Litigation: Predicting Colors with emerging trends in arbitration clauses and class actions

Businesses in many sectors should consider including in their contracts an arbitration clause with specific protections

In the past, mandatory arbitration clauses often failed to protect businesses against class actions, particularly where the parties arguably had unequal bargaining power (e.g., in consumer contracts). But recent Supreme Court decisions have made the arbitration clause a potent weapon against class actions in many areas of the law. In AT&T Mobility LLC v. Concepcion in 2011, the Supreme Court held that an arbitration clause in a consumer mobile telephone contract was enforceable – and a purported federal court class action lawsuit based on the contract was impermissible – under the strong pro-arbitration policy of the Federal Arbitration Act (FAA). The Court rejected the argument that the mandatory arbitration clause was an unconscionable “contract of adhesion” under California state law, and pointed out a number of claimant-friendly provisions in AT&T’s contract that made it easy for an individual claimant to arbitrate his or her claims (including procedures for low-cost telephonic or written arbitration for low-value claims, a prohibition on AT&T recovering attorneys’ fees, and a generous minimum award if the arbitrator awarded the claimant more than AT&T’s last settlement offer.)

Last year, in American Express Co. v. Italian Colors Restaurant, the Supreme Court took a significant additional step by upholding an arbitration clause banning class actions even though, unlike Concepcion, the case arose under federal rather than state law and the arbitration clause contained no unusually claimant-friendly provisions. In Italian Colors, eight merchants sought to bring an antitrust class action against American Express in federal court, contending that the company’s class action waiver was invalid because the high cost of prosecuting an antitrust claim made it economically unfeasible for a single plaintiff to “effectively vindicate” its rights. The Supreme Court rejected plaintiff’s arguments and upheld the arbitration clause and class action waiver, holding that arbitration agreements must be “rigorously enforced” under the FAA and that the effective vindication doctrine prohibited only agreements that completely foreclosed claimants from asserting federal claims (and possibly agreements that imposed prohibitively expensive filing fees and the like), not agreements that make such claims more difficult or expensive to prosecute.

But even in this new, less class action-friendly era, it is not enough simply to have an arbitration clause — if the goal is to avoid class actions, the arbitration clause must be drafted specifically to prohibit them. In Oxford Health Plans v. Sutter, decided a few days before Italian Colors, a physician brought a putative class action against Oxford in federal court, notwithstanding a garden-variety arbitration clause that required arbitration of all disputes but did not directly address class arbitration. Oxford moved to compel arbitration and its motion was granted, but the arbitrator then ruled that the plaintiff could pursue a class action in the arbitration proceeding, and the Supreme Court upheld the arbitrator’s ruling. Determinative, in the Court’s view, were the facts that Oxford had agreed to have the arbitrator construe the contract, and that the arbitrator at least “arguably” had reached his decision by construing the arbitration clause. Having so agreed, Oxford had to abide by the arbitrator’s decision.

In the wake of Concepcion, Italian Colors, and Oxford, businesses should consider including in their contracts an arbitration clause that:

  • unambiguously provides for the submission of all disputes to arbitration;
  • unambiguously forbids class arbitration, consolidation of claims by more than one person, and any other type of representative or class proceeding;
  • addresses and avoids any potential conflict with the arbitration rules specified in the agreement (e.g., the arbitration rules of the American Arbitration Association, which provide procedures for class arbitration); and
  • makes it clear whether questions regarding the scope of the arbitration agreement, including the availability of class arbitration, are to be decided by the arbitrator or the courts.

Beyond that, the law is not yet settled enough to give final guidance. For example, after Concepcion, some lower courts held that a class action waiver must have claimant-friendly provisions similar to the provisions in Concepcion in order to be enforceable, and some companies adopted arbitration clauses requiring the company to pay initial arbitration fees, making respondents’ attorneys’ fees non-recoverable while providing for recovery of claimant’s fees, etc. Of course, none of these accommodations was present in Italian Colors, and their absence had no effect on the outcome.

But Italian Colors may not be the final word on the subject. Efforts are underway to overturn the decision legislatively, and the new Consumer Financial Protection Bureau is pondering regulations that would seek to preserve the class action remedy for consumers. Also, arbitration may not be available in all business sectors. The Financial Industry Regulatory Authority (FINRA) has filed a disciplinary complaint against a broker-dealer for using a class action waiver in customer agreements, and the National Labor Relations Board has ruled that class arbitration waivers are unenforceable under the National Labor Relations Act (although a number of courts have disagreed). Practitioners would be well advised to keep an eye on future developments in this area.

 

This is the first of six articles exploring current trends in class action law. Future articles will discuss recent developments in antitrust, labor and employment, products liability, securities, and privacy class actions.

Contributing Author

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Lawrence T. Gresser

Lawrence T. Gresser is a co-founder and the managing partner of Cohen & Gresser LLP and a member of the firm’s Litigation and Arbitration practice...

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Contributing Author

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Scott D. Thomson

Scott D. Thomson is counsel in Cohen & Gresser LLP’s Litigation and Arbitration practice group.

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