Can Employers Preclude Class Actions Through Mandatory Arbitration Agreements That Are Silent as to Whether Classes Are Permitted?
Consumer Attorneys of California, Forum Magazine
Copyright CAOC, Forum, June 2005. Reprinted with permission.
By John N. Quisenberry and Susan E. Abitanta
A. Introduction
Employers commonly require employees to forfeit their right to a jury through employment agreements containing mandatory arbitration clauses. These arbitration clauses are generally favored and upheld. See Armendariz v. Foundation Health Psychare Servs., Inc., 24 Cal. 4th 83 (2000) (providing test criteria for whether mandatory arbitration clauses are unconscionable or enforceable). Employers argue that the arbitration process is fair, because it allows employees to pursue all the same claims and remedies they could pursue in court. But, economically, many employee rights are only worth pursuing as a class action. A growing controversy in this area is whether arbitration agreements can be used to prevent employees from arbitrating their claims as part of a class of similarly situated employees.
In California, an arbitration provision which explicitly precludes class treatment of claims is unenforceable. See Szetela v. Discover Bank,1 97 Cal. App. 4th 1094, 1101-1102 (2002), cert. denied, 540 U.S. 811 (2003). Furthermore, California clearly authorizes classwide arbitration when arbitration agreements are silent on the issue. See, e.g., Blue Cross of California v. Superior Court, 67 Cal. App. 4th 42 (1998), cert denied, 527 U.S. 1003 (1999). Obviously, California employers should not be allowed to circumvent California law by doing indirectly (precluding class actions by an agreement's silence) what they cannot do directly (expressly precluding class actions).
Nothing in the Federal Arbitration Act (“FAA”), the California Arbitration Act (“CAA”), or California law precludes class arbitration in cases where the agreement is silent on class treatment. However, federal courts in the past have held that if an agreement did not expressly allow class treatment, class arbitration was not available. As a consequence, prior to the Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003) (“Bazzle”) decision, if an arbitration agreement was silent as to class actions, federal courts were likely to preclude their use.
In Bazzle, the United States Supreme Court framed the silence issue, then sidestepped it and concluded that whether class arbitration is permitted under an arbitration agreement is an issue for the arbitrator to decide. In making that determination, Bazzle instructs that arbitrators should consider whether the case to be arbitrated is based entirely on state law issues which do not raise federal questions for review. Another consideration is whether the agreement itself calls for the application of state or federal law to interpret its terms. Clearly, in California, class arbitration is not only acceptable but, when appropriate, the preferred method of adjudication. See infra Sections E & F.
B. After Bazzle, the FAA Has No Bearing on an Arbitrator's Determination of Whether Agreements Allow Classwide
1. Conflicting Approaches
Before the United States Supreme Court spoke in Bazzle, both state and federal courts had attempted to decide whether class arbitrations were permitted under consumer arbitration agreements governed by the FAA.2 Courts took two different approaches. Most of the federal courts interpreted an agreement's silence on the issue of class arbitration to preclude that procedure under section 4 of the FAA.3 In contrast, the California courts permit class arbitration when an agreement is silent on the issue.
a. The Federal Approach
The federal approach before Bazzle was enunciated by the Seventh Circuit in Champ v. Siegel Trading Co., 55 F.3d 269 (7th Cir. 1995), a class action alleging violations of the Commodity Exchange Act, RICO, and other state laws. In Champ, the Seventh Circuit held that “section 4 of the FAA forbids federal judges from ordering class arbitration where the parties’ arbitration agreement is silent on the matter.” The Champ court reasoned that “section 4 of [the act] requires [the courts to] enforce an arbitration agreement according to its terms.” Id. at 275-76. If the agreement did not include a term allowing class procedure, the argument went, the courts could not add such a term. The Champ court, however, did not discuss whether the arbitration agreement was an adhesion contract or one truly negotiated by the parties.
b. The California Approach
(1) Keating v. Superior Court
The California Supreme Court did consider whether a trial court could order class arbitration under adhesive but enforceable contracts in Keating v. Superior Court, 31 Cal. 3d 584 (1982), rev’d in part on other grounds in Southland Corp. v. Keating, 465 U.S. 1 (1984).4 Focusing on the consequences of precluding class arbitrations when arbitration is mandated by an adhesive contract, and balancing the potential inequities and inefficiencies against any prejudice to the contract’s drafter, the Keating court held that the trial court had authority to order class arbitration in appropriate cases. 31 Cal. 3d at 610-12.
