Bass Berry & Sims Labor Talk

Supreme Court Says a Class Action Waiver in Arbitration Agreement is Enforceable

Posted in Uncategorized

The U.S. Supreme Court has ruled that a class action waiver in an arbitration agreement is enforceable. Although not an employment case, the decision likely signals that an employee’s waiver of the right to bring a class action will be enforceable if included in an employment agreement that requires arbitration to settle any employment-related dispute. American Express Company v. Italian Colors Restaurant, No. 12-133 (June 20, 2013). A copy of the opinion is available here.

What does this decision mean for employers?

  • For employers with arbitration agreements that provide for a class action waiver, an arbitration agreement is likely enforceable to prevent a class action either in court (an employer can compel arbitration) or in the arbitration (a “single claim” arbitration). However, a savvy employer would be wise to have the agreement reviewed in light of the decision.
  • For employers without arbitration agreements, or with arbitration agreements that are silent on the class action waiver, employers may want to evaluate having an arbitration agreement or revising an existing agreement to be explicit in its waiver of class action status.
  • In either event, proceed with caution because:
    • We can expect some legislative initiative to limit the potential impact of the decision;
    • The Supreme Court vote was 5-3 (Justice Sotomayor recused herself); thus, the situation could change with the change of one justice;
    • We continue to await the outcome of D.R. Horton. As you will recall, the NLRB in that case found that an employer violated employees’ Section 7 rights when the employer required its employees to waive class action rights. A more detailed discussion of the NLRB’s decision in D.R. Horton is available below.

Detailed Discussion

The Supreme Court was considering a decision by the Second Circuit Court of Appeals that had invalidated a waiver of class action rights in an arbitration agreement. The Second Circuit relied upon a court-created exception to the Federal Arbitration Act (“FAA”) called the “effective vindication” exception. That exception is based on the view that, given the high cost of pursuing some individual federal statutory claims when compared to the potential recovery (such as in an individual overtime claim), a class action waiver prevents effective vindication of the statutory violation.

The Supreme Court reversed. The Supreme Court held that the FAA does not permit such court-created reasoning to overrule a contract between the parties. The Court referred to its recent opinion in CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012), emphasizing that courts “must rigorously enforce arbitration agreements according to their terms, even for claims alleging a violation of a federal statute, unless the FAA’s mandate has been overridden by a contrary congressional command.”

The majority held that the “effective vindication” exception to the FAA did not apply. According to the Court, the effective vindication exception would apply to “an arbitration agreement forbidding the assertion of certain statutory rights” and “would perhaps cover filing and administrative fees attached to arbitration that are so high as to make the forum impracticable.” However, the “fact that it is not worth the expense involved in proving a statutory remedy,” in the Court’s view, did “not constitute the elimination of the right to pursue the statutory that remedy.”

Also of note, the Court held that “[c]ongressional approval of Federal Rule of Civil Procedure 23 [the class action mechanism for use in courts] does not establish an entitlement to class proceedings for the vindication of statutory rights.”