Yesterday, the U.S. Supreme Court agreed to decide whether class action waivers in employee arbitration agreements violate federal law. This is a huge development, with potentially far-reaching implications for many California employers. But, first, a little background (okay, actually it’s a lot of background, but it’s important) —
Advantages of Arbitration
Many employers require their employees to sign mandatory arbitration agreements as a condition of employment. Many employers believe that arbitration is a cheaper, more efficient, less formal, and more private way of resolving employment-related disputes. Employers typically believe that arbitrators are less “passionate” than juries, which means the arbitrator is perceived to be less likely than a jury to issue a devastatingly costly verdict. Employers also like the fact that arbitration decisions cannot be appealed — so there is finality to the process once the arbitrator makes his or her decision.
Disadvantages of Arbitration
Lawyers for employees, on the other hand, typically do not like arbitration. They often feel like arbitrators are biased for employers (because the employer is in a position to refer a lot of disputes to the arbitrator, so there is a concern that the arbitrator may favor the employer in order to keep the referrals coming). Also, employees and their counsel often feel like their access to information is more limited in arbitration. And this typically hurts the employee and his counsel because the employer is the party in possession of most of the important information in these disputes. Lawyers for employees usually prefer a jury, because a skilled lawyer can play to the jury’s emotions and, in the process, increase his or her chances of landing a huge verdict.
Plus, if you are proceeding in court, and if the court or jury makes a mistake, the losing party has the right to appeal to a higher court for relief. You typically lose this right when you proceed through arbitration.
Mandatory Employee Arbitration Agreements are Legal in California
Both California and federal employment laws generally permit the use of these agreements, provided that they are not both procedurally and substantively “unconscionable.” The seminal California case that announced this rule, and discussed what could make an arbitration agreement “unconscionable,” was Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000), available here.
To determine if the agreement is procedurally unconscionable, the court looks to two elements — oppression and surprise. Oppression “arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice,” while surprise “involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.” To determine if the agreement is substantively unconscionable, the court examines whether the agreement itself is “overly harsh,” “unduly oppressive,” so one-sided as to “shock the conscience,’” or “unfairly one-sided.”
Both procedural and substantive unconscionability must be present for a California court to refuse to enforce a mandatory arbitration agreement. However, both do not need to be present in equal amounts. A sliding scale is used. In other words, if the court finds that there is significant procedural unconscionability (i.e., the agreement was presented on a take-it-or-leave-it basis), then very little substantive unconscionability (i.e., requiring the employee but not the employer to arbitrate claims) will be required to find the agreement unenforceable. And vice versa. See Baltazar v. Forever 21, Inc., 62 Cal. 4th 1237 (2016), which can be found here, for a good and recent summary of how this sliding scale works.
Addition of Class Action Waivers to Employee Arbitration Agreements
Since Armendariz, employers have started to insert class action waivers into their mandatory employment agreements. These agreements cause the employee not only to have to bring their disputes to arbitration rather than litigation, but also to waive the employee’s right to pursue claims on a class or collective basis. Instead, if there is a class action waiver in an arbitration agreement, the employee typically (a) gives up his or her right to bring or join a class action in any forum and (b) additionally agrees that all of the employee’s remaining individual claims must be brought in arbitration rather than in court.
This has become one of the major reasons that employers use mandatory arbitration agreements — to try to limit the huge class-action lawsuits that have crippled so many California companies.
Class Action Waivers in Consumer Arbitration Agreements are Legal Nationwide
In 2011, the U.S. Supreme Court addressed whether companies could insert class action waivers in their consumer arbitration agreements. In AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), available here, the plaintiff-consumers brought a class action against AT&T for advertising phones as “free” when, in fact, AT&T charged sales tax on the phones. AT&T sought to enforce the mandatory arbitration agreement that had been signed by the consumers and that included a class action waiver. The consumers argued that the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005) – which held that class action waivers in consumer arbitration agreements are unenforceable under certain conditions – should be applied to render the arbitration agreements and class waivers unenforceable. In a 5-4 ruling, the AT&T Mobility Court ruled that California’s Discover Bank rule “stands as an obstacle” to arbitration. Therefore, the Court concluded, the Federal Arbitration Act (FAA) pre-empted California’s Discover Bank rule. Because the FAA strongly favors the enforcement of arbitration agreements, the Court found the consumer arbitration agreements and class action waivers to be valid and enforceable.
