Class Waivers in Employment Arbitration Agreements

By R. Mark Donnell

It has been over six months since the Supreme Court issued its opinion in AT&T v. Concepcion, 131 S. Ct. 1740 (2011), holding that the Federal Arbitration Act (FAA) preempts contrary California law regarding the enforceability of class waivers in arbitration agreements. While Concepcion arose in the context of a consumer contract, the ripple effect of the decision and its application to employment agreements is already being felt, and the result could be a significant boon for employers looking to avoid class action litigation.

I. AT&T v. Concepcion

Vincent and Liza Concepcion sued AT&T in federal court in California when they were charged sales tax on "free" phones provided by AT&T. Under the contract entered into between the Concepcions and AT&T, all disputes had to be submitted to arbitration "in the parties' individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." Nonetheless, the Concepcions filed suit in the United States District Court for the Southern District of California, where their case was consolidated with a putative class action against AT&T on the same issue of sales tax charged for free phones.

AT&T moved the Court to compel arbitration under the contract. The District Court denied AT&T's motion, citing the California Supreme Court's decision in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005). The Discover Bank rule holds that class action waivers in consumer contracts of adhesion are unconscionable and unenforceable. AT&T appealed, and the Ninth Circuit affirmed.

The Supreme Court reversed the Ninth Circuit, holding that the FAA preempts the Discover Bank rule. The Court did not look favorably on the Concepcions' argument that the Discover Bank rule was a ground that "exists at law or in equity for the revocation of any contract," and thus should not be preempted by the FAA. The five justices of the majority instead viewed California's unconscionability doctrine not as a generally applicable common law doctrine, but as a judicial rule geared specifically toward defeating class waivers in arbitration agreements. As such, the Court held that the rule "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress" in passing the FAA and was therefore preempted.

II. The Application of Concepcion to Employment Litigation

Employment class actions have gained increased media attention in the wake of the Supreme Court's decision in Dukes v. Wal-Mart, 131 S. Ct. 2541 (2011), holding that Wal-Mart employees alleging gender discrimination in hiring and promotion decisions could not proceed on a class-wide basis. But at first glance, it may appear that the Supreme Court's decision in Concepcion should be limited to consumer litigation and contracts of adhesion. Employment contracts do not share many of the characteristics that California courts found particularly concerning in consumer contracts of adhesion-employees do not face an all-or-nothing proposition in agreeing to the contract, and pursuing relief on an individual basis would generally not be as inefficient and uneconomical as in the consumer context.

Nonetheless, the decision does have implications for employment litigation, as evidenced by several cases decided in the six months since Concepcion was handed down. So while Dukes was certainly a victory for Wal-Mart and employers generally, Concepcion provides an even more significant win. By requiring employees to execute binding arbitration agreements with class action waivers, employers can defeat class actions at a much earlier stage, by compelling arbitration on an individual basis at the outset of litigation.

In Lewis v. UBS Financial Services Inc., 2011 WL 4727795 (N.D. Cal. Sept. 30, 2011), UBS was sued by a former employee putatively representing a class action for violations of the California Labor Code and California's Unfair Competition Law related to UBS's policy of offering "bonuses" structured as forgivable loans to new employees. The United States District Court for the Northern District of California held that a class waiver in an arbitration agreement entered into by UBS and its employees was enforceable, following the Supreme Court's decision in Concepcion. The Court effectively overruled Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007), a case in which the California Supreme Court extended the Discover Bank rule to employment contracts.

The United States District Court for Connecticut came to a similar conclusion in D'Antuono v. Service Road Corp., 789 F. Supp. 2d 308 (D. Conn. May 25, 2011). In that case, a group of exotic dancers sued their employer in a collective action seeking unpaid wages under the Fair Labor Standards Act (FLSA). The dancers had signed an agreement to arbitrate any disputes arising from their employment, and that agreement included a class action waiver. The dancers argued that the agreement was unconscionable, but the Court disagreed. Technically, the Court held that, unlike California, Connecticut did not have an established law or doctrine comparable to the Discover Bank rule, and that the plaintiffs did not meet the test for unconscionability under the common law. But the Court also engaged in an extensive discussion of Concepcion, and suggested that, if Connecticut did have such a rule, Concepcion would probably require the Court to hold that the FAA preempted it, even given contrary precedent in the Second Circuit.

III. Limitations of Concepcion for Employers

While the application of Concepcion to employment litigation will certainly mean less class action exposure for employers, it does not mean that every class action waiver in every arbitration agreement will be enforced. As a few recent cases illustrate, the right to certain types of aggregate litigation probably survives Concepcion, and poorly drafted or draconian agreements will not be upheld.

In Urbino v. Orkin Services of California, Inc., 2011 WL 4595249 (C.D. Cal. Oct. 5, 2011), the plaintiff, a former Orkin employee, brought a representative action against Orkin under the Labor Code Private Attorneys General Act (PAGA). Orkin moved to compel arbitration, citing the arbitration agreement signed by the employees, which purported to waive the right to pursue class or private attorney general actions. The Court denied the motion and allowed the suit to move forward, distinguishing Concepcion and the waiver of the private, individual right to bring a class action from the waiver of the public right to pursue a representative action under PAGA.

In yet another California case following on the heels of Concepcion, the California Court of Appeals limited the application of the Supreme Court's decision to the doctrine of unconscionability in Sanchez v. Valencia Holding Co., LLC, 2011 WL 5027488 (Cal. Ct. App. Oct. 24, 2011). Despite the presence of a class waiver in the arbitration agreement at issue, the Court held that it was unconscionable and therefore unenforceable. The Court maneuvered around Concepcion by holding that the arbitration agreement as a whole, rather than just the class action waiver, was both procedurally and substantively unconscionable. Because multiple elements of the agreement were unconscionable, not just those related to class wide arbitration, the Court was able to distinguish the contract at issue from the agreement in Concepcion and apply the more generally applicable doctrine of unconscionability rather than the class-waiver-specific Discover Bank rule.

IV. Conclusion

Prior to the Supreme Court's decision in Concepcion, courts were able to avoid enforcing class waivers in arbitration agreements by finding them unconscionable under state law. Some states, like California, were particularly liberal in their application of the unconscionability doctrine. But Concepcion has created a new obstacle to class wide arbitration and provided a shield from class actions to employers. While the right to some forms of aggregate litigation may not be waivable, and arbitration agreements can still be found unenforceable on other grounds, employers now have a clear opportunity to avoid the vast majority of employment class actions by requiring their employees to enter into carefully drafted arbitration agreements that waive the right to class wide dispute resolution.