Class Action Waivers in Employment Arbitration Agreements

Discover bank had a class action waiver in its arbitration
agreements with credit card holders
Credit card holder filed suit challenging late payment penalty
Court of Appeal upheld the class action waiver, holding that
California rule prohibiting class action waivers was preempted
by the Federal Arbitration Act (the “FAA”)
California Supreme Court reversed, holding that when a class
action waiver is found in a consumer contract of adhesion that
becomes in practice an exculpatory clause; the agreement is
unconscionable under California law
California Supreme Court also held that its decision was not
preempted by the FAA
Circuit City had a class action waiver in its arbitration agreements with
Employee filed suit for violations of the California Labor Code
Court of Appeal upheld the class action waiver
California Supreme Court reversed, holding that at least in some cases, such
class action waivers undermine the vindication of employees’ unwaivable
statutory rights and pose obstacle to enforcement of overtime laws. Factors to
Modest size of potential individual recovery;
Potential for retaliation against class members;
Fact that absent class members may be ill informed about their rights; and
Other real world obstacles to vindication of class members’ rights.
California Supreme Court noted that it had rejected FAA pre-emption in Discover
Shipping companies entered into arbitration agreements with their
Customers filed antitrust claims, which were submitted to arbitration.
Parties stipulated that arbitration clause was silent with respect to
class arbitration
United States Supreme Court held that arbitration panel had
exceeded its powers by concluding that arbitration clause allowed
for class claims
Party cannot be compelled under the FAA to submit to class
arbitration absent a contractual basis for concluding that the party
had agreed to do so
Differences between bilateral and class arbitration were too great to
allow arbitration panel to presume that parties’ silence on issue
constituted consent to arbitrate class claims
Vincent and Liza Concepcion entered into a cell phone
contract with AT&T which guaranteed them a “free
But there was a catch: AT&T charged $30.22 sales tax
on the phone’s retail value
The Concepcions filed a complaint consolidated with a
class action alleging that AT&T was liable for false
advertising and fraud
The arbitration clause required that all disputes be
resolved through arbitration
The arbitration clause prohibited participation in class or
representative actions – only individual cases allowed
AT&T made several amendments to the arbitration
provisions, which the clause permitted
Easy to initiate proceedings by a one page form
available on AT&T website
If there is no settlement within 30 days, the customer can
invoke arbitration with “Demand for Arbitration” form
AT&T pays all arbitration costs for non-frivolous claims
Arbitration held in customer’s home county
For claims of less than $10,000, customer can elect to
proceed by telephone, in person or by written
The U.S. Supreme Court had to address the California
Supreme Court Discover Bank holding that class waivers
in consumer arbitration agreements are not enforceable
o The California Supreme Court’s concern: Arbitration
agreements typically are contained in a boilerplate or “wrap
around” contract
o Since these disputes typically are modest claims, people like
the Concepcions are placed in weaker bargaining position
and are powerless to object to a provision, even if it is
o Such agreements are not enforceable because they are
In California, a contract cannot be both procedurally and
substantively unconscionable
“Procedural unconscionability” focuses on whether there
existed any oppression or surprise in the manner in
which the contract was negotiated, and the
circumstances of the parties at the time of negotiation
“Substantive unconscionability” focuses on whether the
terms of the contract are so one-sided as to shock the
Unconscionability determined on a sliding scale
The Supreme Court held the FAA preempts the Discover
Bank rule – the FAA mandates that arbitration
agreements be enforced as they are written
The U.S. Supreme Court did not expressly overrule or
even reference Gentry
Ralphs had a class action waiver in its arbitration
agreements with employees
Employee filed suit for violations of the California Labor
Code and PAGA
California Court of Appeal distinguished Gentry from
Discover Bank on the grounds that Discover Bank is a
case about unconscionability and Gentry is concerned
with the effect of a class action waiver on unwaivable
statutory rights regardless of unconscionability
Because Plaintiff did not introduce any evidence to address
the four factors in Gentry, the Court reversed trial court and
found the class action waiver to be enforceable.