So what did this mean for arbitration agreements in the employment context? Would the FAA also require the enforcement of employee arbitration agreements in California that included a class action waiver? Would the FAA also prevent California from applying the Armendariz unconscionability test to these employment agreements, since that test also “stands as an obstacle” to arbitration? The U.S. Supreme Court’s decision in AT&T Mobility appeared to be on a collision course with Armendariz and California’s longstanding unconscionability test.
[Note: Many California courts ignored the AT&T Mobility decision in cases involving employee arbitration agreements because AT&T Mobility dealt only with consumer arbitration agreements. See e.g., Brown v. Ralph’s Grocery Co., 197 Cal. App. 4th 489 (2011) (concluding that a California employee’s arbitration agreement which included a class action waiver was unenforceable despite AT&T Mobility)].
Class Action Waivers in Employee Arbitration Agreements are Legal in California — Except for PAGA Waivers
In 2014, the California Supreme Court ruled in Iskanian v. CLS Transportation, 59 Cal. 4th 348 (2014), that class action waivers in employee arbitration agreements are valid and enforceable in California. In reaching this decision, the California Supreme Court cited the U.S. Supreme Court’s decision in AT&T Mobility and its holding that the FAA compelled the enforcement of these agreements. You can read the Court’s full opinion in Iskanian here. I also previously blogged about the Iskanian case here.
However, the Iskanian Court also ruled that there is one exception to its holding. That is, although class action waivers in employee arbitration agreements are generally valid and enforceable in California now, employees cannot be forced to waive their right to bring a representative claim “in arbitration or otherwise” under PAGA. Accordingly, “an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy” and unenforceable. The FAA does not compel a contrary result, the Court concluded, because a PAGA claim “lies outside the FAA’s coverage” (due to it being a dispute between a state and an employer, and not a dispute between two contracting parties).
[Note: So, according to Iskanian, an employee cannot be prohibited outright from bringing a representative action. The employee must be left with some right to bring a representative PAGA action in some forum — either arbitration or litigation. Would it therefore be legal in California for an arbitration agreement to acknowledge that the employee had the right to bring a representative PAGA action, but then mandate that the employee had to arbitrate that action rather than litigate it in court?
Many observers and commentators say the answer is “no.” They interpret Iskanian to say that an employee can never be forced to arbitrate a representative PAGA claim. They base this interpretation on the Iskanian Court’s statement that “a PAGA claim lies outside the FAA’s coverage.” They also point to the Iskanian Court’s discussion about how PAGA claims are fundamentally “a dispute between the state and the employer,” and not the employee bringing the PAGA claims. Some courts have agreed with this analysis and held that an agreement requiring an employee to proceed with a representative PAGA action in arbitration is unenforceable. See e.g., Tanguilig v. Bloomingdale’s, Inc., 2016 WL 6778788, which can be found here; Hernandez v. Ross Stores, Inc., No. E064026 (2017), which can be found here.]
Other observers and commentators disagree and say that Iskanian only invalidates class action waivers that leave an employee with no forum in which to litigate. One California Court of Appeal has reached this same conclusion; however, the opinion was not certified for publication and, thus, it cannot be cited as persuasive legal authority. Eaton v. Big League Dreams Manteca, Third Appellate District 2016, C079374, available here. Another California Court of Appeal has published an opinion that agrees with this position but also recognizes the ambiguity in the Iskanian decision. Garden Fresh Restaurant Corp. v. Superior Court, 231 Cal. App. 4th 678, 688 n. 3 (2014) (suggesting that requiring the arbitration of PAGA claims is unenforceable after Iskanian, but then “on the other hand” acknowledging that Iskanian contains other language in the opinion suggesting that PAGA claims can be arbitrated), available here. Another discusses how Iskanian held only that PAGA claims could not be waived in their entirety but left open the issue of whether PAGA claims could be required to be arbitrated. Perez v. U-Haul Co. of California, 3 Cal. App. 4th 408 (2016) (the Court explicitly declined to resolve this ambiguity and, instead, held “only” that a PAGA plaintiff cannot be forced into multiple forums, first to arbitrate whether he/she has standing under PAGA and then to litigate any actual PAGA claim that exists), available here.
