Today is Halloween, an occasion when our thoughts turn to jack o’lanterns, ghosts, and zombies.  We are particularly fascinated by zombies—the dead returned to life. But we’re not the only ones.  In a decision earlier this week, a majority of the National Labor Relations Board voted to reanimate the dead.

The Board’s zombie of choice?  Its decision nearly three years ago in D.R. Horton (pdf), in which the Board sought to push back on arbitration agreements that require individual arbitration rather than class or collective actions.  As our readers know by now, most courts have accepted the Supreme Court’s clear and emphatic message that the Federal Arbitration Act protects the right of contracting parties to agree to resolve any disputes through arbitration on an individual basis.  But the NLRB, which hears complaints alleging unfair labor practices, came to a different conclusion in D.R. Horton, concluding that individual arbitration interferes with the right of employees to engage in “concerted activities” under Section 7 of the National Labor Relations Act— and that its interpretation of the NLRA trumps the FAA.  Yet, for reasons we—along with many other critics—have discussed, that approach gets it exactly backward.  The Supreme Court has held that the FAA takes precedence in the absence of a contrary congressional command.  Nothing in the NLRA itself (as opposed to the Board’s own policy views) evinces a clear congressional command to override the FAA.  And the Board itself cannot override a congressional enactment like the FAA.

For these reasons, the Board’s D.R. Horton ruling has been rejected by almost every court to consider it: by the Fifth Circuit (on direct review), by the Second Circuit, by the Eighth Circuit, by more than a dozen federal district courts, and— most recently— by the California Supreme Court.

But the Board, rather than acquiescing in the face of this avalanche of judicial authority, has sought to resurrect it.  Earlier this week, by a 3–2 vote, the Board issued its decision in Murphy Oil USA (pdf), reaffirming D.R. Horton and rejecting the views of the courts.  The Board dismissed most of the contrary authority in cavalier fashion—disparaging the Second and Eighth Circuit’s decisions for their “abbreviated” analysis, and refusing to engage with the California Supreme Court’s decision or any federal district court decision because those courts don’t typically exercise direct review over Board decisions.

As for the Fifth Circuit’s decision, the Board complained that the court gave “too little weight to [Board] policy” and that “[t]he costs to Federal labor policy imposed by the Fifth Circuit’s decision would be very high.”  But this assessment simply underscores the error in the Board’s ways:  An agency’s general policy views, no matter how strongly felt, cannot override the powerful congressional mandate favoring the enforcement of arbitration agreements that is embodied in the FAA.  And even though the Board has authority to set policy under the NLRA, the Board’s view of what the FAA requires is not entitled to any weight at all, because Congress has never given the agency authority to interpret or administer that statute.

In response to the Fifth Circuit’s legal analysis, the Board did little more in Murphy Oil than repeat its view— resting on nothing more than the Board’s say so in D.R. Horton— that the right to engage in “concerted activities” under Section 7 includes an unwaivable substantive right to class-action procedures.  But nothing in the text of the NLRA commands or even suggests that result.  Although the Board purported to find an “inherent conflict” between the NLRA and the FAA, the purported conflict in fact arises only from the Board’s questionable interpretation of the NLRA, not from anything inherent in the statute itself.  At bottom, the Board’s position rests on its own view of federal labor policy, not any congressional command, and an agency’s views cannot override what Congress enacted in the FAA.  (Moreover, as the Fifth Circuit pointed out, the agency’s insistence that the purported right to class-action procedures is a nonwaivable substantive right under the NLRA is questionable even on its own terms.)

The Board’s decision will not be the last word on this matter.  As in D.R. Horton, this latest decision is subject to direct review by a federal court of appeals, which will be free to reject the Board’s position and deny enforcement of its order.  Given the weight of judicial authority rejecting D.R. Horton and the Board’s failure to respond to that authority in a convincing manner, the Board’s position will likely continue to be met with skepticism in the courts.  For now, however, employers that use arbitration agreements with their employees may face possible challenges from the Board or from employees seeking to pursue class or collective actions.  In short, the D.R. Horton zombie will continue to stalk the land for the immediate future.

In the three years since AT&T Mobility LLC v. Concepcion, courts have largely been rejecting substantive attacks on arbitration agreements that waive class actions.  By contrast, in some cases plaintiffs have succeeded in avoiding arbitration by arguing that they never agreed to it in the first place.

