The Future of Class Action Arbitration Part II
By: Adam Prom
Ways for class arbitration to survive
In light of the above class arbitration jurisprudence, it is evident that the Supreme Court is quite hostile to class arbitration. This is especially true due to the fact that the majority in three out of the above four cases declared that class arbitration is inconsistent with bilateral arbitration.[i] Despite this hostility, class arbitration can survive in limited circumstances under the Court’s jurisprudence. Most obviously, under Stolt-Nielsen, class arbitration can occur where there is an explicit agreement authorizing it. After Oxford Health, it is clear that class arbitration can proceed when parties agree that an arbitrator should determine what their contract means, including whether its terms allowed class arbitration. Following Italian Colors, class arbitration may be allowed if plaintiffs are not able to vindicate their statutory remedies due to arbitration filing and administrative fees. Notwithstanding these avenues for survival, how else will class arbitration occur in the future?
A. National Labor Relations Board (NLRB)
One possible avenue for the survival of class arbitration is under the NLRB. This path is exemplified by a case involving D.R. Horton, Inc.[ii] In D.R. Horton, the NLRB held that the class action waiver D.R. Horton required its employees to sign violated the National Labor Relations Act (NLRA), which assures employees a right to engage in concerted activities[iii] and which has been interpreted to allow collective actions in litigation or arbitration.[iv] A more recent NLRB case also held that class action bans in arbitration agreements are unlawful under the NLRA.[v] Related to these cases are those involving the Fair Labor Standards Act (FLSA). In Raniere v. Citigroup,[vi] the court held that the right to proceed collectively under the FLSA could not be waived. Commentators have suggested that the Raniere line of precedent could be a vehicle by which low-wage workers can have their claims aggregated.[vii]
Nonetheless, the NLRB’s order in D.R. Horton has all but been invalidated. First, at least one court within the same jurisdiction opposes its reasoning.[viii] Second, the Fifth Circuit reviewed D.R. Horton and issued an opinion on December 3, 2013.[ix] In relevant part, the Fifth Circuit disagrees with the NLRB’s reasoning by discussing how the FAA is equally as important as the NLRA.[x] The Fifth Circuit also cites Concepcion to say that the NLRB’s prohibition of class-action waivers effectively disfavors individual arbitration.[xi] For this reason, the Fifth Circuit says the NLRB’s decision violates the FAA.[xii] The opinion supports this finding by stating that neither the NLRA’s text nor its legislative history contains a command against application of the FAA.[xiii] Moreover, the Fifth Circuit emphasizes that every sister circuit to consider this issue has declared that it would not defer to the NLRB’s rationale in D.R. Horton and held that class waivers in arbitration agreements are enforceable.[xiv]
Serious doubt has also been cast upon Raniere. Indeed, the Second Circuit reviewed that decision and held that the FLSA does not preclude class waivers.[xv] First, the Second Circuit discusses how no congressional command requires it to reject the waiver of class arbitration in the FLSA context.[xvi] Second, the Second Circuit cites Italian Colors to reason that the effective vindication doctrine does not apply simply because it is not “economically feasible” for a plaintiff to enforce his statutory rights individually.[xvii] Put another way, the Second Circuit reiterates the Supreme Court’s position in Italian Colors that the expense in proving a statutory remedy does not foreclose the right to pursue that remedy.[xviii]
For these reasons, it appears that the door to the future for class arbitration under both the NLRA and FLSA has been shut. Therefore, as one commentator has noted, in the context of employment arbitration “individual arbitration of wage claims might be the only avenue left for many low-wage workers.”[xix]
B. State unconscionability defenses
In order to avoid the Supreme Court’s declaration in Concepcion that state rules that interfere with “with [the] fundamental attributes of arbitration,” are inconsistent with the purposes of the FAA and should be preempted,[xx] state courts are analyzing arbitration agreements to see if unconscionability impacted the formation of the contract.[xxi] This analysis is being conducted because the doctrine of unconscionability remains a basis for invalidating arbitration provisions.[xxii] In particular, state courts use the doctrine to guard against one-sided contracts, oppression, and unfair surprise, which can occur during the process of contract formation because it is at that time that a party is required to agree to objectively unreasonable terms.[xxiii] For example, in Brewer v. Missouri Title Loans,[xxiv] the Missouri Supreme Court found an entire arbitration agreement unconscionable because it was non-negotiable and its terms were extremely one-sided.[xxv] While unconscionability may invalidate entire arbitration agreements, this defense may not aid much in the survival of class arbitrations.
