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

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

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.

We’ve previously blogged about the Supreme Court’s grant of review and argument in Oxford Health Plans LLC v. Sutter.  Today, the Supreme Court issued its decision (pdf).  In a narrowly-written ruling, the  Court held that courts lack authority under the Federal Arbitration Act (FAA) to vacate an arbitral award authorizing class arbitration when when (1) the arbitrator’s decision is based on an arguable effort to construe the arbitration agreement and (2) the parties had agreed that the arbitrator should decide whether the arbitration agreement allows class-wide arbitration. Under such limited circumstances, the Court held that the FAA’s limited standard of review of arbitral awards precludes a court from correcting any mistakes in interpreting the agreement. Justice Kagan, who wrote the majority opinion, declared that “[t]he arbitrator’s construction holds, however good, bad, or ugly.”

This decision revisits the question whether an arbitrator may construe an arbitration agreement to permit class arbitration when the parties have not expressly agreed to that procedure. The Supreme Court previously addressed the issue in Stolt-Nielsen v. AnimalFeeds International Corp. (pdf), 130 S. Ct. 1758, 1775 (2010), holding that “a party may not be compelled under the [FAA] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” And in Oxford Health Plans, the Court reaffirmed its prior holding that “[c]lass arbitration is a matter of consent,” and that an “arbitrator may employ class procedures only if the parties have authorized them.” But just as the the Court had previously declined in Stolt-Nielsen “to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration,” it again declined to reach that issue in Oxford Health Plans. Instead, even though the arbitration provision at issue was silent about whether class arbitration was permitted, the Court concluded that because the parties had submitted the interpretation of the agreement to the arbitrator, any error by the arbitrator in construing the agreement to permit class arbitration was not subject to correction on judicial review because the FAA authorizes only limited judicial review of arbitral awards.

In a footnote, the Court reserved a crucial question that limits the practical consequences of the decision. The Court commented that it “would face a different issue” had Oxford Health Plans preserved the argument that the availability of class arbitration is a “question of arbitratibility,” which is a “gateway” issue for courts, rather than arbitrators, to decide. According to Justice Kagan, “Stolt-Nielsen made clear that this Court has not yet decided whether the availability of class arbitration is a question of arbitrability.” Because Oxford Health Plans had agreed that the arbitrator should decide whether the agreement authorized class arbitration, the Court concluded that the case did not provide a vehicle to decide whether the available of class procedures falls within the category of “questions of arbitrability.”  The footnote therefore invites parties in future cases to argue that the availability of class arbitration is a threshold issue that should be decided by the courts, not by the arbitrator.

Although joining the majority opinion, Justice Alito also filed a concurrence (joined by Justice Thomas) that provides useful guidance to parties and arbitrators presented with this issue. As Justice Alito explained, when an arbitration agreement is silent with respect to class-wide arbitration, the agreement should generally not be construed to permit class arbitration because of the incompatibility of class procedures with traditional characteristics of arbitration. Justice Alito added that because absent class members have not consented to the arbitrator’s authority, they (as well as the defendant) would be able to advance substantial due process challenges to any arbitral award entered on a class-wide basis. Consequently, Justice Alito explained, absent class members would need to opt-in to the class arbitration proceeding in order to be bound by the arbitrator’s decision.

Because Oxford’s concession was central to the Court’s holding, and because the Court left the door open to obtaining judicial review of the class-arbitration question by framing the question as one of arbitrability, the Court’s ruling is narrow. Equally significant, the problem at issue in Oxford Health Plans is one that is receding: Companies increasingly have included in their arbitration agreements express preclusions of class arbitration. Today’s decision is a reminder that businesses should consider revising any arbitration agreements that remain “silent” on the issue of class arbitration.

Thus, in the long run, the most significant aspect of the Court’s decision may be Justice Alito’s concurrence, which spotlights the due process challenges to class arbitrations that proceed under contracts that do not clearly authorize the procedure.

In the wake of AT&T Mobility LLC v. Concepcion, the California Supreme Court granted review in three cases involving significant arbitration issues, including key questions about whether the Federal Arbitration Act preempts California law concerning the enforceability of arbitration agreements.