The latest case to address such questions of contract formation comes from the Ninth Circuit, which held last week in Nguyen v. Barnes & Noble, Inc. that  plaintiff Kevin Nguyen had not agreed to arbitration because he and similarly situated consumers lacked sufficient notice of the company’s online “browsewrap” terms of use.  Because the Ninth Circuit applied New York law governing contract formation—and because the court indicated that it would have come to the same conclusion under California law—the decision is an important one for all businesses that engage in online commerce in the United States.

In the opinion, the Ninth Circuit distinguished between the familiar “clickwrap” process—in which a user affirmatively accepts terms by, for example, clicking “I agree” after receiving notice of the terms—and “browsewrap,” in which a company makes the relevant terms available to users on the web site (usually by providing a hyperlink), but does not require a customer to record his or her assent to the terms.

In Nguyen, each page on Barnes and Noble’s web site included a link to the applicable terms of use. If followed, the link would direct a user to the terms, which provided that a user accepts the terms by “visiting any area in the Barnes & Noble.com Site, creating an account, [or] making a purchase.” The terms, among other things, provided that parties would resolve their disputes by arbitration on an individual basis.

In determining whether Nguyen had agreed to those terms, the court of appeals focused on whether he had received “reasonable notice” of them.  The court pointed out that Nguyen was not “required to affirmatively acknowledge the Terms of Use before completing his online purchase” —the “clickwrap” model.  Nor was there “any evidence in the record that Nguyen had actual notice of the Terms of Use.”  The court said, however, that if there had been “actual notice”—presumably meaning proof that the plaintiff had in fact read (or at minimum was aware of) the terms—“the outcome of this case might be different,” because “courts have consistently enforced browsewrap agreements where the user had actual notice of the agreement.”

But in the absence of “actual notice,” the Ninth Circuit  held, “the validity of the browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract.” The answer to that question depends on website “design and content,” including the “conspicuousness and placement of the ‘Terms of Use’ hyperlink” and other design characteristics. Browsewrap agreements will not be enforceable, according to the court of appeals, when the hyperlink is “buried at the bottom of the page or tucked away in obscure corners of the website where users are unlikely to see it.” In the court’s view, “consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.”

Certainly not every court would agree with the Ninth Circuit’s approach to “browsewrap” agreements.  As the court itself admitted, Barnes & Noble’s web site provided a “conspicuous hyperlink” to the terms of use “on every page of the website”—and in some places, the “link appears either directly below the relevant button a user must click on to proceed in the checkout process or just a few inches away.”  While the Ninth Circuit held that even this degree of notice is insufficient under California and New York law, the decisions of other courts suggest that they would take a different approach.

Nonetheless, Nguyen is likely to have a significant impact on the enforceability of online contracts, both in the Ninth Circuit and elsewhere.   Accordingly, businesses may wish to consider reviewing their online contracting processes; in many cases, it may be relatively straightforward to adopt changes that satisfy the Nguyen court’s concerns.

The hostility of some California courts to arbitration—and their resistance to preemption under the Federal Arbitration Act (FAA)—has produced nearly three decades of U.S. Supreme Court reversals. The most recent is AT&T Mobility LLC v. Concepcion, which held that the FAA preempted the Discover Bank rule, under which the California Supreme Court had blocked enforcement of consumer arbitration agreements that required individual rather than class arbitration. Last week’s decision in Imburgia v. DirecTV, Inc. (pdf) demonstrates that resistance to Concepcion lives on in the California courts, even at the cost of creating a split with the Ninth Circuit on the same issue in the same contract used by the same company.

Specifically, DirecTV’s arbitration agreement—like many others—provides that the arbitration agreement shall not be enforced if a court invalidates the ban on class arbitration. Taking advantage of the specific wording of the agreement, a panel of the California Court of Appeal in Los Angeles held that the preemptive effect of Concepcion did not apply and the agreement could be invalidated on the basis of the very Discover Bank rule that Concepcion held was preempted.

The arbitration clause at issue in Imburgia appeared in Section 9 of DirecTV’s customer agreement; the arbitration clause expressly precluded class actions and class arbitration. Section 10 provided that “Section 9 shall be governed by the Federal Arbitration Act.” Section 9 also stated, after the sentence that waived class procedures: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”

The Imburgia court held that the reference to “the law of your state” should be read to invalidate the arbitration agreement if the class waiver would be unenforceable under state law without regard to the preemptive effect of the FAA. That is, the court held, the agreement was subject to state-law rules that are invalid under the FAA even though the arbitration agreement explicitly provided that the FAA would govern. That holding takes an idiosyncratic view of the Supremacy Clause, which mandates that federal law—including the FAA—trumps contrary state law. Under the Supremacy Clause, once state law has been displaced by federal law, the state law cannot survive in some shadow universe. Rather, state law is not “law” when it has been declared unconstitutional, whether because it violates the First Amendment or the Supremacy Clause because it is preempted by a federal statute.