Federal Courts Weigh In — Is the California Rule Pre-Empted by the FAA?
Since the California Supreme Court’s decision in Iskanian, California courts regularly apply and follow what has become to be known as the “Iskanian Rule.” However, Federal courts have not always reached a similar result.
In Sakkab v. Luxxotica Retail North America, Inc., 803 F.3d 425 (2015), the 9th Circuit Court of Appeals applied the Iskanian Rule and held that an arbitration agreement that required an employee to waive her right to bring a representative PAGA claim is unenforceable under California law. The Court concluded that the Iskanian Rule did not conflict with the FAA because it did not express any preference for litigation over arbitration. To the contrary, the Court interpreted Iskanian to allow for the arbitration of PAGA claims so long as the employee was allowed to proceed in arbitration on a representative basis. What rendered the specific agreement in Sakkab illegal was that the employee was prevented from bringing a representative PAGA in any forum, either litigation or arbitration. You can read the Court’s full opinion in Sakkab here.
More recently, the 9th Circuit Court of Appeals reached a similar result — but under a different rationale. In Morris v. Ernst & Young, LLP, 2016 WL 4433080, the 9th Circuit considered whether an agreement requiring employees to pursue legal claims exclusively through arbitration and only as individuals in “separate proceedings” violated federal labor laws. The 9th Circuit held that the National Labor Relations Act (NLRA) precludes such waivers because they interfere with employees’ right to “self-organize” or otherwise participate in “concerted” activity. In addition, the 9th Circuit determined that the FAA did not dictate a different analysis or result. According to the Court, when an arbitration agreement purports to limit a substantive federal right, the Savings Clause of the FAA (which renders an arbitration agreement enforceable except “upon such grounds as exist at law or in equity for the revocation of any contract”) renders the agreement unenforceable. The Court also noted that the FAA explicitly prevents the enforcement of any “illegal” agreement. You can read the Court’s full opinion in Morris here.
The 7th Circuit Court of Appeals reached a similar result. In Lewis v. Epic-Systems Corp., 823 F.3d 1147 (2016), the Court ruled that an arbitration agreement that prohibited employees from bringing class-wide claims contravened the NLRA’s express protections, rendering it illegal and unenforceable. You can read the Court’s full opinion in Lewis here.
However, the 5th Circuit Court of Appeals reached a different — and more employer-friend — result. In Murphy Oil USA, Inc. v. NLRB., 808 F.3d 1013 (2015), the Court held that class action waivers contained in mandatory arbitration agreements did not violate the NLRA. In reaching this decision, the Court once again followed its earlier opinion in D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (2013), which held that arbitration agreements that waive an employee’s right to pursue class and collective claims in all forums do not violate the NLRA. The Court explicitly referenced its prior decision in D.R. Horton to conclude that the right to proceed on a class-wide basis is not a “substantive right” under federal law. You can read the Court’s full opinion in Murphy Oil here.
The U.S. Supreme Court Agrees to Resolve This Split
As a result of this split in the lower federal courts, the U.S. Supreme Court has granted certiorari and decided to consolidate the Morris, Lewis, and Murphy Oil cases. Opening briefs are due on February 27, 2017. The Supreme Court’s eventual ruling, which is expected by June 2017, will hopefully resolve once-and-for-all, on a nationwide basis, whether class action waivers are permissible in employee arbitration agreements. The U.S. Supreme Court’s eventual ruling will also likely address whether California’s Iskanian Rule will survive. And, depending on how broadly the Court writes its opinion, it could also impact whether California can continue to apply Armendariz’s unconscionability test to employee arbitration agreements. Stay tuned!