Uncertainty abounds with class action waivers in arbitration agreements - despite seemingly definitive Supreme Court pronouncements

Introduction

Employers seeking to use arbitration as a means to insulate themselves from expensive class action claims cheered two Supreme Court decisions in the past two years. In the 2010 case of Stolt-Nielsen, S.A. v. AnimalFeeds Int’l. Corp., the Supreme Court ruled that a party could not be compelled to arbitrate class claims in the absence of some indication that it had affirmatively agreed to class-wide arbitration. The Court found that an arbitrator could not allow class arbitration to proceed where the arbitration agreement in question was entirely silent on the subject of class-wide arbitration. Later, in the 2011 case of AT&T Mobility LLC v. Concepcion, the Supreme Court approved of express class action waivers in arbitration agreements. The Court found that under the Federal Arbitration Act (“FAA”), parties were free to limit arbitration to individual claims alone.

After Stolt-Nielsen and Concepcion, many employers with significant risk of class action litigation (e.g., wage and hour claims) considered implementing arbitration programs as a way to minimize this risk. Some employers adopted arbitration agreements containing express class action waivers, as allowed by Concepcion. Other employers adopted arbitration agreements that were silent on the availability of class actions. Those “silent” agreements appeared to be equally effective at stopping class claims because, under Stolt-Nielsen, the absence of affirmative consent to class claims bars such claims in arbitration. Unfortunately, however, both the express waiver and silence strategies have come under attack, and there is now uncertainty as to how employers can best protect themselves from class actions through the use of arbitration agreements.

The NLRB Attacks Express Class Action Waivers

The National Labor Relations Board (“NLRB”) has led the attack on express class action waivers—waivers that appeared to be valid after Concepcion. In the D.R. Horton case, the NLRB ruled in January of this year that an arbitration agreement that prohibits class-wide claims violates employees’ right to engage in concerted activity under the National Labor Relations Act (“NLRA”)—i.e., employees’ NLRA Section 7 rights. The NLRB determined that although Concepcion authorized class action waivers under the FAA, Concepcion did not preclude challenges to class action waivers under the NLRA. Although the D.R. Horton case has been appealed and could be overturned, it is presently a violation of the NLRA for employers to require employees to sign arbitration agreements containing express class action waivers.

Multiple Arbitrators and at Least One Appellate Court Have Allowed Class-Wide Arbitration Even with Arbitration Agreements that Seemed to be “Silent” with Respect to Class Actions

While D.R. Horton makes express class action waivers problematic (at least for now), D.R. Horton did not directly address arbitration agreements that are silent on the availability of class actions—agreements that, under Stolt-Nielsen, can also be used to avoid class actions. It remains to be seen whether the NLRB would view an employer’s use of a “silent” arbitration agreement to avoid class action claims as a violation of employees’ NLRA Section 7 rights. But even assuming that a “silent” arbitration agreement could avoid problems with the NLRB, some recent court decisions demonstrate that the “silent” agreement strategy has another potential problem.

The potential problem with an arbitration agreement that is silent on the availability of class actions is that an arbitrator must agree that the agreement is truly “silent.” In evaluating apparently “silent” arbitration agreements, some arbitrators have found that employers have nonetheless impliedly consented to class arbitration through certain language in the agreement or by the way the employer has acted in response to class claims. This was what happened in the 2011 case of Jock v. Sterling Jewelers, Inc. In Jock, the Second Circuit Court of Appeals upheld an arbitrator’s decision allowing class arbitration to proceed even in the face of what appeared to be a “silent” arbitration agreement. Despite Stolt-Nielsen, the Second Circuit determined that the arbitrator had broad and nearly unfettered discretion to evaluate all of the circumstances surrounding the arbitration agreement and to ascertain whether there was any implied acceptance of class arbitration by the employer notwithstanding the apparent silence regarding class claims in the arbitration agreement itself.

A similar issue arose in the May 2012 case of Reed v. Florida Metropolitan Univ., Inc., but the outcome was different from Jock. In Reed, the Fifth Circuit Court of Appeals rejected an arbitrator’s determination that the parties had impliedly consented to class arbitration. Even in light of the deference that courts give to arbitral decisions, the Reed Court found that the arbitrator exceeded his authority and misapplied Stolt-Nielsen. According to the Fifth Circuit, any doubts as to the parties’ intentions with respect to class arbitration should be resolved against class arbitration. The Fifth Circuit’s Reed decision is thus directly at odds with the Second Circuit’s Jock decision, and this split in Circuits leaves employers outside of the Second and Fifth Circuits uncertain as to how much discretion arbitrators will have in applying Stolt-Nielsen to arbitration agreements that are “silent” on class arbitration.

State Law Attacks On Class Action Waivers

If all of this weren’t complicated enough, employers face the possibility that their arbitration programs can be attacked on state law grounds. Although Stolt-Nielsen and Concepcion apply to arbitration agreements covered by the FAA—which ostensibly covers most arbitration agreements implicating interstate commerce—some state courts have found that some employment arbitration agreements do not implicate interstate commerce as required for FAA coverage. Moreover, the FAA does not itself provide a basis for federal jurisdiction, meaning that employers may not be able to have a federal court decide the FAA coverage issue. If the FAA is inapplicable to an employer’s arbitration agreement, neither Stolt-Nielsen nor Concepcion will apply to the agreement, and an employer must demonstrate that the agreement is otherwise enforceable under the particular state’s arbitration statute. Some state arbitration statutes may disallow class action waivers or severely curtail them, and state courts are often hostile to class action waivers. For example, at least one California court, in the case of Brown v. Ralphs Grocery Co., has used the provisions of the California Private Attorney General Act to circumvent Concepcion and to allow class-type claims to proceed in court notwithstanding an otherwise enforceable arbitration agreement.

Conclusion

There is fierce opposition to employer efforts to use arbitration as a means of avoiding class action claims, and that opposition has resulted in a somewhat cloudy legal picture of the enforceability of arbitration agreements that purport to restrict class actions, whether expressly or by silence. Nevertheless, employers that can successfully navigate this challenging and rapidly developing area of the law can reap substantial benefits by avoiding class action exposure in many circumstances. Employers must recognize, however, that these substantial benefits come with substantial risk that their arbitration agreements will be subjected to multi-faceted and spirited attacks, both with the NLRB and in the courts.