Settlement Services Insights: Mandatory Arbitration and Class Actions

Mandatory Arbitration and Class Actions: What Attorneys and Companies Should Know About Recent Decisions and Proposed Legislation

Arbitration, because it is designed to be more efficient and cost-effective than litigation, has in the past two decades gone from a relatively obscure form of alternative-dispute resolution to a standard provision in all sorts of contracts, from employment agreements to the terms and conditions consumers routinely agree to.

But many consumer advocates argue that the cost to individuals is too high – and that the widespread use of class-action claims waivers in arbitration clauses has had the effect of undermining the spirit of public policy. They say requiring individual arbitration helps companies circumvent the judicial system and prevents their customers from joining together in class-action lawsuits.

It’s a controversial issue in law and policy — and the constantly evolving case law can be hard to pin down. A spate of recent court decisions and increased public awareness via national media, as in this blockbuster investigative report from the New York Times, all but ensure that mandatory arbitration is an area of the law that will continue to evolve with real impacts for plaintiff’s attorneys and the clients they advise.

As a premier banking resource for the legal industry,Western Santander Bank shares in the obligation to provide opportunities for continuing education to make relevant, updated information available in this fast-moving area. But we’re not lawyers, so recently, we worked with our production partner, HB Litigation Conferences, to present a webinar featuring commentary from Jennifer M. Oliver, Partner at MoginRubin LLP and Jeremy K. Robinson, Partner at CaseyGerry titled “Mandatory Arbitration & Class Actions: What Attorneys & Companies Should Know About Recent Decisions & Proposed Legislation.” The webinar provided a thorough, unbiased overview of the legal framework and key issues in arbitration matters.

Oliver and Robinson dissected recent decisions and delved into the key arguments used against mandatory arbitration agreements — noting the tactics and arguments that have been successfully argued and reviewing key rulings. Understanding the ramifications of these decisions is critical to advising clients on either side of a dispute, or when drafting or challenging contracts.

Assessing Valid Agreements

Many arguments and cases deal with the question of whether a valid agreement to arbitrate exists. An arbitration agreement’s validity can be assessed by answering key questions around the signatory, reasonable notice, the legality of the clause itself, and the interplay between state and federal laws.

• Did the plaintiff actually sign the arbitration agreement? In most cases, courts continue to hold that both parties must agree to arbitration for the mandate to hold. And while non-signatories cannot be held to the agreement in most cases, a non-signatory could be bound to the agreement under traditional principles of contract and agency law. Letizia v. Prudential Bache
• Was there a reasonable notice of the agreement? Whether “in the box” contracts in product packaging are binding depends on whether the consumer was provided with reasonable notice of terms. This principle applies as much to physical paper contracts and packaging as it does to internet products and e-commerce. So called “clickwrap” agreements, where the user conveys consent through clicking, have generally been upheld. Courts are less likely to enforce agreements where consumers have to sign up for an account and in the process agree to terms not explicitly called out (“sign-up wrap”) or if terms are imposed without an affirmative user click (“browsewrap”).
• Is the plaintiff a minor? Or were they a minor at the time of the agreement? Strictly speaking, no arbitration agreement is valid if one party is a minor. Some attorneys have tried to get clever with timing, seeking to demonstrate that if a plaintiff was not 18 at the time of the agreement, the agreement is invalidated due to a minor’s inability to give legal consent.
• Does the clause itself violate the law? Up until recently this issue was murky, particularly in the labor-and-employment realm, with the National Labor Relations Board taking the position that collective actions by employees were exempt from the Federal Arbitration Act. However, in 2018’s Epic v. Lewis, the US Supreme Court (SCOTUS) ruled that Northeastern Retail Lumber Association’s collective action allowance did not override FAA. Also complicating the matter: one class of employees are exempt from FAA: transportation workers that take part in interstate commerce.

Assessing Arbitrability

SCOTUS has not yet decided whether courts or arbitrators should resolve issues on the availability of class arbitration (Oxford v. Sutter), and circuit courts across the country are divided on the question. These opinions include:

• The 3rd, 4th, 6th, and 8th Circuit Courts have held that the availability of class arbitration is presumptively for the courts to resolve but can be delegated to arbitrator in the language of the clause.

• The 4th, 6th and 8th Circuit Courts are clear in their opinions requiring specific delegation language.

• The 2nd and 10th Circuits have ruled in favor of the presume that a court should answer the question but will consider whether there is evidence that the parties intended otherwise.

• While the State of California has not favored one or the other, when the parties' intention is in doubt, courts in the state typically resolve in favor of arbitration.

Dealing with Issues of Class Arbitration

In recent years, the Supreme Court has tended to frown upon arguments for proceeding through arbitration as a class arbitration rather than as individuals.

• The court has held that arbitration is “strictly a matter of consent” and has been skeptical of arguments that depend on a class all giving proper consent.

• In Stolt-Nielsen, the court held that even if the contract is silent on the availability of class arbitration, class-wide arbitration cannot be compelled.

• Class arbitration cases have also experienced challenges when the class is challenged on the grounds of representation. This happened in Jensen v Cablevision, when the class was hampered by a certifying plaintiff who was among the 1% of a million others in the class who had opted out of the agreement.

Unconscionability

Agreements to arbitrate may be unenforceable if plaintiffs can show unconscionability, either procedural or substantive. It is up to the states to determine what constitutes unconscionability.

• Procedural unconscionability results from an inequality of bargaining power that prevents the weaker party from meaningfully negotiating. Courts have found valid examples in cases where vendors failed to provide Spanish-language agreements and in “surprise” clauses that turn up in dense, long, small type-faced documents, without any title or headline to flag the existence of the clause. (Carmona v Lincoln Millennium Car Wash Inc)

• Substantive unconscionability refers to terms that are overly harsh and obviously favor the more powerful party. Certain patterns have emerged from the courts in recent years creating clear lines for arbitration clauses that have been found to be substantively unconscionable. These include provisions that shift costs and secretly impose fees onto the consumer as in Pokorny v Quixtar, Inc.

Legislative Responses

In September 2019, Democrats in Congress passed the FAIR Act, a far-reaching bill intended to ban forced arbitration clauses between employers and employees. There is little chance this bill will become law, but policymakers are increasingly taking note of the issue. Some think legislative action is ramping up due to the predictable 5-4 SCOTUS majority favorable to mandatory arbitration clauses; if the judicial system won’t act, some policymakers and academics are pushing for new laws to create a more level playing field between individual employees and consumers and large corporations.

* Information included in this article should not be taken as direct legal advice.