It’s been more than two years since the Supreme Court handed down its landmark pro-arbitration ruling in Concepcion v. AT&T Mobility, but the case is still reverberating throughout the court system, as the 4th Circuit’s recent decision in Muriithi v. Shuttle Express Inc. demonstrates.
Samuel Muriithi sued his employer, Shuttle Express, for allegedly misclassifying him and other shuttle drivers as franchisees to avoid paying them minimum wage or overtime, in violation of the Fair Labor Standards Act (FLSA) and Maryland state wage and hour laws. Shuttle Express sought to compel arbitration pursuant to a franchise agreement that Muriithi had signed.
A district court initially ruled in favor of Muriithi, finding that the franchise agreement was unconscionable because of a class action waiver and a provision that required parties to split the cost of arbitration. Taken together, the two provisions prevented the shuttle drivers from exercising their statutory rights, the court said, “given that the cost of each individual arbitration has the potential to exceed any recovery.”
That decision, however, came down before the Supreme Court’s ruling in Concepcion, which upheld a similar class action waiver in a consumer contract. In light of the high court’s ruling, the 4th Circuit on April 1 remanded the case with instructions to compel arbitration.
“In essence, [the 4th Circuit’s] opinion ended up making the case … that this whole argument about needing to vindicate your statutory rights goes counter to the analysis in Concepcion,” says Liz Kramer, a shareholder at Leonard, Street & Deinard and author of the “Arbitration Nation” blog.
In Concepcion, the Supreme Court ruled 5-4 that AT&T subscribers could not pursue a class action against the company because their contract contained an individual arbitration agreement. Although a state law in California, where the plaintiffs filed the case, prohibits class action waivers in consumer contracts, the high court gave precedence to the Federal Arbitration Act (FAA), which permits such waivers.
Muriithi argued that Concepcion should be limited to cases involving the FAA’s preemption of state law. The 4th Circuit, however, held that the Supreme Court’s ruling “sweeps more broadly than Muriithi suggests.”
“The Supreme Court’s holding was not merely an assertion of federal preemption, but also plainly prohibited application of the general contract defense of unconscionability to invalidate an otherwise valid arbitration agreement under these circumstances,” Judge Barbara Milano Keenan wrote for the court.
Muriithi continues a trend of largely pro-arbitration rulings from the Supreme Court and appeals courts including the 3rd and 8th Circuits. One remaining question is the Supreme Court’s as-yet-unknown decision in American Express Co. v. Italian Colors Restaurant, which is expected by the end of this month.
In that case, the 2nd Circuit voided an arbitration agreement between American Express and a class of merchants on the grounds that the cost of pursuing individual claims would be prohibitive.
The appeals court specifically distinguished between Concepcion, which it labeled as a state common law claim, and the merchants’ statutory claim. If the Supreme Court agrees with this distinction, it could render Muriithi essentially moot, Kramer notes.
Although Concepcion has at least temporarily put mandatory arbitration clauses on solid ground, companies should not assume that courts will uphold every provision in an arbitration agreement. For example, the 4th Circuit recently declined to apply Concepcion to a Maryland law requiring mutual consideration in arbitration agreements (see “Limited Application,” p. 48).
“It’s a nice reminder that you’ve always got to be wary of each state’s laws in terms of what might be found unenforceable in an arbitration agreement,” says Littler Mendelson Shareholder Bill Allen.
Businesses should also ensure that employees acknowledge and understand the arbitration agreements they are signing. “To just stick it in a handbook and have someone acknowledge the handbook is probably not the way to go,” Allen says. “I would prefer that it be a standalone agreement.”
On the whole, though, Muriithi only strengthens the standing of class action waivers in employment agreements. “At this point, everyone should be looking at whether they have [these waivers] in their clauses,” Kramer says. “For large companies that would be faced with class claims, it’s really a powerful tool.”