Accordingly, appellate court did not have to determine
whether, under Concepcion, the Gentry rule is preempted by
the FAA.
Appellate court also pointed out that a PAGA claim, which is a
representative action to enforce state labor laws, is not
preempted by the FAA and is subject to arbitration.
California Supreme Court denied certiorari; Petition for
Certiorari currently pending before U.S. Supreme Court.
Sonic-Calabasas had a class action waiver in its
arbitration agreements with employees
Employee filed suit for violations of the California Labor
Parties agreed that wage claim was within scope of
arbitration agreement, but disagreed as to whether it
contained a right to a Berman hearing before the DLSE
prior to commencement of arbitration proceedings
Appellate court concluded that plaintiff waived his right to
Berman hearing and enforcement of that waiver was not
barred by Gentry
California Supreme Court reversed, holding that waiver of Berman
hearing was against public policy and unenforceable, although the
case would go to arbitration after such hearing took place
California Supreme Court also held that its decision was not preempted by the FAA
In October 2011, US Supreme Court granted Sonic-Calabasas’
petition for a writ of certiorari, vacated the judgment, and remanded
the case to the California Supreme Court for further consideration in
light of Concepcion
Viability of Gentry may be explored further in the upcoming opinion.
Justice Moreno, who authored the opinion in Gentry, and Chief
Justice George, who concurred with Justice Moreno, no longer sit on
the California Supreme Court
The U.S. Supreme Court has held the FAA applies to
most employment contracts. EEOC v Waffle House
(2000) 534 U.S. 279, 289, citing Circuit City Stores, Inc.
v. Adams (2001) 532 U.S. 105
Concepcion and Waffle House stand for the proposition
that the FAA likely preempts state laws prohibiting
arbitration of employment claims
Arbitration is purported to cost less than trials
Arbitration is supposed to cut through the administrative
red tape of the court action
Arbitration is supposed to avoid “runaway” jurors
Arbitration is supposed to be more private than a trial
No more class actions?
Difficult to get dispositive motions granted in arbitration
“Runaway” arbitrators who make findings unsupported
by the law as facts
Arbitration decisions are virtually impossible to appeal:
o Even the incorrect application of the law and facts will not
mandate that the decision be vacated
An avalanche of single plaintiff cases
Courts are still wary of certain language in arbitration
o Limiting the available remedies that would otherwise be available
in courts
o Costs and fees shifting that is contrary to applicable law (e.g.,
attorney’s fees are awarded to the prevailing party)
o Shortening applicable limitations periods
o Not including copy of arbitration rules
Clauses giving employer unilateral right to modify the
Clauses giving the employer the unilateral right to get
injunctive relief
Limits or restrictions on discovery (e.g., one deposition
per party; no written discovery)
Class action waiver (?)
Written award to be issued by an arbitrator
Choice of law and severability provisions
At-will employees: continued employment can provide
consideration for an agreement to arbitrate
One solution: an opt-out clause in the arbitration
NLRB ruled that the NLRA prohibits employment
agreements which waive employees’ right to file joint,
class, or collective claims
o May affect the enforceability of any employment agreement by
which employees waive their right to class or collective action
Likely does not prohibit waivers which merely limit such
actions to either federal court or arbitration
Only agreements which waive the right to collective
action completely, by waiving the right to collective action
in all forms, are clearly prohibited by D.R. Horton
Employees have the right “to engage in. . . concerted
activities for the purpose of collective bargaining or other
mutual aid or protection.” 29 U.S.C. § 157 (NLRA)
o This includes joining together to bring employment claims on a
class-wide or collective basis in court or arbitration
It is an unfair labor practice to “interfere with, restrain, or
coerce employees” in the exercise of such rights. 29
U.S.C. § 158 (NLRA)
