Companies routinely turn to arbitration as an efficient and cost-effective means of resolving disputes. Increasingly, these same companies use arbitration to prohibit consumers and employees from commencing class actions. While certain courts look with skepticism on class-action waivers in arbitration agreements, it is clear from the Supreme Court’s decisions, beginning with AT&T Mobility LLC v. Concepcion through the Court’s most recent decision in Epic Systems Corporation v. Lewis, that class action arbitration waivers do not violate the law.
In Epic Systems, employees pointed to the Federal Arbitration Act’s (FAA) “savings clause,” which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract,” arguing that it allowed employees to use the National Labor Relations Act (NLRA) to void class-action waivers in arbitration agreements. Because the NLRA guarantees workers “the right to self-organization, to form, join or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection” the employees argued that the NLRA displaced the FAA.
The Court disagreed. Relying on its prior precedents, the Court again stated that the savings clause only allows courts to invalidate arbitration agreements in cases where “generally applicable contract defenses such as fraud, duress, or unconscionability” apply. It does not apply when a party seeks to invalidate an arbitration clause in a way that derives “from the fact that an agreement to arbitrate is at issue.” The Court also found that even if the savings clause did apply, the NLRA focuses on the right to “organize unions and bargain collectively.” It therefore does not prevent class-wide arbitration.
Epic Systems reiterates the Court’s deference to arbitration agreements. In light of that deference, when drafting an arbitration agreement with a class action waiver, think about including the following points:
- Opt-out Option. Affording the consumer or employee a meaningful opportunity to opt out of the class action waiver can increase the chances of the clause being found enforceable.
- Conspicuous Language. The more prominent, clear and understandable a provision is, the more it is likely to be enforced. Clauses that are buried in lengthy agreements are more likely to be deemed procedurally unconscionable, as they give rise to surprise.
- Delegation to Arbitrator to Decide Enforcement. Clauses with clear and express language authorizing the arbitrator to decide whether the class action waiver is enforceable are enforceable under United States Supreme Court precedent. For those seeking enforcement of such clauses, resorting to an arbitrator's assessment of unconscionability may be preferable. One caveat, however: arbitrators, particularly those with legal training, generally attempt to follow governing law and there is no assurance that more favorable treatment will be provided by an arbitrator if governing state law suggests the clause is unconscionable.
- Authority to Allow Class Action. Under Stolt-Nielsen, S.A. v. AnimalFeeds, Int'l Corp., silence on class arbitration is tantamount to lack of authority to allow a class action to proceed in arbitration. Incorporating an arbitration association's rules that permit class arbitration can cloud the issue. Language expressly limiting such authority, if that is what is desired, not only clarifies matters, but puts the other party on notice of the rights it is waiving by agreeing to arbitrate.
- Cost and Fee Provisions Beneficial to Consumer/Employee. One of the purported benefits of class actions is the ability for litigants to pursue redress of grievances that would be cost-prohibitive if done on an individual basis. Therefore, including provisions that ameliorate the cost of arbitration, in order to make pursuit of claims on an individual basis more affordable, can influence enforcement.
- Severance Language. If one wishes to arbitrate even if one or two provisions are determined unconscionable, it is best to include clear severance language that encourages a court to enforce those aspects of an arbitration agreement that are found valid.
- Claimant-Friendly Forum. Another cost of arbitrating is having to travel for the hearing. Clauses that select a hearing locale most convenient to claimants can be a factor in determining enforceability.
If you have questions about class action arbitration waivers in construction contracts, or arbitration agreements in general, seek out the advice of an experienced attorney in those industries.
For more on this topic, or for additional citations, see 8 Bruner & O'Connor On Construction Law § 21:208.