AT&T Mobility LLC v. Concepcion

The Supreme Court kicked off its October 2017 Term yesterday with a spirited oral argument in the three cases involving the enforceability of arbitration agreements in employment contracts.

As we have explained, these cases—Epic Systems v. Lewis, Ernst & Young LLP v. Morris, and NLRB v. Murphy Oil USA—present the question whether an arbitration agreement in an employment contract that requires bilateral arbitration, and prohibits class procedures, is invalidated by Section 7 of the National Labor Relations Act (NLRA), which gives employees the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” According to the National Labor Relations Board, Section 7 protects employees’ right to seek relief on a class-wide basis, and therefore renders unenforceable arbitration agreements that bar class procedures—even though the Supreme Court has twice held that the Federal Arbitration Act (FAA) protects the enforceability of such agreements, in AT&T Mobility LLC v. Concepcion (2011) and American Express Co. v. Italian Colors Restaurant (2013).

The four Justices who dissented in either Concepcion or Italian Colors (or both) aggressively defended the NLRB’s determination. When the dust settled, however, it was not at all clear that they will be able to attract a fifth Justice to their position.

Continue Reading Supreme Court Considers Class Waivers in Employment Arbitration Agreements

As we’ve noted in this space before, one of the most persistent efforts to undermine the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion—which held that the Federal Arbitration Act (FAA) generally requires enforcing arbitration agreements that waive class or collective proceedings—has been spearheaded by the National Labor Relations Board. In 2012, the Board concluded in the D.R. Horton case (pdf) that Section 7 of the National Labor Relations Act (NLRA), which protects the ability of employees to engage in “concerted activities” (for example, union organizing), supersedes the Supreme Court’s interpretation of the FAA in Concepcion and its progeny and requires that employees be allowed to bring class actions (either in court or in arbitration).

Until recently, the D.R. Horton rule had been rejected by every appellate court to consider it—the Second Circuit, Fifth Circuit, and Eighth Circuit as well as the California and Nevada Supreme Courts—not to mention numerous federal district courts. But last year, the Seventh Circuit and Ninth Circuit parted ways with this consensus, agreeing with the Board and concluding that (at least in some circumstances) agreements between employers and employees to arbitrate their disputes on an individual basis are unenforceable.

This circuit split all but guaranteed that the Supreme Court would need to step in, and sure enough, last Friday, the Court granted certiorari in three cases involving the validity of the D.R. Horton rule. (We drafted amicus briefs for the U.S. Chamber of Commerce in each case). One case, NLRB v. Murphy Oil USA, Inc., arises out of a Board decision finding that an employer had engaged in an unfair labor practice by entering into arbitration agreements with its employees, and the other two, Epic Systems Corp. v. Lewis and Ernst & Young LLP v. Morris, are private-party disputes in which employees invoked D.R. Horton to challenge their arbitration agreements.

Continue Reading Supreme Court Will Review NLRB’s Anti-Arbitration D.R. Horton Rule

The rule (pdf) just proposed by the Consumer Financial Protection Bureau to regulate arbitration agreements is not a surprise: the Bureau has said for months that it was developing such a rule.

This post examines the details of the proposal—how it would regulate arbitration, its scope, and its effective date. We also discuss the course of the rulemaking process, including potential judicial review of any final rule. In a future post, we’ll evaluate the CFPB’s purported justifications for the regulation.

The bottom line: The CFPB’s proposal is effectively a blanket ban on the use of arbitration by companies in the consumer financial services arena. It is an attempt to overrule by regulation the Supreme Court’s landmark decision five years ago in AT&T Mobility LLC v. Concepcion (in which we represented AT&T). Businesses that are concerned about the ramifications of this proposal will have 90 days from the date the proposal is published in the Federal Register to submit comments to the agency, and if a rule is adopted in the present form of the proposal, parties are certain to seek judicial review.

