SCOTUS Holds that Class Action Waivers in Employment Contracts Must be Enforced

By Stephen A. Fogdall

In a landmark decision, the U.S. Supreme Court has ruled 5-4 that arbitration clauses in employment contracts requiring individual dispute resolution procedures and prohibiting class actions and other collective litigation procedures must be enforced under the Federal Arbitration Act.  The Court rejected the position taken by the National Labor Relations Board and some private plaintiffs that employees’ right to engage in “concerted activities” for their “mutual aid or protection” recognized in Section 7 of the National Labor Relations Act makes such class and collective action waivers unenforceable.  The Court issued its ruling in three consolidated cases:  Epic Systems Corp. v. Lewis, Ernest & Young LLP v. Morris and National Labor Relations Board v. Murphy Oil USA, Inc.  In the latter case, the Fifth Circuit reversed the NLRB’s determination that the employer violated Section 7 by including an individual arbitration clause in its employment contract.  In the former two cases, the Seventh and Ninth Circuits respectively adopted the NLRB’s position and allowed private plaintiffs to pursue collective actions under the Fair Labor Standards Act notwithstanding that they had agreed to individual arbitration clauses in their employment contracts.

The Court, in a majority opinion written by Justice Gorsuch, began its analysis by noting that arbitration clauses in employment contracts fall squarely within the FAA’s command that all arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  The Court then rejected the argument that the final clause of this command, called the “savings clause,” implicates Section 7 of the NLRA.  The Court explained that the savings clause permits a party to oppose arbitration based on defenses, such as fraud in the inducement or duress, that might apply to “any contract.”  However, the savings clause does not allow a court to refuse to enforce an arbitration agreement based on defenses that specifically target arbitration.   The Court reasoned that a putative defense to enforcement of an individual arbitration clause on the theory that such a clause violates employees’ right to engage in “concerted activities” under Section 7 is precisely the type of defense that is not preserved by the savings clause because it specifically targets the alleged illegality of such clauses in the employment setting.  It is, by definition, not a defense of general applicability.

The Court likewise rejected the argument that there is a “conflict” between the FAA and Section 7 of the NLRA such that Section 7 overrides or impliedly repeals the FAA to the extent the FAA would require enforcement of an individual arbitration clause in an employment contract.  The Court held that there could be no conflict between Section 7 and the FAA because “Section 7 doesn’t speak to class and collective action procedures” and contains no “hint about what rules should govern the adjudication of class or collective actions in court or arbitration.”  The Court reasoned that “[u]nion organization and collective bargaining in the workplace are the bread and butter of the NLRA,” and it is “more than a little doubtful that Congress would have tucked into the mousehole” of Section 7 “an elephant that tramples the work done by” the FAA and other laws governing “the particulars of dispute resolution procedures in Article III courts or arbitration procedures.”

Lastly, the Court rejected the argument that the NLRB’s position was entitled to deference under the Chevron doctrine (which requires courts to defer to a federal agency’s interpretation of the statute it administers in certain circumstances).  The Court explained that Chevron was inapplicable because the NLRB did not confine itself to interpreting NLRA, the statue it administers, but rather “sought to interpret this statute in a way that limits the work of a second statute,” the FAA.  If an agency’s “reconciliation” of allegedly competing statutes were subject to deference under Chevron, then “[a]n agency eager to advance its statutory mission, but without any particular interest in or expertise with a second statute, might (as here) seek to diminish the second statute’s scope in favor of a more expansive interpretation of its own,” thus “bootstrapping itself into an area in which it has no jurisdiction.”

The decision is a significant win for employers seeking to limit the costs and risks of class and collective litigation by employees.

Chief Justice Roberts and Justices Kennedy, Thomas and Alito joined Justice Gorsuch’s majority opinion.  Justice Ginsburg wrote a dissenting opinion, joined by Justices Breyer, Sotomayor and Kagan.  The Schnader firm submitted an amicus brief in support of the enforceability of class action waivers in employment contracts in all three cases on behalf of the Mortgage Bankers Association and several state mortgage lending associations.

Ninth Circuit Applies Limited Exception to Supreme Court’s Holding in Italian Colors to Affirm Denial of a Motion to Compel Arbitration

By Christopher Reese

The Ninth Circuit recently affirmed the denial of a motion to compel arbitration based on a limited exception to the United States Supreme Court’s holding in American Express v. Italian Colors Restaurant.  The Ninth Circuit determined that California’s rules for deciding whether a contract is unconscionable were not preempted by the Federal Arbitration Act in the case before it, because provisions contained in the arbitration agreement “effectively foreclose[d] pursuit of the claim.”