o Arbitration agreements which prohibit employees from class or
collective action entirely violate the NLRA by restraining
concerted activities
Waiver of such rights by arbitration agreement also not
protected by the FAA
The FAA requires enforcement of arbitration agreements,
but does not validate agreements by which parties forgo
substantive rights provided by statute, including the right
to concerted activity under the NLRA
The FAA still permits invalidation of employment
agreements on grounds recognized by contract law
Class/collective action waivers are thus invalid under the
FAA because they violate public policy set by NLRA
Q. What if the employer does not "require" employees to
enter into a class action waiver, but obtains a voluntary
agreement waiving the right to participate in class actions
via an opt-out programs (e.g., the employee is given some
A. D.R. Horton does not specifically address this issue.
However the decision holds that the right to bring or join a
class action is a right protected by Section 7 of the NLRA
and that individual employees may not waive section 7
rights. The viability of this argument will have to be
resolved through litigation
If the Board finds that an agreement violates the NLRA, the remedies
available to the Board include, but are not limited to:
(a) requiring the employer to rescind the agreement with such
(b) requiring the employer to reissue an agreement without the
waiver; and
(c) posting a notice regarding the violation. There is a question
whether the Board could or would attempt to void agreements containing a
class action waiver in their entirety, especially where such agreements
contain a severability clause. Whether the Board would pursue this
remedy is unclear
Further, as the decision focused on mandatory arbitration agreements as a
term and condition of employment, it also is unclear whether inclusion of a
class/collective action waiver in a release is problematic
The NLRB could find that any unsuccessful attempt to compel
arbitration or litigation of an individual claim is vexatious litigation filed
for a retaliatory purpose (i.e., in retaliation for the employees
exercising their protected concerted right to initiate or participate in
class or collective claims)
A court may rule a contract that contains a waiver of class claims to
be "unconscionable.“ If a court agrees with the Board's Section 7
arguments, the remedies available to the court include, but are not
limited to: (a) declaring the class waiver invalid, but upholding the
remaining portions of the contract (e.g., a release); (b) declaring the
class waiver invalid and voiding the entire contract release; and (c)
tolling the limitation period on all class and collective claims as the
putative plaintiffs thought they could not pursue such claim
There is some district level authority in the wake of D.R.
Horton which clarifies court positions on its ruling.
o However, final authority on the issue must await a circuit or
Supreme Court opinion
Herrington v. Waterstone Mortg. Corp., U.S. Dist. LEXIS
36220 (W.D. Wis. 2012): Agreed with D.R. Horton and
found rule also protects former employees.
o “[a]n employer’s coercive action affects protected rights
whenever it can have a deterrent on protected activity. This is
true even if an employee has yet to exercise a right protected by
the act.”
Owen v. Bristol Care, Inc., 2012 U.S. Dist. LEXIS 33671
(W.D. Mo. 2012): The right to bring class/collective
action is a substantive right and the FAA may not be
used to enforce agreements which waive that right
o “The [FAA] has a strong policy favoring arbitration. However,
when a Plaintiff's statutory rights are not capable of vindication
through arbitration, the federal substantive law of arbitrability,
grounded in the FAA, allows federal courts to declare otherwise
operative arbitration clauses unenforceable.”
o Found Concepcion’s pro-arbitration ruling not applicable to
employment agreements
Other General Post-D.R. Horton Authority
Some courts have acknowledged D.R. Horton as a
correct holding in its entirety. Palmer v. Convergys Corp.
2012 U.S. Dist. LEXIS 16200 (M.D. Ga. 2012)
Other courts have declared more general disagreement
with D.R. Horton
o D.R. Horton shall not be read as a counter to Concepcion.
LaVoice v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS 5277
(S.D.N.Y. 2012)
Agreements which leave some forum open to
class/collective action probably still enforceable
Agreements which are silent on arbitration of
class/collective claims may be problematic
Rule only may invalidate agreements with “employees”
as defined by NLRA
Does not protect “supervisors” or independent
contractors as defined by the NLRA
To be decided: May not apply to agreements by which
employees gain consideration for not opting out of a class or
collective action waiver
To be decided: May not apply to voluntary agreements to
waive such claims at the termination of employment or
during a settlement
To be decided: Probably will not invalidate agreements with
severability clauses
Employers must await higher court authority to validate or
invalidate the Board’s ruling

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