Of all the federal circuit courts, I was not expecting the 7th Circuit to venture out on a limb to support the NLRB’s interpretation of the National Labor Relations Act (NLRA) as precluding class arbitration waivers.  After all, the 7th Circuit gets affirmed more than other circuit courts by SCOTUS, earning it a reputation for being fairly conservative.  Yet, contrary to the five other circuits that have already disagreed with the NLRB interpretation, the 7th Circuit just became the first to step out in support of the Board’s precedent.

In Lewis v. Epic Systems Corp., 2016 WL 3029464 (7th Cir. May 26, 2016), the arbitration agreement between the employer and its employees called for individual arbitration of disputes and waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”   Nevertheless, a technical writer (of all the unlikely heroes…) sued the employer in federal court asserting violations of labor laws.  When the employer moved to compel individual arbitration, the employee responded that the arbitration agreement violated the NLRA.   The district court agreed with the employee, and the 7th Circuit affirmed.

Knowing that it was creating a circuit split, the unanimous panel supported its result with as much precedent and analysis as it could muster.  The opinion’s logic is this: Section 7 of the NLRA gives employees the right “to engage in other concerted activities,” and filing class actions constitutes “other concerted activities,” by virtue of federal precedent as well as the statute’s legislative history.  Furthermore, the Board’s interpretation of the NLRA is entitled to deference.  Therefore, the Court held, because the employer forced its employees to agree to a contract that stipulated away the employees’ right to class and collective action, it was unenforceable.

The panel then addressed whether the FAA “overrides” the interpretation of the labor laws.  Finding that the two statutes were not in conflict, the panel rejected any notion that the FAA altered the result.  In particular, the opinion notes that on the whole, the NLRA is very pro-arbitration and therefore does not conflict with the federal policy favoring arbitration.  It then attempts to deal with the pro-class-action-waiver language in Concepcion and Italian Colors by pointing out that: 1) it was dicta, dicta, dicta; and 2) the savings clause in Section Two recognizes that arbitration agreements may be made invalid by other laws.

Would this panel have been so bold if there were not an equally divided 8 justices on the Supreme Court?  I don’t know.  But, I do know that if this decision (and the NLRB precedent) wins the day, and if the recent CFPB proposed regulations are issued and upheld, it will represent a fundamental shift in the use and value of arbitration agreements for large companies that contract with hundreds (or thousands or millions) of employees and consumers at once.

Post script: The 7th Circuit did not persuade the 8th Circuit to change its mind on this issue.  Just a week after the Lewis decision, the 8th Circuit decided Cellular Sales of Missouri v. NLRB, 2016 WL 3093363 (8th Cir. June 2, 2016), in which it reaffirmed its 2013 ruling that the NLRB was simply wrong in concluding that class-action waivers violate the labor laws.  However, the 8th Circuit did affirm the Board’s finding that the company violated the NLRA by drafting an arbitration agreement that would lead a reasonable employee to believe it waived or limited their rights to file unfair labor practice charges with the NLRB.

 

Arbitration case law did not break any new ground in 2015.  Instead, a larger sector of the public became aware of the ground already broken in 2011 and 2013, as well as how common arbitration is in professional sports.

Let’s review some of the attention-grabbing arbitration headlines of 2015.  There was:

  • That time in February when the arbitration award in Lance Armstrong’s favor got reversed, ten years after the fact.
  • Also in February, the arbitration award against Adrian Peterson (a football star, my fellow arbitration nerds) was vacated.
  • Then in March, the CFPB (a new federal agency, you football nerds) issued an insanely long report, finding, in short, that it is nearly impossible to avoid arbitration agreements (with their waivers of class actions) in consumer financial products, consumers have no idea they are subject to arbitration, and consumers seem to get higher awards in federal court than in arbitration when they challenge financial institutions.
  • In April, Missouri’s high court found it was unconscionable to allow the NFL Commissioner to serve as the arbitrator deciding an employee’s age discrimination claims.
  • Acting against type, in August the California Supreme Court applied SCOTUS opinions and upheld an arbitration agreement in a consumer clause, despite two lower courts having found it unenforceable. (Okay, that was not headline-grabbing, except in select legal publications.  But it should have been.)
  • Back to football again, in September a federal judge vacated the arbitration award against Tom Brady.  (He’s the quarterback who sells Wrangler jeans, right?  Just kidding, football fans, just kidding.)
  • In October, the CFPB started its pre-rulemaking process by describing two ways it plans to change consumer financial arbitration.  It is likely to: 1) invalidate arbitration agreements for any members of a putative class action “unless and until class certification is denied or the class claims are dismissed;” and 2) collect and publish consumer financial claims filed in arbitration.
  • In November, the New York Times published a three-part series on arbitration, which was generally unflattering.  It focused on the impact of SCOTUS’s decisions, especially in Concepcion and Italian Colors, on individuals’ ability to obtain redress for claims.  More than any court decision in the last five years, this newspaper series got lots of people talking about arbitration and reacting to the series.
  • Finally, in December, SCOTUS capped off this year of arbitration headlines by reversing California’s intermediate appellate court , which had refused to uphold a class action waiver in arbitration.  SCOTUS’s “eye of Sauron” is stuck on California.  Despite evidence that California is (begrudgingly?) enforcing federal decisions interpreting the Federal Arbitration Act (see bullet point five above and this decision from 2014), SCOTUS still sees California as the black sheep of the national arbitration family.  (This year, I nominate Kentucky for that role.  Didn’t SCOTUS see this opinion comparing arbitration to abortion?)

