In National Labor Relations Board v. Alternative Entertainment, Inc., No. 16-1385, 2017 WL 2297620 (6th Cir. May 26, 2017), the Sixth Circuit joined the Seventh and Ninth Circuits in upholding the NLRB’s decision that barring an employee from pursuing class action or collective claims violates the NLRA. Already lined up on the other side of a growing Circuit split are the Second, Fifth, and Eighth Circuits.

In Alternative Entertainment, Inc., the NLRB claimed that language in both the employment contract and the employee handbook used by Alternative Entertainment, Inc. (“AEI”) “violated the NLRA by barring employees from pursuing class-action litigation or collective arbitration of work-related claims.” Alternative Entertainment, Inc., 2017 WL 2297620 at *1.

Joining the Seventh Circuit’s critique of the Fifth Circuit’s logic in D. R. Horton, the Sixth expressly takes on the Fifth stating “the Fifth Circuit started with the wrong question.” When the Sixth asks the question it believes is the right one–if the NLRA is compatible with the FAA–the Court finds them in “harmony” and holds the employer’s ban on concerted action violates the NLRA. As a result, the court found the ban is also unenforceable under the FAA’s saving clause. According to the Sixth, the NLRA bans contracts that interfere with “employees’ right to engage in concerted activity, not because they mandate arbitration.” Any contract provision that interfered in this way would be illegal, which is in full accord with the FAA’s rejection of any contract that “undermine[s] employees’ right to engage in concerted legal activity.”

The Sixth’s second disagreement with the Fifth Circuit is expressed by the Sixth’s use of Chevron deference (arguing in the alternative, after stating there is no statutory ambiguity). The Sixth accepts the NLRB’s permissible construction of the NLRA’s right to concerted activity as a substantive, not procedural right.

In a partial dissent, and referring to the “manifestation of hostility toward arbitration,” Justice Sutton references the history of judicial protection and support of arbitration agreements provided over time. Specifically, the dissent objects to the majority’s overreaching use of Chevron, and states the majority opinion ignores Concepcion’s rejection of similar arguments harmonizing the NLRA with the FAA. (The majority opinion, however, distinguishes the kind of arbitration provision used by AEI and the kind of arbitration provision used by the employer in Concepcion.)

One question here is why would the Sixth Circuit bother drafting and filing this opinion when SCOTUS has already accepted review of this issue? It is possible the Sixth decided to issue this opinion in an effort to intentionally level the sides of this split by adding its voice to the Seventh and Ninth Circuits. It is also possible that since arguments had been heard in November 2016, opinions had already been formed by the time SCOTUS granted cert. on the question in January 2017. Either way, SCOTUS is expected to opine later this year on cases consolidated as National Labor Relations Board v. Murphy Oil USA, Inc., which will resolve the growing divide among the circuits. In granting cert., SCOTUS acknowledged the extent of the Circuit split as it existed in January—and footnoted this Sixth circuit case along with four other potential cases from the Third, Fourth, Eleventh and the D.C. Circuits. SCOTUS saw this one coming their way. I look forward to reading the resolution of this split.

ArbitrationNation thanks Jaclyn Schroeder, a law student at Mitchell Hamline School of Law, for researching and drafting this post.

Now that Justice Gorsuch is confirmed and can take the open seat on the Supreme Court, maybe SCOTUS can move forward on the cases about whether employers can make employees waive their right to class actions in an arbitration agreement.  (Btw, here’s a nice SCOTUSblog piece on Gorsuch’s arbitration decisions.)  In the meantime, California’s high court has decided a similar arbitration issue that seems likely to be the subject of a future cert petition.  In McGill v. Citibank, issued April 6, a unanimous California Supreme Court held that consumers cannot validly waive their statutory right to injunctive relief under California law, and found that the FAA did not preempt that result.

The case involves a woman who purchased a “credit protector” plan from the credit card issuer.  She felt the credit card did not keep its end of the bargain when she lost her job.  Although she had agreed to arbitrate claims and had waived representative or class actions, she started a putative class action in California state court alleging violations of multiple California consumer statutes.  Part of the relief she sought was an injunction preventing the credit card from continuing to violate California statutes.  (The parties agreed that the arbitration waiver prohibited the consumer from obtaining injunctive relief in any forum, not just arbitration.)