Imburgia also expressly conflicts with the Ninth Circuit’s decision in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), which enforced the same clause and rejected the same argument. The Ninth Circuit explained that “Section 2 of the FAA, which under Concepcion requires the enforcement of arbitration agreements that ban class procedures, is the law of California and of every other state.” DirecTV may well seek further review in light of this conflict.

In the meantime, Imburgia offers businesses a pair of cautionary lessons. First, businesses that use arbitration clauses should not underestimate the pockets of resistance to Concepcion and other recent Supreme Court precedents—especially in some California state courts.

Second, the decision underscores the importance of careful drafting of arbitration clauses that waive class actions. Even though the Supreme Court has made clear that any doubts concerning the scope of arbitral agreements should be resolved in favor of arbitration, the court here—like other courts hostile to arbitration—chose to construe the language of the arbitration clause against the drafter. And viewed in that (improper) light, it is easy to see why the wording of DirecTV’s clause, and in particular the use of the phrase—“[i]f … the law of your state would find …”—unnecessarily appeared to give state law special stature. Choice-of-law issues have bedeviled companies in the past—as detailed in an article (pdf) one of us has published, it is important for companies to address the governing law carefully in their agreements and thus minimize the risk that hostile courts will apply the wrong law to defeat arbitration.

Back in 2008, the Supreme Court held in Hall Street Associates, L.L.C. v. Mattel, L.L.C. that parties to an arbitration agreement subject to the Federal Arbitration Act (FAA) cannot agree to empower a federal court with more searching judicial review than section 10 of that Act specifies. According to the Ninth Circuit, just as the FAA doesn’t allow parties to contract for expanded judicial review of arbitral awards, it also forbids parties from contracting for narrower judicial review. The case therefore provides important guidance for parties crafting arbitration agreements.

Here’s some background. Section 10(a) permits a court to vacate an arbitration award only if (1) the award was procured by fraud, corruption, or other chicanery; (2) the arbitrators were biased or corrupt; (3) the arbitrators denied due process through such misconduct as refusing to postpone a hearing for demonstrated cause or excluding material evidence; or (4) the arbitrators exceeded their powers or issued a defective, indefinite award. Most courts (including the Ninth Circuit) add manifest disregard for the law as a fifth ground (or as a gloss on the exceeding-powers ground in section 10(a)(4)). Under Hall Street, the grounds for vacating an arbitration award that are specified in section 10 cannot be expanded by contract.

The Ninth Circuit held this week that a contract cannot eliminate or waive those specified grounds, either. The decision, In re Wal-Mart Wage & Hour Employment Practices Litigation, addressed a dispute among class counsel who had settled a case with Wal-Mart, and had provided that they would arbitrate their respective entitlements to fees. The counsel who got the short end of the arbitration sought unsuccessfully to have a district court vacate the arbitral award, and then appealed to the Ninth Circuit.

The winners of the arbitration tried to have the appeal dismissed outright by arguing that the courts lacked jurisdiction to vacate the award because the agreements provided for “binding, non-appealable arbitration.” The Ninth Circuit held that the contract language could not preclude review of the vacatur factors in section 10(a). Relying on Hall Street, the Ninth Circuit reasoned that the mandatory language of section 9—that a court must enter an order confirming an arbitration award unless the award is vacated or modified under section 10—did not permit a court to overlook the section 10 standards, no matter what the parties’ agreement might say. Accordingly, the Ninth Circuit construed the agreement language narrowly to foreclose review only of the substance of the award. In an unpublished memorandum, the court affirmed the order confirming the award.

In an interesting aside, the Ninth Circuit said that it was not addressing whether parties could waive appellate judicial review so long as the agreement provided by section 10 review by the district court. The Wal-Mart appellee argued that the effect of the non-appealability clause at issue did exactly that, but the Ninth Circuit held that the clause’s plain language applied to all levels of judicial review. In the future, perhaps some doughty enterprise will test the enforceability of a clause explicitly drawing the line at district-court review, without review by the court of appeals.

The day after we released our study (pdf) of class action litigation, the Consumer Financial Protection Bureau issued some preliminary results in connection with its study of arbitration under the Dodd-Frank Act. (That statute gives the CFPB power to regulate or prohibit the use of arbitration agreements by the businesses it oversees, but requires the Bureau first to conduct a study of arbitration agreements.)