The plaintiff in Chavarria v. Ralphs Grocery Company filled out an employment application while seeking employment with defendant Ralphs.  Chavarria obtained employment, and worked as a deli clerk for Ralphs for approximately six months.  After her employment ended, she filed an action on behalf of herself and all similarly situated employees of Ralphs, alleging that Ralphs violated several provisions of the California Labor Code and the California Business and Professions Code by failing to pay employees for rest and meal breaks.

Ralphs’ employment application contained a clause pursuant to which the prospective employees acknowledged receipt of a mandatory arbitration policy.  The arbitration policy contained a procedure for selecting an arbitrator that ensured that the selected arbitrator would be nominated by the party that did not bring the claim.  The arbitration policy also required the parties to split evenly the arbitrator’s fees between them at the outset of the arbitration, without any consideration for the merits of the claim.  The district court held that the arbitration policy was unconscionable under California law and therefore denied Ralphs’ motion to compel arbitration based on the arbitration policy.

The Ninth Circuit began its analysis by setting forth California’s rules for determining whether a contract is unconscionable.  Under California law, the party challenging the enforceability of the contract must demonstrate both procedural unconscionability, which concerns the manner in which the contract was negotiated and the circumstances of the parties, and substantive unconscionability, which concerns whether the contract is so unjustifiably one-sided that it “shocks the conscience.”  The Ninth Circuit determined that Ralphs’ arbitration policy was procedurally unconscionable because: (1) a prospective employee had to agree to it as a condition of applying for employment with Ralphs; (2) the arbitration policy was presented on a “take it or leave it” basis, without any opportunity for negotiation; and (3) Ralphs did not provide Chavarria with the terms of the policy until three weeks after she agreed to be bound by it.

The Ninth Circuit also determined that Ralphs’ arbitration policy was substantively unconscionable for two reasons.  First, the arbitrator selection process would not result in a truly neutral arbitrator because Ralphs’ chosen arbitrator always would be selected in claims brought by an employee against Ralphs.  Second, the policy imposed great up-front costs on the employee – which could run as high as $3,500 to $7,000 per day of arbitration – thus preventing many employees from bringing claims against Ralphs.  Therefore, the Ninth Circuit affirmed the district court’s holding that Ralphs’ arbitration policy was unconscionable and unenforceable.

The Ninth Circuit went on to hold that California’s unconscionability rules are not preempted by the Federal Arbitration Act because they do not disproportionately affect arbitration agreements.  The Ninth Circuit determined that the Supreme Court’s decision in Italian Colors (which we previously analyzed here) did not prevent it from examining the up-front cost that Ralphs’ arbitration policy imposed on employees seeking to bring claims against Ralphs, because Italian Colors only prohibited consideration of the costs needed to prove a claim, not costs imposed simply to “get in the door.”  The provision in Ralphs’ arbitration policy requiring employee-claimants to pay up-front half of the arbitrator’s potentially substantial fees without any consideration of the merits of the claims, the Ninth Circuit held, was just such a “get in the door” fee.  The Ninth Circuit concluded by stating its view that state law unconscionability rules still have a role to play in ensuring that arbitration agreements contain some level of fairness, even after the Supreme Court’s recent decisions in this area.

Federal Arbitration Act Preempts Conflicting California Law Exempting from Arbitration Claims for Public Injunctive Relief

By Melissa Lor

Consistent with the preemption principle of the U.S. Constitution’s Supremacy Clause, the Ninth Circuit recently held that the Federal Arbitration Act preempts California’s so-called Broughton-Cruz rule, which exempts claims for “public injunctive relief” from arbitration.

In Ferguson v. Corinthian Colleges, former students of for-profit schools owned by Corinthian brought a putative class action on behalf of current and former students alleging that Corinthian engaged in a deceptive scheme to entice enrollment of prospective students in violation of California law. Among other relief, plaintiffs sought an injunction. Defendants moved to compel arbitration. The district court granted the motion in part, but denied it with respect to the plaintiffs’ demand for injunctive relief.