Each of the statutes at issue in her lawsuit was intended to protect consumers and each authorized injunctive relief.  One of the statutes also explicitly prohibited waiver of the statutory protections.  The Consumers Legal Remedies Act (CLRA), for example, declares that “[a]ny waiver by a consumer” of the CLRA’s provisions “is contrary to public policy and shall be unenforceable and void.”

California has codified the following contractual defense: “Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” (Civil Code Section 3513.)  Applying that doctrine in this case, California’s high court found the waiver of public injunctive relief in the arbitration agreement invalid, as it “would seriously compromise the public purposes the statutes were intended to serve.”

Now comes the tricky part of every state court opinion in this area.  Having found the arbitration agreement invalid under state law, how will the court clear the hurdles of the FAA and Concepcion/DirecTV?  The McGill opinion took the standard path: it reasoned that because the contractual defense at issue applies to every contract, this decision withstands FAA scrutiny.  (It did not, however, cite any cases in which this defense has been applied outside the arbitration context, which I believe is the unstated requirement of DirecTV.)

Furthermore, the court found reasons to distinguish the banning of class action waivers (prohibited in Concepcion) from the banning of public injunction waivers (at issue here).  For example, it noted class actions are a procedural device, while injunctions are substantive remedies.  It also found that its ruling would not interfere with the fundamental arbitration-ness of arbitration, because the injunctive relief cases will stay in court and can be heard once individual arbitrations are concluded.

Finally, the California high court remanded to the lower court to decide whether the rest of the arbitration clause should be thrown out with the bath water.  (There was conflicting language in the agreement.)

Ah, just when I worried California arbitration decisions were becoming too staid and dull…

 

Continuing last week’s theme of “States Gone Wild,” here are three more oddball summer decisions from state supreme courts. All of them find interesting paths around federal case law (IMHO).

Georgia Says Class Complaint Is Deemed Arbitration Opt Out For All Class Members

In Bickerstaff v. SunTrust Bank, 2016 WL 3693778 (Ga. July 8, 2016), the issue was whether a class action challenging overdraft fees could proceed in court. The class complaint was filed in July of 2010, and in August of 2010 (in response to a court ruling), the bank amended its deposit agreement to allow customers to opt out of arbitration. In part, the amended arbitration agreement stated:

To reject this arbitration agreement provision, you must send the Bank written notice of your decision … by the later of October 1, 2010 or within forty-five (45) days of the opening of your Account. Such notice must include a statement that you wish to reject the arbitration agreement … along with your name, address, account name, account number and your signature … This is the sole and only method by which you can reject this arbitration agreement provision.

Just after October 1, the bank moved to compel arbitration. The issue of whether the complaint could serve as the formal rejection of the arbitration provision ended up before the Supreme Court of Georgia. That court unanimously held that “the filing of Bickerstaff’s complaint, thereby signaling his rejection of the arbitration agreement, tolled the time in which the putative class members were required to notify SunTrust of their intent to reject arbitration.”

In its analysis, the court leaned heavily on Georgia cases in the class action context, finding that class representatives may satisfy statutory or contractual preconditions on behalf of those class members who remain in the class after it is certified. “[T]he satisfaction of a precondition for suit by the class plaintiff typically avoids the necessity for each class member to satisfy the precondition individually.” Curiously absent from the decision was any discussion of Stolt-Nielsen, or Section 2 of the FAA (requiring strict enforcement of valid arbitration agreements), or the preemption rulings in Concepcion and DirecTV.

[Thanks to a reader for sending me this case before Westlaw did.]

Split South Carolina Court Reasons Its Way Around Rent-A-Center

Our next state court ruling at least acknowledges the relevant federal precedent. In Smith v. D.R. Horton, Inc., 2016 WL 3660720 (S.C. July 6, 2016), the issue was whether a husband and wife had to arbitrate their construction defect claims against their builder. Section 14 of the parties’ agreement was entitled “warranties and dispute resolution,” and made up of ten subparagraphs covering topics from whether the builder could remove existing trees, to the private warranty it provided, to the requirement to arbitrate disputes. The arbitration agreement was in 14(g), with its own subheading “mandatory binding arbitration.” The builder moved to compel arbitration and the homeowners argued that clauses within Section 14 made the arbitration agreement unconscionable.

