The Supreme Court of the United States recently issued two landmark rulings affecting the viability of arbitration as an alternative to costly litigation. As a result, every employer of every size needs to reassess whether the protections an arbitration agreement can afford are worth the potential negative ramifications.
It is no secret litigation is expensive. Defense costs in single-plaintiff employment cases can easily reach $150,000 to $250,000 through trial. Class and collective actions, where plaintiffs often number in the thousands, can be exponentially more costly to defend, depending in part on the size of the class, the venue of the lawsuit, the lawyers involved, and the length of the litigation.
For years, employers have utilized arbitration agreements as a line of defense against expensive litigation, particularly against the onslaught of often meritless class and collective actions. However, challenges to the legality of arbitration agreements by plaintiffs in recent years have cast doubt on the viability of arbitration as a cheaper, less cumbersome alternative to litigation.
Thanks to two recent rulings by the Supreme Court, employers can be more confident that, when worded properly, arbitration agreements can and do work, particularly to avoid expensive class and collective actions. In American Express Co. v. Italian Colors Restaurant, the Supreme Court ruled that a waiver of class arbitration in a commercial contract is enforceable under the Federal Arbitration Act. The Supreme Court rejected the plaintiffs’ contention that they could not reasonably pursue their claims individually because the cost would exceed the maximum recovery available to an individual plaintiff. The Court emphasized that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”
The practical impact of American Express is that now arbitration agreements can be used to waive class arbitration. While the National Labor Relations Board has taken the position that class action waivers are unlawful, almost every court to consider the issue has rejected that argument. Considering the high cost of class and collective actions, avoiding such proceedings through use of an arbitration agreement with a class action waiver is now well worth the administrative burdens of maintaining the agreement.
The second case, Oxford Health Plans LLC v. Sutter, illustrates some of the pitfalls of arbitration—and, more importantly for employers, how to avoid them. At issue was the validity of an arbitrator’s ruling that a contract between the parties authorized class arbitration. The company vehemently disagreed with the arbitrator’s interpretation, urging the Court to vacate the arbitrator’s decision. The Court emphasized the high degree of deference afforded to arbitrators, noting courts can overturn arbitration decisions “only in very unusual circumstances.” Because of this high standard, the Court’s review was limited to whether the arbitrator even arguably interpreted the parties’ contract, not whether he got its meaning right or wrong. The Court held that the parties were bound by the arbitrator’s decision permitting class arbitration. In doing so, the Court observed that “convincing a court of an arbitrator’s error—even his grave error—is not enough;” the potential for such mistakes “is the price of agreeing to arbitration.”
Oxford Health illustrates the disastrous results that can occur when an arbitrator (and his or her inherent self-interests) evaluates the scope and application of a class action waiver. To avoid this scenario, the arbitration agreement should provide that only a court—not an arbitrator—can interpret the scope and application of the class action waiver. With that simple change in the language of the agreement, the outcome in Oxford Health would have been different.
Despite the unfortunate outcome in Oxford Health, employers should take heart from the Supreme Court’s rulings. The takeaway message is clear: an employer can avoid class and collective actions by adopting an arbitration agreement that precludes arbitration on a class basis. However, to ensure that happens, an employer must be explicit about it. With a carefully crafted arbitration agreement, employers can gain the benefits of American Express while avoiding the pitfalls of Oxford Health.
A version of this blog post originally appeared in InHouseBlog.com.