Can Employers Opt Out of Class Actions?

May 12, 2011

By a 5-4 vote, last month's U.S. Supreme Court decision in AT&T Mobility LLC v. Concepcion requires arbitration agreements to be enforced according to their terms, even if those terms prohibit class action arbitrations. Overruling California's Supreme Court -- which had held that class action waivers in consumer contracts were unconscionable -- the Supreme Court ruled that "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the [Federal Arbitration Act]." Thus, while an arbitration agreement may specifically authorize arbitration on behalf of a class of individuals, if the agreement does not authorize class arbitration -- or specifically prohibits it -- the courts must enforce the agreement as written.

In the employment context, the Supreme Court ruled in 1991 in Gilmer v. Interstate/Johnson Lane Corp. that employees could be compelled to arbitrate employment discrimination claims pursuant to a mandatory arbitration agreement despite allegations that such agreements arose from unequal bargaining power between employers and employees. Applying the logic of Concepcion to Gilmer, it now appears that an employer can compel its employees to arbitrate all employment claims pursuant to the terms of a mandatory arbitration agreement that expressly prohibits classwide arbitration.

Thus, if an employer enters into such arbitration agreements with all of its employees, it may effectively prevent an employment class action from being brought against it. For example, if an employee asserts a claim in court and seeks to represent a class of similarly situated employees, the employer can move to compel arbitration of the claim. Then, if the employee seeks to represent a class in the duly compelled arbitration, the employer can object to (and move to dismiss) any claims on behalf of anybody other than the original claimant pursuant to the express terms of the arbitration agreement itself. The net result may well be that no class action may be maintained against the employer.

The Supreme Court’s Decision

In Concepcion, AT&T’s cellular telephone agreement required arbitration of all disputes between the parties, but mandated that claims be brought in the parties’ "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." When the husband and wife plaintiffs sought to bring a class action against AT&T -- for charging tax on an allegedly free phone -- AT&T moved to compel arbitration of the dispute pursuant to Section 2 of the Federal Arbitration Act:

A written provision in … a contract … to settle by arbitration a controversy thereafter arising out of such contract …shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

The exceptions to enforceability allow a court not to compel arbitration if the contract was procured through fraud or duress or if it is otherwise unconscionable. Holding that AT&T’s "individual capacity only" arbitration clause was "unconscionable and unlawfully exculpatory" under California law, the federal district and circuit courts in California refused to enforce it. Writing for the Supreme Court’s five-member majority, Justice Scalia gave short shrift to California’s public policy against contractual exculpatory clauses. California could not mandate class action arbitrations because "the overarching purpose of the FAA … is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings."

According to the Supreme Court: "The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute." Since the parties may, by contract, limit the issues subject to arbitration, arbitrate according to specific rules, and limit with whom a party will arbitrate, California cannot force classwide arbitration on a party whose arbitration agreement seeks to reduce the cost and increase the speed of dispute resolution. Since classwide arbitration necessarily increases the stakes and complexity of the proceeding, requires protecting the rights of absent class members, and involves arbitrators who "are not generally knowledgeable in the often-dominant procedural aspects of [class] certification," it is fundamentally inconsistent with the streamlined procedure that AT&T sought to construct.

The Court was not concerned with the fact that the plaintiffs had no real choice in signing the form of agreement that AT&T presented: "the times in which consumer contracts were anything other than adhesive are long past." Nonetheless, the Court noted that AT&T arbitration contract was extremely fair to the consumer, as it specified "that AT&T must pay all costs for non-frivolous claims; that arbitration must take place in the county in which the customer is billed; that, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator my award any form of individual relief, including injunctions and presumably punitive damages." Moreover, the agreement denied AT&T any ability to recover its attorney’s fees and, if the customer received an award greater than AT&T’s last written settlement offer, AT&T would be required to pay a $7,500 minimum recovery and twice the amount of the customer’s attorney’s fees.

Addressing Justice Breyer’s dissenting view that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system, Justice Scalia responded that "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." In sum, since California’s rule prohibiting class action waivers in arbitration agreements "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," it is preempted by the FAA.

What the Decision Means

The Court’s decision in Concepcion raises no concern that the decision will effectively allow companies (in consumer cases) and employers (in employment cases) to preclude class or collective actions against them by requiring all customers or employees to sign mandatory "individual capacity only" arbitration agreements. For an employer, however, the challenge is actually obtaining signed agreements from all employees. Nonetheless, even if some employees slip through the cracks and neglect to sign the arbitration agreement, the requirement of "individual capacity only" arbitration for the vast majority of employees will greatly reduce the risk of class or collective employment actions.