The builder relied on the severability doctrine, first set forth in Prima Paint but reiterated in Buckeye Check Cashing and Rent-A-Center, which holds that courts may only decide disputes about the validity of the arbitration agreement itself, all other challenges to the contract must be determined by the arbitrator. The builder defined the arbitration agreement as 14(g), which the homeowners did not challenge, while the homeowners defined the arbitration agreement as all of Section 14. The court agreed with the homeowners, relying largely on the title of Section 14, and the fact that the subparagraphs had “cross-references to one another, intertwining the subparagraphs so as to constitute a single provision.”

Having defined the arbitration agreement to include all of Section 14, the court went on to find the arbitration agreement unconscionable due to its disclaiming implied warranty claims and prohibiting monetary damages. (As Section 14 had no severability clause, the court refused to analyze whether the unconscionable portions could be stricken.) Two justices dissented, noting that “the majority has not followed controlling precedent of the United States Supreme Court.” (That should help the cert petition…)

[NOTE TO DRAFTERS: Move your arbitration agreement into a separate paragraph with its own heading right now! Give it its own severability clause. Then you can keep reading.]

North Dakota Forgets To Read The Footnotes

Not to be left out of the “buck SCOTUS” summer trend, North Dakota issued a decision finding that a district court did not err in compelling arbitration of the formation of the parties’ contract. 26th Street Hospitality, LLP v. REAL Builders, Inc., 2016 WL 3022054 (N.D. May 26, 2016). One party to the contract argued the contract was invalid because it was executed without the knowledge and authority of the Partnership, as proper consent had not been received pursuant to the company’s charter documents. Nevertheless, the district court compelled arbitration, without deciding the formation of the contract. The North Dakota Supreme Court unanimously found the district court did not err in refusing to decide formation before ordering arbitration, relying on Rent-A-Center’s discussion of severability.   What it did not discuss, however, is 1) the first footnote in Buckeye Check Cashing which specifically states that the severability doctrine does not apply when the issue is “whether any agreement between the alleged obligor and obligee was ever concluded,” or 2) the fact that a majority of federal courts have concluded formation is an issue for courts, not arbitrators.

As long as we’re talking state courts…

Two state supreme courts have new decisions on waiver. The Texas Supreme Court found a company did not waive its right to arbitrate claims with individual customers in RSL Funding, LLC v. Pippins, 2016 WL 3568134 (Tex. 2016). Importantly, the Texas court said that for Party A to waive its right to arbitrate with Party B, the court will only analyze Party A’s litigation conduct with respect to Party B after a dispute arises. In this case, the majority of the company’s litigation conduct at issue was directed at third parties before a dispute arose with the individual customers.

The Supreme Court of South Carolina found a nursing home waived its right to arbitrate wrongful death claims in Johnson v. Heritage Healthcare of Estill, 2016 WL 3022394 (S.C. May 25, 2016). The nursing home had litigated over the estate’s right to records and conducted discovery before moving to compel arbitration.

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This week, the Fourth Circuit found an arbitration agreement invalid because it waived all federal and state laws.  Although two other federal circuit courts had already found the same company’s arbitration agreement unenforceable because it called for an impossible arbitration process, the Fourth Circuit found it invalid for a new reason.

The issue in Hayes v. Delbert Services Corp., __ F.3d___, 2016 WL 386016 (4th Cir. Feb. 2, 2016), was whether a putative class of plaintiffs could assert violations of two federal statutes (Fair Debt Collection Practices Act and Telephone Consumer Protection Act) by the servicing agent of a payday lender in court, or whether they had to arbitrate the claims.  The servicer relied on the arbitration clause in the loan agreement to compel arbitration.  The arbitration clause called for arbitration by the Cheyenne River Sioux Tribal Nation, in accordance with the Tribe’s “consumer dispute rules.”  However, the Tribe had no arbitration rules and no capacity to administer arbitrations.  Those failures had led the Second and Seventh Circuits to find the arbitration agreement in the same lender’s loan agreement unenforceable.  But, the arbitration clause in this case was slightly different, as it allowed the borrower the right to select either AAA or JAMS to “administer the arbitration.”  So, the question in this case seemed to be whether that could save the arbitration clause, by providing a real arbitration forum.

