In our last column, we discussed a comparative case study analyzing outside counsel fees, lifecycle and total costs. In this article—as part of our continuing analysis into the most effective arbitration practices—we analyze the latest court decisions regarding the enforceability of consumer and employment arbitration agreements. Our goal is to provide a brief overview of the relevant legal issues, the current state of the law and how to take advantage of the favorable environment. We start with the U.S. Supreme Court, and then we’ll turn to the federal circuit courts and the state of California.
The Supreme Court
The Supreme Court is continuing its pro-arbitration decisions and recently agreed to review the issue of whether class action arbitration may be imposed where the agreement remains silent.
In AT&T Mobility v. Concepcion, the Supreme Court held that the Federal Arbitration Act (FAA) preempted a California state law that invalidated class action waivers in consumer contracts on grounds of unconscionability. The court opined that Section 2 of the FAA reflects a “liberal federal policy favoring arbitration,” and the “fundamental principle that arbitration is a matter of contract.”
The Supreme Court’s trend of holding that the FAA preempts state law continued with its Nov. 26 decision in Nitro-Lift Technologies v. Howard. Two former employees of Nitro-Lift—both of whom had signed confidentiality and noncompete agreements with an arbitration clause—began working for a competitor. Nitro-Lift claimed that the employees breached their noncompetition agreements and filed a demand for arbitration. The employees sued in state court, asking the court to declare the noncompetition agreements null and void and to enjoin their enforcement. The Oklahoma Supreme Court eventually held that the arbitration clauses were void and unenforceable as they were against the state’s public policy limiting the enforceability of noncompetition agreements. The Supreme Court granted certiorari on Nov. 26 and immediately vacated the lower court’s decision, holding that under the FAA, the arbitrator must decide whether the covenants not to compete are valid as a matter of applicable state law, and that, under the Supremacy Clause, the state courts must abide by the FAA. Nitro-Lift Technologies is the latest decision from the Supreme Court to uphold the enforceability of arbitration agreements and that empowers arbitrators to determine issues under the agreement.
In a seminal case to be decided regarding class action arbitrations, the Supreme Court agreed Dec. 14 to review Oxford Health Plans, LLC v. Sutter, which tees up the issue of whether classwide or collective arbitration may be compelled where the parties' arbitration agreement is silent on the issue of class claims.
With the exception of the 2nd Circuit, the circuit courts have adopted the Concepcion rationale. The 3rd Circuit in Antkowiak v. TaxMasters vacated a finding of unconscionability of a class action waiver in an arbitration clause and remanded the case to be retried consistent with the Concepcion holding. The 3rd Circuit has since relied upon AT&T Mobility to strike down state prohibitions on class action waivers in New Jersey (see Litman v. Cellco P'ship) and in Pennsylvania (see Quilloin v. Tenet HealthSystem Philadelphia, Inc.). Similar results have been upheld in the 8th Circuit(in Green v. SuperShuttle Intern., Inc., the court relied upon Concepcion to dismiss an appeal of the district court’s holding that a class action waiver clause was enforceable); in the 9th Circuit (in Coneff v. AT&T Corp., the court ruled that the FAA preempted a state statute based on Concepcion and reversing the lower court’s finding of unconscionability in an arbitration clause with a class-action waiver); and the 11th Circuit (in Cruz v. Cingular Wireless, LLC, the court held that the FAA preempted a Florida statute and upheld an arbitration clause a with collective arbitration waiver that had previously been ruled unconscionable). The 2nd Circuit in In re American Exp. Merchants’ Litigation has distinguished Concepcion in cases where class action waivers have not been ruled unconscionable on state law but instead are invalidated based upon the plaintiff’s ability to vindicate a federal statutory right.
Concepcion appears to apply equally to class action waivers in employment arbitration agreements (see Green v. Super Shuttle Int’l, in which the 8th Circuit affirmed the district court’s grant of a motion to compel arbitration and its enforcement of class action waivers under the Minnesota Fair Labor Standards Act because the waivers were valid and enforceable under Concepcion).
And then there is California, where the waters remain murky regarding whether Concepcion preempts California decisions limiting the enforceability of class action waivers in employment arbitration agreements. Two recent cases conflict: the pro-employer case Iskanian v. CLS Transp. Los Angeles, LLC (holding FAA preempts California law holding class action waivers as to employees’ unwaivable rights to be contrary to public policy) and the pro-employee case Franco v. Arakelian (holding FAA does not preempt California law on enforceability of class action waivers in the employment context, specifically the California Supreme Court's decision in Gentry v. Superior Court).
The California Supreme Court recently granted review of Iskanian , and we expect the court to grant review in Franco. So do not despair: The California Supreme Court may likely—in 2013—speak on the issue of enforceability of class action waivers in employment arbitration agreements in light of Concepcion.
If not now, when?
If you have been considering implementing arbitration clauses and class action waivers as part of your dispute resolution repertoire, these are propitious times to do so. While Concepcion is certainly not the death knell of collective actions, it provides strong support to attempt to compel arbitration and enforce class action waivers in consumer and employment-related disputes in most jurisdictions. And Nitro-Lift Technologies supports the use of arbitration to resolve noncompete disputes. In these contentious cases, the forum and the decision maker could contribute greatly to efficiently achieving a good outcome.
In our next column, we will take a look at the Texas legal landscape on these issues.