U.S. Supreme Court Approves Limitation of Class Actions Pursuant to the Federal Arbitration Act

Posted on May 10, 2011

The use of class action lawsuits, where potentially scores of individuals join together to pursue their individual claims in one case, have become more and more prevalent in the employment arena. Employers are repeatedly faced with class action lawsuits for all manner of work place practices including alleged wage and hour violations, acts of discrimination and retaliatory practices. One example of the potential enormity of the burden on employers is the case Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (9th Cir), cert. granted in part, 131 S.Ct. 795 (2010). In Dukes, the plaintiffs’ attorneys are attempting to try in one case action, the claims of all women who work or have worked in any Wal-Mart store throughout the country since 1998. Allowing class certification would require Wal-Mart to defend hundreds of thousands of employees’ claims in one proceeding.

Over the past decade, employers have moved toward arbitration as a means to reduce litigation costs while allowing a neutral decision maker to resolve fact issues and render decisions regarding employment disputes. Although sometimes criticized, arbitration is often found to be less expensive for the employer and the employee and typically results in more rapid resolution of claims than conventional litigation. Judicial case authority widely proclaims arbitration as being a favored means of resolution but it is often vigorously opposed by plaintiffs’ attorneys. Despite regular attacks, however, the U.S. Supreme Court has repeatedly stated that the Federal Arbitration Act (FAA) demonstrates Congress’ intent to allow arbitration to proceed in most employment situations. Consequently, arbitration agreements between employers and employees have been found to be enforceable even when they are made as a condition of employment and where there is a contrary state statute that attempts to limit the scope of arbitration in employment matters. Recently, the U.S. Supreme Court again enforced the protection of arbitration agreements against contrary state law; this time in a manner which avoids class action suits.

In AT&T Mobility LLC v. Concepcion,- – S.Ct. – -, 2011 WL 1561956 (2011), the U.S. Supreme Court reviewed an arbitration agreement in a commercial transaction governed by the FAA. In particular, the arbitration agreement required that all claims must be brought in the party’s “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding”. The lower courts that initially reviewed the arbitration agreement recognized that the FAA applied to the agreement but determined that under California law the limitation on class actions was unconscionable and therefore unenforceable. Consequently, the Concepcions were allowed to bring their claims as class members rather than as individual claimants. The U.S. Supreme Court disagreed.

Instead, the Supreme Court concluded that arbitration agreements enforceable under the FAA must be given effect despite contrary state laws. In this particular instance, the lower courts relied on judge made law promulgated by the state courts in California which precluded arbitration agreements which limited class actions. The Supreme Court found such a requirement incompatible with the scope of the FAA and enforced the arbitration agreement limiting the ability to pursue claims as a class representative.

Although the Concepcion decision arose in a commercial context, as a result of the Supreme Court’s decision, employers should review their arbitration agreements to ensure appropriate language is used to limit class claims and allow cases to be heard based on individual merit. It should be noted, however, that in the Concepcion case, there was evidence that the dispute resolution process, including arbitration, was sufficient to ensure that any person who brought a claim would essentially be made whole, including the payment of attorney’s fees. In fact, the district court who initially reviewed this case determined that the Concepcions were “better off” under the arbitration agreement than they would have been as participants to a class action. If the arbitration requirements taken together could have been viewed as placing the plaintiffs in a less advantageous position, the result may have been different.

Mr. Sieczkowski is Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization and has represented employers’ interests for 20 years. If you have any questions or comments regarding this Notice, please feel free to contact Keith.