Many hospitality employers have long considered implementing arbitration programs as a means for resolving workplace disputes. For years, the effectiveness of arbitration programs against class and collective action lawsuits, however, was an area of uncertainty in many states -- especially California. While the possibility of obtaining a waiver of class or collective actions in court has existed for years, the possibility of ending up with a class action in an arbitral forum was a risk most employers were unwilling to take.
In the wake of the Supreme Court's decisions in 2010 and 2011 -- Stolt-Nielsen v. AnimalFeeds and AT&T Mobility v. Concepcion -- arbitration has re-emerged a possible way for employers to insulate themselves against employment-related class and collective actions in any forum throughout the United States, including California.
The prospect of avoiding class or collective actions has sparked employer interest. As of October 2011, based on a survey conducted by Seyfarth Shaw among retail and hospitality employers, roughly 40% of respondents indicated that they are considering seriously the implementation of mandatory arbitration with class action waivers in the wake of Concepcion, and many more have since given thought to such a program.
The decision to implement such a program is not an easy one, and employers must understand the advantages and disadvantages -- both real and perceived. In addition, employers must understand where the mines are buried, and understand the various ways in which mandatory arbitration may come under attack.
It has been nearly a year since Concepcion, and the vast majority of courts that have applied Concepcion to arbitration agreements containing a class or collective action waiver have enforced those agreements and compelled arbitration. Selected courts, however, continue to find arbitration clauses unenforceable, particularly when attempting to reconcile the FAA with federal statutes that arguably give rise to substantive right to proceed on collective basis. For example, federal judges in the Southern District of New York are split as to the enforceability of collective action waivers under the Fair Labor Standards Act ("FLSA"). Federal and state courts in California differ as to the ability to waive the right to file claims under the Private Attorney General's Act ("PAGA").
Perhaps the biggest post-Concepcion obstacle to class and collective action waivers was erected in January 2012 by the National Labor Relations Board. The Board in D.R. Horton ruled that a mandatory class and collective action waiver imposed by an employer is illegal and unenforceable under the National Labor Relations Act ("NLRA") because -- in the Board's view -- class or collective actions constitute "protected concerted activity" within the meaning of Section 7 of the NLRA. Many of these decisions are currently subject to appeal, and many employers are eagerly waiting and hoping for reversal.
As employers await the appeal of these decisions, they must also predict the upcoming political landscape, including the threat of legislative action, as well as other challenges to arbitration agreements based on generally applicable contract defenses. Despite the challenges, however, employers remain interested in mandatory arbitration and class action waivers as a means for potentially staving off the threat of class and collective actions.
The Supreme Court's Strong Support of Mandatory Arbitration
One thing is clear: The Supreme Court of the United States has long interpreted the Federal Arbitration Act (FAA) to require courts to honor the parties' expectations and enforce arbitration agreements according to their terms. A string of decisions -- starting with Gilmer v. Interstate/Johnson Lane (1991) and continuing most recently in CompuCredit Corp. v. Greenwood (2012) and Marmet Health Care Center v. Brown (2012), have emphasized that under the FAA, arbitration agreements are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. This, according to the Court in Marmet and Concepcion, reflects an "emphatic federal policy in favor of arbitral dispute resolution." State laws, the Court made clear, that seek to prohibit outright the arbitration of a particular type of claim "[are] displaced by the FAA." Likewise, in CompuCredit, the Court made clear that even when federal statutory claims are at issue, arbitration agreements must be enforced by their terms.
State Laws Prohibiting Class Action Waivers Clearly Preempted by the FAA
Since Concepcion, a string of federal courts have routinely struck down state laws that seek to prohibit class action waivers in arbitration agreements. Most recently, on March 14, 2012, the Third Circuit in Quilloin v. Tenet Healthsystem Philadelphia, overturned a district court decision and noted that while Pennsylvania law may find class action waivers to be unconscionable, such law is "surely preempted by the FAA under Concepcion." In 2011, the Third Circuit also held a similar New Jersey law to be preempted by the FAA, in Litman v. Cellco P'ship. Even the Ninth Circuit has followed suit, holding most recently on March 7, 2012 in Kilgore v. KeyBank, that even claims solely for injunctive relief under California's Unfair Competition Law may be preempted by an arbitration agreement, because California's law prohibiting arbitration of injunctive relief claims is preempted by the FAA under Concepcion.
