigned opinion, the U.S. Supreme Court reversed the state high court.

West Virginia's prohibition against predispute agreements to arbitrate personal-injury or wrongful-death claims against nursing homes is a cate- gorical rule prohibiting arbitration of a particular type of claim, and that rule is contrary to the terms and coverage of the FAA.

 

The West Virginia Supreme Court alternatively held that the arbitration agreement at issue was "unconscionable,"  a state law defense that is a valid exception to the Federal Arbitration Act. 
The U.S. Supreme Court also vacated that alternative holding:

in its discussion of the alternative holding, the state court found the arbitration clauses unconscionable in part because a predispute arbitration agreement that applies to claims of personal injury or wrongful death against nursing homes "clearly violates public policy." Id., at 91a.

On remand, the West Virginia court must consider whether, absent that general public policy, the arbitration clauses in Brown's case and Taylor's case are unenforce-able under state common law principles that are not specific to arbitration and pre-empted by the FAA

Here's why you may care - In California, the Supreme Court and the courts of appeal have fashioned special rules for enforcing arbitration of certain kinds of employment claims (arising from statute or public policy).  Rather than banning agreements to arbitrate outright (as in the West Virginia case), the California courts have come up with a gauntlet of impediments, making it easy to hold arbitration agreements "unconscionable" based on criteria that would not apply to any other kind of contract.  Thus, the California courts apply different rules to agreements to arbitrate certain kinds of claims, but not others. 

Given the Supreme Court's recent case law, these state law rules may not be long for this world. Of course, Congress could amend the Federal Arbitration Act or the Supreme Court's membership might change, in which case all bets are off.

This case is Marmet Healthcare Center v. Brown and the opinion is here.