The Enforceability of Class Action Waivers in Arbitration Clauses

Article excerpt

Employers are increasingly including in their arbitration agreements a provision waiving the right to bring class action claims in arbitration. The case law regarding the enforceability of class action waivers in the employment context is relatively sparse. There is more case law on this issue in the consumer arena. This article addresses the issues surrounding class action waivers and proposed legislation that would make this issue moot by making arbitration agreements in the employment setting unenforceable.

With the enforceability of arbitration agreements established in the labor and employment arena, even with respect to statutory discrimination claims, employers are fighting efforts by employees to bring collective claims in arbitration. The main tool employers are using is a provision waiving the right to bring a class or collective arbitration. Should courts enforce such waivers? Some proponents of class arbitration waivers argue that employees ought to be able to waive a procedural right in exchange for the benefits of arbitration; others argue that class arbitration waivers make it impossible to bring low-value claims to the arbitral forum because arbitration costs (if the employer is not required to pay them) and the employee's attorney fees could exceed the potential recovery, thereby depriving the employee of his or her substantive rights. On the other hand, if the whole point of a collective action is to help people bring meritorious claims despite financial barriers, does affordable access to arbitration accomplish this goal, making class proceedings unnecessary?

The presumption in the Federal Arbitration Act (FAA) is that arbitration agreements will be "valid, irrevocable, and enforceable" unless a generally applicable, state law contract defense would apply. Thus, to be enforceable, the contract- including any class arbitration waiver- must not violate state contract law.

What are generally applicable, state law contract defenses? Examples include unconscionable provisions or provisions that violate public policy, such as one that protects a party from being held liable for violating the law.

The legal status of class action waivers in consumer contracts that require arbitration of disputes has been heavily litigated, with decisions holding these waivers unenforceable with increasing frequency. Whether this trend will continue is unclear. A decision on the issue could be forthcoming since the U.S. Supreme Court has been asked to review a case involving a class arbitration waiver in the antitrust context.1 In the meantime, Congress is currently considering a bill that would make mandatory arbitration provisions in employment agreements and consumer contracts unenforceable altogether.2

The situation is different in the employment arbitration context. Only a few courts have ruled on the enforceability of class arbitration waivers in employment contracts. One reason may be that arbitration agreements between employees and employers are heavily scrutinized for fairness and more thought goes into signing them than a credit card contract application. In one California employment case, the court refused to enforce a class arbitration waiver in a wage and hour case on the theory that the waiver could leave plaintiffs with no remedy for violations of their statutory rights. Other courts have disagreed, holding that a class arbitration waiver in an employment agreement is enforceable because it is consistent with the FAA's goals of "simplicity, informality, and expedition." These cases are discussed more fully below.

The California Approach

In 2006, the California Supreme Court issued a seminal decision on waivers of collective action in arbitration. Gentry v. Superior Court of Los Angeles3 began as a class action lawsuit against Circuit City Stores. The lawsuit alleged that the employer "illegally misclassified" the plaintiff class to avoid paying them overtime pay. …