The agency repeatedly describes the information that it reports as “preliminary” and subject to further review and revision, and states that the subjects covered are those as to which it has been able to gather information—and does not indicate “the relative importance of different areas to be covered in the statutory report.”

These disclaimers are important, because the “preliminary results” provide little information that is relevant to the central questions that the Bureau must address: For the kinds of injuries that most consumers can suffer, what is the real-world accessibility, cost, fairness, and efficiency of arbitration as compared to suing in court? And how will consumers be harmed if arbitration is prohibited or subjected to regulation that eliminates arbitration’s availability?

Most of the CFPB’s preliminary results relate to the numbers of cases filed in arbitration and in court. But the number of formal claims filed by consumers in arbitration and in court says nothing about the relative accessibility and fairness of the two methods of dispute resolution. Indeed, consumers’ claims often are resolved before the filing of a formal arbitration proceeding—and all of those resolutions aren’t counted under the Bureau’s approach.

The Bureau also briefly discusses the results of a group of eight class actions, but that small, specially-selected sample provides no basis for any conclusion regarding the overall value of class actions to consumers—as the Bureau itself acknowledges by stating that it intends to study—among other areas that it has not yet addressed—“the disposition of cases across arbitration and litigation (including class litigation), both in terms of substantive outcomes and in terms of procedural variables like speed to resolution.”

A more comprehensive discussion of the CFPB’s preliminary results report is available here (pdf).

We have frequently chronicled the ongoing efforts of the plaintiffs’ bar to circumvent the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act (FAA) requires the enforcement of parties’ agreements to resolve their disputes through individual arbitration rather than class or collective proceedings. One of the most prominent efforts to evade Concepcion has been the National Labor Relations Board’s ruling in D.R. Horton (pdf), which declared that the right of employees to engage in “concerted activities” under Section 7 of the National Labor Relations Act (NLRA) trumps the FAA and requires that employees be allowed to bring class actions (either in court or arbitration). The Board also pointed to the Norris-LaGuardia Act, which provides that employees “shall be free from the interference, restraint, or coercion of employers” in “concerted activities.” In the NLRB’s view, any business subject to the Board’s jurisdiction (and that includes most private-sector businesses) that requires its employees to agree to resolve disputes through individual arbitration has engaged in an unfair labor practice and faces the threat of agency action.

Numerous plaintiffs seeking to invalidate arbitration provisions in employment agreements have claimed that the Labor Board’s D.R. Horton decision establishes the invalidity of arbitration provisions that include a class waiver, but virtually every court to consider the question has declined to follow the NLRB’s lead. Yesterday, in an important decision for employers nationwide, the Fifth Circuit invalidated the Board’s decision, holding in DR Horton, Inc. v. NLRB (pdf) that the NLRB’s position is inconsistent with the FAA. In overturning the Board’s order, the Fifth Circuit noted its agreement with “[e]very one of our sister circuits to consider the issue,” each of which “has either suggested or expressly stated that they would not defer to the NLRB’s rationale, and held arbitration agreements containing class waivers enforceable.” Slip op. at 25 (citing Richards v. Ernst & Young, LLP (9th Cir.), Sutherland v. Ernst & Young LLP (2d Cir.), and Owen v. Bristol Care, Inc. (8th Cir.)). (Our colleague Andy Pincus will be arguing this issue in the Ninth Circuit later this week in Johnmohammadi v. Bloomingdale’s, Inc. on behalf of the U.S. Chamber of Commerce; a PDF of our amicus brief in that case is available here.)

Continue Reading Fifth Circuit Overturns NLRB’s Anti-Arbitration D.R. Horton Ruling

Law Seminars International is once again holding its annual class actions conference in Chicago on December 9 and 10.  As in past years, the organizers have put together a great group of speakers to address the most recent developments affecting class actions .  For my part, I am looking forward to speaking on an issue we cover frequently on the blog:  the impact of arbitration on class-action litigation.

 A copy of the conference’s agenda is available here.  If any of the blog’s readers plan to attend the conference (or will be in Chicago during that time), I would love to hear from you.

The California Supreme Court has a long history of inventing new rules—either from common law or as “glosses” on statutes—to invalidate arbitration agreements entered into by consumers and employees. For example, in 2005, that court announced a new unconscionability rule—the“Discover Bank” doctrine, which was named after one of the parties to the case—that effectively blocked enforcement of every consumer arbitration agreement that did not permit class procedures. The U.S. Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion held that the Federal Arbitration Act (“FAA”) preempted the Discover Bank rule.