This avenue for survival is likely limited because Concepcion is being interpreted to mean that a court cannot invalidate an arbitration agreement on the sole basis that it contains a class waiver.[xxvi] This means that the existence of a class waiver, alone, will not make the entire arbitration agreement unconscionable. Instead, class arbitration will likely only survive under state unconscionability defenses when arbitration agreements containing class waivers can be invalidated as a whole because of non-negotiable and extremely one-sided terms, as in Brewer. Yet, even that may not be enough if courts begin following the reasoning of recent Sixth Circuit case law that says an agreement is not unconscionable even when an arbitration agreement is one-side and adhesive.[xxvii] Reliance on state unconscionability defenses to help ensure the survival of class arbitration may also prove limited due to the following: wide variation among jurisdictions in applying the doctrine, the ability to use choice of law clauses to avoid jurisdictions that take a liberal approach to unconscionability, and the potential of FAA preemptions of state unconscionability law.[xxviii]
C. Agency Regulations
Class arbitration may survive in a limited fashion under recently enacted regulations. Specifically, the Consumer Financial Protection Bureau issued “Regulation Z,”[xxix] which prohibits mandatory arbitration clauses and waivers of certain consumer rights. Because Regulation Z only relates to mortgage-related consumer transactions, it likely has a limited effect on the survival of class arbitration. Yet, class arbitration could be conducted in this context, especially because Regulation Z expressly allows a consumer and creditor to agree to use arbitration to resolve a dispute after it arises.[xxx] Because this regulation became effective June 1, 2013, very little litigation concerning its provisions has occurred.[xxxi] Nonetheless, commentators predict that more will surely follow.[xxxii] Therefore, this avenue for class arbitration’s survival is only beginning to take shape.
D. Mass and collective arbitral procedures
Class arbitration may survive inside and outside the U.S., albeit in different forms. Abaclat v. Argentine Republic[xxxiii] has been labeled as one of the most controversial international arbitrations in recent years because 60,000 claimants joined their claims in a single arbitration.[xxxiv] For the proceeding to progress, the majority in Abaclat frames the arbitration as a “mass” action in order to avoid the U.S.’s hostility to class arbitration.[xxxv] To do this, the majority uses a hybrid of aggregate and representative relief, which allows it to consider questions of consent and admissibility separately.[xxxvi] Conducting a large-scale arbitration in this fashion may provide a path for class arbitration’s survival internationally despite existing in a modified form.
Additionally, another aggregate arbitral procedure exists. “Collective arbitration” has developed as an alternative and is different from class arbitration in that it involves opt-in procedures rather than opt-out procedures.[xxxvii] Collective arbitrations have been conducted in the U.S.,[xxxviii] and they could help ensure the survival of aggregate arbitral procedures in general because parties may implicitly agree to them within an arbitration agreement.[xxxix]
Consequently, it appears that class arbitration may survive in the U.S. although it could take on a different form. Regardless of the official form of the proceeding, the fundamental quality of class arbitration—the aggregation of claims—would remain. Nonetheless, the possibility exists that the Supreme Court’s hostility to anything other than bilateral arbitration could impair class arbitration’s ability to take on alternative forms. While the future of class arbitration is still cloudy in the U.S. along these lines, Abaclat has broken new ground abroad, which has led most commentators to agree that the door has been opened to mass claims in the international investment arbitration arena.[xl]
Stay tuned to read Mr. Prom’s thoughts on the future debate surrounding class arbitration.
[i] Concepcion, 131 S. Ct. at 1750; Stolt-Nielsen, 130 S. Ct. at 1775; Italian Colors, 133 S. Ct. at 2312.
[ii] In Re D. R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012).
[iii] See Rhonda Wasserman, Legal Process in A Box, or What Class Action Waivers Teach Us About Law-Making, 44 Loy. U. Chi. L.J. 391, 413-14 (2012) (citing 29 U.S.C. § 157 (2012)).
[iv] See id. (citing D.R. Horton, 357 N.L.R.B. No. 184, at *2-3).
[v] See 24 Hour Fitness USA, Inc., 20-CA-035419, 2012 WL 5495007 (Nov. 6, 2012) (holding that employers may not compel employees to waive their right to collectively pursue litigation in all forums, arbitral and judicial).
[vi] 827 F. Supp. 2d 294, 299 (S.D.N.Y. 2011).
[vii] Nantiya Ruan, What’s Left to Remedy Wage Theft? How Arbitration Mandates That Bar Class Actions Impact Low-Wage Workers, 2012 Mich. St. L. Rev. 1103, 1147 (2012)
[viii] LaVoice v. UBS Fin. Servs., Inc., No. 11-2308, 2012 WL 124590, at *6 (S.D.N.Y. Jan. 13, 2012) (declining to follow D.R. Horton and emphasizing how Concepcion stands “against any argument that an absolute right to collective action is consistent with the FAA’s ‘overarching purpose”’).