For employers -- increasingly faced with class action wage and hour litigation and class action employment discrimination suits -- Concepcion could be a gift from on high. Implicitly, Concepcion reflects hostility to class actions by the conservative majority of the Supreme Court. Both Concepcion and last term’s decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. evidence a desire to shut down class action arbitrations unless the parties have expressly authorized it in their agreement. Stolt-Nielsen held that class action arbitration was not authorized by an agreement that was silent on the issue.

In addition to class action arbitrations, the Supreme Court appears increasingly unhappy with class actions in court litigation as well. The Court’s oral argument in the yet-to-be-decided Walmart case revealed a majority apparently willing to reverse the lower court’s decisions authorizing certification of a nationwide class consisting of over one million women claiming sex discrimination in Walmart’s compensation and promotion decisions. A decision is expected by late June.

Indeed, Concepcion itself reflects hostility to both class actions and to class action plaintiffs’ attorneys:

Consumers remain free to bring and resolve their disputes on a bilateral basis …, and some may well do so; but there is little incentive for lawyers to arbitrate on behalf of individuals when they may do so for a class and reap far higher fees in the process. And faced with inevitable class arbitrations, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.

* * * *

[C]lass arbitration greatly increases risks to defendants. Informal procedures do of course have a cost: The absence of multilayered review makes it more likely that errors will go uncorrected. Defendants are willing to accept the costs of these errors in arbitration, since their impact is limited to the size of individual disputes, and presumably outweighed by savings from avoiding the courts. But when damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of error will often become unacceptable. Faced with even a small chance of devastating loss, defendants will be pressured into settling questionable claims. Other courts have noted the risk of "in terrorem" settlement that class actions entail, … and class arbitration would be no different.

Given the tenor of these comments, it requires no great leap of logic to conclude that the Supreme Court has deliberately created a path out of the darkness for the class action weary.

Caveats

In the two decades since Gilmer, many employers have relied on arbitration agreements for a variety of reasons. For some, the need for confidentiality -- of trade secrets or dirty laundry -- is paramount. Other employers may desire to avoid the cost and expense of jury trials and the risks of runaway jury damage awards. To this list of "pros" should now be added the potential to avoid class or collective actions potentially exposing the employer to ruinous liability.

Employment arbitration, however, is no panacea. Reducing costs has motivated some employers, but arbitration can itself be costly, especially if it involves motion practice and/or discovery, not to mention the arbitrator’s fees. While the arbitration agreement can require tailor-made procedures, the American Arbitration Association’s standard rules for employment disputes authorize discovery subject only to limitations imposed by the arbitrator. Some arbitrators prohibit motion practice, limit document discovery, and/or preclude depositions -- which likely reduces costs -- but it also increases the chances of surprise at the arbitration hearing since the opposing party’s factual contentions typically cannot be ferreted out as they would in formal discovery. Arbitration awards themselves are extremely difficult to overturn, even if the arbitrator is wrong on the law. Additionally, battles over the enforceability or scope of the arbitration agreement can significantly increase the costs of dispute resolution.

While Concepcion emphasizes the need to enforce arbitration agreements according to their terms, there are limits to what an employer can require an employee to sign. The AT&T agreement was a model of fairness to the consumer. Courts are loath to enforce unfair or one-sided procedures that appear to favor the employer or company whose lawyers drafted the agreement. Most courts have not permitted employers to require rank-and-file employees to pick up half the costs of the arbitration because most employees cannot afford it and it would effectively preclude suing the employer for valid claims. Indeed, the American Arbitration Association rules for employment dispute resolution limit the employee’s out-of-pocket costs to an amount comparable to a court filing fee and require the employer to pay all other arbitrator and administrative fees. Fairness concerns have led some employers to pick up the employee’s attorneys’ fees for any non-frivolous claim. Employers should seek legal guidance to ensure that their arbitration agreements are both procedurally and substantively fair.

Significantly, Concepcion controls only arbitration agreements governed by the FAA -- that is, "a contract evidencing a transaction involving commerce." Given modern economic realities, it is difficult to envision a contract that does not somehow "involve" commerce. Nonetheless, since the FAA preempts arbitration-inhibiting state rules, we may end up seeing more legal challenges to whether a particular contract "evidenc[es] a transaction involving commerce" by claimants desiring to apply more favorable state arbitration requirements.

Finally, the Equal Employment Opportunity Commissions has taken the position -- as yet, unresolved by the courts -- that it is unlawful for an employer to require an employer to sign an arbitration agreement as a condition of employment. The EEOC has generally gotten the courts to agree that no employer can contractually preclude an employee from filing a charge of discrimination with the agency. However, once a right-to-sue notice has been issued, the ensuing employment discrimination claim should be arbitrated pursuant to the agreement. Of course, no arbitration agreement can prevent the EEOC or the Secretary of Labor on its or her own authority from filing an individual, collective, or class action against the employer on behalf of one or a group of employees.