After the Supreme Court decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) – which held that class action waivers in arbitration agreements are valid under the Federal Arbitration Act (“FAA”) – companies rushed into class action waiver arbitration agreements without heeding the proverb, “Look before you leap.” While avoiding class actions is an admirable goal, doing so through arbitration agreements may lead to unintended and painful consequences.  In addition, many companies have found courts reluctant to enforce the class action waiver and/or the arbitration clause, which can cost tens of thousands of dollars in law and motion practice only for the case to remain in state or federal court.

First, let’s take a deeper look at AT&T Mobility LLC v. Concepcion.  Before the case went to the Supreme Court, the U.S. District Court denied a motion by AT&T to compel arbitration, finding under Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005) that the class action waiver rendered the arbitration clause unconscionableThe Ninth Circuit affirmed, holding “the Discover Bank rule was not preempted by the FAA because that rule was simply a ‘refinement of the unconscionability analysis applicable to contracts generally in California.’” The Supreme Court reversed because the FAA requires arbitration clauses be enforced except “upon such grounds as exist at law or in equity for the revocation of any contract.”  While the ultimate holding of Concepcion is widely known, few have read the decision carefully to understand why the Supreme Court upheld AT&T’s arbitration clause. That is where we begin.

AT&T’s class action waiver and arbitration clause were contained in a mobile phone service agreement that was consumer-friendly: it provided that a customer could initiate a dispute by filling out a one-page, online form, and if not resolved to the customer’s satisfaction within 30 days, the customer could initiate arbitration by filling out another online form.

If a customer pursued arbitration proceedings, the arbitration would be held “in the county in which the customer is billed” and AT&T was required to “pay all costs for nonfrivolous claims.”  The customer also could elect to proceed in small claims court. Moreover, if the amount in dispute was less than $10,000, then the customer could elect whether the arbitration should be conducted “in person, by telephone, or based only on submissions.”  In addition, “the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages.”  AT&T was prohibited from seeking reimbursement of its attorney fees, and “in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer,” then the service agreement “requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.”

This does not mean that every arbitration agreement containing a class action waiver must track AT&T’s service agreement.  It does mean to say that the Supreme Court was not faced with an anti-consumer agreement; the agreement penalized the company if it did not act reasonably in working with its customer to resolve the dispute.  The less consumer friendly the agreement, the more likely that it will be challenged and the greater the risk that a court will refuse to enforce it. Generally, a court’s refusal to compel arbitration can be traced to onerous terms, real or judicially-perceived, due to a lack of appreciation of the clause at issue in Concepcion.

More fundamentally, arbitration agreements are not talismans; arbitration is expensive and may be made more so based on state statutes governing particular types of disputes.

For example, California law requires arbitration agreements between an employer and an employee comply with Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (Cal. 2000), which means inter alia: the requirement to arbitrate must bind the employer as well as the employee; the agreement must not contain features contrary to public policy or unconscionable, or place a limitation on damage available to the employee by statute; the employer must bear the costs “unique” to arbitration; there must be discovery “sufficient to adequately arbitrate [the] statutory claim”; and there must be a written arbitration decision and judicial review “sufficient to ensure the arbitrators comply with the requirements of the statute.”

More recent case law calls into question the enforceability in the Ninth Circuit of class action waivers in any employment agreement.  Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016), cert. granted, 137 S.Ct. 809 (2017) (holding employer violated National Labor Relations Act by requiring employees to sign a class action waiver).

Generally speaking, arbitration is comparatively less expensive than a single trial, but a host of arbitration disputes can quickly become far more costly than defending against a single class action lawsuit.  Employment agreements are perfect examples.

To the extent that a company encounters the occasional arbitration dispute with an employee, a class action waiver arbitration agreement will likely save the company considerable legal costs.  But in California the arbitrator’s fees for handling a labor law case average approximately $75,000.  So if the hypothetical representative plaintiff contacts co-workers and persuades them to also initiate individual arbitration cases, a company will quickly find itself bleeding attorney fees and costs.

I would argue that an effort to avoid class action lawsuits should begin with an objective analysis of what conduct puts a company at risk for such lawsuits, and what changes may be made at an institutional level to eliminate that risk or, at the very least, stack the deck in favor of the company in the event a class action lawsuit is filed.  For example, it is far simpler to adopt procedures to comply with the TCPA than it is to craft an arbitration agreement containing a waiver sufficient to preclude a consumer from bringing a class action.

If it is advisable to adopt an arbitration clause with a class action waiver, a company should be aware that arbitration agreements are not widgets:  one size does not fit all.  The agreement should be drafted by counsel and specifically tailored to the party sought to be bound – viz., a consumer, an employee, a vendor, a client.  The company must identify what it wants – with more specificity than “not to get sued” or “to arbitrate any dispute.”  Unless the goal is identified, a recommended course of action can be neither determined nor taken.

 

This post was written by Michael Hassen, a partner at Jeffer, Mangels, Butler & Mitchell LLP in San Francisco. Hassen’s litigation practice spans almost 30 years and emphasizes general business and commercial litigation, including class action defense and matters involving intellectual property, securities and unfair competition.