[ix] D.R. Horton, Inc. v. N.L.R.B., No. 12-60031, 2013 WL 6231617 (5th Cir. Dec. 3, 2013).
[x] Id. at *9.
[xi] Id. at *11.
[xii] Id.; see also Wasserman, Legal Process in A Box, at 431 (predicting that the Supreme Court will likely have to resolve the conflict between the NLRA, along with FINRA Rules that also invalidate class action waivers in certain circumstances, and the Court’s pro-arbitration policy under the FAA).
[xiii] Id. at *12.
[xiv] See id. at *14 (citing Richards v. Ernst & Young, LLP, No. 11–17530, 2013 WL 4437601, at *2 (9th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297–98 n. 8 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1055 (8th Cir. 2013).
[xv] Raniere v. Citigroup Inc., 11-5213-CV, 2013 WL 4046278, *2 (2d Cir. 2013).
[xvi] Id.
[xvii] Id.
[xviii] Id.
[xix] Ruan, What’s Left to Remedy Wage Theft?, at 1141.
[xx] Rudolph Cole, On Babies and Bathwater, at 489.
[xxi] See Brian J. Murray, I Can’t Get No Arbitration: The Death of Class Actions That Isn’t, at Least So Far, 60-SEP Fed. Law., 62 (2013) (discussing how state courts have resisted Concepcion by characterizing rules that are anti-arbitration in practice as being general in theory and holding entire arbitration clauses unconscionable instead of deciding whether the class action waiver within the clause was enforceable).
[xxii] Id.; see also 9 U.S.C.A. § 2 (West) (permitting agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability)
[xxiii] Brewer v. Missouri Title Loans, 364 S.W.3d 486, 492-93 (Mo. 2012) cert. denied, 133 S. Ct. 191 (U.S. 2012) reh’g denied, 133 S. Ct. 684 (U.S. 2012).
[xxiv] Id.
[xxv] Id.
[xxvi] Davis v. Sprint Nextel Corp., No. 12-01023, 2012 WL 5904327, *2 (W.D. Mo. Nov. 26, 2012); see also Robinson v. Title Lenders, Inc., 364 S.W.3d 505, 515 (Mo. 2012) (citing Concepcion, 131 S. Ct. at 1748).
[xxvii] See Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, 734 F.3d 594, 600 (6th Cir. 2013) (holding that the arbitration agreement at issue was not unconscionable despite its one-sided and adhesive nature because Italian Colors held that the absence of a class action right does not make an agreement unenforceable notwithstanding other unconscionability concerns).
[xxviii] Martin H. Malin, The Arbitration Fairness Act: It Need Not and Should Not Be an All or Nothing Proposition, 87 Ind. L.J. 289, 308 (2012).
[xxix] 12 C.F.R. § 1026.36(h).
[xxx] Id.
[xxxi] The only case the author could find concerning § 1026.36 is CFPB, v. Castle & Cooke Mortg., et al., 2013 WL 4047047 (D. Utah), which alleges the defendant is in violation of § 1026.36(d)(1)(i) by paying its loan officers bonuses based on terms or conditions of consumer-credit transactions secured by a dwelling. No case could be located concerning Regulation Z’s prohibition of mandatory arbitration clauses and waivers under § 1026.36(h).
[xxxii] Murray, I Can’t Get No Arbitration, at 62-63.
[xxxiii] Abaclat (formerly Beccara) v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility (Aug. 4, 2011), available at http:// italaw.com/sites/default/files/case-documents/ita0236.pdf
[xxxiv] S.I. Strong, Mass Procedures As A Form of “Regulatory Arbitration”-Abaclat v. Argentine Republic and the International Investment Regime, 38 J. Corp. L. 259 (2013).
[xxxv] Id. at 267.
[xxxvi] Id. at 267-68.
[xxxvii] Id. At 285-86.
[xxxviii] See Velez v. Perrin Holden & Davenport Capital Corp., 769 F. Supp. 2d 445, 446-47 (S.D.N.Y. 2011) (permitting collective arbitration for labor and compensation disputes); see also JetBlue Airways Corp. v. Stephenson, 88 A.D.3d 567, 573-74, (N.Y. App. Div. 2011) (allowing collective arbitration for statutory claims).
[xxxix] See Strong, Mass Procedures As A Form of “Regulatory Arbitration”, at 285 (citing JetBlue Airways Corp., 88 A.D.3d at 573-74 to discuss how courts can distinguish Stolt-Nielsen because under a collective action all of those affected are actual parties, unlike in a class arbitration. Therefore, because collective and class procedures are different and because a collective action is not so fundamentally different from an ordinary arbitration, parties can implicitly agree to a collective arbitration unlike the class arbitration in Stolt-Nielsen).
[xl] Id. at 321-22.