AT&T Mobility's Impact on Employers' Arbitration Agreements
By Andrée P. Laney – September 6, 2011
On April 27, 2011, in AT&T Mobility LLC v. Concepcion, 563 U.S. ___, 2011 U.S. LEXIS 3367 (2011), the Supreme Court held in a 5–4 decision that the class action waiver in a consumer arbitration agreement was enforceable, even though the state law expressly held such waivers to be illegal in consumer agreements of this type. The Concepcions, a California couple, had attempted to bring a class action against AT&T in federal district court in 2006 after they were charged $30 apiece for cell phones the company purportedly had advertised as "free."
Read the Fine Print
AT&T moved to compel arbitration based on the consumer arbitration agreement in its cell phone service contract, which required consumers to arbitrate all disputes and expressly waived class actions.
The Concepcions opposed AT&T's motion, claiming that the consumer arbitration agreement's class action waiver was unconscionable under California's Discover Bank rule and, therefore, unenforceable under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. Applicable to all arbitration agreements involving interstate commerce, the FAA encourages arbitration of disputes and seeks to ensure that agreements are enforced as written by the parties. Under section 2 of the FAA, known as the "savings clause," arbitration agreements are unenforceable only "upon such grounds as exist at law or in equity for the revocation of any contract," such as fraud or duress, or unconscionability. 9 U.S.C. § 2.
The Concepcions argued that their service contract with AT&T Mobility was an adhesion contract, wherein the much more powerful corporation had unilaterally drafted nonnegotiable terms and conditions that greatly disadvantaged the less powerful consumer. Because California law stated that class action waivers in consumer adhesion contracts are unconscionable, the Concepcions reasoned their contract with AT&T Mobility likewise was unconscionable and, therefore, unenforceable under section 2 of the FAA.
Derived from the decision of California's highest state court in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), the Discover Bank rule prohibits as unconscionable class action waivers in consumer contracts of adhesion ("take it or leave it" contracts). The state court reasoned that class action waivers in consumer agreements—where the parties' bargaining powers are inherently unequal—would unconscionably disadvantage consumers. Merchants' misconduct would go unchecked, as consumers' damages would be so small individually that they would be far less likely to pursue and vindicate their claims separately than they would if allowed to band together.
The court's reasoning in the Discover Bank case was persuasive to many. Indeed, both the district court and Ninth Circuit denied AT&T’s motion to compel arbitration, finding that the class action waiver in AT&T’s service contract with the Concepcions violated the Discover Bank rule and was therefore unenforceable under the FAA.
Supreme Court Compares FAA and State Law
The U.S. Supreme Court granted certiorari, determining that "[t]he question in this case is whether § 2 [of the FAA] preempts California's [Discover Bank] rule classifying most collective arbitration waivers in consumer contracts as unconscionable." AT&T Mobility, 2011 U.S. LEXIS 3367, at *11.
Typically, when federal and state law conflict, the state law is preempted. However, in the AT&T Mobility case, the state law and federal law appear to work in tandem. The FAA says that unconscionable agreements are unenforceable and, furthermore, the FAA does not define the term "unconscionable." Arguably, the Discover Bank rule merely clarifies that certain arbitration agreements are per se unconscionable. Right?
Mere Preference Is Not Law
Not so fast, said the Supreme Court, which was not convinced that the Discover Bank rule met the enforcement exception in the FAA's savings clause. The Court criticized the California court's failure to demonstrate that class-wide waivers in consumer agreements met the state’s legal standard of unconscionability: substantive and procedural unconscionability. Id. at *11–12. Instead, the Court found, California's Discover Bank rule evolved from the state’s disfavor of bilateral arbitration to resolve disputes where merchants have used superior bargaining power to avoid responsibility for defrauding consumers.
While the rule's intent to protect "the little guy" was laudable, the Court found the ends did not justify the means. In an unmistakable criticism of California's judiciary, the Court noted that "California's courts have been more likely to hold contracts to arbitrate unconscionable than other contracts," id., and cautioned that arbitration agreements would be "eviscerated" if courts allowed unconscionability to be defined by "a State's mere preference for procedures that are incompatible with arbitration," id. at *16–17.
