Companies can end class-action suits by including class arbitration waivers, but smaller firms should be careful about adopting them
The US Supreme Court’s decision in Italian Colors vs American Express empowers companies to end class-action lawsuits against them by allowing them to include, as a standard contract clause, a requirement for the signee to waive the right to class arbitration as part of the agreement. What are the implications for firms that impose such a clause in their contracts?
In the Italian Colors case, Italian Colors and other small businesses sued American Express as a class action, alleging that AmEx was violating antitrust laws. AmEx responded by trying to enforce the mandatory arbitration clause in its contract, which included a prohibition on class arbitration. The Second Circuit refused to enforce the class arbitration waiver on the grounds that if it did, the purpose of the antitrust laws would be thwarted because no individual plaintiff could afford to pursue the claim. The US Supreme Court reversed that ruling, holding that, while the law required that plaintiffs have a right to pursue their claims, that right need not be economically viable.
The court’s position is simple: arbitration agreements mean what they say, so a waiver of class arbitration is effective and must be enforced. Prior cases established that for the purpose of analyzing the effectiveness of an arbitration clause, it does not matter whether it was in a contract between commercial equals, negotiated at arm’s length or inserted into a form contract of adhesion signed by a consumer who didn’t read or understand it. As a general matter, then, any company wishing to avoid class actions in the future need only include in its contracts a pre-dispute mandatory arbitration clause that includes a class-action arbitration waiver.
Employment law provisions, such as the ‘fee-shifting’ provisions of the labor statutes, make it less likely that using blanket arbitration agreements with class arbitration waivers will mitigate litigation risk. Maimon Kirschenbaum of Joseph & Kirschenbaum, who represents employees in wage and hour cases, says, ‘On an individual level, employees tend to be a lot more committed to pursuing their rights than consumers.’
Kirschenbaum notes that because of the fee-shifting provisions, employees can find lawyers to bring those individual claims. Nor are all the claims necessarily small; cases involving the misclassification of workers can involve very large damages. Kirschenbaum also points out that the employer’s cost risk extends past legal fees and damages to include arbitration fees, which can be quite high. ‘On a person-to-person basis it could cost employers significantly more in arbitration than if they went to court,’ he explains.
As a result, Kirschenbaum suggests that in particular, smaller employers should be careful about adopting mandatory arbitration with class waivers. ‘Sometimes it’s just better, more efficient, to get finality via a class action,’ he says.
Not everyone agrees that using pre-dispute arbitration clauses with class waivers is bad for employers, however. Ben Robbins of the New England Legal Foundation, who authored an amicus brief in the Italian Colors case, explains that ‘fee-shifting provisions may work when the claim is fairly simple. But the small value of a more complex claim may deter an attorney from agreeing to take on the case, because fees would be limited by reasonableness in light of the small value.’
More generally, he continues: ‘As a practical matter, if I’m an employer and I have a blanket arbitration clause and a situation arises where I wish I didn’t as I’m facing too many individual arbitration cases, I can always trump the agreement to arbitrate by agreeing with the plaintiffs to pursue a class action in court.’
Collective action
Amanda Fugazy of Fugazy & Rooney, who represents employers, says federal statutes that provide a right to ‘collective action’ rather than class action will likely be unaffected by this new ruling. ‘Not only does Italian Colors make it perfectly clear that you can waive class claims, but it also gives a very strong nod that employers will be able to enforce arbitration agreements that prohibit [Fair Labor Standards Act] collective claims, and that’s where most employment litigation is coming from,’ she says, pointing to Justice Scalia’s reference in dicta to Gilmer vs Interstate Johnson Lane Corp (1991).
In Gilmer, Fugazy explains, ‘the Supreme Court enforced an arbitration provision. While it wasn’t pertinent to the Gilmer decision, the Gilmer arbitration agreement contained a collective action waiver. In the Italian Colors opinion, by discussing Gilmer and its collective action waiver, Scalia suggests that waiver of collective actions will be equally enforceable as a waiver of class actions.’ As a result, she adds, ‘employers, in drafting their arbitration agreements, should be careful to specify that all arbitrations will be on an individual basis, and that there will be no arbitration of class or collective claims. It is important to specify both.’
In addition to noting the dicta by Justice Scalia, employers can follow the DR Horton case. The National Labor Relations Board (NLRB) has tried to prohibit employers from imposing mandatory pre-dispute arbitration agreements with class waivers by issuing a ruling against DR Horton, which has appealed to the Fifth Circuit. The court had not provided its ruling by the time Corporate Secretary went to press, but more than two dozen courts have rejected the NLRB’s logic, perhaps foreshadowing a similar outcome in the DR Horton case.
What the future may hold
Given the court’s ruling, the only way these arbitration clauses can be limited in any way is by explicit congressional action or by regulators’ use of Congress-granted authority. In the latter case, the congressional authority will have to be sufficiently explicit for the regulations to survive legal challenge. Given Congress’s current dysfunction, it is unlikely to pass major legislation – but that doesn’t mean big change can’t happen. Mark Kantor, an arbitrator and mediator who also teaches at Georgetown University Law Center and serves on the board of directors of the American Arbitration Association (AAA), notes that Congress authorized major regulatory action when it enacted Dodd-Frank.
Speaking for himself, Kantor says, ‘Dodd-Frank contained four provisions that are really important. The first simply prohibited pre-dispute arbitration agreements for any residential mortgage type. As a result, for mortgages, AmEx is irrelevant. Second, Congress gave the Consumer Financial Protection Bureau [CFPB] authority to limit or prohibit pre-dispute arbitral agreements for consumer finance products. The CFPB is in the data-gathering process now, and it might in the future end pre-dispute arbitration clauses in consumer finance products. Third and fourth, Congress gave authority to the SEC to decide whether or not to limit or prohibit pre-dispute arbitration clauses in agreements between broker-dealers and their customers and investment advisers and their customers. To date, the SEC hasn’t moved forward with that authority.’
Until those regulators act (and their regulations survive any legal challenges brought), companies that wish to avoid class litigation through arbitration ‘should immediately add the class-action waiver,’ advises Robbins, because of the other arbitration decision the US Supreme Court issued recently, in the Oxford Health Plans vs Sutter case. ‘Short of that, a firm should at the very least make clear in the agreement that a court, and not an arbitrator, should decide the issue of whether the agreement authorizes class arbitration.’
That’s because the Oxford Health case stands for the proposition that an arbitrator can get the issue wrong, holding class arbitration authorized without explicit authorization language, and the courts will not disturb that holding.
