Washington D.C. Employment Law Update : Washington D.C. Employment Lawyer & Attorney : Littler Mendelson Law Firm : Virginia, Tyson's Corner

The facts in this case involved a consumer contract for wireless telephone services that contained both an agreement to arbitrate disputes and a class action waiver clause. In response to a putative class action filed by aggrieved consumers, the company sought to compel individual arbitration pursuant to the arbitration agreement and class action waiver the plaintiffs had signed. The arbitration agreement at issue provided a number of pro-consumer terms, including the following: the company would pay all arbitration fees for non-frivolous complaints; the arbitration itself would be conducted in the county of the customer’s billing address; an allowance would be provided for the claimant to proceed in small claims court; the company would provide double the amount of attorneys’ fees and $7,500 if the ultimate arbitration award exceeded the company’s settlement offer; and a waiver of the company’s right to attorneys’ fees in the event it prevailed on the matter.

A California district court held, however – and the Ninth Circuit court of appeals affirmed – that the arbitration provision was unconscionable under California precedent because it precluded class action lawsuits, and that the FAA does not preempt state law on this issue. Specifically, the lower courts ruled that under the California Supreme Court decision in Discover Bank v. Superior Court, the arbitration provision was unconscionable because the company had not shown that bilateral arbitration “adequately substituted for the deterrent effects of class actions.” In its 5-4 decision, the Supreme Court reversed and remanded, finding that “[r]equiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

Among other rationales, the Court explains that arbitration “is poorly suited to the higher stakes of class litigation,” adding that “the point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute.” In arriving at this conclusion, the Court explains that “the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration — its informality — and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” For example, the Court contends that contrary to the intent of arbitration agreements, class arbitration “requires procedural formality.” If such procedures are too informal, the Court states, absent class members would not be bound by the arbitration decision. For a decision to be valid, the arbitrator must ensure that absent members are given notice of the proceedings and afforded an opportunity to participate and/or opt out of the class. Having an arbitrator preside over these procedural requirements was not likely Congress’ intent in passing the FAA, according to the Court.

Furthermore, the opinion explains that:

class 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 an error will often become unacceptable.

The Court also noted that “faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.”

For more information on this decision and its implications for employers, see Littler’s ASAP: Supreme Court Finds California Class Action Arbitration Waiver Enforceable.

A California District Court held, however – and the Ninth Circuit Court of Appeals affirmed – that the class action waiver was unconscionable under California law, and that the FAA does not preempt state law on this issue. Counsel for petitioner argued that the standard for unconscionable that California courts apply to arbitration agreements is less stringent than the standard it applies to other types of contracts, which is “whether something is so unfair as to shock the conscience.” Therefore, he asserted, the application of the unconscionability standard to arbitration agreements discriminates against arbitration and therefore does not fall under the “savings clause” of Section 2 of the FAA, which he argued limits revocation of an arbitration agreement to only those situations that apply even-handedly to all contracts. In response Justice Scalia asked, “Are we going to tell the state of California what it has to consider unconscionable?"

In addition, counsel for petitioner invoked the Court’s recent decision in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp. to support its position that the class wavier in the arbitration agreement is valid. The Court in Stolt-Nielsen held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

The attorney for the respondents, on the other hand, argued that the state unconscionability law is not preempted because 1) “it is consistent with the equal footing principle or nondiscrimination principle that the Court has consistently recognized is embodied in section 2” of the FAA; 2) it ensures that “arbitration is a matter of consent and not coercion,” and that arbitration represents “merely a choice of forum;” and 3) “the State law at issue is a correct and legitimate application of the State's common law to which this Court should defer.”

In response to a question about the effect of the Court’s decision in Stolt-Nielsen, respondent’s counsel replied that it did not apply to the question of the validity of an arbitration agreement with a class action waiver: “What Stolt-Nielsen tells you is that you cannot impose class arbitration on an unwilling defendant.” In reply Justice Scalia stated, “[T]he question is not whether they are being forced to accept class arbitration; it's whether they are being coerced into abandoning regular arbitration [in favor of defending a class action in court]. That's really the issue.”

While this case involved an arbitration provision and class action waiver in a commercial contract, the Supreme Court’s decision will impact such provisions in employment contracts as well. Should the Court agree with the respondents in this matter, class action waivers in arbitration agreements would be rendered meaningless in states that deem such provisions unlawful. On the other hand, should the Court agree with the petitioner, the ability of plaintiffs to bring class action lawsuits where parties are bound to arbitration agreements that waive such suits would be dramatically diminished.

The company, in response to a class action contract dispute, sought to compel individual arbitration pursuant to their consumer agreements. The arbitration provision at issue provided considerably more generous terms, including the stipulation that the company would pay all arbitration fees for non-frivolous complaints; an agreement that the arbitration itself would be conducted in the county of the customer’s billing address; an allowance for the claimant to proceed in small claims court; a provision stating that the company would provide double the amount of attorneys’ fees and $7,500 if the ultimate arbitration award exceeded the company’s settlement offer; and a waiver of the company’s right to attorneys’ fees in the event it prevailed on the matter. A California District Court held, however – and the Ninth Circuit Court of Appeals affirmed (pdf) – that the class action waiver was unconscionable under California law, and that the FAA does not preempt it.

In its petition to the Supreme Court, AT&T Mobility asserted that the question whether the FAA preempts state law rules barring agreements to arbitrate on an individual basis is of “exceptional importance”:

Class-wide arbitration affords none of the benefits of traditional, individual arbitration--it is at least as burdensome, expensive, and time-consuming as litigation--while multiplying the risks enormously because judicial review is so limited. For that reason, hundreds of millions of arbitration agreements require that arbitration proceed on an individual basis.

The Supreme Court’s decision in this matter could have a profound impact on employment agreements in California and in any state in which arbitration clauses have been deemed unconscionable or otherwise invalid.