The Silver Bullet to Avoid Class Actions

By Olivia Goodkin
Broads Circle Premium Member

Olivia GoodkinOne of the worst economic threats to companies today is the class action lawsuit. Class action lawsuits provide employees and former employees with a weapon for aggregating small individual claims into a large lawsuit that plaintiffs’ lawyers are eager to pursue.  These lawsuits are expensive to defend, and are rarely covered by employment practices insurance.  Furthermore, until two weeks ago, agreements by employees to waive the right to bring class actions—and to instead arbitrate their individual claims—was against the law in California.

On April 27, 2011, the U.S. Supreme Court issued its opinion in AT&T Mobility v. Concepcion.  The case discussed whether a consumer’s arbitration agreement with a company such as AT&T could properly include a waiver of class-wide arbitration or lawsuits.  The Court found that existing California law was preempted by the Federal Arbitration Act (FAA) and that, if an arbitration agreement subject to the provisions of the FAA was otherwise valid, a consumer could be forced to arbitrate his or her individual dispute without the benefit of the class action arsenal.

The big question for employers is whether AT&T Mobility applies to arbitration agreements between employers and employees.  I believe that it could, if the arbitration agreement otherwise meets all of the legal requirements in California.

What are the advantages of arbitration?

For employers, the biggest advantage of binding arbitration is that a wrongful termination or discrimination case will not be decided by a jury of the employee’s peers, but rather by a presumably less emotional and more sophisticated retired judge or experienced lawyer serving as an arbitrator.  As a result, the decisions tend to be pro-employer.  Even when employers lose in arbitration, the awards typically reflect realistic damages that may have been suffered by employees, rather than potentially larger jury verdicts.  Furthermore, now that the Supreme Court has blessed the viability of a class-action waiver in an arbitration agreement, such an agreement has the ability to completely change the landscape of employment law, preventing “bet the company” type cases involving large groups of employees.

In addition, the arbitration and the proceedings leading up to it are private and out of the public spotlight.  Arbitrations are scheduled at the parties’ convenience, in contrast to the scheduling of court cases, which are often continued from date to date according to the court’s ever-changing schedule.  Finally, the cost of an arbitrated dispute typically is far less than a litigated dispute, because there tends to be less discovery, fewer hearings, and no needless continuances of the trial date. 

What are the disadvantages of arbitration?

The primary and significant disadvantage of binding arbitration is the lack of judicial review.  If either party dislikes the award rendered by the arbitrator, by law a court can only review the decision on limited grounds.  For example, a party may move to set aside the arbitrator’s decision if it comes to light that the arbitrator had a conflict of interest, or the process was tainted by fraud.  The inability to appeal the award is critical, dissuading some employers from offering arbitration agreements to their employees. 

Moreover, although the initial arbitration process is private, either party may seek judicial confirmation of the award.  For instance, if the employee wins an award of damages, and the employer does not immediately pay the award, the employee may petition the court to convert the arbitrator’s decision into a judgment that can be enforced like any other judgment.  Once a motion to enforce the arbitration award is filed, the privacy enjoyed by the employer during the arbitration process is eliminated. 

Another potential disadvantage is the limited discovery that may be permitted.  In certain cases, it is preferable to have a full breadth of discovery methods available. Finally, it may not be possible in an arbitration proceeding for an employer to move for summary judgment, which is a request that the decision maker find that the employee’s case does not state a claim under the law, even assuming there is no dispute as to the facts of the case.  A motion for summary judgment in favor of the employer ends the case before the trial or arbitration.

What are the requirements for enforceable arbitration agreements?

An employer cannot require that every dispute be arbitrated.  To be valid, arbitration agreements must be neither procedurally nor substantively unconscionable.  The Supreme Court’s decision in AT&T Mobility did not change this requirement. 

In 2000, the California Supreme Court set forth the legal requirements for enforceable employment arbitration agreements in the seminal case of Armendariz v. Foundation Health Psychcare Services, Inc.  Arbitration agreements in California must include five provisions: 

  1. The agreement must be mutual, meaning that both the employer and employee agree to arbitrate any disputes.  Agreements that force the employee, but not the employer, to arbitrate are illegal.  In addition, it is illegal for the agreement to allow only the employer to use the court system for obtaining injunctive relief, such as a temporary restraining order.  Any “carve-out” from mandatory arbitration must be mutual.
  2. The employer must pay for all arbitration costs that exceed any court fees the employee would have incurred.  In essence, the employer must agree to pay the arbitration fees. 
  3. The arbitration agreement cannot cut off the right to discovery.  The parties must have the right to conduct at least limited discovery, such as depositions of key witnesses and document productions. 
  4. The arbitrator must issue a written award that includes his or her essential findings and conclusions. 
  5. The arbitration agreement must allow the employee to be able to recover the same kind of damages that are available in court on the same legal claim.  In other words, if the employee states a claim that would include a right to treble damages in court proceedings, then that remedy must be available in arbitration as well.

In addition to these Armendariz factors, employers should heed other court holdings and provide arbitration agreements in “stand alone” documents (rather than as part of an employee handbook), clearly labeling the agreement as an arbitration agreement and unequivocally stating that the employee is agreeing to mandatory and binding arbitration and waiving the right to a jury trial.

Finally, given that AT&T Mobility holds that class action waivers in arbitration agreements governed by the FAA are valid, in order to ensure the enforceability of such a waiver, your arbitration agreement must include a provision stating that the agreement is subject to the rules of the FAA.

Are some claims still not subject to arbitration?

Employers cannot require arbitration of claims for workers’ compensation benefits, unemployment insurance, or administrative charges (including harassment and discrimination claims) filed with certain federal or state agencies such as the Department of Fair Employment and Housing and the National Labor Relations Board. Moreover, arbitration provisions cannot bar parties from filing a lawsuit in court seeking injunctive or declaratory relief to enforce trade secret agreements or enjoin unfair competition.  Also excluded are claims pursuant to California Code of Civil Procedure Section 527.6 and/or 527.8 to restrain threats of and/or acts of harassment or violence. 

May employers require employees to sign arbitration agreements?

The short answer is “no.”  Employers may ask current employees to sign arbitration agreements, but they may not require employees to agree to arbitration as a condition of continued employment.  With respect to applicants, however, companies may advise those individuals that they will be required to sign an arbitration agreement as a condition of employment. 

Final thoughts on arbitration agreements

Because resolving disputes by arbitration reduces litigation costs and exposure to major jury verdicts, we recommend that California employers have arbitration agreements with their employees.  However, this advice is far from one-size-fits-all and some employers are reticent to put their fate in the hands of one decision maker with no right to appeal.  While no court has yet decided if AT&T Mobility applies in the employment context, the decision of the Supreme Court adds to the mix of factors to consider.  If the decision is made to proceed with an arbitration agreement, make sure that both procedural and substantive requirements are addressed so that the agreement is enforceable.

Olivia Goodkin represents companies of all sizes in a variety of employment and business disputes. Preventively, she guides clients through risk management and liability avoidance to help them accomplish their overall objectives.

Email: ogoodkin@rutterhobbs.com
310.286.1700 | 1901 Avenue of the Stars, Suite 1700 | Los Angeles, CA 90067-6018 | www.rutterhobbs.com

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