What would casual observers learn from this year of arbitration headlines?  Two lessons: first, famous athletes have an uncanny knack for vacating arbitration awards; and second, there is a real battle brewing between SCOTUS and the executive branch (CFPB as well as NLRB) over enforcement of class action waivers in arbitration agreements.  If that battle erupts in 2016, then arbitration will really take center stage in our national debate.  As usual, you can monitor the drama right here at www.arbitrationnation.com.

Happy New Year everyone!

Arbitration is having its 15 minutes of fame.  Thanks to a series in the New York Times, my inbox is full of links to the articles, questions about the information, and fascinating commentary.  [Next time I am in Oakland, I am totally having the “Scalia” cocktail at Italian Colors.]  With the far-reaching audience of the NYT, the policy questions surrounding waivers of class arbitration are no longer just a conversation among in-house counsel, advocates, and law professors, but reached the general water cooler set.  For anyone passionate about arbitration law, it’s like Christmas morning.  Jumping past the merits of the policy questions for a moment, what could happen if the public demands that its representatives take action?

One possibility is that there may be more cases like McLeod v. General Mills, Inc., Case No. 15-494 (D. Minn., October 23, 2015).  In that case, the Chief Judge of the District of Minnesota found that an employee collective action could go forward in court, despite a valid arbitration agreement that demanded individual actions.  Why?  Because language in the Older Workers Benefit Protection Act of 1990 (OWBPA) provides that any worker challenging the validity of a waiver of ADEA (Age Discrimination in Employment Act) rights “shall have the burden of proving in a court of competent jurisdiction that a waiver was knowing and voluntary.”  The court found that the statute’s use of “shall” along with “court” was sufficient to trump the earlier and more general requirement that courts enforce arbitration agreements (in the FAA).  [Some of the workers in the case are just 42, and 44 years old.  Could I really be that close to the definition of an “older worker”??]

Unless there is a wholesale rewriting of the FAA, which seems unlikely, any action to ensure the availability of class and collective actions in court will likely take place one industry or one specific statute at a time.   The CFPB may require that consumers of financial products can bring class actions in court.  And members of Congress may start inserting language like the text of the OWBPA into other statutes designed to protect certain classes of employees and consumers.  Although, in my experience, the most likely outcome is that arbitration’s 15 minutes will pass, and it will go back to something talked about only by lawyers, judges and professors, and nothing will change until the current SCOTUS majority becomes the minority.

Arbitration has a brand recognition problem. Not enough people know what it is.

The recent CFPB report summarized studies showing that even among consumers who know they have an arbitration clause, the majority do not realize they cannot go to court or have their claims decided by a jury. One explanation is that those consumers are not aware what it means to sign an arbitration clause.

Often when I present to groups of sophisticated business people about arbitration, their questions make clear they think I am talking about mediation. I find many law students are also confused between arbitration and mediation, as are plenty of practicing lawyers.

Confusing arbitration and mediation is understandable, by the way. Arbitration and mediation rhyme. They are often taught together at law school under the “Alternative Dispute Resolution” umbrella, which ensures the concepts are forever linked in the minds of those lawyers. (Or included together in the same section of contracts.) And sure, they are both “alternatives” to litigation, but so are fistfights and “hugging it out” but we don’t teach those (and we would never confuse them).

Plus, arbitration does not come from a root word that most people recognize or can associate with a private system of dispute resolution. (At least mediation sounds a bit like middle-ation.) Instead, arbitration sounds like arbitrary. And that’s not a good connotation.

Does arbitration’s brand awareness matter? I think so. 80 million consumers are subject to arbitration agreements in their credit card agreements, and almost as many arbitrations are filed each year as new civil cases in the federal district courts. Tons of people are entering into arbitration agreements (as individuals and on behalf of companies). And, a good chunk of those people may have no idea what arbitration means. That undermines the primary rationale of arbitration acts – that contracting parties affirmatively chose to resolve disputes in a private arena with less formality and no government-paid decisionmaker and the courts are just enforcing those pre-dispute choices.

But, what can realistically be done? I suppose all the arbitral providers could form a marketing association and put out billboards and banner ads. And we could stop packaging arbitration and mediation together under an “ADR” banner.  Or we could just start calling arbitration something new. Like what… Disputation? Coolidgation (after the President who signed the FAA into law)? Scaliation (after the Justice whose opinions have strengthened enforcement of arbitration agreements)? Or even just simply litigation – instead of saying “they arbitrated their dispute” you could say “they litigated their dispute before the AAA.”

