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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions