October 04, 2013

Recent Supreme Court Decisions Shed Light on Enforceability of Class Action Waivers in Arbitration Agreements

For years, many employers have used mandatory arbitration agreements to limit litigation costs and expedite employee dispute resolution. Many of these arbitration agreements contain class or collective action waivers that seek to prohibit employees from collectively suing their employers. Unfortunately, the enforceability of such class or collective action waivers has varied based on the federal circuit court in which the agreement is challenged. In two recent cases, however, the United States Supreme Court has provided guidance that should unify federal courts in upholding class or collective action waivers in arbitration agreements. While in the first case the Supreme Court did not expressly uphold class action waivers, in the second case it did.

In the first case, Oxford Health Plans LLC v. Sutter, the plaintiff provided medical care to the Plans' insured individuals under a contract that contained a mandatory arbitration clause. 133 S.Ct. 2064 (2013). The contract provided that:

No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration.

Id. at 2067. Thus, the arbitration agreement prohibited civil lawsuits, but it did not specifically address class arbitration. 

Despite the mandatory arbitration clause, the plaintiff filed a class action lawsuit in New Jersey state court alleging Oxford Health failed to make prompt and accurate payments under the contract. The state court compelled arbitration, and the arbitrator determined that the contract permitted class arbitration. Specifically, the arbitrator concluded that the "clause sent to arbitration the same universal class of disputes that it barred the parties from bringing as civil actions." Id. Oxford Health filed an action in federal court to vacate the arbitrator's decision. Ultimately, the case found its way to the United States Supreme Court on the issue of whether the arbitrator exceeded his powers in permitting class arbitration. While the Supreme Court noted its recent decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. that "a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding the party agreed to do so," it declined to second-guess the arbitrator's interpretation of the parties' contract. Id. (emphasis in original). While this language supports the notion that the Court would enforce an explicit agreement between the parties to waive class arbitration, the Court noted that it could only set aside the decision if the arbitrator exceeded his authority. The Supreme Court found he did not. 

Without expressly doing so, the ruling in Oxford Health appeared to invalidate wage and hour/employment law decisions in which courts rejected class action waivers contained in employer/employee arbitration agreements. Before experts and employers could fully digest the Court's ruling and forecast its implications on express class action waivers, the Court eliminated all doubt a mere 10 days later.  

In the second case, the Supreme Court went a step further by upholding an express class action waiver. In American Express Co. v. Italian Colors Restaurant, a group of merchants that accepted American Express cards sought a class action lawsuit alleging violations of federal antitrust laws. 133 S.Ct. 2304 (2013). The merchants had signed agreements with American Express requiring that all disputes be resolved by arbitration and waiving any right to bring claims as class arbitrations. 

American Express moved the federal district court to compel individual arbitration under the Federal Arbitration Act. In opposition, the merchants submitted an economist's estimate that the cost of proving the antitrust claim would be exponentially greater than the individual merchant's maximum recovery. The U.S. District Court for the Southern District of New York granted American Express' motion to compel arbitration and dismissed the merchants' claims. However, the U.S. Court of Appeals for the Second Circuit reversed, finding the class waiver unenforceable. 

The case then bounced back and forth between the Supreme Court and the Second Circuit. Ultimately, the Supreme Court reviewed the case and issued its decision in June. The Supreme Court noted that arbitration agreements are matters of contract and must be "rigorously enforce[d]." 

And consistent with that text, courts must ‘rigorously enforce' arbitration agreements according to their terms, including terms that ‘specify with whom [the parties] choose to arbitrate their disputes,' and ‘the rules under which that arbitration will be conducted.' That holds true for claims that allege a violation of a federal statute, unless the FAA's mandate has been ‘overridden by a contrary congressional command.'

133 S.Ct. at 2309 (internal citations omitted)

The Court looked to federal antitrust laws to determine whether the laws contain a contrary congressional command requiring the rejection of the class arbitration waiver. The Court concluded that the antitrust laws contain no such command. Thus, the Court enforced the arbitration agreements and the merchants' waiver of class action rights. In doing so, the Court has resolved any split among federal courts in favor of enforcing class action waivers.

Since the American Express decision, the Second Circuit Court of Appeals has followed the Supreme Court's lead and overturned a lower court's refusal to compel arbitration in a Fair Labor Standards Act (FLSA) overtime lawsuit. However, the plaintiff in that case has filed a petition for rehearing alleging the ruling erroneously disregarded the legislative history of the FLSA. The Plaintiff claims that congressional intent makes clear that FLSA collective actions are a non-waivable right under the FLSA.  The court has yet to rule on the petition.  Thus, it is conceivable the court may hold that collective action waivers are unenforceable with respect to the FLSA.  However, this appears unlikely as the Fourth, Fifth and Ninth Circuits have all concluded that a waiver of rights under the FLSA is permissible because the FLSA itself does not confer a substantive right to a collective action. Harrington v. Waterstone Mortgage Corp., No. 11–cv–779–bbc, 2012 WL 1242318 (W.D.Wis. Mar. 16, 2012). 

Additionally, there remains one other threat to class action waivers — the National Labor Relations Board (NLRB) has taken the position that they are prohibited by the National Labor Relations Act (NLRA). In D.R. Horton, Inc., the NLRB found that a class action waiver requiring only individual arbitration of employment claims interfered with the employee's right to engage in protected concerted activities under Section 7 of the NLRA. 357 NLRB No. 184. D.R. Horton has since appealed the Board's ruling with the Fifth Circuit Court of Appeals, which has yet to rule. However, other courts, including the Second Circuit Court of Appeals in Sutherland v. Ernst & Young LLP, have rejected the NLRB's decision in Horton and enforced class action waivers despite the NLRA.

Takeaways

Based on the recent Supreme Court decisions, and subject to the Fifth Circuit's ruling in D.R. Horton, it appears that arbitration agreements containing class action waivers will continue to be enforced by the courts. However, employers must ensure the agreement contains an express waiver of class action arbitrations.

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