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Class dismissed

June 14, 2011

Can an employer force its employees to waive their rights to pursue collective relief — a class action — in an arbitration agreement?  Four years ago, the California Supreme Court said “no” in Gentry v. Superior Court.  The Gentry Court found so-called “class action waivers” to be unfair (or “unconscionable,” in the best legal tradition of never using a short word where a longer one will do suffice) and thus unenforceable.  Because the individual claims can be too small to bring one-by-one, a rule forbidding class claims is unfair since it basically lets the wrongdoer break the law without any consequences.  Gentry followed the California Supreme Court’s 2005 decision in Discover Bank v. Superior Court, which refused to enforce class action waivers in consumer arbitration agreements.

Last month, however, in AT&T Mobility v. Concepcion, the US Supreme Court said that Discover Bank‘s rule violated the Federal Arbitration Act (FAA).  In the FAA, Congress intended to remove obstacles to enforcement of arbitration agreements — previously viewed with skepticism by judges wary of intrusions onto their turf — except where some general (i.e., not limited to arbitration agreements) contractual defense applied.  The Concepcion Court held that Discover Bank applied the doctrine of unconscionability in a fashion that “disfavors or interferes with arbitration,” in violation of the FAA.

Said the Court:

 The “principal purpose” of the FAA is to “ensur[e] that private arbitration agreements are enforced according to their terms.” This purpose is readily apparent from the FAA’s text. Section 2 makes arbitration agreements “valid, irrevocable, and enforceable” as written (subject, of course, to [generally applicable contract defenses]); §3 requires courts to stay litigation of arbitral claims pending arbitration of those claims “in accordance with the terms of the agreement”; and §4 requires courts to compel arbitration “in accordance with the terms of the agreement” upon the motion of either party to the agreement (assuming that the “making of the arbitration agreement or the failure … to perform the same” is not at issue). In light of these provisions, we have held that parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom a party will arbitrate its disputes.

Employers — particularly large, multi-state employers — will want to consider having employees sign mandatory arbitration agreements with class action waivers.  Note that such agreements must be carefully drafted, and demanding them of existing employees requires careful analysis of whether they are supported by consideration.  Legal advice is a necessary.

Small businesses, however, may be better off without them.  Arbitration is expensive, and in California the employer pays for the whole thing.  In return, you largely give up any right to appeal even clearly wrong decisions.  As I’ve written before, there’s little evidence that arbitration awards are lower than court judgments or jury verdicts.  But there are some advantages, even for smaller employers, that would be worth a discussion with your lawyer if you are considering going the arbitration route.

Employees faced with such an agreement as a condition of employment are pretty stuck for the moment.  Congress can vote to reverse the Concepcion rule, and several senators and representatives have stated they will try to do so.  But prior similar bills have failed, and it’s hard to see such a bill being successfully enacted in the current election-year environment.

We will keep you posted.

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