The United States Supreme Court returned its focus to the parameters of class action litigation in three important decisions issued during its most recent term. The decisions in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013), Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013), and Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) are, in significant part, a continuation of the Court’s recent trend of trimming the availability of class actions.
Class Claims and Arbitration — Not Necessarily Perfect Together
American Express and Oxford Health both relate to the availability of class arbitration and, when read together, provide clear guidance as to how employers may avoid class arbitration. In American Express, the Court held that a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act (“FAA”) even when the plaintiffs’ costs of individually arbitrating a statutory claim exceeds the potential recovery. Plaintiffs, merchants who accept American Express cards, asserted class claims against American Express for violations of federal antitrust laws, claiming that the company used its monopoly power in the charge card market to force merchants to pay exorbitantly high fees.
Relying on an arbitration clause in the parties’ agreement providing that “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis,” American Express moved to compel individual arbitration of the claims. Plaintiffs opposed the motion on the basis that requiring individual arbitration was prohibitively expensive because the expert analysis required to prove an antitrust claim would costs hundreds of thousands of dollars while the most each individual could recover was approximately $40,000.
The district court granted American Express’s motion and dismissed the lawsuit. The United States Court of Appeals for the Second Circuit reversed, finding that the class waiver was unenforceable because plaintiffs would “incur prohibitive costs if compelled to arbitrate under the class action waiver.”
The Supreme Court reversed. It held that enforcing the class waiver would not bar the effective vindication of the plaintiffs’ federal rights: “[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Thus, the Court concluded that “[t]he regime established by the Court of Appeals’ decision would require — before a plaintiff can be held to have contractually agreed to bilateral arbitration — that a federal court determine (and the parties litigate) the legal success on the merits claim‑by‑claim and theory-by theory, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success,” which would “undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure.”
Notably, following the Supreme Court’s decision in American Express, the Second Circuit applied its holding to an employment dispute arising under the Fair Labor Standards Act (the “FLSA”). Reversing its prior reticence to enforce class action waivers, the Second Circuit found that American Express and the Supreme Court’s earlier decision in AT&T Mobility v. Concepcion, 131 S. Ct.1740 (2011), “inexorably lead to the conclusion that the waiver of collective action claims is permissible in the FLSA context.” Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. Aug. 9, 2013); see also Owen v. Bristol Care, Inc., 702 F.3d 1050, 1051 (8th Cir. 2013).
The Court’s decision in Oxford Health is, on the one hand, a slight departure from the Court’s recent hostility toward class actions in that it not only confirms that class arbitration is potentially available to plaintiffs absent a class waiver, but also makes clear that an arbitrator’s finding that an agreement permits class arbitration is virtually unreviewable by the courts. On the other hand, the case is helpful because it provides a roadmap for the employer seeking to restrict the availability of class arbitration.
In Oxford Health, a physician asserted class claims against Oxford Health, an insurance company, claiming that it failed to properly reimburse physicians for the medical services they provided to patients. The governing agreement contained a provision requiring “any dispute arising out of this Agreement” to be submitted to arbitration, but, unlike the agreement in American Express, was silent with respect to the permissibility of class arbitration.
The parties agreed to submit to the arbitrator the question of whether the arbitration provision authorized class arbitration. Because that question turned on “construction of the parties’ agreement,” the arbitrator “focused on the arbitration clause’s text, analyzing…the scope of both what it barred from court and what it sent to arbitration.” The arbitrator concluded, based on “that textual exegesis,” that the provision “on its face…expresses the parties’ intent that class action arbitration can be maintained.” Oxford Health then unsuccessfully moved in federal court to vacate the arbitrator’s decision on the grounds that the arbitrator had exceeded his powers under the FAA.
The Supreme Court held that an arbitral decision “must stand, regardless of a court’s view of its (de)merits” as long as the arbitrator is “even arguably construing or applying the contract.” Under the FAA, the Court continued, “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Applying that extremely deferential standard, the Supreme Court affirmed the lower courts’ decisions upholding the arbitrator’s award because the arbitrator had interpreted the parties’ agreement. As the Court summarized, the arbitrator
provided an interpretation of the contract resolving that disputed issue. His interpretation went against Oxford, maybe mistakenly so. But still, Oxford does not get to rerun the matter in a court. Under the [FAA], the question for the judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all.
Under this standard, it would appear that an arbitrator’s decision regarding the availability of class arbitration is essentially unreviewable.
