The Federal Arbitration Act (FAA) was enacted in response to judicial hostility to arbitration agreements, and it makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Long before AT&T v. Concepcion, the U.S. Supreme Court interpreted the FAA to require courts to honor the parties’ expectations and enforce arbitration agreements according to their terms. Nonetheless, some courts have refused to enforce arbitration agreements by invoking generally applicable contract defenses, which are expressly preserved by the FAA.

In Concepcion, a 5-4 Court held that the FAA preempts a California rule that invalidated class action waivers in certain arbitration agreements as unconscionable. Since that decision, the Supreme Court has granted certiorari, vacated, and then remanded several cases “for further consideration in light of AT&T Mobility LLC v. Concepcion . . . .”

Concepcion Left The Door Open To Challenges To Arbitration Agreements

On the whole, courts have adopted a broad view of Concepcion and have held that the FAA preempts any rule that stands as an obstacle to enforcement of arbitration agreements as written. Yet a number of federal and state courts have taken a more limited view of Concepcion and continue to find arbitration clauses unenforceable. And Concepcion left the door open for them to do so because 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.” Moreover, Concepcion expressly involved the vindication of state, not federal, rights, so plaintiffs’ lawyers may argue that it is unclear what effect that decision has on class or collective actions brought under federal statutes.

Three post-Concepcion decisions are instructive. In the In Re Checking Account Overdraft Litigation, a district court in the Southern District of Florida invalidated several arbitration agreements that contained class action waivers as “unconscionable” despite Concepcion. The court rejected the defendants’ argument that Concepcion eliminated unconscionability as a defense to the enforceability of an arbitration agreement. To the contrary, the court explained that 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.” The court then analyzed each of the arbitration agreements under their respective state’s contract laws and found them to be unconscionable. Unlike the arbitration agreement in Concepcion, the agreements contained feeshifting provisions that allowed the defendants to automatically recover their costs and attorney’s fees if they prevailed, and allowed them to take those fees and costs directly from a customer’s bank account. The court found these provisions to be overly oppressive and unfairly one-sided.

Similarly, in Kanbar v. O’Melveny & Myers, a district court in the Northern District of California found several provisions of a law firm’s arbitration agreement for employment disputes to be unenforceable under California law. Initially, the court concluded that the arbitration agreement was procedurally unconscionable because it was a “take it or leave it” condition of employment. The court also concluded that the following provisions were substantively unconscionable:

  • The Notice Provision. This provision required an employee to give notice of a claim within one year from when the employee knew or should have known about the claim. The court opined that this amounted to a one-year statute of limitations, and that shortened limitations periods, especially with respect to employment-related statutory claims, are unconscionable. 
  • The Confidentiality Provision. This provision limited with whom an employee could communicate regarding the arbitration. The court found this provision to be unconscionable because it stifled an employee’s ability to investigate and gather evidence and, therefore, placed the employer in a superior position. 
  • The Provision Exempting the Employer from Arbitration. Under this provision, the employer, and not the employee, could forego arbitration and had access to the courts for certain claims (e.g., claims for injunctive relief based on the disclosure of privileged or confidential information). The court found this provision to be broader than necessary to protect the employer’s commercial interests.

The court acknowledged in Kanbar that Concepcion represents a significant change in the law on arbitration. Nonetheless, the court concluded that the FAA did not preempt the court’s unconscionability determination based on state law because arbitration agreements are still subject to an unconscionability analysis. According to the court, Concepcion does not preclude challenges to arbitration agreements even if it means that an agreement will not be enforced according to its terms: “The doctrine of unconscionability can override the terms of an arbitration agreement and the parties’ expectations in connection therewith.”

Finally, in Raniere v. Citigroup, Inc., a district court in the Southern District of New York held that employees cannot waive their right to bring collective actions under the Fair Labor Standards Act (“FLSA”). There, mortgage loan officers filed a nationwide collective action under the FLSA and a class action under New York Labor Law claiming that they were misclassified as exempt employees and, therefore, improperly denied overtime. The employer moved to compel arbitration of the claims brought by the employees who had signed arbitration agreements that included class and collective action waivers. But, according to the court, “[i]t is not enough to respond that such a [collective action] waiver should be upheld in the name of the broad federal policy favoring arbitration, simply because the waiver was included in an arbitration agreement. An otherwise enforceable arbitration agreement should not become the vehicle to invalidate the particular Congressional purposes of the collective action provision and the policies on which that provision is based.” The court also opined that Concepcion did not change this analysis, because that decision addressed only a state law, and not federal arbitral law. Accordingly, the court held that a waiver of the right to proceed collectively under the FLSA--which the court characterized as a substantive statutory right--is unenforceable as a matter of law. Because the court concluded that the collective action waiver was unenforceable, it did not address the validity of the class action waiver.

Raniere’s holding that the ability to bring a collective action under the FLSA is a substantive--and not a procedural--right that cannot be waived is contrary to each and every decision that has addressed the issue, including five Circuit Courts of Appeal. The defendants in Raniere have filed an appeal with the Second Circuit, and the appellate court’s decision could be a candidate for Supreme Court review if it affirms the district court’s ruling.