(2) Blue Cross of California v. Superior Court
The California Court of Appeal expounded on the Keating holding and addressed the impact of the FAA on silent arbitration agreements in Blue Cross of California v. Superior Court, 67 Cal. App. 4th 42 (1998), cert denied, 527 U.S. 1003 (1999). Blue Cross held that section 4 of the FAA does not apply to the state courts at all. To support its conclusion, the court discussed the FAA's legislative history and opinions of the Supreme Court:
Significantly, the United States Supreme Court has repeatedly indicated that sections 3 and 4 of the act do not apply in state courts. In Southland Corp. v. Keating . . . the court stated: “In holding that the Arbitration Act preempts a state law that withdraws the power to enforce arbitration agreements, we do not hold that §§3 and 4 of the Arbitration Act apply to proceedings in state courts. Section 4, for example provides that the Federal Rules of Civil Procedure apply in proceedings to compel arbitration. The Federal Rules do not apply in such state court proceedings.”
67 Cal. App. 4th at 60 (emphasis in original) (also citing Volt Info. Sci., Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 476-77 (1989)5 for the same proposition).
2. In Bazzle, The United States Supreme Court Addresses the Conflict Between the Federal and State Approaches to the Silence Issue
The United States Supreme Court addressed the conflicting federal and California approaches in Bazzle, a case concerning contracts between a commercial lender and its customers which contained identical clauses mandating arbitration of all contract-related disputes. The Supreme Court defined the scope of its review as a determination of whether the South Carolina Supreme Court's decision B permitting class arbitrations when the arbitration clauses were silent on the class issue B was consistent with the FAA. 539 U.S. at 447.
At the heart of this issue was the split of opinion among the federal circuits as to whether section 4 of the FAA applies to state proceedings. The Supreme Court's plurality in Bazzle could have resolved the issue by adopting the direct approach proffered by Justices Rehnquist, O’Connor and Kennedy in their dissenting opinion (see id. at 459-60 B concluding that the FAA preempts state law); or by Justice Thomas in his dissenting opinion (see id. at 460 B concluding that the FAA does not apply to state court proceedings); or by Justice Stevens in his opinion concurring in part and dissenting in part (see id. at 454-55 B concluding that the FAA does not preempt state law). The plurality, however, does not decide the very issue it framed as the core of its analysis, and its failure to do so appears to be intentional. It speaks volumes about the Court's determination that the issue is to be left for the arbitrator to decide.
While the Court acknowledges the FAA preemption issue, and the importance of resolving the effect of a contract's silence regarding arbitration, it concludes that it cannot make that determination, "not simply because it is a matter of state law,6 but also because it is a matter for the arbitrator to decide.”7 Id. at 447 (emphasis added).
The Court reasoned that “what kind of arbitration proceeding the parties agreed to . . . does not concern a state statute or judicial procedures. It concerns contract interpretation and arbitration procedures.” Id. at 452-53 (emphasis in original).8 The only logical explanation for the conclusion that state law precludes the Court from deciding the issue on appeal is that the issue cannot be resolved without interpreting the parties' arbitration agreement. The Court referenced its holding in Volt, 489 U.S. at 476, that under the FAA courts must enforce private arbitration agreements as they would ordinary contracts: in accordance with their terms. Contract interpretation is generally a question of state law which the United States Supreme Court does not have constitutional authority to review B except to the extent that the state law is preempted by federal law due to an actual conflict between the two. Id. at 477.
