In a decision that management lawyers hope was not an April Fool’s prank, the Fourth Circuit earlier this week upheld an arbitration agreement with a class action waiver, reversing a district court decision that held the waiver unenforceable.
In so holding, the appeals court signaled its continued adherence to the holding in AT&T Mobility LLC v. Concepcion, the Supreme Court’s 2011 landmark 2011 decision that sustained class action waivers under federal law against challenges grounded in state law contract principles.
The current case, Murithi v. Shuttle Express, Inc., arose out of a dispute in which a franchisee claimed that he (and similarly situated others) were misclassified as independent contractors in their positions as drivers for an airport shuttle service. He sued under the FLSA and Maryland law, and the defendant moved to compel arbitration.
The district court denied the motion, finding three infirmities in the agreement: (1) the provision requiring the parties to “each bear one-half of the fees and costs of the arbitrator”; (2) the class action waiver; and (3) the agreement’s one-year limitations provision. The Fourth Circuit disagreed on each point.
Fee-splitting: Relying on projected arbitration costs ($2,300 per side), plus the Plaintiff’s tax returns, the district court held that he could not afford to pursue arbitration on an individual basis in light of his potential recovery. The appeals court was not convinced. It held that the Plaintiff did not meet his “substantial burden” under the Supreme Court’s Green Tree decision to show that the costs of proceeding in a bilateral arbitration would be prohibitive. The court also noted that, at oral argument, defense counsel made an “eleventh hour” agreement to bear the full arbitration costs notwithstanding the parties’ written 50-50 arrangement.
Class waiver: The agreement stated that any arbitration “shall be conducted and resolved on an individual basis only and not on a class-wide, multiple plaintiff, consolidated or similar basis.” The district court held that this was unconscionable, notwithstanding Concepcion, because its effect would be to preclude any claims at all given the costs of arbitration compared to the value of individual recovery. The Fourth Circuit was having none of it. Reaffirming Concepcion, it said courts may not “alter otherwise valid arbitration agreements by applying the doctrine of unconscionability to eliminate a term barring classwide procedures.”
Statute of limitations: Under the parties’ agreement, arbitration must be commenced within one year of the act or omission giving rise to the claim. For the district court, this clause contributed to the agreement’s unconscionability, since it unreasonably restricted the Plaintiff’s ability to pursue statutory claims. The appellate court, rather than opining on this point, held simply that this provision was distinct from the arbitration clause, and therefore was beyond the scope of a court’s “gatekeeping function” in deciding a motion to compel arbitration. Instead, the court held, the validity of the limitations clause was for the arbitrator to decide.