The Fourth Circuit did not answer that question, however.  Instead, it issued a much bolder decision.  It focused on the fact that the loan agreement “purports to disavow the authority of all state or federal law.”  In its “Governing Law” section, for example, the loan agreement states “this Agreement shall be subject to and construed in accordance only with the provisions of the laws of the Cheyenne River Sioux Tribe, and that no United States state or federal law applies to this Agreement.”  (Similar language was repeated within the arbitration clauses, so there is no severability doctrine problem here.)

Those provisions really raised the court’s hackles.  It held that:

[A] party may not underhandedly convert a choice of law clause into a choice of no law clause–it may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.  Because the arbitration agreement in this case takes this plainly forbidden step, we hold it invalid and unenforceable.

To support that holding, the court cited 14 Penn Plaza, for the idea that arbitration agreements cannot waive federally protected civil rights, and to Italian Colors, for the proposition that the FAA precludes “an arbitration agreement forbidding the assertion of certain statutory rights.”  Because it found the rejection of all federal law to be at the “core of the arbitration agreement,” the court would not sever those provisions.

In closing, the court issued a bench-slap to the servicer, and a warning to drafters of arbitration agreements:

rather than use arbitration as a just and efficient means of dispute resolution, Delbert seeks to deploy it to avoid state and federal law and to game the entire system.  Perhaps in the future companies will craft arbitration agreements on the up-and-up and avoid the kind of mess that Delbert is facing here.

This opinion is interesting mostly because it could have been predictable and easy.  The Fourth Circuit could have just said “two of our sister circuits have already found this clause invalid, and the add-on language about allowing the AAA to “administer” the arbitration doesn’t save it”.  But instead, the court seems to expand on the existing case law regarding federal statutory rights and takes a strong stance against allowing corporations to use arbitration to circumvent federal claims.

The issue in analyzing whether a party waived its right to arbitrate is usually whether the defendant waited too long to assert the arbitration obligation.  But, this week the Second Circuit had the opportunity to address whether a plaintiff waives its right to arbitrate by the simple fact of bringing a case in court.

In LG Electronics, Inc. v. Wi-LAN USA, Inc., 2015 WL 5254894 (2d Cir. Sept. 10, 2015), the appellate court affirmed the district court’s decision that defendant Wi-LAN had not waived its right to arbitrate.  The court found that Wi-LAN’s four month delay in asserting arbitration was not sufficient to show waiver, when LG could not prove prejudice other than litigation expenses.  Furthermore, the court noted that Wi-LAN had not waived its right to arbitration merely by bringing suit in federal court in the first place.

The Supreme Court of Alabama made that same point earlier this year in IBI Group, Michigan, LLC v. Outokumpu Stainless USA, 2015 WL 2161150 (Ala. May 9, 2015).  In that case, clients had sued the designer of their facilities in federal court.  After the parties had engaged in Rule 26 disclosures and served discovery (and even debated whether there was complete diversity of citizenship to support federal jurisdiction), the clients/plaintiffs demanded arbitration and asked the federal court to stay litigation.  In response, the designer brought its counterclaims in state court and the clients moved to compel arbitration of the state court claims.

The Alabama courts enforced the arbitration clause, despite the clients’ initial filing of the federal action.  The Alabama Supreme Court noted it had previously held that plaintiffs are not barred from exercising contractual arbitration rights just because they initiated litigation.  But the complicating factor in this case was that the arbitration agreement gave the clients the “sole discretion” to choose whether a dispute would be arbitrated or litigated, and the designer argued that once the clients made that decision, it was “irrevocable.”  The Alabama courts disagreed, interpreting the arbitration agreement to allow the clients to change their mind about the dispute resolution forum.

Finally, in a more run-of-the-mill waiver case, the Sixth Circuit recently concluded that the defendant had waived its contractual right to arbitrate by participating in federal litigation for 15 months, including filing dispositive and non-dispositive motions.  Gunn v. NPC Int’l, Inc., 2015 WL 5061545 (6th Cir. Aug. 28, 2015).

Three federal appellate courts recently affirmed lower courts’ refusal to compel arbitration.  These cases show that the federal policy favoring arbitration is not absolute – the parties must have agreed to arbitrate the claims at issue and the defendant cannot have waived its right to arbitrate by engaging in significant discovery and motion practice.