In the end, the Court concluded that the Discover Bank rule tried to do an end run of sorts around the FAA's standard for not enforcing arbitration agreements, i.e., that grounds exist that would render "any contract" unenforceable, by carving out a type of agreement (those with class action waivers) and deeming them unconscionable. Rejecting this effort, the Court reasoned that "a court may not rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what the state legislature cannot," id. at *31.
Federal Law Prevails
Rejecting the Discover Bank rule's authority to change parties' agreements to class action waivers after the fact, the Court concluded that "[a]rbitration is a matter of contract and the FAA requires courts to honor parties' expectations." Id. Found to stand "as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA," id. at *33, the Discover Bank rule was preempted.
What Does This Mean in the Employment Context?
Consumers and Employees Are Similar
Admittedly, AT&T Mobility is a consumer protection case and, unlike adhesion contracts, employment agreements are typically entered into "at will." But there are similarities. The relationship of employers and employees, like that of businesses and consumers, has been governed by federal legislation (e.g., Title VII, Sherman Act). Like their consumer counterparts, employees are legally empowered to bring claims to vindicate their rights. In fact, the analytical similarities between arbitration agreements in consumer contracts and employment agreements have prompted courts analyzing employment cases to borrow rationales from consumer cases. E.g., Sutherland v. Ernst & Young, 2011 U.S. Dist. LEXIS 26889 (S.D.N.Y. Mar. 3, 2011) (court rejects employer’s class action waiver based on application of test that was developed in a consumer law case).
Arbitration Is Good for Business
The Court could have limited its preemption analysis to the fact that the Discover Bank rule conflicted with the FAA. But it didn't. Instead, the Court went further to strongly endorse bilateral arbitration to resolve business disputes. Conceding that parties could agree to class arbitration, the Court nevertheless made clear that "[a]rbitration is poorly suited to the higher stakes of class litigation" AT&T Mobility, 2011 U.S. LEXIS 3367, at *29. Instead, the Court extolled many benefits of bilateral arbitration—namely, informality, efficiency, cost-effectiveness, and procedural flexibility. Id. at *19–20.
The Court then painted a daunting portrait of how class arbitrations would terrorize businesses into settling questionable claims, bog down once-streamlined processes into a complex and procedure-heavy morass, and give both parties very few bases on which to review and challenge an arbitrator's decision. Id. at *25–29. The Court also cautioned that plaintiffs' lawyers would have little incentive to represent individual plaintiffs and businesses would have even less incentive to entertain and resolve individual plaintiffs' claims. Id. at *23–24.
In essence, the Court cautioned, if you change arbitration, the "little guy" would lose.
No Adhesion Contract Here
While employees have repeatedly challenged employment agreements as unenforceable adhesion contracts, citing the oft-pre-printed forms and "take it or leave it" nature of many job offers, courts have held consistently that mandatory arbitration agreements are not unconscionable and are enforceable. Cf. Am. Gen. Life Ins. Co. v. Wood, 429 F.3d 83 (4th Cir. 2005) (arbitration agreement was valid and enforceable, despite being an adhesion contract); Desiderio v. NASD, 191 F.3d 198 (2d Cir. 1999) (Form U4, which mandates arbitration in securities industry, found not to be unconscionable); Seus v. John Nuveen & Co. Inc., 146 F.3d 175, 184 (3d Cir. 1998) (U4 arbitration clause is not a contract of adhesion).
What Should Employers Do?
Revise Your Agreements
The Court's pro-arbitration analysis and holding in AT&T Mobility suggest that employers without arbitration agreements should consider them. Employers who have such agreements should consider amending them to add class action waivers.
Employers who choose to revise their arbitration agreements in light of the AT&T Mobility case should be mindful of certain considerations regarding statutory rights, scope, and notice in drafting or revising their arbitration agreements to include class action waivers.
Give Employees Proper Notice of Revisions
If amending an existing arbitration agreement to include a class action waiver, provide clear and unequivocal written notice to employees of that fact. In Skirchack v. Dynamics Research Corp., 508 F.3d 49 (1st Cir. 2007), the First Circuit held that an employer could not communicate the addition of a class action waiver to its employees via an email buried within a document that neither identified itself as containing a class action waiver nor required that its employees agree to the waiver. The court concluded that the timing, the language, and the format of the email rendered the class action waiver both procedurally and substantively unconscionable. Id. at 60.
