United States: D.R. Horton And The Arbitration Hotchpotch: Emerging "Rules" And The Future Of Compelled Arbitration In California

Horton Hears an Employer Victory

Last December, the Fifth Circuit issued its long-awaited decision in D.R. Horton, Inc. v. NLRB, holding that employers may require employees to sign arbitration agreements categorically waiving the right to pursue employment claims in a collective or class action. In doing so, the Fifth Circuit's rejected the NLRB's opinion that such agreements violate employees' right under Section 7 of the NLRA to engage in "concerted activities for the purpose of collective bargaining or other mutual aid or protection."

As the New York Times and others noted, the Fifth Circuit's decision represents a big win for employers, who frequently use arbitration agreements and class waivers to minimize exposure to costly litigation. Viewed alongside decisions in the Second and Eighth Circuits also upholding class action waivers in arbitration agreements and declining to follow the NLRB's contrary opinion, the Fifth Circuit's holding in D.R. Horton signals a growing consensus in favor of labor arbitration, one that the Ninth Circuit has suggested it will join if given the chance.

Remaining Hurdles

Despite significant decisions upholding compelled individual-arbitration agreements, the fight is far from over. As Ronald Meisburg wrote recently on Proskauer's Labor Relations Update, the NLRB is not likely to back away from its view that the NLRA invalidates arbitration agreements with class action waivers until more Courts of Appeals or the Supreme Court resolve the issue.

In California, moreover, state courts have aggressively employed the doctrine of "unconscionability" to nullify arbitration agreements under the Federal Arbitration Act's "savings clause," which empowers courts to invalidate arbitration contracts "upon such grounds as exist at law or in equity for the revocation of any contract." As recently as October 2013, the California Supreme Court's opinion in Sonic-Calabasas A, Inc. v. Moreno emphasized that the unconscionability doctrine remains alive and well, holding that "unreasonably one-sided" arbitration agreements may be challenged and deemed unenforceable under California law on a case-by-case basis, notwithstanding recent U.S. Supreme Court precedent. The Ninth Circuit is in apparent agreement, recently stating that "Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power."

All of this is poised to come to a boil when the California Supreme Court reviews Iskanian v. CLS Transportation Los Angeles, which held that the U.S. Supreme Court's decision in AT&T Mobility v. Concepcionimpliedly overruled California cases requiring the invalidation of class waivers in arbitration agreements if a class action would be "a significantly more effective practical means of vindicating the [unwaivable statutory] rights of the affected employees than individual litigation or arbitration." Iskanian also created a split within the California courts by finding the FAA applicable to representative claims brought under the California Labor Code's Private Attorneys General Act ("PAGA").

Emerging "Rules" for Compelling Arbitration in California

In the face of this murky hotchpotch, employers may wonder how they are supposed to go about creating enforceable arbitration agreements in California.  Although Iskanian may throw a whole new wrench into the mix, a paper by Judge William F. Highberger of the Los Angeles Superior Court hints at some emerging rules for compelling arbitration in California courts.

The first point of issue is, of course, whether the FAA covers the agreement. Most of the time, FAA coverage exists, although there is a narrowly-read exception for "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Additionally, it is not yet clear whether PAGA claims are exempt from FAA coverage since federal and state courts have reached different conclusions on the point.

If the FAA covers the agreement, then, as the Supreme Court emphasized in Concepcion,courts have the responsibility to enforce arbitration agreements according to their terms. Accordingly, employers should give significant attention to language delineating the scope of the arbitration agreement and the designated decision-making authorities. Among the issues Judge Highberger suggests an agreement's language should contemplate are:

  • The claims to be submitted to arbitration;
  • Applicable rules of procedure;
  • The permissibility of class or representative claims;
  • Whether a court or the arbitrator initially determines the enforceability of an arbitration agreement; and
  • Whether a court or the arbitrator decides certain "gateway matters," such as whether a particular claim is capable of arbitration.