In Lloyd v. J.P. Morgan Chase & Co., __ F.3d __, 2015 WL 3937978 (2d Cir. June 29, 2015), the issue was whether putative class and collective actions by former financial advisors could proceed in court.  The employment agreements call for arbitration of “any claim or controversy … required to be arbitrated by the FINRA Rules … no claims shall be arbitrated on a  … collective or class-wide basis.”  The current FINRA Rules prohibit arbitration of any class or collective claims.  The employer moved to compel arbitration and the district court denied the motion, finding that plaintiffs’ class and collective action claims fall outside the scope of the arbitration clause.  The Second Circuit affirmed.  It engaged in a grammatical analysis of the arbitration clause (rejecting the employer’s argument about the “rule of the last antecedent”) and found that the phrase “required to be arbitrated by the FINRA Rules” modifies “claim or controversy.”  Therefore, because the current FINRA Rules did not require arbitration of class or collective actions, the claims could proceed in federal court.

In another case about whether the parties really intended to arbitrate their claims, the Eighth Circuit found that the plaintiff never accepted the terms of the contract containing the arbitration agreement, despite starting to perform under that contract.  LoRoad, LLC v. Global Expedition Vehicles, LLC, __ F.3d __, 2015 WL 3449847 (8th Cir. June 1, 2015).  The plaintiff and defendant had exchanged multiple revisions of the contract, until finally the defendant sent a version that plaintiff appeared to accept by wiring a deposit on the funds due under the contract and faxing the contract back with the signature of an (unauthorized) principal and “minor handwriting notations and changes.”  Later, however, plaintiff asserted “unfinished business” and threatened to rescind the contract, and the defendant suggested revising the contract.  Applying UCC and Missouri law, the Eighth Circuit found the plaintiff never accepted the contract.  Furthermore, even though every version of the agreement contained the same arbitration provision, the Eighth Circuit found “there was an enforceable agreement to arbitrate if, and only if, [plaintiff] proved there was a final, enforceable [contract].”  (Plaintiff had filed suit to compel arbitration.)

Finally, in a class action antitrust case, In re Cox Enterprises, Inc. Settop Cable Television Box Antitrust Litig., ___ F.3d __, 2015 WL 3875726 (10th Cir. June 24, 2015), the defendant’s motion to compel arbitration was denied because the court found the defendant waived its right to compel.  The appellate court found that the defendant waived its right by waiting until two years into the litigation – after moving to dismiss the claim, engaging in “extensive pretrial discovery,” and opposing class certification.  In particular, the district court was offended that the defendant’s failure to inform the court of the arbitration agreement until after class certification had wasted significant court resources and suggested an attempt at “multiple bites at the apple” and to “play heads I win, tails you lose.”

The Fifth Circuit un-vacated an arbitration award last week, holding the district court had wrongly concluded that the court was the proper decision-maker on contract formation.  Although courts are presumptively authorized to decide whether an arbitration agreement exists, the Fifth Circuit found the parties altered that presumption by “submitting, briefing, and generally disputing that issue throughout the arbitration proceedings.”  OMG, L.P. v. Heritage Auctions, Inc.,  2015 WL 2151779 (5th Cir. May 8, 2015).  [Or, as I like to think of the case: “OMG!  I gave arb TMI and lost my appeal.  WTF”]

The dispute related to OMG’s claim that it was owed more commissions than the auction house had paid it for firearm sales.  The parties disputed how to interpret the term “merchandise” in the contract. Heritage demanded arbitration.  The two relevant agreements between OMG and Heritage provided for binding arbitration of “any dispute” “in any way related” to the agreements.  In arbitration, the auction house argued there was no meeting of the minds regarding the meaning of “merchandise,” so the contract was unenforceable.  The arbitrator agreed and rescinded the contract.

OMG asked the federal district court to vacate the arbitration award, arguing that the arbitrator exceeded his authority by ruling on the issue of contract formation.  The district court agreed, finding “a court was the proper decision-maker as to contract formation issues in this case, not the arbitrator.”

The Fifth Circuit reversed.  Critically, it found that “by their actions, the parties may agree to arbitrate disputes that they were not otherwise contractually bound to arbitrate.”  It cited Fifth Circuit precedent from 1980 (Piggly Wiggly, I am not kidding with the names here) and from 1994 (Executone Info. Sys.) to support that proposition.  Because the auction house had disputed whether there had been a meeting of the minds throughout the arbitration, and OMG “never contested the arbitrator’s authority to resolve” that issue, “the parties agreed to arbitrate contract formation.”  The court found that OMG could have refused to arbitrate the formation issue.  But it could not “simply [] wait until it receives a decision with which it disagrees before challenging the arbitrator’s authority.”

