June 7, 2017

Individual Arbitration Deposes Class Actions

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The prominent role of class actions in the U.S. legal system is far from certain after a pair of recent opinions by the U.S. Supreme Court.

In 2011, these two U.S. Supreme Court rulings all but eviscerated the class action tool—Wal-Mart v. Dukes, 564 U.S. 338 (2011) and AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). While Dukes tightened the guidelines to maintain a class action, Concepcion made it easy for employers to convert class actions into individual arbitrations. Although debatable, this author would argue that Concepcion triggered a much larger but slower change to class actions. The Dukes case tightened the standards to maintain any similar class action, including a class action that had been pending for years. One of the core tests of class actions—whether the group had sufficient commonality to warrant class action status—became far stricter in State and federal courts alike. Indeed, a worker who was on the verge of filing a motion for class certification when Dukes was published would likely need to rewrite the motion itself and would likely need to conduct additional discovery and obtain a supplemental report from an expert witness. The effect from Dukes was immediate.

Regardless of which case resulted in a greater change, most would agree Concepcion’s impact was slower because it mostly affected newly filed class actions. Since the purpose of arbitration is swift justice that reduces the costs of litigation, many Courts refused to compel a years-old class action where expensive discovery had already been completed for all class members because, in such a case, the purposes of arbitration were already moot, as the parties had already spent the time and money to litigate. Many companies lost bids to compel arbitration because, among other things, judges ruled it would be unfair to force a worker into individual arbitration after the worker already expended thousands of hours and perhaps hundreds of thousands of dollars in attorneys’ fees investigating a class action based on what had been considered well-settled law. Judges found other ways to avoid compelling individual arbitration, such as by finding the agreements themselves to be unconscionable and therefore unenforceable. However, a wave of pro-arbitration opinions quickly whittled down the various arguments to avoid Concepcion’s reach.

Because Concepcion’s effect was mostly on new class actions, its impact would increase exponentially over the next few years.

After 2011, advice by corporate counsel was, for once, almost unanimous: companies should add a contract term stating that the employee would only bring claims on an individual basis in arbitration. Employee Handbooks almost invariably contained a “collective waiver” of some type, making clear that the employee waives the right to participate in class or group actions. Case law trended consistently in favor of the ease of forming a binding arbitration agreement: electronic signatures are generally sufficient and many judges will enforce an “agreement” that the employee never signed and which was sent with a message that the employee automatically accepts it if he or she fails to opt out by a specific deadline. As such, wise companies made sure collective waivers were in place. For a short time, those waivers resulted in millions or—more likely—billions of dollars saved in litigation costs by companies in California that avoided group actions altogether, until PAGA claims – which could not be forced into arbitration—became the new normal of employment litigation.