Tag: class action waiver

Waiting for Gorsuch: SCOTUS Kicks Important Class Action Waiver Case to Next Term

Supreme Court SCOTUS Class Action WaiverLast week, the United States Supreme Court informed litigants in Epic Systems Corp. v. Lewis that it is pushing the case to its October 2017 term. The lawsuit, which rose up through the Western District of Wisconsin and the Seventh Circuit, presents the High Court with a chance to resolve a robust circuit split on the question whether mandatory arbitration clauses in employment contracts may contain class action waivers without running afoul of the National Labor Relations Act (NLRA). Last spring, the Seventh Circuit ruled that such clauses were unenforceable, deviating from rulings by the Second, Fifth, and Eighth Circuits, and prompting the Supreme Court to grant certiorari on January 13, 2017.

The resolution of the issue turns on whether NLRA Section 7’s (29 U.S.C. § 157) protection of employees’ right to engage in “concerted activities” qualifies as a “contrary congressional command” (under CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012)) sufficient to override the Federal Arbitration Act’s (FAA) presumption that arbitration agreements are enforceable as written. The National Labor Relations Board (NLRB) has taken the position for years that class action waivers in employment agreements are unenforceable under the NLRA. See D.R. Horton, Inc., 357 N.L.R.B. 2277, 2289 (2012).  In Lewis, Judge Barbara Crabb of the Western District of Wisconsin followed the NLRB’s interpretation, based on Supreme Court precedent directing courts to give “considerable deference” to the agency’s interpretations of the NLRA. Lewis, No. 15-cv-82-bbc, 2015 U.S. Dist. LEXIS 121137, at *4 (W.D. Wis. Sept. 11, 2015) (quoting ABF Freight System, Inc. v. NLRB, 510 U.S. 317, 324 (1994)).

On appeal, the Seventh Circuit ruled that such class action waivers were “illegal” under the NLRA, making them unenforceable because the FAA contains a “savings clause” that allows courts to refuse to recognize arbitration agreements on grounds sufficient “for the revocation of any contract.” Lewis, 823 F.3d 1147, 1159 (7th Cir. 2016) (quoting 9 U.S.C. § 2). The Seventh Circuit acknowledged that its decision departed from precedents in its sister circuits but dismissed their reasoning. Following Lewis, a divided Ninth Circuit panel joined the Seventh Circuit, deepening the circuit split and teeing the issue up for Supreme Court review.

Because the case has now been deferred until next term, President Trump’s recent nomination of Judge Neil Gorsuch leads inquisitive minds to wonder about his jurisprudence on the FAA. With the Supreme Court’s present four-to-four ideological split, Judge Gorsuch’s vote may well decide the case. The 10th Circuit has not weighed in on the enforceability of class action waivers in employment agreements, but Judge Gorsuch’s opinions on the FAA demonstrate a commitment to enforcing its preference for arbitration.

Just a few weeks ago, in Ragab v. Howard, 841 F.3d 1134 (10th Cir. 2016), Judge Gorsuch penned a dissent from a panel decision that affirmed denial of a motion to compel arbitration. The parties in Ragab agreed to six business contracts with one another, each containing a separate (and contradictory) mandatory arbitration provision, which led the panel to rule that the parties failed to reach agreement on the essential terms regarding arbitration. In his dissent, Judge Gorsuch opined that the parties’ verbal cacophony regarding the procedural details of arbitration did not override their clear intention to arbitrate. His dissent identified two “workarounds” to save the arbitration agreements and alluded to the preemptive force of the FAA over state law. Id. at 1139, 1141. And, in Sanchez v. Nitro-Lift Techs., L.L.C., 762 F.3d 1139 (10th Cir. 2014), Judge Gorsuch joined an opinion requiring three former employees to arbitrate their wage claims against their employer, despite ambiguity in the parties’ arbitration agreement, based on the “liberal federal policy favoring arbitration.” Id. at 1145, 1147-48.

Furthermore, Judge Gorsuch has expressed deep skepticism regarding deference to administrative agencies. Back in August, he authored not one but two opinions in a case called Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016). In his opinion for the court, Judge Gorsuch ruled that the Board of Immigration Appeals could not apply a new administrative rule retroactively. Id. at 1148. Then, in a separate concurring opinion, he called on the Supreme Court to reconsider the doctrine of Chevron deference to administrative agencies, calling the precedent a “behemoth” of administrative law that was “more than a little difficult to square with the Constitution of the framers’ design.” Id. at 1149. This suggests that the NLRB’s anti-class waiver position may not carry much deferential heft with Judge Gorsuch.

So, while it appears that employers across the country will need to hold tight for a few months longer to see whether the class action waivers in their employment agreements hold water, the wait could be worthwhile for those looking to avoid class adjudication.

ARTICLE BY Aaron R. Wegrzyn of Foley & Lardner LLP

© 2017 Foley & Lardner LLP

The Supreme Court Paves the Way to End Consumer Class Actions

Last year, the Supreme Court removed state law prohibitions on contractual agreements to waive class action rights.  Because disputes involving small dollar amounts (only $30.22 per plaintiff in a recent Supreme Court case and a $2.99-per-month service for plaintiffs in a recent 11th Circuit decision) provide little incentive for plaintiffs’ lawyers (or the plaintiffs themselves), these cases have often materialized as class actions resulting in massive class fees and statutory damages.  As a result, many businesses include arbitration provisions in their consumer contracts that contain a class action waiver provision to require individual plaintiffs to bring their claims on their behalf alone.

