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1. 2 Discover bank had a class action waiver in its arbitration agreements with credit card holders Credit card holder filed suit challenging late payment.

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Presentation on theme: "1. 2 Discover bank had a class action waiver in its arbitration agreements with credit card holders Credit card holder filed suit challenging late payment."— Presentation transcript:

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3 Discover bank had a class action waiver in its arbitration agreements with credit card holders Credit card holder filed suit challenging late payment penalty Court of Appeal upheld the class action waiver, holding that California rule prohibiting class action waivers was preempted by the Federal Arbitration Act (the FAA) California Supreme Court reversed, holding that when a class action waiver is found in a consumer contract of adhesion that becomes in practice an exculpatory clause; the agreement is unconscionable under California law California Supreme Court also held that its decision was not preempted by the FAA 3

4 Circuit City had a class action waiver in its arbitration agreements with employees Employee filed suit for violations of the California Labor Code Court of Appeal upheld the class action waiver California Supreme Court reversed, holding that at least in some cases, such class action waivers undermine the vindication of employees unwaivable statutory rights and pose obstacle to enforcement of overtime laws. Factors to consider: o Modest size of potential individual recovery; o Potential for retaliation against class members; o Fact that absent class members may be ill informed about their rights; and o Other real world obstacles to vindication of class members rights. California Supreme Court noted that it had rejected FAA pre-emption in Discover Bank 4

5 Shipping companies entered into arbitration agreements with their customers Customers filed antitrust claims, which were submitted to arbitration. Parties stipulated that arbitration clause was silent with respect to class arbitration United States Supreme Court held that arbitration panel had exceeded its powers by concluding that arbitration clause allowed for class claims Party cannot be compelled under the FAA to submit to class arbitration absent a contractual basis for concluding that the party had agreed to do so Differences between bilateral and class arbitration were too great to allow arbitration panel to presume that parties silence on issue constituted consent to arbitrate class claims 5

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7 Vincent and Liza Concepcion entered into a cell phone contract with AT&T which guaranteed them a free phone But there was a catch: AT&T charged $30.22 sales tax on the phones retail value The Concepcions filed a complaint consolidated with a class action alleging that AT&T was liable for false advertising and fraud 7

8 The arbitration clause required that all disputes be resolved through arbitration The arbitration clause prohibited participation in class or representative actions – only individual cases allowed AT&T made several amendments to the arbitration provisions, which the clause permitted 8

9 Easy to initiate proceedings by a one page form available on AT&T website If there is no settlement within 30 days, the customer can invoke arbitration with Demand for Arbitration form AT&T pays all arbitration costs for non-frivolous claims Arbitration held in customers home county For claims of less than $10,000, customer can elect to proceed by telephone, in person or by written submission 9

10 The U.S. Supreme Court had to address the California Supreme Court Discover Bank holding that class waivers in consumer arbitration agreements are not enforceable o The California Supreme Courts concern: Arbitration agreements typically are contained in a boilerplate or wrap around contract o Since these disputes typically are modest claims, people like the Concepcions are placed in weaker bargaining position and are powerless to object to a provision, even if it is fraudulent o Such agreements are not enforceable because they are unconscionable 10

11 In California, a contract cannot be both procedurally and substantively unconscionable Procedural unconscionability focuses on whether there existed any oppression or surprise in the manner in which the contract was negotiated, and the circumstances of the parties at the time of negotiation Substantive unconscionability focuses on whether the terms of the contract are so one-sided as to shock the conscience Unconscionability determined on a sliding scale 11

12 The Supreme Court held the FAA preempts the Discover Bank rule – the FAA mandates that arbitration agreements be enforced as they are written The U.S. Supreme Court did not expressly overrule or even reference Gentry 12

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14 Ralphs had a class action waiver in its arbitration agreements with employees Employee filed suit for violations of the California Labor Code and PAGA California Court of Appeal distinguished Gentry from Discover Bank on the grounds that Discover Bank is a case about unconscionability and Gentry is concerned with the effect of a class action waiver on unwaivable statutory rights regardless of unconscionability 14

