Silence or Waiver?
What's the Best Strategy for Employers With Arbitration Agreements to Avoid Class Actions
In Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 130 S.Ct. 1758 (2010), the Supreme Court held that a class action could not proceed in arbitration where the agreement to arbitrate was silent on the issue of proceeding on a class basis. Accordingly, the plaintiffs were forced to arbitrate their disputes on an individual basis. The plaintiffs in Stolt-Nielsen purported to represent a class of users of shipping services who alleged price-fixing by certain shipping companies. The plaintiffs first filed an antitrust class action in federal court, but were compelled to bring their claims to an AAA panel pursuant to the arbitration clauses in their various contracts. The plaintiffs then attempted to proceed as a class in arbitration under the AAA’s Supplemental Rules for Class Action Arbitration. The Second Circuit upheld an AAA panel’s clauseconstruction award that the class arbitration could proceed. The Supreme Court reversed, holding that arbitration is a matter of the parties’ consent, not coercion, and that private agreements to arbitrate should be enforced according to their terms like any other contract.
The Court emphasized that the parties in Stolt-Nielsen had stipulated that they had not reached an agreement on the issue of class-action arbitration. Silence, therefore, on these facts indicated that no agreement to arbitrate disputes on a class-wide basis existed. The Court also emphasized that the parties in Stolt-Nielsen were sophisticated business entities of relatively equal bargaining power.
Stolt-Nielsen has generated the argument that class-action arbitration waivers are redundant and so unnecessary. If silence on the issue in an agreement to arbitrate allows a party to avoid class arbitration, why clutter up the agreement with an express waiver? However, employers (and others) may want to think twice before trusting that silence always means “no” to class-action arbitration. Stolt-Nielsen was decided on facts unique to it. The Supreme Court in Stolt-Nielsen appeared greatly influenced by the parties’ express stipulation that there had been no previous understanding between or among them as to whether disputes could proceed on a class-wide basis in arbitration. The parties’ stipulation gave the Court a stronger basis to preclude class arbitration as a contractual term than “mere silence.” Given the parties’ stipulation, the Court was careful to note it had no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.
Also, in contrast to Stolt-Nielsen, in many agreements to arbitrate disputes, e.g., consumer and employment contracts, defendants will not be able to argue as persuasively that all parties are sophisticated business entities of relatively equal bargaining power. Silence may not so readily be deemed to mean “no” in the context of alleged contracts of adhesion. For example, in In re American Express Merchants’ Litigation, Italian Colors Restaurant, 554 F.3d 300 (2nd Cir. 2009), the Second Circuit struck down an arbitration provision which precluded having a claim arbitrated except on an individual basis. The Second Circuit held that this waiver of class-arbitration rights and agreement to pursue claims exclusively in arbitration on an individual basis was unconscionable. The Supreme Court granted certiorari and vacated the decision for further consideration under Stolt-Nielsen. 130 S.Ct. 2401 (2010).
Carefully drafted waivers may help potential defendants avoid the charge of “unconscionability.” AT&T Mobility recently relied on certain provisions in its class-action waiver in a consumer contract with an arbitration provision to fight against claims of unconscionability in a case argued to the Supreme Court late last year.
On November 9, 2010, the Supreme Court heard oral arguments in AT&T Mobility v. Concepcion (No. 09-893). The Concepcions selected AT&T cell phones advertised as free but were then charged sales tax of $30.22 on the full price of the phones. The Concepcions filed a class-action lawsuit against AT&T alleging they and others had been deceived and cheated. AT&T moved to compel the
Concepcions to prosecute their claim by way of individual arbitration since the purchase contract included an agreement to arbitrate disputes on an individual, not class, basis. The district court and Ninth Circuit denied AT&T’s motion on the grounds that the contract was unconscionable and not preempted by the Federal Arbitration Act. At the November 9 oral argument, the Justices’ questions appeared to reflect a reluctance to deprive states of the right to set their own standards of unconscionability. Given that, it may be prudent for potential defendants hoping to avoid class-actions, judicial or arbitral, to avoid to the extent possible the indicia of unconscionability and adhesion.
A carefully drafted waiver may aid in that effort.
For example, in its brief to the Supreme Court, AT&T emphasized that the lower courts had struck down its contract to arbitrate individually simply because it prohibited class-wide relief not because it was unfair to the Concepcions themselves. AT&T noted the indicia of fairness present in its contract such as cost-free arbitration, convenience of location (in county of customer’s billing address), availability of full remedies and absence of confidentiality requirements. It remains to be seen, of course, whether the Supreme Court will find such protections sufficient to overcome the lower courts’ findings of unconscionability. However, it is safe to say that AT&T’s chances would be worse without such consumer-favoring provisions.
Agreements to arbitrate between employers and employees may fare better than those between retailers and consumers when it comes to unconscionability challenges. Employers may have better arguments than retailers against the standard unconscionability arguments.
For example, the plaintiffs in AT&T Mobility argued that consumers will not bother to pursue claims for small amounts on an individual basis, allowing potential defendants to get away with fraud and other unlawful practices. The amount in dispute in AT&T Mobility was $30.22. That same argument cannot be made rationally with respect to employment claims where victorious plaintiffs often recover significant sums. In addition, individual employment plaintiffs have the incentive of statutory fee-shifting provisions which allow them to recover attorneys’ fees should they prevail on their claims.
Another unconscionability argument is that the class-action arbitration waiver is buried in the small print of voluminous “legalese.” In contrast, the decision of an applicant to accept a job is a one-on-one kind of decision far different than the purchase of a discounted cell phone. The “small-print” argument is less persuasive in the employment context where each unique applicant is free to market his or her skills elsewhere and is free to question the terms and conditions of prospective employment in a given position.
Employers who wish to forego the protections of the judicial system, such as the rules of civil procedure and appellate review, for the perceived efficiencies of arbitration should take pains to avoid the “smallprint/ adhesion” argument by presenting the agreement to arbitrate on an individual basis clearly and fairly. One employer recently lost a motion to compel arbitration and was forced to litigate a FLSA claim because the agreement to arbitrate claims on an individual basis was included in a handbook which was subject to unilateral amendment by the employer rendering it unenforceable. John Carey v. 24 Hour Fitness USA, Inc., Civil Action No. H-10-3009 (S.D. Texas) (12/01/10).
Careful drafting of an explicit waiver may also help employers to guard against an argument that a mandatory individual arbitration agreement is a prohibited attempt to violate an employee’s rights under Section 7 of the National Labor Relations Act. The NLRB General Counsel’s Guidance Memorandum of June 16, 2010 Concerning Unfair Labor Practice Charges Involving Employee Waivers stated that the concerted filing of a class-action lawsuit or arbitral claim is protected by Section 7 of the NLRA. The Memorandum states further that an employer’s mandatory arbitration agreement may not be drafted in such a way that a reasonable employee could read the agreement as conditioning employment on a waiver of Section 7 rights. However, the Memorandum recognizes that an employer may condition employment on an employee’s agreeing that individual non-NLRA statutory employment claims will be resolved by arbitration. Employers may prefer to draft express waivers cognizant of Section 7 rights rather than face the argument that silence equals ambiguity and attempted interference.
The bad news is that much remains unsettled on this topic. The good news is that greater clarification lies just ahead when the Supreme Court issues its decision in AT&T Mobility v. Concepcion.