On April 27, 2011, the United States Supreme Court held that the Federal Arbitration Act (“FAA”) preempted California state contract law which courts had applied to invalidate arbitration agreements that did not permit class arbitration. Although the decision involved a consumer contract, the Supreme Court’s reasoning provides a basis for employers to seek enforcement of employment agreements that prohibit workplace class actions and require the individual arbitration of employment-related claims.
In AT&T Mobility LLC v. Concepcion, the Concepcions brought an action in federal court alleging that AT&T had engaged in false advertising and fraud by charging sales tax on mobile phones it advertised as free. Their action was later consolidated with a putative class action. AT&T tried to compel arbitration with the Concepcions individually because its contract with them contained an arbitration clause with a class action waiver. Both the District Court and the Ninth Circuit Court of Appeals denied AT&T’s motion to compel arbitration. The lower courts relied on the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), to invalidate the arbitration clause in the contract as “unconscionable” under state law because the provision did not allow for class action arbitration.
In Discover Bank, the California Supreme Court held that class action waivers in consumer arbitration agreements were unenforceable because they amounted to “one-sided, exculpatory contracts” that insulated companies from liability. The California Supreme Court had also applied the reasoning of Discover Bank to preclude class action waivers for statutory wage-and-hour claims. See Gentry v. Superior Court, 42 Cal. 4th 443 (2007).
In a 5-4 ruling, the Supreme Court said that California’s Discover Bank rule “interferes with arbitration” and “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” including the faster resolution of disputes. Arbitration agreements may be invalidated under the FAA by “generally applicable contract defenses,” such as fraud, duress, or unconscionability, but not by “defenses that apply only to arbitration or derive their meaning from the fact than an agreement to arbitrate is at issue.”
The majority opinion written by Justice Scalia emphasized the ability of parties to use arbitration to create “efficient, streamlined procedures tailored to the type of dispute.” In the majority’s view, class arbitration undermines many of the benefits of arbitration and increases risks to defendants. The majority also found arbitration to be “poorly suited to the higher stakes of class litigation,” particularly because of the lack of appellate review. The majority did not express any concern about consumers losing the ability to bring class actions to assert their rights. “The dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system . . . [b]ut States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”
Although AT&T Mobility arises in a consumer context, it has wide-ranging implications for employers. Employers should consider mandatory arbitration as a another means to help prevent or at least defend against discrimination and wage-and-hour class action lawsuits. Employment agreements or policies could mandate the use of arbitration to resolve employment-related disputes with class action waivers to take advantage of the benefits of arbitration while at the same time avoiding costly, complex, and protracted class action proceedings. This approach, if widely adopted, however, may lead to increased federal regulatory scrutiny of such agreements from the EEOC, the NLRB and the DOL’s Wage and Hour Division. Accordingly, employers need to keep in mind the impact of federal labor and employment laws before they adopt any company-wide arbitration policies with class action waivers. Though there are many pros and cons for employers to weigh when deciding whether mandatory arbitration provisions are right for them, the potential availability of a class action waiver following AT&T Mobility certainly provides another checkmark in the "pro" column.