Continue Reading The CFPB’s Proposed Anti-Arbitration Rule

A unanimous panel of the Fourth Circuit has held Del Webb Communities, Inc. v. Carlson that the question whether an arbitration agreement authorizes class-wide arbitration is for the courts, not an arbitrator, to decide—unless the agreement clearly and unmistakably delegates that issue to the arbitrator. In so holding, the Fourth Circuit aligned itself with decisions of the Third and Sixth Circuits. As we discuss below, the decision benefits businesses that seek to enforce individual arbitration when the arbitration agreement does not expressly authorize class arbitration: If the important question of the availability of class-wide arbitration was assigned to an arbitrator, meaningful judicial review of that decision would not be available.

Continue Reading Fourth Circuit: Courts, Not Arbitrators, Decide If Arbitration Agreement Authorizes Class-Wide Arbitration

In AT&T Mobility LLC v. Concepcion, the Supreme Court held that the Federal Arbitration Act (“FAA”) preempts state-law rules barring enforcement of an arbitration agreement if the agreement does not permit the parties to utilize class procedures in arbitration or in court. Before Concepcion, the law of California included that limitation on the enforceability of arbitration agreements, but Concepcion declared that rule invalid as a matter of federal law. Yesterday, in DIRECTV, Inc. v. Imburgia (pdf), the Supreme Court held that Section 2 preempts a state-law interpretation of an arbitration agreement based on a legal rule that the state’s courts had applied only in the arbitration context, concluding that the state-law ruling “does not rest ‘upon such grounds as exist . . . for the revocation of any contract.’”

(We filed an amicus brief on behalf of the U.S. Chamber of Commerce in support of DTV.)

Continue Reading Supreme Court Holds that Federal Arbitration Act Preempts California Court’s Interpretation of Arbitration Clause

The California Supreme Court has a reputation for hostility to arbitration, especially in the consumers and employment context. Much of the arbitration docket of the United States Supreme Court over the past 30 years has involved reversals of California Supreme Court decisions refusing to enforce arbitration agreements, most recently (and perhaps most notably) in AT&T Mobility v. Concepcion (in which the authors were counsel). Even when seemingly compelled to enforce an arbitration provision in the face of recent U.S. Supreme Court authority, the California court has often found a way to carve out some exception to arbitration in the particular case or to offer suggestions to plaintiffs seeking to avoid arbitration in a future case. A prime example is the 2014 decision in Iskanian v. CLS Transportation, which exempted from arbitration all wage-and-hour civil-penalty claims under the Private Attorney General Act.

The decision in Sanchez v. Valencia Holding Co. (pdf) represents a welcome break from this pattern, upholding an arbitration agreement against an array of unconscionability challenges without finding it necessary to sever even a single clause to render the agreement enforceable. Although every point decided in Sanchez is consistent with recent U.S. Supreme Court authority applying the Federal Arbitration Act, however, the opinion’s emphasis on the specific factual setting may seed further efforts to evade arbitration agreements . As so often is the case, the devil is often in the details.

Continue Reading Man Bites Dog: California Supreme Court unanimously rejects unconscionability challenge to consumer arbitration provision

In our first post of 2015, we wanted to congratulate our colleague and mentor, Evan Tager, for his recent recognition as a Litigation Trailblazer and Pioneer by the National Law Journal.

Evan has been at the forefront of major developments in the law—including those affecting class action and mass tort litigation.  As this profile notes, Evan has been a leader on at least two major issues.  First, he helped convince courts of the need for due process limitations on excessive punitive damages awards, ultimately prevailing in BMW of North America v. Gore.  And second—working with us and others at the firm—Evan spearheaded Mayer Brown’s efforts on behalf of AT&T to craft and enforce arbitration agreements that require fair individual arbitration instead of class actions, culminating in the win for the business community in AT&T Mobility LLC v. Concepcion.

Evan’s award is reason enough for us to write this post.  But what the award does not capture is that, in addition to being among the very best appellate lawyers who represent businesses, he is a wonderful teacher, mentor, and friend.  Evan has guided the two of us, as well as many other Mayer Brown lawyers, as our careers have developed.  Indeed, Evan encouraged us to launch this blog.  So we have especially good reason to celebrate Evan’s recent accomplishment.

We’ll be back to our regularly scheduled programming later this week—Archis will have a blog post on the Seventh Circuit’s 2014 cases addressing class settlements.

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.

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.