15 Because Plaintiff did not introduce any evidence to address the four factors in Gentry, the Court reversed trial court and found the class action waiver to be enforceable. Accordingly, appellate court did not have to determine whether, under Concepcion, the Gentry rule is preempted by the FAA. Appellate court also pointed out that a PAGA claim, which is a representative action to enforce state labor laws, is not preempted by the FAA and is subject to arbitration. California Supreme Court denied certiorari; Petition for Certiorari currently pending before U.S. Supreme Court. 15

16 Sonic-Calabasas had a class action waiver in its arbitration agreements with employees Employee filed suit for violations of the California Labor Code Parties agreed that wage claim was within scope of arbitration agreement, but disagreed as to whether it contained a right to a Berman hearing before the DLSE prior to commencement of arbitration proceedings Appellate court concluded that plaintiff waived his right to Berman hearing and enforcement of that waiver was not barred by Gentry 16

17 California Supreme Court reversed, holding that waiver of Berman hearing was against public policy and unenforceable, although the case would go to arbitration after such hearing took place California Supreme Court also held that its decision was not pre- empted by the FAA In October 2011, US Supreme Court granted Sonic-Calabasas petition for a writ of certiorari, vacated the judgment, and remanded the case to the California Supreme Court for further consideration in light of Concepcion Viability of Gentry may be explored further in the upcoming opinion. Justice Moreno, who authored the opinion in Gentry, and Chief Justice George, who concurred with Justice Moreno, no longer sit on the California Supreme Court 17

18 The U.S. Supreme Court has held the FAA applies to most employment contracts. EEOC v Waffle House (2000) 534 U.S. 279, 289, citing Circuit City Stores, Inc. v. Adams (2001) 532 U.S. 105 Concepcion and Waffle House stand for the proposition that the FAA likely preempts state laws prohibiting arbitration of employment claims 18

19 Arbitration is purported to cost less than trials Arbitration is supposed to cut through the administrative red tape of the court action Arbitration is supposed to avoid runaway jurors Arbitration is supposed to be more private than a trial No more class actions? 19

20 Difficult to get dispositive motions granted in arbitration Runaway arbitrators who make findings unsupported by the law as facts Arbitration decisions are virtually impossible to appeal: o Even the incorrect application of the law and facts will not mandate that the decision be vacated An avalanche of single plaintiff cases 20

21 Courts are still wary of certain language in arbitration agreements: o Limiting the available remedies that would otherwise be available in courts o Costs and fees shifting that is contrary to applicable law (e.g., attorneys fees are awarded to the prevailing party) o Shortening applicable limitations periods o Not including copy of arbitration rules 21

22 Clauses giving employer unilateral right to modify the agreement Clauses giving the employer the unilateral right to get injunctive relief Limits or restrictions on discovery (e.g., one deposition per party; no written discovery) 22

23 Class action waiver (?) Written award to be issued by an arbitrator Choice of law and severability provisions At-will employees: continued employment can provide consideration for an agreement to arbitrate One solution: an opt-out clause in the arbitration provision 23

24 NLRB ruled that the NLRA prohibits employment agreements which waive employees right to file joint, class, or collective claims o May affect the enforceability of any employment agreement by which employees waive their right to class or collective action Likely does not prohibit waivers which merely limit such actions to either federal court or arbitration Only agreements which waive the right to collective action completely, by waiving the right to collective action in all forms, are clearly prohibited by D.R. Horton 24

25 Employees have the right to engage in... concerted activities for the purpose of collective bargaining or other mutual aid or protection. 29 U.S.C. § 157 (NLRA) o This includes joining together to bring employment claims on a class-wide or collective basis in court or arbitration It is an unfair labor practice to interfere with, restrain, or coerce employees in the exercise of such rights. 29 U.S.C. § 158 (NLRA) o Arbitration agreements which prohibit employees from class or collective action entirely violate the NLRA by restraining concerted activities 25