In a noteworthy footnote, however, the Court indicated that the question of whether an arbitration agreement authorizes class arbitration is one that should be decided by a federal court in the first instance and not an arbitrator. The Court specifically stated that it would “face a different issue if Oxford Health had argued below that the availability of class arbitration is a so-called ‘question of arbitrability,’” instead of having agreed to allow the arbitrator to decide whether the parties’ agreement contemplated class arbitration. Those “gateway matters,” which the Court stated include “whether a concededly binding arbitration clause applies to a certain type of controversy,” are “presumptively for the courts to decide” and therefore an arbitrator’s decision on those subjects is reviewed de novo absent “clear and unmistakable evidence” that the parties intended to resolve the dispute through arbitration.
Read together, American Express and Oxford Health provide guidance for the employer seeking to avoid class arbitration. First, and most obviously, American Express instructs that arbitration clauses should explicitly state that the arbitration may be maintained only on an individual basis and that class, collective or other types of representative arbitrations are not permitted. Where an arbitration agreement is silent on the issue of class arbitration and a plaintiff is attempting to pursue class claims through arbitration, however, Oxford Health makes clear that an employer should not agree to have the arbitrator decide whether the arbitration provision authorizes class resolution. Rather, an employer should file a motion in federal court raising the issue as a “question of arbitrability” at the outset of the litigation. An employer could protect itself further by including language in the arbitration provision itself making clear that the issue of class arbitrability is one to be decided by a court.
Employers considering the use of arbitration agreements that contain class action waivers must, however, be aware of the decision of the National Labor Relations Board (“NLRB”) in D.R. Horton, Inc. and Michael Cuda, Case 12-CA-25764, 357 NLRB No. 184 (Jan. 3, 2012). In D.R. Horton, the NLRB ruled that an employer violates the National Labor Relations Act by requiring employees to sign an arbitration agreement containing a class or collective action waiver. But while the NLRB continues to adhere to the D.R. Horton decision, all of the appellate courts that have addressed the issue — including the Second Circuit in Sutherland — and the majority of the district courts that have done so have rejected the NLRB’s reasoning and declined to follow D.R. Horton. Sutherland v.Ernst & Young LLP, 726 F.3d 290 (2d Cir. Aug. 9, 2013); see also Richards v. Ernst & Young, LLP, __ F.3d __, 2013 WL 4437601 (9th Cir. Aug 2, 2013); Owen v. Bristol Care,Inc., 702 F.3d 1050 (8th Cir. 2013).
Tightening Up the Rule 23 Standards
In Comcast, the Supreme Court reaffirmed that courts must “rigorous[ly]” analyze whether the requirements of Rule 23 of the Federal Rules of Civil Procedure have been met before certifying a class action and made clear that Rule 23(b)(3) is not satisfied if individualized questions regarding damages predominate over liability issues. Rule 23(b)(3) permits maintenance of a class action only if, among other things, “questions of law or fact common to class members predominate over any questions affecting only class members.”
Plaintiffs, subscribers to Comcast’s cable television services, alleged that Comcast violated antitrust laws by engaging in a series of transactions that concentrated operations within the Philadelphia region. Plaintiffs sought class f liability, but the district court certified just one, called the “overbuilder” theory, and limited plaintiffs’ proof of antitrust impact to that theory alone. In addition, although plaintiffs’ damages expert’s model could not isolate the damages resulting from the overbuilder theory from the other theories of liability that were not certified, the district court determined that damages could be calculated on a classwide basis.
The Supreme Court found that the lower courts had misapplied the predominance requirement of Rule 23(b)(3) because plaintiffs’ damages model “does not even attempt” to measure only those damages attributable to the overbuilder theory of liability and thus “it cannot possibly establish that damages are susceptible of measurement across the entire class.” Consequently, the Court found that “under the proper standard for evaluating certification, [plaintiffs’] model falls far short of establishing that damages are capable of measurement on a classwide basis” and concluded that “[q]uestions of individual damages calculations will inevitably overwhelm questions common to the class.”
While Comcast involved antitrust claims, lower courts already have applied it in the employment context. For instance, in Roach v. T.L. Cannon Corp., 2013 WL 1316452 (N.D.N.Y. Mar. 29, 2013), a New York District Court applied Comcast to hold that wage and hour class claims did not satisfy Rule 23 because “Plaintiffs’ proof that some employees, on various occasions, were denied their 10-hour spread payments indicates that damages in this putative class are in fact highly individualized. Because Plaintiffs have offered no model of damages susceptible of measurement across the entire putative 10-hour spread claims class, ‘questions of individual damages calculations will inevitably overwhelm questions common to the class.’”
The Supreme Court’s decision in Comcast should cause courts to focus on the complexity of the calculation of individualized damages in employment class actions in assessing whether the predominance requirement is met. Increased scrutiny of the Rule 23 requirements may be expected to result in fewer class certification decisions.