Will the California Supreme Court faithfully apply Concepcion and the U.S. Supreme Court’s other recent rulings overturning lower courts’ refusals to enforce arbitration agreements? Or will it try to formulate new grounds for prohibiting arbitration, requiring the U.S. Supreme Court to intervene yet again to vindicate the Federal Arbitration Act’s “liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” With four significant arbitration cases now pending before the California Supreme Court, we are likely to find out in the next 12 to 24 months.

The first of these decisions, handed down on October 17 in Sonic-Calabasas A, Inc. v. Moreno (pdf)—in which our firm filed an amicus brief (pdf)—contains a distinctly mixed message. In response to the U.S. Supreme Court’s order granting certiorari and vacating and remanding the case in light of Concepcion, the California Court overturned its own prior ruling invalidating the arbitration agreement, correctly holding that its original rationale could not stand. In an opinion by Justice Liu, the Court went on to discuss—although not explicitly mandate—a brand-new approach to unconscionability analysis that reintroduces the precise legal principle that the U.S. Supreme Court held preempted in Concepcion and rejected again this year in American Express Co. v. Italian Colors Restaurant. And it does so through an unconscionability standard specially constructed to apply only to arbitration contracts, notwithstanding the FAA’s express preemption of arbitration-specific contract enforcement standards.

Did the California Supreme Court, finding its prior decision clearly precluded by Concepcion, decide to create a new basis for refusing to enforce arbitration agreements that is different in appearance but the same in effect as its now-invalid ruling? The court’s musing about unconscionability doctrine is not tethered to any holding, because the court specifically leaves the question of unconscionability for determination on remand. And the court repeatedly says that its new analysis is simply “one factor” that could be considered in the unconscionability inquiry.

Even more important, the majority’s musing does not actually require a lower court to do anything in any particular case. As Justice Corrigan, who joined the majority, explained in her concurring opinion, the decision “does not require trial courts to adopt a new procedure or analytic approach”; rather “[c]onsiderations outlined in the majority’s opinion may be relevant to [unconscionability] analysis, but lower courts retain discretion to weigh these considerations as appropriate in each particular case.” That qualification is important, because if a California court were to apply this new test to invalidate an arbitration agreement, that ruling plainly would be subject to reversal on the ground that such state-law rulings are preempted on multiple grounds by the FAA.

Companies defending arbitration clauses in California now must be prepared to explain why, as a matter of California law, courts should not—indeed, must not—rest an unconscionability finding on this new analysis, as well as why a refusal to enforce an arbitration agreement based on the California Supreme Court’s new rationale would violate the FAA. If the California courts do not heed those warnings, the state’s law of unconscionability is on track for a return trip to the U.S. Supreme Court.

We discuss the Sonic decision in much greater depth here.

We frequently help companies address how to manage dispute resolution with their customers and employees—and in particular, how to make use of arbitration as a fair alternative to litigation in court (including class actions).  As a result, we have a great deal of experience with drafting new arbitration agreements and helping companies fine-tune their existing agreements.  We provide some of our insights in  a recent article published in the Spring 2013 issue of the ABA’s Dispute Resolution Magazine called Getting Under the Hood: A Practical Guide to Drafting Consumer and Employee Arbitration Agreements (pdf).  We hope that readers of the blog find that it provides useful guidance for how businesses should approach consumer or employment arbitration.

The Supreme Court’s decision today in American Express Co. v. Italian Colors Restaurant (pdf), No. 12-133, eliminated the last significant obstacle to adoption of fair, efficient arbitration systems that increase access to justice for consumers while reducing transaction costs for everyone, particularly the huge legal fees of both plaintiffs’ lawyers and defense lawyers.

In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court held that the Federal Arbitration Act (FAA) prohibits courts from refusing to enforce arbitration agreements on the ground that they do not provide for class actions. Today’s ruling in American Express makes clear that Concepcion’s determination applies to claims under federal law as well. Mayer Brown represented AT&T Mobility in Concepcion and filed an amicus brief (pdf) for the Chamber of Commerce of the United States of America and Business Roundtable in American Express.

American Express has significant implications both for courts’ consideration of attempts to invalidate arbitration agreements and for the policy debate over the enforceability of those agreements. We discuss both, after explaining the grounds for the Supreme Court’s ruling.

Continue Reading Supreme Court Rejects Challenge to Arbitration Agreements