Judge Highberger's "decision tree" also includes considering whether an agreement's terms might be deemed unconscionable under general California contract principles. California law requires "procedural" and "substantive" unconscionability to invalidate an agreement. Arbitration agreements presented to an employee on a "take it or leave it" basis without the opportunity to negotiate the agreement's terms are usually deemed procedurally unconscionable. Unfortunately, the California Supreme Court resisted formulating a precise standard for "substantive unconscionability" in Sonic-Calabasas. Sweeping broadly, the California Supreme Court said only that the unconscionability doctrine prohibits "unreasonably one-sided" agreements, which it suggested might mean an agreement that "shocks the conscience." As examples, the Court identified:

  • A provision in an arbitration agreement effectively giving the party imposing an adhesive contract the right to choose a biased arbitrator
  • An agreement setting  $50,000 threshold for an arbitration appeal
  • An agreement containing a damages limitation clause under which "the customer does not even have the theoretical possibility he or she can be made whole"; and
  • An arbitration agreement obligating the employee to pay the employer's attorneys' fees if the employer prevails, but not vice versa.

Lastly, arbitration agreements should reflect the developments surrounding D.R. Horton. Although, as mentioned above, numerous courts have rejected the view that the NLRA prohibits class waivers in arbitration agreements, the Fifth Circuit's recent decision made clear that arbitration agreements must not "lead employees to a reasonable belief that they were prohibited from filing unfair labor practice charges [with the NLRB]." For this reason, employers should have their arbitration agreement's language carefully reviewed to ensure that the agreement is not overbroad.

In a legal-regime still rife with uncertainty, considering the emerging "rules" discussed above is an employer's best bet to crafting a successful arbitration agreement.

Looking Forward: The Future of Compelled Arbitration

In light of the above "rules" and the present trend of enforcing arbitration agreements and upholding class action waivers, an important question remains: how will plaintiffs respond?

One possibility is that plaintiffs' attorneys confronted with an enforceable class action waiver will corral an identifiable class into a throng of individual arbitrations, hoping that sizable up-front arbitration costs borne by employers can be run up and leveraged into favorable settlements. But as one prominent attorney told Forbes this past summer: proceeding individually simply doesn't make financial sense since it requires attorneys to incur substantial costs to assess the merit and probable recovery of each individual client rather than a few class representatives. Just last year, in fact, the U.S. Supreme Court considered—and ultimately rejected—the argument that contractual waivers of class arbitration should not be enforced where the cost of individual arbitration would be prohibitively high.  Thus, when dealing with low-value claims for which any recovery may only marginally cover an attorney's costs, a wave of individual proceedings seems unlikely.

However, as Cardozo Law Professors Myriam Gilles and Anthony Sebok point out in forthcoming law review article, business models under which attorneys can arbitrate individual claims cost-effectively may still exist. Gilles and Sebok specifically advance two models. First, they propose a hybrid injunction-to-serial-arbitration model under which attorneys first seek broad injunctive relief in court that can later dictate the outcome in an individual arbitration. Since the Ninth Circuit has, within the past year, at least twice held that claims for "public" injunctive relief may be subject to mandatory arbitration, plaintiffs may be left waiting for the rare occasions on which the State Attorney General initiates a parens patrie action seeking injunctive relief.

Alternatively, Gilles and Sebok envision an "arbitration entrepreneur" model akin to the already rampant practice of small-value debt collection litigation. In that model, an attorney "buys up" the claims of similarly situated plaintiffs in order to collectively resolve the claims in a single arbitration. Although the fact that the "entrepreneur" "owns" each bundled claim might circumvent a class action waiver, the claims-buying process is of questionable legality. Where assignment of a claim is little more than a "lawsuit-mining arrangement" conducted without regard for the real parties in interest, California courts may, as the Fourth Circuit has done, find the assignment contrary to public policy.

Whether or not either practice will come to dominate the future of arbitration is too uncertain to predict now. The important takeaway for employers is that the success of compelled arbitration and class-action waiver agreements do not necessarily portend the death of large-scale, aggregated-claim disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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