So If You Want To Ensure That Your Arbitration Agreement Is Enforced As Written, Does It Have To Be Fair?

As the post-Concepcion cases demonstrate, companies still will face challenges to their arbitration agreements, and some judges may continue their skepticism towards such agreements, particularly if they contain class action waivers. Accordingly, companies that have or plan to implement arbitration agreements should carefully consider the provisions in their agreements to ensure that they do not arguably prevent the claimant from vindicating his or her rights.

Indeed, the arbitration agreement approved by the Court in Concepcion was unusually consumer-friendly. That agreement, for example, contained the following terms:

  • AT&T agreed to pay all arbitration costs for nonfrivolous claims by its customers;
  • AT&T agreed to conduct the arbitration in the county were the customer was billed; 
  • For claims of $10,000 or less, the customer could choose whether the arbitration proceeds in person, by telephone, or based only on submissions; • Either party could opt to bring a claim in small claims court in lieu of arbitration; 
  • The arbitrator could award any form of individual relief, which presumably included punitive damages;
  • AT&T could not seek reimbursement for its attorney’s fees; and
  • AT&T agreed to pay customers a minimum of $7,500 and twice their attorney’s fees if they obtained more in the arbitration than AT&T had offered beforehand.

Although Concepcion did not hold that arbitration agreements must be fair to be enforced, or even to have any of those specific terms, the majority did laud the consumer-friendly provisions in AT&T’s arbitration agreement. Moreover, in response to the dissent’s claim that class proceedings are necessary to prosecute small-dollar claims, the majority highlighted the district court’s conclusion “that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action.”

Indeed, a Superior Court judge in Massachusetts recently invalidated an arbitration class action waiver where small-dollar claims were involved. In Feeney v. Dell, Inc., two plaintiffs, whose claims were both worth less than $250, sought to bring a consumer class action against Dell based on the company’s collection of sales tax on their computer service contracts. Those contracts, however, required arbitration and included a class action waiver. Nonetheless, the Massachusetts court refused to enforce the class action waiver because, in its view, Dell’s “arbitration agreement stands in stark contrast to the AT&T agreement in Concepcion, which had so many pro-consumer incentives that an individual consumer might be better off in arbitration than in class litigation.”

How “fair” an arbitration agreement needs to be, if at all, to be enforced post-Concepcion remains to be seen. But companies should not read Concepcion as giving them carte blanche to draft their arbitration agreements without considering the impact that the agreement may have on an employee’s ability to vindicate his or her rights.

Be Conscious Of Unconscionable Arbitration Provisions

In light of the uncertainty that remains post-Concepcion, companies that want the benefits of arbitration should consider taking steps to reduce the risk that a court will invalidate their arbitration agreements. Companies may wish to consider, for example, the following provisions when drafting their agreements

  • Create an agreement that is as straightforward, short and easy to understand as possible. Try to avoid lengthy agreements filled with legalese. 
  • In addition to making the agreement itself easy to read, make the procedure for initiating arbitration simple and clear from the agreement.
  • Explain what rules will apply to the arbitration.
  • If the agreement incorporates certain arbitration rules by reference (e.g., the American Arbitration Association National Rules), make sure those rules are easily available to the claimant (e.g., provide a link to the internet address if the rules are available online).
  • Allow claimants sufficient discovery to investigate their claims. 
  • Ensure the agreement provides claimants with the same, or close to the same, substantive rights that they would have outside of arbitration. For example, the arbitration agreement should not shorten the applicable statute of limitations or limit the remedies available to a claimant. 
  • Include a provision that specifically excludes any claims that cannot be forced to arbitration from the agreement, e.g., some federal statutes require claims brought under the statute to be filed in court. • If the company wants bilateral arbitration only, then the agreement should include a class action waiver or the company may run the risk that a court will interpret a silent agreement to permit class arbitration.
  • Class action waivers should be in the initial provisions of the agreement and highlighted. That is, they should not be “buried” in the agreement.
  • If the company does not want to go to class arbitration in the event the waiver is stricken, the agreement should provide that the entire agreement is void if the waiver is deemed unenforceable.
  • Allow the claimant to go to small claims court in lieu of arbitration if the claim is less than the claim limit for that court. 
  • Agree to pay all or most of the arbitrator’s fees and expenses and any other costs unique to arbitration. 
  • Agree to pay a claimant’s attorney’s fees and costs up to a set amount in the event he or she prevails at arbitration.

Be Careful What You Wish For

Many companies may see Concepcion as a way to avoid costly class actions by implementing arbitration agreements that include class action waivers. Presumably, however, an arbitration agreement that is “fair” and can withstand judicial scrutiny will not prohibit claimants from vindicating their rights. As a result, companies that rush into arbitration agreements to avoid the costs associated with litigation, particularly collective and class action litigation, may later find themselves facing thousands of bilateral arbitrations at significant costs. Just as the provisions of an arbitration agreement need to be given careful consideration, so does the decision to adopt one.