Although most courts have enforced class action waivers in arbitration provisions considering the U.S. Supreme Court’s long-standing position that arbitration agreements must be enforced according to their terms, some state high courts have struck down contractual agreements not to bring class actions, including class arbitrations, as unconscionable and a violation of state public policy.  At least California, New Jersey, and Massachusetts’ Supreme Courts had issued such decisions in the last seven years.  See Discover Bank v. L.A. County Superior Court, 36 Cal. 4th 148 (Cal. 2005); Muhammad v. County Bank of Rehoboth Beach, 912 A.2d 88 (N.J. 2006); Feeney v. Dell Inc., 908 N.E.2d 753 (Mass. 2009).

The California Supreme Court in Discover Bank held that class action waivers in consumer arbitration agreements were unconscionable if the agreement is an adhesion contract and involves small amounts of damage in dispute where the party with inferior bargaining power alleges a deliberate scheme to defraud.  36 Cal. 4th at 162-63.  Similarly, in New Jersey, the Supreme Court held that the class-action waiver in the arbitration agreement was “clearly a contract of adhesion” and that the prohibition of class actions would prevent plaintiff from pursuing her statutory consumer protection rights and shield defendants from compliance with state laws.  Muhammad, 912 A.2d at 100-01. The Massachusetts Supreme Court similarly held that “public policy sometimes outweighs the interest in freedom of contract” when it refused to enforce an arbitration provision prohibiting class actions. Feeney, 908 N.E.2d at 761-62.

In April of 2011, however, the United States Supreme Court held that agreements not to arbitrate through class actions should be enforced and overruled Discover Bank in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).  In Concepcion, the putative class complained that AT&T advertised free cellular phones with the purchase of AT&T service, yet the consumers were charged $30.22 in sales tax based on the phones’ retail value.  Despite AT&T’s extensive arbitration provision that was described as “quick, easy to use” and would likely result in “promp[t] full or … even excess payment to the customer without the need to arbitrate or litigate” the Ninth Circuit,  relying on Discover Bank, nonetheless found that the waiver of the ability to bring a class action was unconscionable.  Laster v. AT&T Mobility LLC, 584 F.3d 849, 855 (9th Cir. 2009).  On certiorari, the Supreme Court held that, because it is a fundamental principle that arbitration is a matter of contract and those contracts must be enforced according to their terms, and where, by contrast, state law prohibits outright the arbitration of a particular claim, the conflicting rule is displaced by the Federal Arbitration Act.  The Supreme Court thus reversedDiscover Bank holding that the rule of Discover Bank stood “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”Concepcion, 131 S.Ct. at 1753.

In August of last year, the Eleventh Circuit followed the rule of law established byConcepcion.  Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (11th Cir. 2011). The plaintiffs in Cruz were customers of Cingular Wireless (which was acquired by AT&T) and had signed the same binding arbitration agreement that was litigated inConcepcion.  In Cruz, plaintiffs complained that Cingular Wireless had fraudulently included a $2.99 monthly “Roadside Assistance” charge to plaintiffs’ monthly bills in violation of Florida’s Deceptive and Unfair Trade Practices Act.  Cruz v. Cingular Wireless, LLC, No. 2:07-cv-714-FtM-29DNF, 2008 WL 4279690 at *1 (M.D. Fla. Sept. 15, 2008).  Plaintiffs alleged that they never ordered the service and the charges were hidden in their telephone bills.  The Eleventh Circuit heard oral argument in Cruz before the Supreme Court rendered the decision in Concepcion; however, it was awaiting the Florida Supreme Court’s answers to a series of certified questions related to determining the substantive questions of unconscionability under Florida law and the time Concepcion was decided.

In its decision, the Eleventh Circuit echoed the Supreme Court:  arbitration provisions will be enforced as written − including waivers of class action rights. The court acknowledged that, even if Florida law would be sympathetic to plaintiff’s arguments that absent class procedures numerous claims of small values where potential plaintiffs do not even know of their claims, defendants may violate Florida law, a state policy that stands as an obstacle to the Federal Arbitration Act’s objective of enforcing arbitration agreements according to their terms is preempted. Cruz, 648 F.3d at 1213.

The Third Circuit similarly held that the Federal Arbitration Act specifically preempted the rule established by the New Jersey Supreme Court in the Muhammad decision.  In Litman v. Cellco Partnership, 655 F.3d 225 (3d Cir. 2011), the Third Circuit stated, “[w]e understand the holding of Concepcion to be both broad and clear:  a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration ‘is desirable for unrelated reasons.’” Id. at 231.

Although a waiver of the right to pursue a claim as a class action can be challenged under grounds of fraud or duress under the savings clause of section 2 of the Federal Arbitration Act, these arguments would likely require individualized arguments that could not apply in a class action context.  As a result, it appears that future “unconscionability” attacks to contractual class action waivers will fail under the analysis of Concepcion, Cruz, and Litman. This is a big win for businesses who thoughtfully draft their consumer contracts to avoid class action plaintiffs’ attorneys’ fees and exponential damages.

Just as a waiver of the right to a jury trial or the limiting of consequential damages have become routine in many consumer contracts, the waiver of the ability to bring a class action should be considered in all consumer contracts. For example, the language contained in the contracts enforced in the Conception and Cruz cases provided for arbitration of all disputes between the parties and requires that those disputes be brought in the consumer’s “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.  Further, unless you and [business] agree otherwise, the arbitrator may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class proceeding.” Similar language, less than fifty words, could save millions for a business involved in consumer contracts in the wake ofConception, Cruz, and Litman.

*Until March 2012, Monica Brownewell Smith was a partner in the Litigation Department. While she raises her young children, Monica is working for the Firm as a contract attorney.

© 2012 BARNES & THORNBURG LLP