Last week, the United States Supreme Court issued a decision that could be the beginning of the end of employment-related class action lawsuits.
Arbitration agreements are often viewed as attractive alternatives to costly and unpredictable litigation. However, when large groups join together in class-wide claims, the benefits of arbitration vanish. Therefore, arbitration agreements often include “class action waivers,” barring individuals from participating in group claims.
Some states won’t enforce these waivers, finding them “unconscionable” because the high cost of prosecuting individual claims for small amounts can effectively bar any real relief. In California, this is known as the “Discover Bank Rule” from a decision on this issue involving Discover Bank.
States Must Respect Arbitration
In AT&T Mobility, LLC v. Concepcion, 09-893 (April 27, 2011), handed down on April 27, 2011, Vincent and Liza Concepcion claimed that AT&T improperly charged them $30.22 for sales tax. They tried to join a class action for false advertising, but AT&T claimed the class action waiver in their arbitration agreement required that they pursue individual arbitration. The lower courts invoked the Discover Bank Rule allowing the Concepcion’s to join the class action.
The United States Supreme Court overruled the earlier decisions, finding that the Discover Bank Rule was inconsistent with and preempted by the Federal Arbitration Act (“FAA”). Since the contract between the parties intended them to participate in a two-party arbitration, refusing to enforce the waiver of class arbitration changed the essential purpose of the contract.
The Supreme Court explained that class arbitration sacrifices the informality and efficiency that Congress contemplated in enacting the FAA. “Arbitration is a matter of contract,” the Court observed, “and the FAA requires courts to honor parties’ expectations.” The Court said the Discover Bank Rule must yield since it impedes “the accomplishment of the FAA’s objectives” of promoting arbitration and ensuring that arbitration agreements are enforceable according to their terms.
The full implication of Concepcion is not entirely known but it could substantially restrict class actions in employment litigation. In particular, it could dramatically change wage and hour litigation which typically involves large groups suing for relatively small individual losses. Without lumping all of these claims together, it may be hard for individuals to secure legal representation.
Employers with existing arbitration agreements should carefully examine them to determine whether they should be modified to obtain the benefits of Concepcion. Employers that do not currently use arbitration agreements should weigh the pros and cons of adopting them. We’ll know more when the Concepcion decision is considered and refined, but this could be a very beneficial tool in the battle against class-based claims against employers.