When the U.S. Supreme Court decided AT&T Mobility, LLC v. Concepcion, holding that class action waivers can be enforced despite state law unconscionability doctrines, class action defense lawyers of all stripes cheered. Class actions could be avoided with a simple waiver provision in an arbitration agreement.
But in the employment class action context and elsewhere, courts have been inconsistent thus far in applying Concepcion. The good news for defense counsel is that some federal circuit courts have read the Supreme Court's opinion broadly to compel putative class members to arbitrate claims on an individual basis. Other lower courts, however, have found ways to distinguish Concepcion and are allowing employment and other types of class actions to proceed -- particularly in California under its Private Attorney General Act ("PAGA").
By way of background, in Concepcion the Supreme Court considered whether the Federal Arbitration Act "prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures." -- U.S. --, 131 S. Ct. 1740, 1744 (2011). In that case, the Concepcions challenged as unenforceable under California law a class action waiver contained within an arbitration provision in a cellular telephone purchase agreement. California case law holds that class action waivers in consumer contracts of adhesion are unconscionable when the dispute between the parties involves a small amount of damages and the party with the superior bargaining power has allegedly carried out a scheme to deliberately prevent large numbers of consumers from individually receiving small sums of money. See Discover Bank v. Superior Court, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005). California courts had frequently applied the Discover Bank rule to invalidate various provisions of arbitration agreements, including class action waivers.
Although the district court and Ninth Circuit both held the class action waiver invalid under California law, the Supreme Court reversed. In an opinion by Justice Scalia, the Court determined that the FAA preempts the Discover Bank rule because the rule was being applied in a fashion that disfavors arbitration and conflicted with the FAA's overarching purpose of enforcing arbitration agreements according to their terms so as to facilitate streamlined proceedings. Furthermore, the Court held that permitting a consumer-plaintiff to seek a class action within arbitration also "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of [the FAA]" because classwide arbitration "sacrifices the principal advantage of arbitration -- its informality -- and makes the process slower, more costly, and more likely to general procedural morass than final judgment." The court also noted that the arbitration options available to the consumers of the AT&T cell phone contract appeared to be consumer-friendly and favorable for individual claimants.
Class action defense attorneys rejoiced when the ruling came out. The tone of the ruling seemed to raise the question whether any class action waiver provision could be invalidated using state law unconscionability principles. Class action defense counsel are now pressing courts to apply Concepcion broadly and beyond consumer class actions. The results, however, have been mixed.
Eight, Third and Eleventh Circuits Give Concepcion Broad Reading, Denying Wage and Hour Class Action
First, the good news. The Eighth Circuit recently affirmed a grant of a motion to compel arbitration, holding that, under Concepcion, the FAA preempted a Minnesota state law challenging a class action waiver in a franchisee agreement that drivers for SuperShuttle are required to sign. Green v. SuperShuttle International, Inc., Case No. 10-3310, U.S. Court of Appeals for the Eighth Circuit (Sept. 16, 2011).
The plaintiff drivers brought the action alleging that they had been misclassified as franchisees rather than employees and were eligible for lost wages, employment benefits and other damages under the Minnesota Fair Labor Standards Act. ShuperShuttle moved to compel arbitration, asserting that the following provision was enforceable:
Any arbitration suit, action or other legal proceeding shall be conducted and resolved on an individual basis only and not on a class-wide, multiple plaintiff, consolidated, or similar basis.
With little analysis, the Eighth Circuit held that the Minnesota state law the plaintiffs argued invalidated the class action waiver was preempted by the FAA. The court concluded that the state law suffered the same flaw as the California law that was at issue in Concepcion. The court didn't elaborate on the "flaw;" rather, it appeared to give Concepcion a broad reading and extended the decision's applicability beyond cellular telephone sales contracts.
In Litman v. Cellco Partnership, -- F.3d -- , 2011 WL 3689015, No. 08-4103, Aug. 24, 2001, the Third Circuit on remand from the Supreme Court also applied Concepcion in a relatively straightforward way. This was easy for the court to do since the New Jersey law at issue was similar to the Discover Bank rule from California and the cell phone sales contract involved similar class action and class arbitration waivers to those at issue in Concepcion. The Third Circuit reasoned:
We understand the holding of Concepcion to be both broad and clear: a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration "is desirable for unrelated reasons." ... Therefore, we must hold that ... the rule published by the New Jersey Supreme Court in [Muhammad v. County Bank of Rehoboth Beach, Delaware] is preempted by the FAA. It follows that the arbitration clause at issue here must be enforced according to its terms, which requires individual arbitration and forecloses class arbitration.