Not all courts, however, have fully given over to this position. Specifically, California state courts -- even post Concepcion -- have continued to suggest that the arbitration of certain state law claims is prohibited. Notably, the California Court of Appeal in Brown v. Ralph's Grocery held that claims under California's Private Attorney General Act ("PAGA") may not be compelled to arbitration. Unfortunately, the California Supreme Court declined to review Brown. Several California federal district courts, however -- notably Quvedo v. Macy's (C.D. Cal) and Grabowski v. CH Robinson (S.D. Cal) -- have explicitly held that Brown got it wrong, and found that PAGA claims may be compelled to arbitration. The Ninth Circuit, based on its decision in Kilgore, presumably would agree.
Conflicting Federal Rights to Proceed Collectively or as a Class
The National Labor Relations Act. Perhaps the biggest setback for employers post-Concepcion was dealt in January, 2012, by the Board in D.R. Horton. In a closely watched decision ultimately penned by Member Craig Becker, the Board held that class action waivers are a per se violation of Section 7 of the National Labor Relations Act, and therefore unlawful. The Board argued that employees' rights to engage in concerted activity includes the right both to file and to pursue a class action, and that an arbitration agreement that disallowed such activity unlawfully chilled employees' Section 7 rights. The Board's order is before the Fifth Circuit Court of Appeals, which will be a closely watched decision in the coming months. Unless it is reversed, this decision presents a challenge for employers looking to implement a new program because of the ease with which an employee can challenge implementation by filing a charge with the NLRB.
The FLSA. While the preemptive effect of the FAA vis-à-vis state law prohibitions of class action waivers is reasonably clear, a more recent and troubling trend is the proper balancing of arguably conflicting federal substantive rights to proceed on a class or collective basis. Chief among these, of course, is the Fair Labor Standards Act, which at least according to one Federal District Court Judge in the Southern District of New York -- in Ranieri v. CitiGroup -- includes the substantive right to proceed collectively. Accordingly, according to the court in Ranieri, FLSA collective action claims cannot be compelled to individual arbitration.
The Ranieri decision, however, is an outlier. Every other district court to consider the issue has held that FLSA claims and collective actions may be compelled to single-plaintiff arbitration. Indeed, even a sister court in the Southern District of New York, in LaVoice v. UBS, expressly declined to follow Ranieri (or, for that matter, the NLRB's decision in D.R. Horton). The Ranieri decision, which has been appealed and briefed before the Second Circuit, is another decision-to-watch for employers.
EEOC Pattern and Practice Claims. Another decision out of the Southern District of New York -- Chen Oster v. Goldman Sachs -- adopts a similar view, arguing that the right to proceed as a class or group is so inherently bound up in Title VII that such claims may not be compelled to single-plaintiff arbitration, notwithstanding the FAA. Perhaps unsurprisingly, the EEOC also shares this view.
While courts generally have adopted a broad view of Concepcion, and have preempted any state law and most federal laws prohibiting arbitration, agreements are still subject to challenge. The Supreme Court specifically noted that the FAA "permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability."
Accordingly, several courts have analyzed arbitration agreements with class action waivers and refused to enforce them as unconscionable, despite Concepcion. The most common reasons that agreements are found to be unconscionable include:
- Providing that the prevailing party must pay the other sides' attorneys fees, or refusing to permit attorneys fees to shift, as compared to the fee-shifting that would be available to a prevailing plaintiff in an employment lawsuit in court. See, for example, In Re Checking Account Overdraft Litigation (S.D. Florida); Mayer v. Volt Mgmt (Ct. App. Cal. - 4th Dist.)
- Shortening the statute of limitations as compared to what would be available by statute. See, for example, Kanbar v. O'Melveny & Myers (N.D. California)
- Failing to make the arbitration rules clear, most notably by failing to include a clear reference to the applicable rules and a copy of the applicable rules. Mayer v. Volt Mgmt (Ct. App. Cal. - 4th Dist.)
Other Issues and Carve-Outs
Employers who are considering implementation of mandatory arbitration should consider other important potentially applicable carve-outs. For example, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, certain types of whistleblower claims may not subject to mandatory pre-dispute arbitration.
Strategic carve-outs should also be considered, such as reserving the right to seek emergency or temporary injunctive relief in court for disclosure of trade secrets. Another example of a strategic carve-out would be situations in which an employer maintains different types of ERISA plans -- such as Severance Pay Plans or Short-Term Disability Plans -- that call for different types of dispute resolution procedures.
Many companies view Concepcion as a way to avoid costly class actions by implementing arbitration agreements that include class action waivers. While the D.R. Horton decision works its way through the Fifth Circuit, and employers await and hope for the reversal of the Ranieri decision in the Second Circuit, many employers are continuing to design mandatory arbitration programs with class and collective action waivers, so they can be ready to implement. For many employers, the prospect of avoiding even one class or collective action is well worth the risk.