Something to ponder over your summer vacation… Send me your great ideas.

Almost two years ago in American Express Co. v. Italian Colors, SCOTUS significantly narrowed, but did not overrule, the “effective vindication” doctrine, which allows plaintiffs to invalidate an arbitration agreement if it precludes them from effectively vindicating their federal statutory rights.  A decision today from the Eighth Circuit shows just how difficult it is for plaintiffs to take advantage of the effective vindication doctrine after AmEx.

In Torres v. Simpatico, Inc., a putative class of cleaning business franchisees sued the franchisor and related companies for RICO violations.  The defendants moved to compel individual arbitration, based on language in the franchise agreements.  In response, the plaintiffs argued that the arbitration agreement was unconscionable, and that some defendants were non-signatories and therefore could not enforce the arbitration agreement.  The district court compelled individual arbitration and the Eighth Circuit affirmed.

The plaintiffs raised four arguments as to why the arbitration agreement was unconscionable — “first, the costs to arbitrate will exceed the average claimant’s loss; second, the arbitration claimant must pre-pay the filing fee and other pre-hearing fees; third, the prevailing party is entitled to reimbursement of costs and expenses; and fourth, the agreement limits the franchisee’s available remedies.”  (Quoted from district court opinion.)  The plaintiffs noted that their average loss was $6,100, that individual filing fees would be between $775-975, that average daily fees for arbitrators in four cities were between $1300-$1800, and that their cases would likely take three hearing days.  Therefore, plaintiffs argued the costs of individual arbitration would exceed any individual’s damages.

Keeping in mind the statement from AmEx that “[t]he FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims,” the courts were not interested in the comparison between each class member’s damage and their potential costs of arbitration.  Instead, the Eighth Circuit focused on whether plaintiffs had proven that the costs of arbitration were so high that they could not proceed.  It found the plaintiffs’ proof fells short because the arbitrations would not proceed in any of the four cities for which daily rates were provided, and because the plaintiffs themselves did not submit any affidavits stating that they could not afford the costs of arbitration (they relied on an affidavit of their lawyer to that effect).  In short, the Court held “[t]he Appellants failed to carry their burden to show that the costs of individual arbitration ‘are so high as to make access to the forum impracticable’ or to prevent them from effectively vindicating their rights in the arbitral forum.” [With respect to plaintiffs’ complaint about the limitation of remedies, the court found that was an issue for the arbitrator.]

On the issue of whether the non-signatory defendants could enforce the arbitration agreement, the court found two reasons why they could.  First, those non-signatories were third party beneficiaries of the contract under Missouri law.  But second, the arbitration agreement explicitly bound the franchisee to arbitrate disputes with those parties by stating “all controversies, disputes, or claims between us and our affiliates, and our and their respective members, officers, managers, agents, and/or employees, and you . . . must be submitted for binding arbitration.”

This case gives important guidance for any other potential plaintiffs who hope to make a successful argument under the “effective vindication” doctrine.  Notably: put in individual affidavits from each named plaintiff about his or her inability to pay the filing fees and arbitrator fees; get information on arbitrator rates in cities where the plaintiff’s hearing will likely be heard; and use the new CFPB study to add statistics about how often arbitrators award individual claimant’s their arbitration costs.  Conversely, for drafters of arbitration agreements who want to avoid class actions, consider inserting specific language authorizing the arbitrator to award the claimant his or her filing fees or arbitrator fees if the claim is successful.

Just a few months after its first Director took office in January of 2012, the Consumer Financial Protection Bureau is embarking on a study of arbitration.  The CFPB announced on April 24 that it invites the public to send information about “how consumers and financial services companies are affected by arbitration and arbitration clauses,” so that it can eventually determine whether to flex its rule-making muscle.

This request for information does not signal any particular bias of the new Director, Richard Cordray.  Instead, it shows the new agency is fulfilling its mandate under the Dodd-Frank Act to study the use of pre-dispute arbitration agreements in the consumer financial arena.

The agency, however, is starting its study with the speed of a tortoise and in the style of a professor wearing tortoise shell glasses.   Instead of diving right in, the CFPB is holding off its real study while it decides how to choose the questions.  For example, it is seeking information about 1) how to assess how prevalent pre-dispute arbitration agreements are in consumer financial agreements; 2) what data it should seek from what sources; and 3) whether it should find out whether consumers who arbitrated disputes against financial services companies were satisfied with the process.  (Let me publicly answer that last question: Yes!  Of course!  Please ask both consumers and companies whether they were satisfied with the process.)

While I am excited about the prospect of this new agency investigating and publicizing important data about consumer arbitrations that is currently inaccessible, the CFPB’s current list of questions makes me wonder whether it is up to the task.