In Volt, the Court acknowledged that choice-of-law provisions in arbitration agreements must be honored, and courts must follow the law of the jurisdictions chosen by the parties. Id. at 478-479. California law clearly authorizes classwide arbitration when arbitration agreements are silent on the issue. See, e.g., Blue Cross, 67 Cal. App. 4th at 42. Blue Cross held that permitting classwide arbitration does not directly conflict with the FAA, which is silent as to classwide arbitration and “preempts state law only to the extent it stands as an obstacle to the enforcement of contractual agreements to arbitrate.” Id. at 65. The FAA's purpose is to encourage arbitrations. Employers should not be permitted to misuse the FAA to restrict arbitrability.
The Bazzle Court analyzes whether the contract's silence indicates the parties' intention to permit or preclude class arbitration. It interprets the language contained in only two clauses: (1) whether the agreement's language stating that all disputes “shall be resolved . . . by one arbitrator selected by [Green Tree Financial] with the consent of [Green Tree's customer]” evidences an intention by the parties to exclude from that arbitration any substantially similar or identical claims of other customers (the same “use of singular” argument often promoted by employers); and (2) whether the agreement that the arbitrator determine “[a]ll disputes, claims or controversies arising from or relating to this contract,” shows that the parties intend for the arbitrator, rather than a court, to decide whether the silent arbitration agreement precludes class treatment. Bazzle, 539 U.S. at 450-452.
Bazzle holds that an arbitrator's interpretation of an arbitration agreement is governed by applicable state law, and the arbitrator must look to state law when determining whether class arbitration is permissible under a silent agreement. In light of the clearly delineated conflict among the courts as to the FAA's application when faced with the “silence” issue, the Supreme Court's failure to discuss the FAA in the plurality opinion must be seen as its determination that the FAA does not preempt state law on this issue.
The handling of the FAA issue suggests that the Bazzle Court would uphold an arbitrator's interpretation of a silent arbitration agreement to permit class arbitration, without regard to any application of section 4 of the FAA. Clearly, Justices Stevens and Thomas would agree to such a holding, which would transform the plurality to a majority opinion on that specific issue.
C. Employers’ “Singular Excludes Plural” Argument Is Disingenuous
Employers often take their cue from Justice Rehnquist's dissent in Bazzle, and suggest that arbitration agreements preclude class arbitration because under the FAA it must be construed “according to its terms,” and each contract governs only the relationship between the employer and the individual employee to whom the agreement refers. This “singular argument,” however, is dismissed by the Court, finding the use of the singular does not exclude the plural. Bazzle, 539 U.S. at 450-51.
Of course, Green Tree did not independently select this arbitrator to arbitrate its disputes with the other class members. But whether the contracts contain this additional requirement is a question that the literal terms do not decide. The contracts simply say (I) “selected by us [Green Tree].” And that is literally what occurred. The contracts do not say (II) “selected by us [Green Tree] to arbitrate this dispute and no other (even identical) dispute with another customer.”
Id. at 451(emphasis added).
D. Class Arbitration Does Not Violate Due Process Rights
While employers argue that classwide arbitration will violate the arbitration rights of other class members, they cannot genuinely argue that the contractual rights of absentee class members will be adversely affected or prejudiced by a class arbitration.
In Keating, the California Supreme Court compared consolidated arbitrations with classwide arbitrations and concluded that class arbitrations are less intrusive than consolidations, and the interests of justice served by class arbitrations are greater than those served by consolidated arbitrations.9 The Keating court recognized that class members in classwide arbitration “would all be parties to an agreement with the party against whom their claim is asserted; each [agreement] would contain substantially the same arbitration provision; and if any of the members of the class were dissatisfied with the class representative, or with the choice of arbitrator, or for any other reason would prefer to arbitrate on their own, they would be free to opt out and do so.” Keating, 31 Cal. 3d at 612-613.
In misclassification cases, for example, (1) employees will generally only benefit from a ruling that they have been misclassified as salaried managers exempt from overtime; (2) an employer’s arbitration agreements will likely be virtually identical with no conflicting provisions; and (3) if a class is certified and the arbitrator finds it necessary, a further safeguard can be employed by allowing class members to opt out and arbitrate their claims individually.