Identify Statutory Claims
There is no prohibition to employers requiring employees to arbitrate their statutory rights. Cf. Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001); Desiderio, 191 F.3d 198 (found no evidence that Congress intended to preclude waiver of judicial forum in Title VII claim). However, and of particular importance in collective bargaining agreements, employers must specify the statutes under which disputes are referable to arbitration and expressly waive any rights the employee may have to litigate those statutory claims (such as those under Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act) as part of a class or in a judicial forum. Cf. Wright v. Universal Mar. Serv. Corp., 525 U.S. 70, 80 (1998) (Court denied defendant's motion to compel arbitration of an Americans with Disabilities Act (ADA) claim where the collective bargaining agreement only called for arbitration of "all disputes" in general and, in the absence of specificity, the Court deemed the federal court system is better suited for a claim under the ADA).
Assess Procedural Costs and Benefits
An employer who requires its employees to arbitrate any such statutory claims must ensure that the class action waiver (as well as the rest of the agreement) protects the employees’ substantive statutory claims. 14 Penn Plaza v. Pyett, 129 S. Ct. 1456, 1469 (2009) ("By agreeing to arbitrate a statutory claim a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum"). In Sutherland v. Ernst & Young, 2011 U.S. Dist. LEXIS 26889 (S.D.N.Y. Mar. 3, 2011), for example, the court allowed the plaintiffs’ overtime class action to go forward in litigation despite the employer’s mandatory arbitration provision. The court applied a costs-benefits test developed in In re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009), which had dealt with a class action waiver in merchants’ service agreements with Amex. The Sutherland court concluded that the potential employee’s individual claim of $2,000 was "too meager to justify" the costs of pursuing that claim, which were likely to exceed $200,000. In essence, the costs so far outweighed the benefits, the court concluded, that the practical effect of the class action waiver was to prevent employees from vindicating their statutory rights and to give the employer de facto immunity for any alleged wage law violations. Sutherland, 2011 U.S. Dist. LEXIS 26889, at *19–20.
Using a similar costs-benefits analysis, the Court in AT&T Mobility demonstrated that courts will review the terms of an arbitration agreement to discern whether it impermissibly discourages employees from pursuing claims against an employer. Although the Court's holding relied primarily upon the judicial deference afforded parties' agreements under the FAA, the Court did note, nonetheless, that AT&T Mobility's agreement provided consumers many procedural benefits—such as requiring AT&T Mobility to (1) pay all costs for non-frivolous claims, (2) hold the arbitration in the consumer's county, (3) allow for punitive damages, (4) forfeit claims to recover attorney fees, and (5) pay at least $7,500 to any consumer who recovered more in arbitration than AT&T Mobility had previously offered to settle the case—noting that the district court had concluded that the Concepcions were in fact better off under the arbitration agreement than they would have been under a class action litigation. AT&T Mobility, 2011 U.S. LEXIS 3367, at *32.
Specify Your Choice of Law
In addition to thinking about statutory claims, employers who operate in more than one state need to consider which state’s laws to apply to disputes that arise under the arbitration agreement. An employer’s choice of law will impact possible awards rendered under their arbitration agreements. While the FAA has generated substantive law determining whether a dispute is arbitrable, state law may control such things as the availability of punitive damages and the standards applied to review or vacate arbitration awards.
Define the Scope of the Arbitrator's Authority
Finally, employers should ensure that they specify the scope of an arbitrator’s authority regarding resolution of disputes. Pursuant to the FAA, courts are directed to resolve all ambiguities regarding the scope of an arbitration agreement in favor of arbitrability. Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 475–76 (1989). In the absence of clear direction from the agreement, however, courts will refer to litigation issues they determine the "contracting parties would likely have expected a court" to decide, such as whether a contract is valid or applies to the type of dispute at hand. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). Accordingly, if employers want to increase the likelihood of keeping the dispute within the arbitral forum, they should specify, for example, that issues regarding not only arbitrability, but also the arbitrator's jurisdiction, construction of the agreement, and substantive defenses to arbitrability, should be expressly subjected to the arbitrator's authority.
Andrée P. Laney is counsel at Bressler, Amery & Ross, P.C. in New York, New York.