26 Waiver of such rights by arbitration agreement also not protected by the FAA The FAA requires enforcement of arbitration agreements, but does not validate agreements by which parties forgo substantive rights provided by statute, including the right to concerted activity under the NLRA The FAA still permits invalidation of employment agreements on grounds recognized by contract law Class/collective action waivers are thus invalid under the FAA because they violate public policy set by NLRA 26

27 Q. What if the employer does not "require" employees to enter into a class action waiver, but obtains a voluntary agreement waiving the right to participate in class actions via an opt-out programs (e.g., the employee is given some consideration) A. D.R. Horton does not specifically address this issue. However the decision holds that the right to bring or join a class action is a right protected by Section 7 of the NLRA and that individual employees may not waive section 7 rights. The viability of this argument will have to be resolved through litigation 27

28 If the Board finds that an agreement violates the NLRA, the remedies available to the Board include, but are not limited to: (a) requiring the employer to rescind the agreement with such waiver; (b) requiring the employer to reissue an agreement without the waiver; and (c) posting a notice regarding the violation. There is a question whether the Board could or would attempt to void agreements containing a class action waiver in their entirety, especially where such agreements contain a severability clause. Whether the Board would pursue this remedy is unclear Further, as the decision focused on mandatory arbitration agreements as a term and condition of employment, it also is unclear whether inclusion of a class/collective action waiver in a release is problematic 28

29 The NLRB could find that any unsuccessful attempt to compel arbitration or litigation of an individual claim is vexatious litigation filed for a retaliatory purpose (i.e., in retaliation for the employees exercising their protected concerted right to initiate or participate in class or collective claims) A court may rule a contract that contains a waiver of class claims to be "unconscionable. If a court agrees with the Board's Section 7 arguments, the remedies available to the court include, but are not limited to: (a) declaring the class waiver invalid, but upholding the remaining portions of the contract (e.g., a release); (b) declaring the class waiver invalid and voiding the entire contract release; and (c) tolling the limitation period on all class and collective claims as the putative plaintiffs thought they could not pursue such claim 29

30 There is some district level authority in the wake of D.R. Horton which clarifies court positions on its ruling. o However, final authority on the issue must await a circuit or Supreme Court opinion Herrington v. Waterstone Mortg. Corp., U.S. Dist. LEXIS (W.D. Wis. 2012): Agreed with D.R. Horton and found rule also protects former employees. o [a]n employers coercive action affects protected rights whenever it can have a deterrent on protected activity. This is true even if an employee has yet to exercise a right protected by the act. 30

31 Owen v. Bristol Care, Inc., 2012 U.S. Dist. LEXIS (W.D. Mo. 2012): The right to bring class/collective action is a substantive right and the FAA may not be used to enforce agreements which waive that right o The [FAA] has a strong policy favoring arbitration. However, when a Plaintiff's statutory rights are not capable of vindication through arbitration, the federal substantive law of arbitrability, grounded in the FAA, allows federal courts to declare otherwise operative arbitration clauses unenforceable. o Found Concepcions pro-arbitration ruling not applicable to employment agreements 31

32 Other General Post-D.R. Horton Authority Some courts have acknowledged D.R. Horton as a correct holding in its entirety. Palmer v. Convergys Corp U.S. Dist. LEXIS (M.D. Ga. 2012) Other courts have declared more general disagreement with D.R. Horton o D.R. Horton shall not be read as a counter to Concepcion. LaVoice v. UBS Fin. Servs., 2012 U.S. Dist. LEXIS 5277 (S.D.N.Y. 2012) 32

33 Agreements which leave some forum open to class/collective action probably still enforceable Agreements which are silent on arbitration of class/collective claims may be problematic Rule only may invalidate agreements with employees as defined by NLRA Does not protect supervisors or independent contractors as defined by the NLRA 33

34 To be decided: May not apply to agreements by which employees gain consideration for not opting out of a class or collective action waiver To be decided: May not apply to voluntary agreements to waive such claims at the termination of employment or during a settlement To be decided: Probably will not invalidate agreements with severability clauses Employers must await higher court authority to validate or invalidate the Boards ruling 34

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