Resistance to Class Waivers in Arbitration Agreements Continues on Multiple Fronts

In the wake of AT&T Mobility LLC v. Concepcion[1], mandatory arbitration agreements have become increasingly common in consumer and employment contracts. The rise of arbitration agreements even caught the eye of the New York Times, which ran a three-part series about the “soaring number of consumer and employment contracts” containing arbitration clauses.[i] As discussed in earlier blog posts, when combined with a class-action waiver, arbitration agreements can effectively preclude class action lawsuits—which is one reason why more businesses are choosing to include arbitration provisions in their contracts.

As a result of Concepcion and other recent Supreme Court decisions on the Federal Arbitration Act (FAA), many lawyers and courts (including those in Washington) have refocused their legal arguments in an attempt to work around the Supreme Court’s decisions on the FAA. For example, in Gandee v. LDL Freedom Enters., Inc.,[2] the Washington Supreme Court limited the reach of Concepcion by grounding its decision on the doctrine of unconscionability. And as we posted earlier, the Ninth Circuit Court of Appeals recently held that the FAA does not preempt a California rule barring waiver of representative claims under Private Attorneys General Act.

But resistance to Concepcion and FAA preemption is not confined to the courts. Federal agencies and members of congress also have joined the legal fight. A good example is the National Labor Relations Board (“NLRB”). In 2012, the NLRB found that D.R. Horton, a homebuilding company, violated the National Labor Relations Act by including class- and collective-action waivers in its arbitration agreements with employees.[3] The NLRB held that its position did not conflict with Concepcion or undermine the pro-arbitration policy that underlies the FAA. On appeal, the Fifth Circuit reversed the relevant portion of the NLRB’s decision. Citing Concepcion, the Court of Appeals sided with the employer who argued the FAA’s presumption in favor of arbitration trumped any policy to the contrary embodied in the NLRA.[4]

Two years later, in Murphy Oil,[5] the NLRB again ruled that arbitration agreements containing class-action waivers violated the NLRA. Once again, the Fifth Circuit reversed.[6] But the NLRB appears undeterred, taking the position that, unless overruled by the Supreme Court, its decisions remain binding on the NLRB’s administrative law judges.[7] Just last month, the NLRB cited its decisions in D.R. Horton and Murphy Oil to affirm an administrative law judge’s ruling that found an employer violated the NLRA for requiring employees to waive their rights to pursue class or collective actions as a condition of employment.[8]

The Consumer Financial Protection Bureau (“CFPB”) also is at the forefront of the legal fight over arbitration agreements and class-action waivers. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress instructed the CFPB to study and report to Congress on “the use of agreements providing for arbitration of any future dispute… in connection with the offering or providing of consumer financial products or services.”[9] Congress also gave the CFPB the power to “prohibit or impose conditions or limitations” on the use of arbitration agreements related to consumer financial products or services if the CFPB found such limitations to be “in the public interest and for the protection of consumers.”[10]

The CFPB released the findings of its study in March 2015. According to the CFPB, the study confirmed much of what was already known: that arbitration clauses effectively prevent group lawsuits and that very few consumers seek individual relief through arbitration or the courts. [ii] As a result of the study, the CFPB announced last fall that it was considering potential regulations that would effectively overrule Concepcion by making it illegal for contracts related to certain consumer financial products to have an arbitration clause that deprives the consumer of the opportunity to participate in class action lawsuits.[iii]

Notably, the proposed regulation would not apply to arbitration agreements entered into before the rule is published (and for a limited period thereafter). That means arbitration agreements related to consumer financial services entered into before the CFPB rule takes effect can still take advantage of Concepcion and its favorable treatment of class action waivers.

The legal fight spawned by Concepcion is not limited to the executive and judicial branches. Last month, Senator Patrick Leahy (D-VT) introduced the “Restoring Statutory Rights and Interests of the States Act of 2016.”[iv] To address Concepcion and related cases, the legislation would: (1) make the FAA inapplicable to claims brought by an individual or small business, either in an individual or class action lawsuit, unless a written agreement to arbitrate “is entered into by both parties after the claim has arisen…” (emphasis added); (2) allow state and federal law (statutes and common law) to invalidate arbitration agreements on unconscionability, contract law, or public policy grounds; and (3) require a court, as opposed to an arbitrator, to make the decision as to whether the FAA applies to an arbitration agreement. While the legislation is unlikely to get very far in a divided Congress (govtrack.us says it has a 1% chance of being enacted), the hard-fought legal battle over class action waivers and arbitration agreements is likely to continue for the foreseeable future.

–Michael Licata