Class or Collective Waivers and Employment Arbitration—Should Employers Consider Deploying This New Weapon?
Even though many employers have long thought that they cannot deploy arbitration agreements in the employment context to avoid class and collective action claims from their employees (because the Courts had held that it was unfair to employees), now, more than ever, courts are willing to enforce arbitration agreements that contain class action or collective action waivers.
The fairly recent, and rapidly expanding, trend to enforce arbitration agreements began with the Supreme Court’s landmark decision in AT&T Mobility v. Concepcion, where the Court upheld the enforceability of a class action waiver in a consumer contract. This was an important victory for companies selling products and services to consumers. Valid class action waivers in contracts (even what are sometimes called contracts of adhesion, like cell phone service contracts) mean that customers seeking relief must bring their own individual lawsuit, rather than benefit from sharing the costs of a lawsuit with other consumers in a class action. Bringing such claims individually is, practically speaking, cost prohibitive for many consumers. That fact usually results in a sharp decrease in litigation brought by consumers.
Last year, in American Express v. Italian Colors Restaurant, the Supreme Court expanded the Concepcion ruling to the area of contractual waivers of class arbitration. The Court determined that a contractual waiver of class arbitration was enforceable under the Federal Arbitration Act—even if a party cannot otherwise afford to vindicate its rights through individual arbitration. This was an important decision because it provided a clear way to avoid the result of Oxford Health Plans LLC v. Sutter, where the Supreme Court gave deference to an arbitrator’s (probably incorrect) finding that there was a basis for class arbitration in the parties’ arbitration agreement because the arbitration clause was silent on whether or not class actions were permissible or impermissible. Companies wishing to avoid the result in Oxford Health Plans may now, pursuant to American Express v. Italian Colors Restaurant, specifically include class arbitration waivers in their arbitration agreements.
Moreover, in the relatively recent Supreme Court decision of Nitro-Lift Technologies, L.L.C. v. Howard,the Court overturned a ruling by the Oklahoma Supreme Court that permitted judicial review of a non-competition provision despite the contract’s arbitration clause, which required the arbitration of the non-competition dispute. So, there is good reason to think that the decisions in Concepcion and Italian Colors Restaurant will also apply in the employment law context Indeed, on March 21, 2014, the Eleventh Circuit in Walthour et al. v. Chipio Windshield Repair, LLC et al. cited both Conception and Italian Colors Restaurant in holding that an arbitration agreement that waives an employee’s ability to participate in a collective action under the Fair Labor Standards Act is enforceable under the Federal Arbitration Act.
So, what should a company consider when deciding whether or not to implement arbitration agreements, and/or arbitration agreements containing class or collective action waivers?
When it comes to claims for money damages arbitration may be preferable because (1) arbitration is typically faster and less expensive (though costs are rising) than traditional litigation; (2) arbitrations are private proceedings; (3) arbitrations have no plaintiff-sympathetic juries; and (4) the company can have some choice in the selection of an arbitrator. This is not to say, however, that arbitrating claims for money damages does not have downsides as well. For example, it is much easier for baseless claims to proceed to a full arbitration hearing, as it is difficult to get an arbitrator to grant early motions to dismiss (or motions for summary judgment). And, because arbitrations are private, there is often less predictability as to the outcome. Moreover, the right to appeal arbitration rulings is extremely limited, so there are fewer checks and balances on arbitrators.
Matters are further complicated when your company includes an arbitration agreement in its form employment agreement, and that form agreement contains restrictive covenants. For example, how would the company in such circumstances proceed when an employee leaves the company, steals confidential information, poaches employees and the company’s clients, and goes to work for a competitor? The company clearly wants injunctive relief. But obtaining injunctive relief (such as a temporary restraining order or a permanent injunction) in an arbitration proceeding is often problematic. Injunctive relief typically takes far longer to obtain in arbitration than it would at the courthouse, where parties can seek immediate (at least temporary) relief. In addition, arbitrators lack contempt power to enforce any injunctive relief they grant. Also, a party who ignores an arbitrator’s order does not face jail (while a party who ignores a court order does face going to jail).
Common sense suggests that employers who wish to litigate non-compete claims should draft an exception in their arbitration clause allowing them to pursue injunctive relief to enforce non-compete and non-solicit provisions through the courts. However, this may not be the best idea because many states find that an agreement drafted in that manner is one-sided, an unfair contract of adhesion, and, accordingly, the agreement may be treated as invalid from the outset (“void ab initio,” to use the fancy Latin term courts and lawyer enjoy). This is currently the case even in the face of the extremely favorable precedent of Concepcion and Italian Colors Restaurant.
What if the agreement at issue had been a restrictive covenant rather than an employment agreement? The employer could lose the benefit of the entire agreement and be forced trying to shoehorn its claim into other causes of action.
Where does this leave employers? First, employers must recognize that arbitration is not a silver bullet. Implementing arbitration across the board will not necessarily lead to the employer prevailing in all claims that are brought. With that said, there may be targeted instances in which employers would likely benefit from arbitration ― particularly where employees try to bring class or collective actions, including class action claims alleging discriminatory practices or collective actions seeking relief for alleged wage-and-hour violations. If employees cannot pursue class or collective action claims, many possible plaintiffs (and, even more importantly, plaintiffs’ lawyers) may find that it is no longer worth their time and money to pursue these types of claims on an individual basis against an employer. For this reason, employers may decide that the downsides of arbitration are outweighed by the benefits.
Employers seeking to avail themselves of the benefits of an arbitration program should seek experienced employment counsel, who can help them carefully draft a limited arbitration provision (along with a class and collection action waiver) that has the highest likelihood of being enforced.
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