Arbitration as a Means of Avoiding Class Actions

In AT&T Mobility v. Concepcion, the Supreme Court held that a waiver of class action that was part of an arbitration clause in a consumer contract was enforceable despite state law to the contrary. Subsequently, in Oxford Health Plans v. Sutton, it upheld an arbitrator’s ruling that a class action could be sustained in a commercial arbitration agreement, because the arbitrator’s finding had drawn its essence from interpretation of the arbitration agreement itself. And in American Express v. Italian Colors Restaurants, the Court held that class action waivers in commercial arbitration agreements are enforceable even if collective action is the only practical method to enforce a claimant’s statutory rights.

In order to assess the consequences of these cases, and their impact on the way businesses might conduct themselves, we can look to examples of disputes involving the assertion of a class waiver outside the context of an arbitration agreement. What is the result of challenges to purported class waivers that are asserted in the course of litigation, not arbitration? Does arbitration promise effective class waiver that litigation does not? Put otherwise, would a business seeking to avoid class claims gain advantages in arbitration that are not available in ordinary litigation?

The answer appears to be “probably.” Companies might be well advised to enter into arbitration agreements for the sole purpose of avoiding class action. And in the current state of the law, companies anticipating consumer, employee, and perhaps even business complaints can accomplish a protection from class actions unilaterally, without negotiation or agreement, by promulgating a “policy” pursuant to which individuals who engage with them have, by virtue of that engagement alone, entered into an arbitration “agreement” and waived the exercise of F.R.C.P. 23.

Some cases are discussed in Thomas Stipanowich, “The Third Arbitration Trilogy,” 22 Am. Rev. of Int’l Arbit. at 381 (2011). Those and others include:

In Grant v. Convergys Corp (E.D. Mo. 2013), Plaintiff employee asserted claims of violation of the Fair Labor Standards Act, and also alleged that a class action waiver contained in the employment application was unenforceable because it violated her rights to collective action under Section 7 of the National Labor Relations Act. The court agreed that “collective and class litigation, engaged in by employees for the purpose of mutual aid and protection, is protected concerted activity under the NLRA.”

In Copello v. Boehringer Ingelheim Pharmaceuticals Inc. (N.D. Ill. 2011), plaintiff’s class action claim was dismissed on grounds of waiver and estoppel because he had agreed, as part of the separation agreement with the former employer, to release the employer of all claims of any sort, and to opt-out of any class action asserting such claims.

In Doe 1 v. AOL LLC (9th Cir. 2009) a contract for services containing choice of law, forum selection and class waiver provisions was found unenforceable as to California members of the class making claims under the federal Electronic Privacy Act, pursuant to California policy protecting consumers in adhesion contracts that contain class waiver, whose claims are foreseeably small, and who allege fraud.

In In re Yahoo Litigation, 251 F.R.D. 459 (C.D. Cal. 2008), plaintiff advertisers alleged breach of an agreement that Yahoo would place their ads on “targeted” web pages. Defendant Yahoo moved to dismiss the class action, relying on the advertising agreement that provided “You agree to submit to the exclusive jurisdiction of the state and federal courts located in the County of Los Angeles, California or another location designated by Overture. Any claim against Overture arising from this Agreement shall be adjudicated on an individual basis, and shall not be consolidated in any proceeding with any claim or controversy of any other party.” The court allowed the class to continue, extending the California consumer doctrine to commercial settings where there may be evidence of unequal bargaining power.

The issue is clearly drawn by the Washington Supreme Court in Scott v. Cingular Wireless. There, in defeating a motion to dismiss class claims of violation of the state’s Consumer Protection Act (“CPA”), the court found no distinction between a class waiver in litigation and a class waiver in arbitration:

Congress simply requires us to put arbitration clauses on the same footing as other contracts, not make them the special favorites of the law. See 9 U.S.C. § 2. As we held above, contracts that effectively exculpate their drafter from liability under the CPA for broad categories of liability are not enforceable in Washington, even if they are embedded in an arbitration clause. The arbitration clause is irrelevant to the unconscionability. Class action waivers have very little to do with arbitration. Clauses that eliminate causes of action, eliminate categories of damages, or otherwise strip away a party’s right to vindicate a wrong do not change their character merely because they are found within a clause labeled “Arbitration.”

As Fricka says to Wotan in Act II of Die Walküre, “Nicht so.” However appealing the Washington Supreme Court’s rationale, it seems no longer to be the law. Class waivers in forum selection clauses anticipating litigation are subject to judicial scrutiny, while class waivers in arbitration agreements are not. And as the recent General Mills experience has taught us, you can consider the term “agreement” to be the operative equivalent of “unilateral policy.” Whether this distinction is “substantive” would appear to be conceded, inasmuch as the Supreme Court, in American Express, held it a matter of complete indifference that a class waiver effectively denied plaintiffs the ability to enforce their federal rights under the Sherman Act.

We teach, and learn, that arbitration is a mere change of forum, and that the same claims, rights, defenses and damages cognizable in court are cognizable in arbitration. Well, I don’t think we’re in Kansas anymore.

View the complete Business Conflict Management article here.

                        author

F. Peter Phillips

F. Peter Phillips is a commercial arbitrator and mediator with substantial experience providing consultation on the management of business disputes to companies around the globe. A cum laude graduate of Dartmouth College and a magna cum laude graduate of New York Law School, Mr. Phillips served for nearly ten years… MORE >

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