Although Corinthian moved to compel arbitration pursuant to arbitration clauses in plaintiffs’ enrollment agreements, the district court declined to compel arbitration of plaintiffs’ claims for injunctive relief under California’s unfair competition law, false advertising law, and Consumer Legal Remedies Act. The district court reached this decision after concluding that it was bound by California Supreme Court decisions establishing the so-called Broughton-Cruz rule, which exempts claims for “public injunctive relief” from arbitration.

On appeal, the Ninth Circuit held that the Broughton-Cruz rule is preempted by the Federal Arbitration Act. The FAA provides that agreements to arbitrate are “valid, irrevocable, and enforceable,” unless legal or equitable grounds exist for the revocation of the contract. The Court further overruled that portion of prior circuit authority, Davis v. O’Melveny & Myers, which applied the Broughton-Cruz rule, because it was clearly irreconcilable with subsequent United States Supreme Court decisions concerning the FAA. Hence, the Ninth Circuit employed the analysis set forth in AT&T Mobility LLC v. Concepcion, and reaffirmed in Marmet Health Care Center, Inc. v. Brown, to reason that, by exempting from arbitration claims for public injunctive relief, the Broughton-Cruz rule incorrectly prohibited outright arbitration of a particular type of claim.  In so doing, the Court concluded, the FAA preempts the conflicting rule.

In championing preemption by the Federal Arbitration Act and federal policy in favor of arbitration, this case demonstrates the importance of considering in the contract drafting stage whether arbitration or a judicial forum better serves the client’s interests, and underscores the due attention and care that practitioners must take in drafting, negotiating, and subsequently enforcing arbitration clauses in contracts.

The “Effective Vindication” Doctrine is a Dead Letter After American Express Co. v. Italian Colors Restaurant

Schnader Alert by Stephen A. Fogdall:

The U.S. Supreme Court has ruled that the Federal Arbitration Act requires courts to enforce a contractual waiver of class action procedures in an arbitration clause, even where the practical effect of such a waiver is to bar claimants from asserting claims under federal law because they have no economic incentive to arbitrate them on an individual basis. The Court’s ruling rejects the doctrine that such waivers prevent the “effective vindication” of a federal statutory right.

Please click here to read the full Alert.

Sixth Circuit Holds That Arbitrator, Not the District Court, Must Decide if Plaintiff’s Class Claims are Barred by Waiver in Arbitration Agreements

By Christian Sheehan

On June 11, 2013, in Lowry v. JPMorgan Chase Bank, N.A., the Sixth Circuit held that an arbitrator, not the district court, must decide whether the plaintiff’s class claims were barred by a class-action waiver in the parties’ arbitration agreement. The Court explained that although questions of arbitrability are presumptively for a court to decide, the parties had clearly and unmistakably agreed that the arbitrator would resolve disputes about whether their claims were arbitrable. In addition, because the provision requiring an arbitrator to decide this threshold issue did not exclude class claims, the Court held that JPMorgan Chase’s argument that the plaintiff’s class claims were barred must be addressed in arbitration. The Court reached this conclusion despite the fact that it found the class-action waiver to be “unambiguous.” Lowry therefore is significant because it makes clear that even if an arbitration agreement contains a provision unambiguously barring class claims, if the parties agreed that the arbitrator would resolve disputes about arbitrability, the district court must submit all claims, including the seemingly barred class claims, to arbitration.

Lowry is noteworthy for the additional reason that it is the latest in a series of recent Circuit court decisions addressing the proper roles of courts and arbitrators in determining the effect of class-action waiver provisions in arbitration agreements. In In re American Express Merchants’ Litigation, 554 F.3d 300, 310-11 (2d Cir. 2009), vacated on other grounds by Am. Express Co. v. Italian Colors Rest., 130 S. Ct. 2401 (2010), and Puleo v. Chase Bank USA, N.A., 605 F.3d 172, 188 (3d Cir. 2010) (en banc), the Second and Third Circuits, respectively, held that challenges to the enforceability of such class-action waivers presented questions of arbitrability that should be resolved by a court, not an arbitrator. Lowry is not inconsistent with these decisions. Unlike in Lowry, the Third Circuit in Puleo held that the arbitration agreement did not clearly and unmistakably provide that the arbitrator would resolve questions of arbitrability. Thus, the default rule—that a court should decide arbitrability—applied. And, in American Express, neither party argued that the contract required questions of arbitrability to be decided by the arbitrator.

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