The court's analysis did not mention whether the arbitration clause at issue contained the sorts of consumer-friendly procedural protections that were contained in the AT&T Mobility agreement. The Third Circuit also did not undertake analysis applying unconscionability principles to the agreement as a whole, or remand the matter directing the district court to do so.
The Eleventh Circuit reached a similar conclusion in Cruz v. Cingular Wireless LLC, No. 08-16080, August 11, 2011, in which the arbitration agreement was identical to the one in Concepcion. In Cruz the Eleventh Circuit held that a Florida public policy that would have invalidated the agreement as unconscionable was preempted by the FAA.
These cases teach that a class action or class arbitration waiver likely cannot be the sole reason an arbitration agreement is ruled unconscionable. The decisions provide a defendant with strong authority for arguing that such waivers cannot be held unconscionable in states that have adopted unconscionability doctrines similar to the Discover Bank rule or where a state public policy has been applied in a sweeping fashion to invalidate the waivers.
New York District Court Limits Concepcion Holding in "Pattern or Practice" Case
Not all courts are willing to give Concepcion such an expansive reading. In Chen-Oster v. Goldman, Sachs & Co., 2011 WL 2671813, July 7, 2011, the U.S. District Court for the Southern District of New York held that the federal common law of arbitrability precludes enforcement of an arbitration clause when doing so would interfere with a substantive federal statutory right, such as a "pattern or practice" discrimination claim brought under Title VII of the Civil Rights Act of 1964. Defendants argued that Concepcion controlled because it "reinforces the broad and consistent commitment of the Supreme Court, under the [FAA], to allowing enforcement of arbitration agreements, even where enforcement prevents plaintiffs from proceeding as a class. The court held that such a reading of Concepcion went too far. It found that Concepcion does not apply when the issue is not preemption of a state law but whether a right provided by a competing federal statute is infringed by compelling arbitration. According to the court, the right to be free from discriminatory employment practices trumps. The court said it is a right that cannot be provided in an individual bilateral arbitration since Title VII prohibits individuals from bringing pattern or practice claims.
As Usual, California Always Proves to Be a Challenging Jurisdiction
Concepcion also has been limited in California, where employees can be deputized as attorney generals to enforce California's labor code under the Private Attorney General Act of 2004 ("PAGA"). In Brown v. Ralphs Grocery Company, Case No. B222689, July 12, 2001, a division of the California Court of Appeal held that Concepcion does not apply to enforce waivers of representative actions under PAGA. The court noted that the Supreme Court did not address a state statute such as PAGA where the employee serves as a proxy or agent of the state's labor law enforcement agencies. "Until the Supreme Court rules otherwise, we continue to follow what we believe to be California law." The court did reverse a ruling invalidating the class action waiver with respect to the plaintiff's regular Rule 23 class action claim, but on the grounds that the lower court's ruling was not supported by substantial evidence. The court avoided the question of whether the waiver was enforceable under a Concepcion analysis.
Despite this state appellate court ruling, two federal district courts in California held the opposite with respect to Concepcion's effect on PAGA claims. In Grabowski v. Robinson, 2011 WL 4353998, No. 10cv1658-WQH-MDD (S.D. Cal. Sept. 19, 2011), the Southern District of California determined that allowing plaintiffs to proceed with representative claims under PAGA when they have executed conscionable arbitration agreements with class action waivers would be inconsistent with the FAA and thus preempted. The Southern District cited and sided with the Central District of California's similar holding in Quevedo v. Macy's, Inc., -- F.Supp.2d --, No. CV 09-1522, 2011 WL 3135052 (C.D. Cal. June 16, 2011). The court in Quevedo noted that, just as the Supreme Court found in Concepcion that arbitration is poorly suited to the higher stakes of class litigation, "it is also poorly suited to the higher stakes of a collective PAGA action."
In Kanbar v. O'Melveny & Myers, -- F.Supp. 2d -- , 2011 WL 2940690, July 21, 2011, the Northern District of California held in an employment discrimination case that, notwithstanding Concepcion, an arbitration provision was unconscionable under California law. The court found that the California unconscionability law as applied there did not interfere with the fundamental attributes of arbitration, particular its informality, expeditiousness and relative inexpensiveness. But the court nonetheless compelled arbitration on the grounds that plaintiff had waived her right to object to the enforceability of the arbitration clause.