My colleagues and I have filed amicus briefs on behalf of the Chamber of Commerce of the United States in all three cases, the most recent of which is Iskanian v. CLS Transportation, No. S204032.

In Iskanian, the Second District of the California Court of Appeal had affirmed an order compelling individual arbitration in a putative class/representative action alleging, among other things, that the defendant had failed to pay overtime and provide required meal and rest breaks. For more background on the grant of review and the decision below, please see our prior blog post here.

The Chamber’s amicus brief (pdf) to the California Supreme Court explains why the court of appeal was correct.

Continue Reading U.S. Chamber of Commerce Files Amicus Brief On Arbitration Issues In Key California Supreme Court Case

The Supreme Court heard oral argument earlier today in Oxford Health Plans LLC v. Sutter, No. 12-135, on whether the Federal Arbitration Act (“FAA”) allows an arbitrator to interpret an arbitration agreement that does not affirmatively authorize class arbitration to permit use of that procedure.

For some background on Oxford, please see our prior blog post.  My takeaway from the argument (transcript here) is that two competing principles under the FAA were in play.  On the one hand, class arbitration is highly disfavored:  The Supreme Court has previously explained—both in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. and AT&T Mobility LLC v. Concepcion—that class arbitration is not the type of arbitration envisioned by the FAA because, like jury trials and full-blown discovery, class proceedings are incompatible with the benefits of arbitration.  On the other hand, courts generally review an arbitrator’s decision with a great deal of deference.  In particular, review of the substance of an arbitrator’s award ordinarily is limited to whether an arbitrator exceeded his or her powers or engaged in “manifest disregard of the law.”

How will the Court balance these principles?  From the argument, it’s hard to tell how the Court will rule.  It seemed that most of the Justices viewed the arbitrator’s decision to be legally incorrect in light of Stolt-Nielsen.  But there was considerable disagreement over whether a federal court can remedy that error.  Some Justices’ questions appeared to signal that, so long as the arbitrator had been trying to interpret the language of the arbitration clause, that interpretation—even if terribly mistaken—cannot be overturned given the limited standard of review for arbitral awards.  But other Justices appeared to believe that the arbitrator’s reading of the agreement was so implausible—especially in the face of Stolt-Nielsen—that it could be overturned even under a deferential standard of review, just as the Court held in Stolt-Nielsen itself.  And Chief Justice Roberts discussed whether to chart a different path, noting that some of the Court’s precedents had applied de novo (that is, non-deferential) review when the issue an arbitrator has determined is whether a particular individual or entity is bound by an arbitration agreement.  As questions by Justice Alito highlighted, the effect of the arbitrator’s ruling in this case did not just affect Oxford and the named plaintiff, Dr. Sutter, but also some 20,000 other physicians who Dr. Sutter purported to represent.

Businesses should watch for the Supreme Court’s decision in this case for a number of reasons.  First, the case will affect those businesses that are parties to arbitration agreements that do not address class arbitration explicitly.  If the Court rules against Oxford, businesses may be at a greater risk of being forced into class arbitrations to which they never intended to agree.  Second, it seems likely that the Court will address the standard of review applicable to arbitral awards—an issue that could arise in a wide variety of arbitration-related settings.

At the same time, Oxford may have a limited shelf life.  Going forward, most companies should be able to avoid the issues presented in this case by expressly addressing (and precluding) class arbitration in their arbitration agreements.  In addition, companies may wish to consider revising any existing arbitration agreements that do not address class arbitration to make their intentions clear.

Two years ago, the Supreme Court held “that a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Stolt-Nielsen v. AnimalFeeds International Corp., 130 S. Ct. 1758, 1775 (2010) (emphasis in original). But the Court expressly declined at the time “to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.” Today, the Supreme Court granted review in Oxford Health Plans LLC v. Sutter, No. 12-135, to resolve a circuit split over what counts—consistent with the FAA—as an agreement to authorize class arbitration. This issue is important to businesses that seek to enforce arbitration agreements in the context of putative class actions when those agreements do not expressly address class arbitration.

Continue Reading Supreme Court Grants Review in Class Arbitration Case, Oxford Health Plans LLC v. Sutter