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Class Action Waivers Enforceable, For now . . .

posted Apr 2, 2014, 7:41 AM by Christopher Vrountas

Here’s the familiar nightmare scenario: The demand letter arrives from the lawyer of a former server claiming wage and hour violations at your restaurant. You can’t remember the server, but she claims to have worked at your place a year ago for all of a month and was allegedly required to do more side work than what the Fair Labor Standards Act allows.  Your manager has since left and it seems impossible to recall the facts from the time when she worked. What’s worse, her lawyer alleges without providing any factual support that the problem was “wide spread” and claims that she has filed a class action under state law and a collective action under the FLSA, seeking repayment of the “tip credit” for all servers going back three years, multiplied by three, plus attorneys’ fees.  What could have been a small claim that could easily settled now imposes a risk of liability that could close your business. 

Here’s the ounce of prevention to avoid the nightmare: Employers often ask their employees to sign arbitration agreements that include class and collective action waivers upon offer of employment.  If drafted with recent Supreme Court precedent in mind, such agreements should be enforced by the courts. In that event, your response to the demand letter above could easily end the threat of litigation with a demand for arbitration, enforcement of the class action waiver and, if appropriate, payment of the likely modest sum potentially owed to the former employee. While the employee may be quickly made whole, the plaintiff lawyer is deprived the opportunity for the litigious shake down.

Here’s the rub: An important ruling favoring arbitration agreements and class action waivers now hangs in the balance.  The Fifth Circuit has recently agreed to allow the National Labor Relations Board (“NLRB”) a 45-day window to decide whether to petition for a rehearing of the Fifth Circuit's ruling rejecting the NLRB’s decision that purported to prohibit class action waivers in employee arbitration agreements.

Here’s the background: Earlier this year, the U.S. Court of Appeals for the Fifth Circuit joined the Second, Eighth and Ninth Circuits by upholding a class action waiver in an employee arbitration agreement. But now the Fifth Circuit has reopened the issue, calling into question how the federal courts will construe these provisions and potentially setting up a battle before the United States Supreme Court.


Here’s the case: The Fifth Circuit overturned an NLRB decision that had ruled employee arbitration agreements containing class action waivers violate Section 8(a)(1) of the National Labor Relations Act (NLRA).  The NLRB had held that such agreements violate the NLRA on the grounds that they supposedly infringe on employees' Section 7 rights to engage in concerted activities protected by the NLRA.  The NLRB also ruled that the arbitration agreement as phrased could also be interpreted as intending to prohibit an employee's right to file an unfair labor practice charge with the NLRB. The Fifth Circuit reversed the NLRB's holding that arbitration agreements containing class action waivers necessarily violate the NLRA based on its reading of the Federal Arbitration Act (FAA), which generally requires arbitration agreements to be enforced according to their terms, subject to limited exceptions. But the Fifth Circuit upheld the NLRB’s interpretation of the arbitration agreement as potentially purporting to preclude unfair labor practice charges filed with the NLRB.

Here’s the recent word from the Supreme Court: While the Supreme Court has provided some guidance regarding class and collective action waivers in the context of arbitration agreements, it has not yet done so in the employment context.  Here are some instructive cases, however, which suggest the Court as current comprised may be likely to uphold these agreements.

In another case pitting one federal statute against another, a health plan provided coverage to its insured individuals under a contract that contained a mandatory arbitration clause. Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064 (2013). Specifically, the clause read:

No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration.

Notwithstanding the provision, an insured individual filed a class action lawsuit alleging the plan failed to make proper payments under the insurance contract. The court compelled arbitration, and the arbitrator determined that the contract permitted class arbitration. On appeal the case eventually made it to the Supreme Court which upheld the decision, stating that "a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding the party agreed to do so."   By emphasizing that the agreement of the parties governed the issue of how a class action may be heard, the Court left open the issue as to whether the parties may agree to avoid class actions altogether.

 

The Supreme Court later upheld a class action waiver in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013). In what was again not an employment case, the plaintiffs were a group of businesses seeking a class action against American Express alleging violations of federal antitrust laws. The plaintiff businesses had signed agreements with American Express, however, requiring that all disputes be resolved by arbitration and waiving any right to bring claims as class arbitrations. 

American Express moved the federal district court to compel individual arbitration under the Federal Arbitration Act. The Southern District of New York granted American Express' motion but the Second Circuit reversed, finding the class waivers unenforceable as contrary to the federal antitrust laws. The Supreme Court rejected the Second Circuit’s reasoning, however, and upheld the enforceability of the class action waivers in the arbitration agreements.  In doing so, the Supreme Court noted that the antitrust laws contain no requirement to reject such waivers.

Here’s the recipe: In ATT Mobility v. Concepcion, the Supreme Court not only upheld class action waiver and arbitration agreements, it also provided the recipe for drafting one that will likely be enforceable.  In that case, the Concepcions entered into a cell phone service contract with ATT Mobility. The contract contained an arbitration provision with a class action waiver. The Concepcions sued ATT Mobility because of sales tax charges on phone that had supposedly been given to them, ATT Mobility moved to compel arbitration. Court denied the motion, and 9th Circuit affirmed.

On Appeal to the U.S. Supreme Court, the Court considered whether the District Court erred when it refused to enforce the arbitration clause and class action waiver on the grounds of unconscionability. The District Court had applied state contract law that contracts containing waiver of class action are generally unconscionable, and reasoned that the Federal Arbitration Act did not preempt such state law because the prohibition was for all contracts, not just arbitration contracts. The Supreme Court rejected this reasoning, stating that the FAA preempts state laws and court decisions that prohibit arbitration clauses from containing class action waivers; as such clauses are not necessarily unconscionable. The Court specifically reasoned that the FAA not only favors arbitration, but also disfavors class action proceedings.

That said, the Court did not rule that all class action waivers are enforceable.  Specifically—although class action waivers in the context of an arbitration clause are not necessarily unconscionable, courts must still evaluate the particular arbitration clause or agreement at issue on a case-by-case basis to determine whether terms are fair.

In ATT Mobility, the following considerations favored enforceability:

§  The required venue was the state of residence of the consumer

§  The consumer could elect to have arbitration in person or over the phone

§  ATT agreed to pay costs of arbitration

§  Arbitrators could award full array of remedies, including damages, punitive damages and injunctive relief

§  Minimum recovery to consumer of $7,500 if award is greater than last offer of settlement.

Ultimately, the consumers “were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which ‘could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.’”

As a result, the Court enforced the arbitration clause in customer contracts that waive the right to join class action against the company.  While this was also not an employment case, there is no reason why such reasoning should not also apply to employment agreements. 

Here’s the bottom line: Consider using arbitration agreements with class action waivers. Make sure they are fair, indeed perhaps favorable, for the employee. Be sure they allow for filing claims with the NLRB for unfair labor practices.  And watch the Supreme Court, as it may finally take a case concerning these provisions in the employment context. While the Court should extend its reasoning from its prior cases to the employment context, that issue has not yet been specifically decided and the case now pending in the Fifth Circuit could result in new law. Stay tuned. 

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