Understanding Class Arbitration Rules: US Supreme Court Insights

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In a trio of cases since 2010, the US Supreme Court has telegraphed “best practices” for avoiding class arbitrations for consumer and employee claims.

Best Practices To Avoid Class Actions And Class-Wide Arbitration

First the “best practices.”  If you are a businesses that wants to arbitrate disputes but wants to prevent class wide arbitration pay attention. The US Supreme Court appears to be telling you to:

    1. Write your arbitration agreements under the Federal Arbitration Act (FAA);
    2. Make your intent to prohibit class arbitration crystal clear.  Include express language in the arbitration agreement:
      • that the parties may sue only in their individual capacity;
      • that neither party may act as a representative of a class, collective or representative action or any similar group action or proceeding; and
      • that the arbitrator has no power to consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class proceeding.

This should prevent a party to the arbitration agreement (i.e. a consumer or employee) from suing your business on a class wide basis not only in court but also in arbitration.  The consumer or employee may sue you in arbitration but only as an individual.  This limits your exposure to the individual dispute at hand which is the point of arbitration from a business defendant’s view point.  Think consumer or employee lawsuits – what business wants to be in front of a jury on such claims at all, let alone if a “class action” is involved?

Now The Explanation

The trio of United States Supreme Court cases since 2010:

    1. Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S.Ct. 1758 (2010)
    2. AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011)
    3. Oxford Health Plans v. Sutter, Slip Opinion (June 10, 2013)

The first case Stolt-Nielsen S.A. basically said where there is “no agreement” to arbitrate on a class-wide basis there can be no class wide arbitration.  The result: arbitration panel could not force a party to arbitrate on a class wide basis as that exceeded the panel’s powers.

The second case AT&T Mobility basically said if the parties agree to an express waiver of class-wide arbitration in a consumer arbitration agreement, no state law rule can trump the parties’ agreement.  The result: consumer (Concepcion) could sue AT&T Mobility for its alleged consumer fraud, but had to do so in private binding arbitration and on an individual basis only, not on a class-wide basis because Concepcion agreed to it.  Sure, said the US Supreme Court, the business can strong arm the consumer and force them to sign such an agreement (an “adhesion contract”), but that’s not a sufficient reason to refuse enforcement of the arbitration agreement in accordance with the parties’ no class arbitration terms.

The third case Oxford Health Plans basically said that if the arbitration agreement could be read to allow class arbitration and the parties allow the arbitrator to interpret the language they have to live with the arbitrator’s decision.  Arbitration decisions will be overturned only in “unusual circumstances.” That’s not one of them.  Even if the arbitrator made a serious error in interpreting the language, the interpretation must stand when the parties “bargained for the arbitrator’s construction [interpretation] of their agreement.”

Lessons Learned From The Trio Of US Supreme Court Cases

For agreements to arbitrate under the FAA, we are reminded of the following general rules:

    1. The FAA’s primary purpose is to enforce private arbitration agreements according to their terms.
    2. The parties may structure their arbitration agreement as they see fit within the bounds of contract law.
    3. General defenses for revocation of any contract apply.
      • But the US Supreme Court is unlikely to allow revocation based on an “adhesion contract.”   An adhesion contract is where one party tries to avoid the contract by saying they had “no choice” but to sign the contact because they were the “weaker” party.
      • Nor is the US Supreme Court likely to allow revocation on “public policy” grounds.  A state, state court, or private arbitrator has no power to revoke the arbitration contract on “public policy” grounds or to impose requirements (such as the requirement to arbitrate on a class-wide basis) not consented to by the parties.
    4. The parties’ intent and expectations as set forth in the arbitration agreement control.  So make your intent clear.  If you wish to arbitrate only on an individual basis and not on a class wide basis, then say so.
    5. If the language is ambiguous and you bargain for the arbitrator to interpret that ambiguous language then the arbitrator’s decision will not be vacated.
    6. A decision by an arbitrator acting within his/her powers is subject to extremely limited judicial review.  Even if the arbitrator gets the law or the facts wrong the decision will stand.
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Attorney Scott Shibayama has been advocating for California businesses for nearly 30 years. Based in Sacramento, he helps small business employers avoid lawsuits and litigation.

Attorney Shibayama now wants to make sure every business owner and employer can protect themselves by sharing insights learned defending Fortune 500 companies.

Connect with his firm, Vision Law, to stay updated on the latest developments in California Employment Law and gain valuable insights needed to prevent vulnerabilities or employee litigation.

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