I find the analysis here very interesting.  The Fifth Circuit chose not to base the arbitrator’s authority to rescind the contract in the parties’ agreement to arbitrate any dispute, or any other language in the (now rescinded) agreement.  Instead, it looked to the parties’ conduct to authorize the award.  And in describing that conduct, it did not use a concept like waiver (OMG could have waived its right to argue the arbitrator exceeded his power by not raising that in the arbitration), but instead described the conduct as forming a separate agreement to arbitrate.  In any case, the public policy behind the decision is very clear and reminds me of the “invited error” doctrine: parties cannot ask the arbitrator to exercise power, or accede to that exercise of power, and later complain that the arbitrator exercised that power.

This is an important issue for advocates in arbitration.  Every issue that is presented to the arbitrator — by either party– should be carefully analyzed to determine whether it is validly within the scope of the parties’ arbitration agreement.  If an issue is outside the scope, and the party wants to preserve an objection to its submission to the arbitrator, it must “forcefully” object (see First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)).  Otherwise, the party will be deemed to have agreed to arbitrate the issue, and the arbitrator’s decision will be subject to the highly deferential review of the Federal Arbitration Act.

We haven’t had a good waiver case in a while.  The First Circuit served one up last week with a flourish, teaching me multiple new words in the process (not for the first time, either).  It found that a plaintiff had waived its right to arbitrate, not by bringing its claims to court in the first place, but by waiting nine months to compel arbitration, thereby seeming to “use [] an arbitration clause as a parachute when judicial winds blow unfavorably.”

In Joca-Roca Real Estate, LLC v. Brennan, __ F.3d __, 2014 WL 6737103 (1st Cir. Dec. 1. 2014), the plaintiff alleged fraud and breach of contract stemming from an asset purchase agreement.  The agreement required arbitration.  The parties conducted significant discovery, involved the court in discovery disputes, and were scheduled for trial on February 3, 2014.  On December 6, 2013, shortly before the summary judgment deadline, the plaintiff moved to stay proceedings pending arbitration.  (First big word: the court says the plaintiff did not explain its “cunctation” in invoking the arbitration provision.)  The district court found the plaintiff had waived its right to seek arbitration.

The First Circuit affirmed.  It reiterated the rule in its circuit that mere delay in seeking arbitration is insufficient to find waiver, there must be prejudice to the non-moving party.  To analyze prejudice, the court reviews a “salmagundi” of factors.  But the court admits the prejudice requirement is “tame” and can be inferred from a long delay accompanied by significant activity in the courts. In this case, the court focused on: the fact that the parties engaged in significant discovery, that the plaintiff waited until close to trial to seek arbitration, and that the change in forum would have delayed final disposition of the case and “nullify one of the primary benefits of arbitration.”

So we know at least two things: first, if you’re appearing before the First Circuit, you should use some fifty cent words in your briefs; and second, if you are on the eve of trial, it is probably too late to compel arbitration of the claim.

California is the Judd Nelson of The Preemption Club.  (Or the John Bender, if you prefer using character names.)  The Supreme Court has sent the California courts to preemption detention for ignoring the Federal Arbitration Act in blockbuster, groundbreaking cases (see Concepcion).  But California cannot help itself.  It keeps coming up with novel arguments to avoid arbitration.  And in doing so, it keeps inviting reversal.  Of course, other states get sent to The Preemption Club (West Virginia and Oklahoma, for example), just not with the same panache.

