Federal Arbitration Act

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

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

As readers of this blog know, prior to the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, the California Supreme Court (and a number of other state courts) had declared that waivers of class-wide arbitration were unenforceable as a matter of state law. But in Concepcion, the Supreme Court held that the Federal Arbitration Act (“FAA”) preempts state-law rules requiring the availability of class-wide arbitration.

How do the FAA and the Supremacy Clause of the U.S. Constitution affect the interpretation of arbitration clauses written prior to Concepcion? The Supreme Court may provide further guidance on that issue in DIRECTV, Inc. v. Imburgia, No. 14-462, in which it granted certiorari today. (We have previously blogged about Imburgia.)

At issue in Imburgia is whether an arbitration provision that specifies that it is inapplicable if its ban on class-wide procedures is unenforceable under “the law of [the customer’s] state” is (a) governed by state law without reference to FAA preemption, or (b) by state law taking into account the preemptive effect of the FAA. Stated another way, did the parties contract out of the FAA’s coverage?

Respondent Imburgia, a customer of petitioner DIRECTV, Inc. (“DTV”), filed a class action in California state court against DTV in 2007, alleging that DTV improperly charged early termination fees to its customers. DTV’s Customer Agreement contained an arbitration clause that specified that it was governed by the FAA and that arbitration would take place on an individual rather than class-wide basis. That arbitration clause also stated that “[i]f … the law of your state would find this agreement to dispense with class action procedures unenforceable, then this entire Section [i.e., the arbitration clause] … is unenforceable.”

In Discover Bank v. Superior Court, the California Supreme Court declared that consumer arbitration agreements are unconscionable under California law unless they allow for class arbitration. In light of Discover Bank, DTV did not invoke the arbitration provision when the lawsuit was filed. Shortly after the Supreme Court decided Concepcion—and held Discover Bank to be preempted by the FAA—DTV moved to compel arbitration. The trial court denied DTV’s motion.

The California Court of Appeal affirmed. The Court of Appeal held that the reference in the arbitration provision to “the law of [the customer’s] state” was ambiguous and could mean either (1) the state’s law without regard to federal law; or (2) the state’s law, as superseded by federal law (such as the FAA). The court adopted the first interpretation—i.e., that the preemptive effect of federal law does not bear on the meaning of “the law of [the customer’s] state.” Under that interpretation, the California Court of Appeal declared, the law of California is that agreements to dispense with class action procedures are unenforceable, and accordingly DTV’s arbitration clause is unenforceable. The California Supreme Court denied review. (We filed an amicus letter (pdf) in the case urging that the California Supreme Court grant review.)

Interpreting the same DTV arbitration provision, the Ninth Circuit in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), reached the opposite conclusion. In Murphy, the Ninth Circuit held 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. The Customer Agreement’s reference to state law does not signify the inapplicability of federal law,” because under the Supremacy Clause, “the Constitution [and] laws . . . of the United States are as much a part of the law of every State as its own local laws and Constitution.” Id. at 1226 (citation omitted). As a result, the Ninth Circuit concluded that the reasoning later adopted by the California court—that “the parties intended state law to govern the enforceability of the arbitration clause, even if the state law in question contravened federal law”—“is nonsensical.” Id.

The Supreme Court’s decision in Imburgia should help clarify whether a company’s good-faith effort to include in an arbitration provision language designed to comply with existing state law risks can have the unintended effect of jettisoning the protections of the FAA. The case will likely be briefed over the next several months and argued in the fall.

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.

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.

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

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