Rulings Elsewhere Caution Against Drafting One-Sided Arbitration Provisions
In re: Checking Account Overdraft Litigation, Case No. 09-MD-02036-JLK, U.S. District Court, Southern District of Florida, the court found arbitration agreements with class action waivers to be unenforceable on substantive unconscionability grounds despite Concepcion. The defendant banks, in this alleged excessive overdraft fee class action suit, renewed their motions to compel arbitration after the Eleventh Circuit remanded the matter for consideration in light of the Concepcion ruling. The district court had earlier held the class action waivers contained in the banks' arbitration agreements with consumers to be unconscionable under various states' laws.
In its order on remand issued September 1, 2011, the district court provided a sentient summary of the wake left by Concepcion:
The Parties now before the Court have each argued for an extreme interpretation of Concepcion. Plaintiffs ask the Court to find that Concepcion has changed nothing, and that the class action waivers in the arbitration agreements may still be the basis for finding them unconscionable. Defendants, on the other hand, argue that Concepcion has changed everything, and that unconscionability is no longer a defense to the enforceability of an arbitration agreement. In a sense, both views are correct. Concepcion has changed everything, in that class action waivers have historically been a major factor in the unconscionability analysis under state law, and now, they can no longer be considered. And yet, Concepcion has changed nothing in that a thorough, case-by-case analysis of the applicable state law doctrine of unconscionability, applied to the specific terms of an arbitration agreement, is still required. In sum, Concepcion has not relieved courts from their obligation to scrutinize arbitration agreements for enforceability on a case-by-case basis where one party resists arbitration; rather, Concepcion provides guidance as to what courts may consider when fulfilling that obligation. Order at 9-10.
The court then analyzed the five agreements at issue under each agreement's controlling state law. It found four of the five to be substantively unconscionable when applying each state's general common law on unconscionability to the agreements as a whole. The court denied the motion to compel relating to the fifth agreement on separate grounds, holding that the scope of the arbitration agreement did not cover the claims at issue between the parties.
The court focused on each agreement's fee-shifting provisions, which allowed the banks to automatically recover its costs and attorneys' fees if they prevailed -- and further allowed the banks to simply take the fees and costs directly from a plaintiff's bank account if the plaintiff lost in arbitration. The court found these provisions to be overly oppressive and one-sided in favor of the banks. It was clear from the order that the arbitration agreements the banks used did not contain the kind of consumer-friendly provisions that were lauded by the Supreme Court in Concepcion, such as paying for all costs for non-frivolous claims by its customers, holding arbitrations in the county were the customer was billed, allowing the parties to opt to bring a claim in small claims court in lieu of arbitration, allowing arbitration by telephone or based on submissions for claims under $10,000, and allowing arbitrators to award any form of individual relief, such as an injunction or punitive damages.
In a ruling similar to that in Checking Account Overdraft Litigation, New Jersey's highest court invalidated an arbitration agreement on the grounds that it was too confusing, too vague and too inconsistent to be enforced. NAACP of Camden County East v. Foulke Management Corp., -- A.3d -- , 2011 WL 3273896, August 2, 2011, Superior Court of New Jersey. The court came to this conclusion despite stating that the agreement's class action waiver itself could not be invalidated in light of Concepcion. Nevertheless, the New Jersey Superior Court turned to Justice Thomas's concurring opinion in Concepcion, in which he stated that the majority opinion in Concepcion did not leave litigants bereft of other contract defenses, including the procedural conscionability question of contract formation or contract interpretation principles. The New Jersey court ultimately found that the arbitration provision at issue could not be enforced because it lacked sufficient clarity and consistency to be reasonably understood by the consumer.
The Supreme Court of New Mexico also invalidated an arbitration provision in an auto dealership sales contract that it found could not be enforced because the named arbitration service was no longer available to conduct the arbitrations. Despite the technical reason for reversing the lower court's order compelling arbitration, the court found the arbitration to be unfairly one-sided and substantively unconscionable irrespective of Concepcion. Rivera v. American General Financial Service, Inc., -- P.3d -- , 2011 WL 3687624, New Mexico Supreme Court, July 27, 2011.
The lesson here is to avoid terms that are oppressive to the consumer or employee. When drafting an arbitration agreement with a class action waiver, include easily understandable, balanced provisions or even consumer-friendly provisions so that the agreement is not overly one-sided and unfair to the individual. Ensuring that the employee or consumer has a forum in which to fairly air a grievance will help the provisions surpass the unconscionability test and other contract defenses. And, make sure the agreement provides for alternative arbitration services should one not be available or refuse to act in a particular case.