Just last week, the Supreme Court reversed a decision of the California Court of Appeals and remanded it for reconsideration in light of AmEx. In CarMax Auto Superstores California, LLC v. Fowler, a putative class of CarMax employees alleged CarMax violated California labor laws.  The parties engaged in discovery and motion practice for over a year and then stayed the case.  Two years into the stay period, in June of 2011, CarMax moved to compel the plaintiffs to individually arbitrate their claims, in accordance with the terms of their employment agreement.  The plaintiffs opposed the motion, arguing that CarMax had waived its right to arbitrate and that the arbitration agreement was unconscionable.  Plaintiffs also relied on California’s Gentry rule, which provides that class-action waivers in employment arbitration agreements are invalid if “a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”

The district court sided with CarMax but in March of 2013 the California Court of Appeals reversed.  It did not rest its decision on an uncontroversial issue like waiver, however.  (It gave CarMax a break for not moving to compel arbitration before Concepcion, as the motion would have likely been futile under California law, and it also said that the discovery and dispositive motion proceedings could have taken place in arbitration so there was no prejudice.)  The court also did not rest its decision on the alleged illusoriness of the arbitration agreement, because California law does not find agreements illusory, even if they can be modified without advance notice.  Instead, the court went with the riskiest possible basis for its decision: finding that Gentry was not preempted under the Concepcion analysis.  After the California Supreme Court refused to review the decision, CarMax took the issue up to the Supreme Court.

The Supreme Court made short work of the matter.  Just three days after considering the certiorari petition in conference, the Supreme Court granted cert, reversed the Court of Appeals, and remanded the case for reconsideration in light of AmExAmEx is the decision that, in June of 2013, seriously weakened the “effective vindication of statutory rights” line of cases.  So, what will the Court of Appeals do now?  I don’t see much room for fitting the case into what is left of the “effective vindication” doctrine, because that only applies to federal statutory rights and CarMax appears based on state statutory rights.  So if California really wants these CarMax employees to continue as a class, it either has to reverse itself on waiver, or come up with a different basis for finding the arbitration agreement unenforceable.  And in doing so, it will effectively say “Eat… My… Shorts” to SCOTUS.

In January of this year, the Eighth Circuit was the first federal appellate court to refuse to adopt the National Labor Relations Board’s ruling on class action waivers in employment contracts.  (The previous year, in D.R. Horton, the NLRB declared it a violation of federal labor law for employers to require employees to waive their rights to class actions.)  Last month, the Second and Ninth Circuits joined the Eighth Circuit in that stance.

In Sutherland v. Ernst & Young, __ F.3d__, 2013 WL 4033844 (2d. Cir. Aug. 9, 2013), an employee brought a putative class action for violations of the Fair Labor Standards Act.  The employer, E&Y, moved to compel arbitration.  Because the lead plaintiff had a potential recovery of only $1,900, but her attorneys fees and expert costs would likely reach $200,000, the district court relied on the Second Circuit’s Amex III decision and denied the motion to compel arbitration.  Now that SCOTUS has reversed the Second Circuit in Amex III, however, the Second Circuit ruled that this case against E&Y must proceed in individual arbitrations.

While the Second Circuit did not address the NLRB ruling directly, it expressed its disagreement sub silentio.  It found that Congress did not preclude the waiver of collective action claims in the FLSA, and cited the Eighth Circuit’s decision in Owen v. Bristol Care repeatedly.  It also hinted that recent Supreme Court rulings make clear that the NLRB ruling is unsupported.

In contrast, the Ninth Circuit did directly address the NLRB ruling in Richards v. Ernst & Young, LLP, __ F.3d__, 2013 WL 4437601 (9th Cir. Aug. 21, 2013).  In Richards, three employees brought wage and hour claims against the employer (E&Y again).  After the Concepcion decision in 2011, the employer moved to compel arbitration, and the district court denied the motion, finding E&Y had waived its right to arbitrate.  Although there was “years of litigation” before E&Y moved to compel, the Ninth Circuit found that the employee had not proven any prejudice and therefore E&Y had not waived its right to arbitrate.  In particular, dismissal of some claims (without prejudice) was not prejudicial, nor was the expense of discovery.

Although the court did not need to address the NLRB ruling (because it found the employee had not proven prejudice and had not raised the NLRB argument at the district court level), it went out of its way to say that “the only court of appeals, and the overwhelming majority of the district courts, to have considered the issue have determined tha they should not defer to the NLRB’s decision in D.R. Horton because it conflicts with the explicit pronouncements of the Supreme Court concerning the policies undergirding the Federal Arbitration Act.”  Therefore, the employee claims in Richards also had to proceed on an individual basis in arbitration.

What’s the opposite of a circuit split?  A circuit pile-on?  In any case, that’s what we’ve got so far on this issue.  The federal appellate courts are ganging up on the NLRB on the issue of contractually precluding class and collective waivers.