E. California Public Policy Encourages Class Actions
California has a strong public policy encouraging the class action procedure. See Richmond v. Dart Indus., Inc., 29 Cal. 3d 462, 473 (1981). This public policy has been applied by California courts in decisions allowing classwide arbitration in appropriate cases. See Keating, 31 Cal. 3d at 608-614 (class action “eliminates the possibility of repetitious litigation and provides small claimants with a method of obtaining redress for claims which would otherwise be too small to warrant individual litigation”); Blue Cross, 67 Cal. App. 4th at 52; Izzi v. Mesquite Country Club, 186 Cal. App. 3d 1309, 1321-1322 (1986); Lewis v. Prudential Bache Sec., Inc., 179 Cal. App. 3d 935, 945-946 (1986).
“If the right to a classwide proceeding could be automatically eliminated in . . . adhesion contracts [by including] a provision for arbitration, the potential for undercutting these class action principles, and for chilling the effective protection of interests common to a group, would be substantial.” Keating, 31 Cal. 3d at 609. If the arbitration clause can be used to preclude class actions, “it may well be oppressive and may defeat the expectations of the nondrafting party.” Id. at 610; see Blue Cross, 67 Cal. App. 4th at 52-53. In fact, express prohibitions of classwide arbitrations have been held unconscionable. See Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) (mutual ban against class actions was really one-sided ban to sole detriment of employee; thus agreement held substantively unconscionable under California law).
F. Class Arbitrations Can Efficiently Adjudicate Employment Claims
In Keating, the California Supreme Court concluded that trial courts could order classwide arbitrations in appropriate cases:
If the alternative in a case of this sort is to force hundreds of individual [parties] each to litigate its cause... in a separate arbitral forum, then the prospect of classwide arbitration, for all its difficulties, may offer a better, more efficient, and fairer solution. Where that is so, and gross unfairness would result from the denial of opportunity to proceed on a classwide basis, then an order structuring arbitration on that basis would be justified.
31 Cal. 3d at 613. The difficulties of classwide arbitration involve the extent to which a court must supervise the arbitration “in order to safeguard the rights of absent class members to adequate representation and in the event of dismissal or settlement.” Id.
In Lewis v. Prudential-Bache, the court ordered classwide arbitration in a securities dispute involving hundreds of thousands of class members. The court rejected an attempt by an employer to avoid class treatment through a petition to compel arbitration of the named plaintiff's claims. The Lewis court rejected the employer's argument that the named plaintiff should be forced to arbitrate his individual claims because the procedural complexities of a class action would defeat the goals of arbitration:
The alternative to class arbitration here is to force each Prudential customer to individually arbitrate claims, most of which probably cannot justify the time and money required to prove. This case appears to offer no great difficulty in adapting arbitration to fit the class action mold, with adequate judicial supervision over the class aspects.
179 Cal. App. 3d at 946 (emphasis added). The court remanded the case to the trial court to make whatever determinations necessary to certify the class and provide proper class notice.
“Given the three paths down which this litigation can be directed B compelled individual arbitration, class action in a court of law, or compelled classwide arbitration B the last choice best serves the dual interest of respecting and advancing contractually agreed upon arbitration agreements while allowing individuals . . . an economically feasible route to get injunctive relief from large institutions employing adhesion contracts. . . . [¶] Compelling individual arbitration would force individuals already straitjacket[ed] by an industry-wide practice of arbitration agreements to fight alleged improprieties at an exorbitant economic cost. Individual arbitration would be small deterrent to companies certain that few proceedings will be instituted against them. Because the principles of res judicata and collateral estoppel are not applicable to arbitration proceedings, each plaintiff would be forced to fully litigate his complaint. [¶] . . . Fairness mandates . . . that [plaintiffs] bound by adhesion form contracts to arbitration agreements, be able to protect their interests by proceeding as a class through arbitration.”
Blue Cross, 67 Cal. App. 4th at 55 n.5 (citations omitted) (internal parentheticals in original)).
