The U.S. Court of Appeals for the Third Circuit continues to follow the Supreme Court’s “bold and clear” lead in favoring arbitration clauses over state laws prohibiting class action waivers. In T Mobility v. Concepcion, the Supreme Court held that the Federal Arbitration Act (FAA)’s broad mandate favoring arbitration agreements, which typically are construed to not permit class actions, trumped a California state law that prohibited class action waivers in consumer agreements. In 2011, the Third Circuit followed Concepcion and struck down a similar New Jersey prohibition on class action waivers in Litman v. Cellco P’ship. On March 14, 2012, the Third Circuit struck down another similar law, this time in Pennsylvania, in Quilloin v. Tenet HealthSystem Philadelphia, Inc. This trend proves valuable to companies seeking to avoid the expense of class action litigation, and adds a premium to arbitration clauses.
Janice Quilloin worked at Hahnemann University Hospital (a subsidiary of Tenet Healthcare Corporation) in two different periods, one beginning in October 2006 and the other beginning in January 2009. Close in time to both start dates, Ms. Quilloin signed the “Employee Acknowledgement” form, which required the signing employee to agree to the company’s “Fair Treatment Process,” and required that the employee submit all claims and disputes to final and binding arbitration.
In December 2009, Ms. Quilloin filed suit against Tenet, asserting a collective action under the Fair Labor Standards Act of 1938, on the grounds that she and others were not paid for work they completed during the 30-minute, automatically-deducted meal break. In its answer, Tenet asserted the existence of an arbitration agreement as an affirmative defense, and in June of 2010, Tenet filed a motion to compel compliance with the arbitration agreement. Ms. Quilloin responded by claiming that the agreement to arbitrate was unconscionable. In January 2011, before the Concepcion ruling, the district court found that there were genuine disputes of material fact as to whether the arbitration agreement was enforceable and denied Tenet’s motion to compel arbitration. On appeal, and after the Concepcion ruling, the Third Circuit reversed the lower court ruling and compelled arbitration, finding that the agreement to arbitrate was neither substantively nor procedurally unconscionable.
The Third Circuit examined whether the arbitration clause was unconscionable. While the arbitration clause itself did not expressly waive class actions, the Third Circuit ruled that even if it had, the FAA would protect such a waiver from a Pennsylvania law that prohibited class action waivers in arbitration agreements. Noting that the Concepcion holding was “both bold and clear,” the Third Circuit endorsed the Supreme Court’s finding that “arbitration is poorly suited to the higher stakes of class litigation” because (1) class arbitration sacrifices the principal advantage of arbitration – its informality, (2) it is “at the very least odd” to entrust an arbitrator with ensuring the enforcement of third parties’ due process rights, and (3) “class arbitration greatly increases the risks to defendants.” The Third Circuit further noted that the Supreme Court rejected the argument that class proceedings are necessary to prosecute small-dollar claims, stating: “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”
The Third Circuit focused on its Litman ruling, where it followed Concepcion for the first time and struck down a New Jersey law prohibiting class action waivers. The New Jersey law prohibited class action waivers in both the arbitration and litigation context. Nevertheless, the Third Circuit struck it down as it applied to arbitrations because “it seeks to impose class arbitration despite a contractual agreement for individualized arbitration.” In applying Litman and Concepcion, the Third Circuit found the Pennsylvania law to be substantively similar to the California law in Concepcion, and even more egregious than the New Jersey law in Litman. Unlike the New Jersey law, Pennsylvania’s prohibition on class action waivers applied only to arbitration agreements. The Third Circuit called this an “even greater obstacle to the fulfillment of the FAA’s purpose ... because it is exactly the type of law that singles out the provisions of the arbitration agreement.”
In addition to many district courts around the country, the Third Circuit is now the fourth circuit court of appeals to follow Concepcion and strike down state law prohibitions on class action waivers in favor of arbitration agreements. Quilloin did, however, leave a few possible doors open for plaintiffs seeking class arbitrations. First, the Third Circuit did not address the National Labor Relations Board’s recent decision in D.R. Horton, Inc., which held that class action waivers violate employees’ rights to engage in concerted activity. In that decision, the NLRB expressly rejected the notion that the FAA supersedes the National Labor Relations Act’s prohibition against class action waivers, taking pains to distinguish its decision from Concepcion. In light of that decision, employers who use mandatory arbitration in employment agreements must take care not to limit its employees’ ability to file NLRB charges or bring class or collective actions under the National Labor Relations Act.
In addition, the arbitration clause in Quilloin was “silent” as to whether or not it prohibited class arbitrations. While the Third Circuit noted such silence typically meant “no class arbitrations,” the court ruled that determining whether or not the arbitration clause waived class arbitrations was a question for the arbitrator. To avoid a lengthy battle before an arbitrator on this issue, companies should make clear in their arbitration clauses that class action arbitrations are not available. Further, other courts around the country have not enforced class action arbitration waivers when the prohibition on such waivers stems from federal (as opposed to state) statutory law.
While the jury may still be out as to whether arbitrations generally offer better cost savings over litigation, in the context of class actions, the verdict is now in: arbitration clauses that waive class action arbitrations stand to save a company significantly more money than the alternative.