Unless Congress acts to overturn the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, ____ DJDAR ____ (Apr. 27, 2011), employers with properly drafted arbitration agreements can cross employment law class actions off their lists of things to worry about. The California Supreme Court largely prohibited employers (and anyone else) from excluding class-based claims from arbitration agreements. But Concepcion and the U.S. Supreme Court’s decision last Term in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. ____ (2010), hold that the Federal Arbitration Act preempts California case law, and permits employers to require employees to forego the right to arbitrate on behalf of a class.
Concepcion may motivate some employers to implement arbitration agreements, particularly retailers and other businesses assailed by the swarm of wage-hour class actions that have filled the courts and mediation offices. But my bet is that many employers will resist the temptation because a number of California court decisions make arbitration an expensive and overly complex process for dealing with employment claims.
Employers some day may have a further incentive to require employees to arbitrate. The Concepcion majority’s discussion of arbitration law sets the table for a broader challenge to California jurisprudence regarding the enforcement of arbitration agreements in the employment setting.
By way of background, Congress passed the Federal Arbitration Act in 1925, when class actions were nearly unheard of. Section 2 of the Act provides that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Act preempts state laws that conflict with its provisions. However, the “savings” clause permits states to apply generally applicable contract defenses to arbitration agreements.
The California Supreme Court in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), held that arbitration agreements including a class action waiver may be unconscionable, a state law defense. The court decided that class action waivers were unlawful “exculpatory clauses,” in that they could insulate a company from small claims that individuals would not pursue. The court refused to hold the Act preempted state law on this issue, reasoning that class action waivers are unconscionable in litigation and arbitration equally.
The California Supreme Court in Gentry v. Superior Court, 42 Cal. 4th 443 (2007), extended Discover Bank to employment law class actions. Declining to hold that all class action waivers in employment-related arbitration agreements are unconscionable, the court set forth factors for courts to consider: “the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ rights to overtime pay through individual arbitration.”
Against this backdrop, the U.S. Supreme Court considered whether the Act preempts Discover Bank’s application of unconscionability law to arbitration agreements. The Concepcion case involved a consumer class action based on AT&T Mobility’s collecting sales tax after advertising a cell phone was “free.” Although AT&T Mobility’s arbitration agreement contained many provisions favoring consumers, it also contained a class action waiver.
Striking down the waiver, the lower federal courts held that the Act did not preempt Discover Bank because, in the words of the Ninth Circuit, “Discover Bank placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.”
In a 5-4 opinion penned by Justice Scalia, the Supreme Court majority decided that the Discover Bank rule operated to interfere with the Act’s purpose: to promote streamlined dispute resolution. Although parties could agree to class action arbitration, state law could not require it.
The Court’s holding is that a state cannot use the “unconscionability” doctrine to “stand as an obstacle” to the purpose of the Act. And the principal purpose of the Act is to “ensure that private arbitration agreements are enforced according to their terms.”
The majority in dicta noted that a number of state law requirements, even if deemed “unconscionable” under state law, would be preempted. These requirements might include that arbitration be conducted with judicially monitored discovery, that the arbitrator would have to follow the Federal Rules of Evidence, or that arbitration be conducted by a “jury” of 12 lay arbitrators. The majority opined (and even the Concepcions conceded) that such requirements would be inconsistent with the purposes of the Act and, therefore, preempted.
These dicta and the court’s holding call into question California courts’ application of unconscionability law to arbitration of employment law claims. For example, the California Supreme Court recently decided in Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659, 693 (2011), that employers may not require employees to arbitrate instead of filing an administrative claim with the Division of Labor Standards Enforcement. The court rejected the notion that “any state law procedure that delays the commencement of arbitration is preempted by the FAA.” But in Concepcion, the U.S. Supreme Court quoted from a prior decision (also addressing a California arbitration case): “A prime objective of an agreement to arbitrate is to achieve ‘streamlined proceedings and expeditious results,'” which objective would be “frustrated” by requiring a dispute to be heard by an agency first.” Moreno stands on shaky ground.
The California Supreme Court’s seminal decision in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000), holds agreements to arbitrate discrimination claims under the Fair Employment and Housing Act are contrary to public policy unless they provide for, among other things, sufficient discovery, a written arbitration decision, and a degree of judicial review of the arbitrator’s decision for errors of law. Concepcion notes that imposing procedural and evidentiary rules “is not arbitration as envisioned by the FAA, lacks its benefits, and therefore may not be required by state law.” Indeed, after Armendariz, arbitration bureaus developed significant procedural rules, such that arbitration can be as expensive and time consuming as litigation in court.
The federal and state courts after Armendariz began striking down as “unconscionable” a host of provisions in arbitration agreements. For example, the courts strictly prohibit employers from “carving out” claims (e.g., for trade secret misappropriation) from their arbitration agreements. These decisions may run afoul of Concepcion’s recognition that “parties may agree to limit the issues subject to arbitration.”
These are just a few examples. The decisions invalidating arbitration agreements as “unconscionable” or contrary to public policy are legion. Concepcion may require courts interpreting California law to re-examine the extent to which the courts can impose requirements and restrictions on arbitration agreements.
It remains to be seen whether Armendariz and its progeny will survive. Additionally, as stated, Congress may act to limit or eliminate the Act’s applicability to employment claims, consumer class actions, etc. California employers tempted to consider arbitration anew should carefully monitor how the law develops in this area.