Employment cases are particularly suited for class treatment because the individual damage claims often are relatively small and based on wage and hour violations that are subject to common proof. Cf. Sav-On Drug Stores, Inc. v. Superior Court, 34 Cal. 4th 319 (2004) (holding that class treatment of such claims is proper). Multiple litigation of these employee claims would be terribly inefficient, duplicative, cumulative and grossly unfair. An arbitrator can analyze the particular facts and determine the practicality of a classwide arbitration procedure in each case. See Keating, 31 Cal. 3d at 613; Lewis, 179 Cal. App. 3d at 946.
The Blue Cross court recognized that the ability to order classwide arbitration can avoid the waste of judicial resources, unnecessary expense of time and money, and lingering uncertainty in the law. 67 Cal. App. 4th at 48. Given the nature of the issues presented in these cases, classwide arbitration will enhance the benefits of the alternative dispute resolution process by eliminating the need for numerous arbitrations to decide the same issue (e.g., the employer’s misclassification of employees as exempt managers) in individual cases.
G. AAA’s And JAMS’s Policies and Rules Support Class Arbitrations
JAMS and AAA have adopted similar policies regarding class arbitrations. Both organizations will accept such arbitrations where (1) the arbitration agreement is silent with respect to class claims, and (2) the arbitration agreement does not prohibit class arbitration. In fact, both JAMS, in its “Policy Regarding Use of Class Action Preclusion Clauses in Consumer Cases,”10 and AAA, in its “Policy on Class Arbitration,”11 state that they will refuse to administer any arbitration where the underlying agreement prohibits class treatment. JAMS goes a bit further than AAA by stating, “JAMS takes the position that it is inappropriate for a Company to restrict the right of a consumer to be a member of a class action arbitration or to initiate a class action arbitration.” In that regard, AAA states that “[t]he arbitrability of class arbitrations where the parties' agreement precludes such relief is a developing area of the law, and the Association awaits further guidance from the courts on this issue.”
While AAA has adopted its “Supplementary Rules for Class Arbitrations,”12 JAMS has not adopted any rules and procedures specifically applicable to class arbitrations. JAMS does, however, represent that certain of its neutrals specialize in class actions. Both AAA’s and JAMS’s rules provide that the determination of whether the proceeding is appropriate for class treatment is a threshold issue to be resolved by the arbitrator, and once so determined, the arbitrator shall decide whether to certify the class.13
H. Class Arbitration Can Provide Parties with the Same Benefits and Protections Courts Provide to Class Action Litigants
In promulgating its policy of refusing to accept any case in which one of the parties was required to execute a class arbitration waiver, JAMS has demonstrated that it favors the arbitration of matters on a classwide basis. Recognizing the benefits and efficiencies of class arbitrations, and the special needs involved in class proceedings, JAMS has set up a comprehensive “Class Action and Mass Tort Settlement Adjudication Program” (the “Program”). In its Program brochure, JAMS assures that “all issues that arise in connection with a class action . . . can be coordinated and addressed in one forum.” In fact, the Program provides for the “[p]reservation of individual's rights of due process, including the right of appeal.” The Program is set up to assure that the rights of the employee class will be as well protected as they would be in court.
I. Conclusion
An arbitration agreement which expressly precludes class treatment of claims is unenforceable in California. When the agreement is silent as to whether class treatment is available, Bazzle directs that the contract be interpreted by the arbitrator, not the courts. Here in California, we can expect these battles over class arbitrations to continue, but under California law (which should govern the contract interpretation), class arbitration is available and preferred.
