The United States Supreme Court Gives Employers a Tool to Stave Off the Threat of Class Actions and Class Arbitrations

Earlier this year, in the Oxford Health Plans LLC v. Sutter and American Express Co. v. Italian Colors Restaurant decisions, the United States Supreme Court held that arbitration agreements containing class and collective action waivers could give employers a way to manage the constant risk of class proceedings. In sum, employers who want to avoid class and collective actions should have their employees expressly waive that option when they agree to arbitration. By doing so, employers can avoid class proceedings, assuming there is no specific legislation to the contrary and that the agreement is not otherwise unenforceable.

Oxford Health Plans

In Oxford Health Plans, Dr. John Ivan Sutter sued Oxford, an insurance company, for failing to pay him and other similarly situated medical professionals for medical services provided to Oxford’s managed care network. The contract between Dr. Sutter and Oxford required that all disputes be resolved solely through arbitration. But after the arbitrator decided that the arbitration clause, which was silent on the topic of class and collective actions, allowed “class arbitration,” the case eventually made its way to the Supreme Court.

At the Supreme Court, Oxford argued that the arbitrator’s decision must be vacated because the parties never explicitly agreed to class arbitration in their contract. On the other hand, Dr. Sutter argued that the arbitrator did base his decision on the terms of the contract and acted within the scope of his powers because the arbitration clause did not preclude class arbitrations. Ultimately, the Court agreed with Dr. Sutter. On behalf of the majority, Justice Kagan concluded that when an arbitrator determines that the parties to an arbitration intended to authorize class-wide arbitration, that determination survives judicial review under § 10(a)(4) of the Federal Arbitration Act as long as the arbitrator was arguably construing or applying the contract. The Court’s deference to the arbitrator’s decision is based on the concept that the parties “bargained for” the arbitrator’s construction of their contract “and so far as the arbitrator’s decision concerns the construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his.”

The Court’s decision in Oxford is a warning to employers trying to avoid class proceedings: They should explicitly identify the specific kinds of actions they wish to arbitrate, and those they do not, within the contract language of their arbitration agreements. Leaving an issue silent is no guarantee class arbitrations will be prohibited even though other forms of class proceedings may be explicitly excluded from the contract.

American Express Co.

Just a few weeks later, the Supreme Court provided even more direction on the topic of class action waivers. Specifically, in American Express Co., Justice Scalia wrote for the majority and stressed the FAA’s overarching principle that arbitration is a contractual issue and courts cannot invalidate a contractual waiver of class arbitration unless another statute overrides that principle.

In particular, American Express’s arbitration agreement with merchants contained a class arbitration waiver. The merchants brought an antitrust class action against American Express opposing American Express’s motion to compel individual arbitration. The Court held that the class arbitration waiver could not be invalidated in spite of the high expense of proceeding individually with the merchants’ antitrust claims against American Express. The Court’s decision provides important guidance on how the FAA is applied to agreements to arbitrate all types of federal statutory claims, not just antitrust claims. Consequently, employers may be able to benefit from this ruling by crafting arbitration agreements limiting an employee’s right to pursue employment claims on behalf of a class of employees.

D.R. Horton, Inc. and Sutherland

Even though the recent decisions permitting class action waivers in arbitration agreements provide much needed clarification to employers, it may be a little too soon to celebrate. Specifically, still unsettled is whether waivers can arrest employment class actions. For example, the National Labor Relation Board’s D.R. Horton, Inc. decision is pending on appeal before the United States Court of Appeals for the Fifth Circuit. The question in D.R. Horton is whether employers can require employees to sign an arbitration clause that waives the right to bring class or collective actions against employers regarding the terms and conditions of employment.

In D.R. Horton, the Board held that employers may not require as a condition of employment that employees agree to a blanket waiver of rights to pursue their employment claims by means of class actions. The Board allowed the waiver of class and collective actions in employment arbitrations only where the employer permitted employees to bring these actions in court. The Board reasoned that requiring such a waiver in a mandatory arbitration agreement is an unfair labor practice under the National Labor Relations Act because it restricts the right of employees to engage in concerted activity affecting their working conditions.

Subsequently, D.R. Horton appealed to the Fifth Circuit, which held oral argument on February 5, 2013. Meanwhile, numerous other federal and state courts – including the United States Supreme Court – have rejected the D.R. Horton reasoning in litigation involving the enforceability of class waivers in arbitration agreements. Among the most noteworthy recent cases is Sutherland v. Ernst & Young LLP where the Second Circuit reversed the district court's denial of Ernst & Young's motion to compel arbitration based on the precedent set by American Express. The Second Circuit ruled that Sutherland’s argument that it would be more expensive for her to litigate her claim for overtime under the Fair Labor Standards Act than the claim is worth was insufficient to avoid enforcement of the arbitration agreement. Additionally, the Second Circuit held that FLSA collective action proceedings could be waived, and it refused to defer to the NLRB’s decision in D.R. Horton that class waivers violate the NLRA.

Nonetheless, the NLRB has and likely will continue to actively challenge blanket class and collective actions waivers in mandatory arbitration agreements until ordered otherwise. As such, the D.R. Horton ruling and NLRB enforcement are still obstacles that employers need to consider even in the post-American Express landscape.

So what could Oxford and American Express mean for employers?

Oxford and Amex demonstrate that precisely crafted arbitration clauses can prevent unhappy employees (and ex-employees) from litigating their disputes as class actions or in class arbitration. In the aftermath of the Supreme Court’s recent decisions, employers should consider adopting a mandatory arbitration agreement that includes a class and/or collective action waiver within the documents an employee signs upon hiring. While the right decision will vary from employer to employer, the following pros and cons of arbitration and class actions should play a part in your decision:

Pros

  • Arbitration can be less costly than litigating in court.
  • Employee waiver of the right to participate in collective or class actions limits the employer’s liability exposure in the arbitration proceeding to that of the individual employee's claims. Instead of having to pay to defend against a whole class, the employer's expenses relate to defending against a single claim in arbitration.
  • Arbitrations can be more confidential because most arbitration filings are not public records.
  • Arbitration allows employment cases to be heard by professional arbitrators, not juries, thereby reducing the risk that a jury will empathize with the employee and not consider the company’s side.
  • In arbitration, the parties jointly select an arbitrator, who is usually selected for their expertise in the field.
  • In arbitration, discovery can be limited, and hearings can be scheduled and completed more quickly. The process is also more informal.

Cons

  • Unlike class actions, individual arbitrations will not resolve a dispute affecting an entire class of persons. Consequently, employers may have to worry about defending a series of identical claims individually. Of course, the reverse holds true as well, and an employer who gets a positive result in the initial individual arbitration case may be able to dissuade others from bringing the same claim.
  • The arbitrator's decision is final and binding, with a very limited right of appeal. This can mean that the employer may effectively be stuck with a bad decision, without any ability to appeal.
  • Unlike in court proceedings, cases are not usually decided on dispositive motions.

Topics:  American Express v Italian Colors Restaurant, Arbitration, Class Action, Class Action Arbitration Waivers, Collective Actions, Oxford Health v Sutter, SCOTUS

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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