ENDNOTES
1. In Szetela, the credit card company attempted unilaterally to amend its existing credit agreement to preclude class treatment of any claims under its mandatory arbitration clause. The court struck the class preclusion provision as procedurally and substantively unconscionable, and permitted the arbitration class certification procedure to proceed. The identical class arbitration waiver provision was reviewed in Discover Bank v. Superior Court, 105 Cal. App. 4th 326 (2003) (ordered depublished) (review granted). In Discover Bank, the court upheld the class arbitration waiver, finding that California law was preempted by sections 1 and 2 of the FAA (its substantive provisions). The Discover Bank court held that, under the FAA, a state court cannot carve out a class waiver provision as unconscionable when the underlying arbitration agreement was validly formed, and there exists no defense to the contract's formation. The California Supreme Court has granted review but not yet resolved this issue. The Ninth Circuit, however, has expressly disagreed with the Discover Bank decision. See Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) (company's attempted, one-sided bar to class arbitration is unconscionable and invalidates arbitration agreement); Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003) (because unconscionability is an applicable contract defense, it may be used to invalidate an arbitration clause without contravening section 2 of the FAA).
2. Federal Arbitration Act, 9 U.S.C. § 1, et seq. Section 2 of the FAA provides, “[a] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable. . . .” Id. § 2. Some employers B seeking to place the conflict under the federal approach precluding class arbitration B argue that, because their businesses involve interstate commerce, the FAA applies to their agreements. (In one case our firm handled, the employer argued this despite a choice of law provision requiring disputes to be governed by California law).
3. Section 4 of the FAA provides for a petition to compel arbitration in “any United States district court” and for the issuance of an order “directing the parties to proceed to arbitration in accordance with the terms of their agreement.” 9 U.S.C. §4 (emphasis added).
4. In the underlying Bazzle v. Green Tree Fin. Corp., 351 S.C. 244, 358 (2002), vacated by Bazzle, 539 U.S. 444 (2003), the South Carolina Supreme Court acknowledged that it had not previously considered whether class arbitration could be ordered when an arbitration agreement was silent on the issue. It noted, however, that South Carolina favored arbitration of disputes and resolved doubts as to the scope of arbitrable issues in favor of arbitration. Id. The court looked to California law for assistance on the subject of whether class arbitration could be ordered where arbitration contracts are adhesive but enforceable:
The United States Supreme Court declined to reach this issue, finding that the California Supreme Court’s [Keating] decision was based entirely on state law and raised no federal question for them to review (e.g., whether or not the FAA prohibited classwide arbitration in these circumstances).
Id. at 357 n.14.
5. In Volt the Supreme Court held that an arbitration agreement's California choice of law provision, having the effect of invoking section 1281.2 of the California Code of Civil Procedure (which allowed for a stay of arbitration pending the resolution of related, ongoing litigation), was not preempted by the FAA. The Volt Court found “no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate.” 489 U.S. at 476.
6. The Green Tree Financial agreement included a South Carolina choice of law provision. Id. at 447-448.
7. “The parties agreed to submit to the arbitrator ‘[a]ll disputes, claims, or controversies arising from or relating to this contract or the relationships which result from this contract.’” Id. at 451.
8. In applying the FAA, the Supreme Court has pronounced that “ordinary state-law principles that govern the formation of contracts” should be applied. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
States may regulate contracts, including arbitration clauses, under general contract law and they may invalidate an arbitration clause “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2 (emphasis added).
Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995).
9. Consolidated arbitrations are analogous to class arbitrations. California Civil Procedure Code section 1281.3 provides circumstances in which arbitrations may be consolidated, e.g., when: (1) separate arbitration agreements are in place with one of the parties and a third party; (2) the dispute arises out of the same transactions or a series of related transactions; and (3) common issues of law and fact create the possibility of conflicting rulings by more than one arbitrator or panel of arbitrators. Cal. Civ. Proc. Code '' 1281.3(1)-(3). Claims against an employer by employees that they have been improperly classified as “exempt” from overtime compensation typify such circumstances.
10. http://www.jamsadr.com/Images/PDF/%202005-03-10-ClassActionPrecPolicyWD.doc
11. http://www.adr.org/ArbitrationPolicy
12. http://www.adr.org/sp.asp?id=21936
13. AAA’s Class Arbitration Rules speak directly to this issue. JAMS rules provide that the “the Arbitrator shall resolve . . . who are the proper Parties to the Arbitration . . . as a preliminary matter.”
Copyright CAOC, Forum, June 2005. Reprinted with permission.
