Pro-Arbitration Policy Gets Put to the Test

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Arbitration Agreements

The Federal Arbitration Act (FAA) provides that agreements to arbitrate should be enforced. The Supreme Court has held that the FAA reflects “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” In recent years, the courts and litigants have grappled with the application of that liberal federal policy to various situations, including those with agreements mandating arbitration of small-dollar consumer claims on a non-class-action basis, those in which an arbitration agreement potentially involves employment statutes, and those in which a party is a non-signatory to the arbitration agreement. In this Bloomberg Law Insights article, Matthew Solum, senior litigation partner of Kirkland & Ellis LLP, discusses each of these situations.

Matthew Solum

Matthew Solum

Matthew Solum is a senior litigation partner of Kirkland & Ellis LLP. His practice focuses on high‑stakes disputes, including M&A, securities and complex commercial litigation.

The Federal Arbitration Act (FAA) provides that agreements to arbitrate should be enforced. The Supreme Court has held that the FAA reflects “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983).

In recent years, the courts and litigants have grappled with the application of that liberal federal policy to various situations, including those with agreements mandating arbitration of small-dollar consumer claims on a non-class-action basis, those in which an arbitration agreement potentially involves employment statutes, and those in which a party is a non-signatory to the arbitration agreement. Each of these situations is discussed below.

Enforcement in Clickwrap, Shrinkwrap, and Similar Types of Contracts

Signing up for a credit card, a cell phone, or any number of consumer services, often involves agreeing to a clause mandating arbitration of any disputes between you and the service provider.

Agreeing to arbitrate can have benefits, but agreeing to arbitrate also often involves waiving the possibility of bringing a class action. Class actions are a vehicle for bringing claims on behalf of a group of people—or “class”—who have all allegedly suffered the same legal wrong. In recent years, service providers in a variety of contexts have required that their customers agree not only to arbitrate, but also agree not to file or join class actions.

Consumers had attempted to challenge this trend through litigating the validity of those waivers, but in the 2011 decision AT&T Mobility v. Concepcion, the U.S. Supreme Court resolved the debate. The Court held that the FAA preempts state law purporting to vitiate a party’s agreement to arbitrate as a result of a class-action waiver. The high court concluded that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the [FAA].” Detractors commented that class actions were an efficient vehicle for litigating low-dollar claims that, in the aggregate, could affect millions of consumers. Nevertheless, in the 2015 case DirecTV v. Imburgia, the Supreme Court reaffirmed that the FAA required the enforcement of arbitration agreements with class-action waivers even where state law purported to ban such waivers.

Enforcement in Employment Disputes

The use of arbitration clauses in employment contracts creates distinct legal issues given the interplay between the FAA and employment-related statutes. Consider, for example, the recent cases of Lewis v. Epic Systems; Ernst & Young LLP v. Morris; and NLRB v. Murphy Oil, where three separate federal appellate courts came to different conclusions as to whether the FAA’s arbitration-friendly policies override the collective action protections of the National Labor Relations Act. In each of the three cases, employees subject to arbitration agreements brought class or collective actions in federal court. In each of the three cases, the arbitration agreements expressly precluded such actions.

In Epic Systems and Ernst & Young, the U.S. Courts of Appeal for the Seventh Circuit and the Ninth Circuit held that the collective-action waivers in the employees’ arbitration agreements ran afoul of the NLRA’s protection of “concerted activities” for “mutual aid and protection.” Accordingly, those courts declined to enforce those waivers. In Murphy Oil, however, the U.S. Court of Appeals for the Fifth Circuit held that the NLRA confers no substantive right to class-action litigation and that the waiver of class-action claims was enforceable under the FAA. The Supreme Court heard oral argument in all three of these cases on Oct. 2, 2017, and a decision is expected this term.

Enforcement Against Non-Signatories

Although the Supreme Court has found that arbitration “is a matter of consent, not coercion” ( see Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.), there are a multitude of scenarios in which a party that has never signed an arbitration agreement can have its case dismissed and be compelled to arbitrate because of a clause in an agreement that it did not sign.

For example, this may arise where a non-party to a transaction has knowingly received direct benefits under an agreement containing an arbitration clause. In that event, the non-party may be estopped from later claiming not to be bound by that arbitration clause.

A recent illustrative case is Everett v. Paul Davis Restoration, 771 F.3d 380. Plaintiff Renee Everett co-owned an LLC along with her husband. That LLC was a franchisee of Paul Davis Restoration, and the franchise agreement contained an arbitration clause. The business relationship deteriorated and Paul Davis shut down the Everetts’ franchise for cause. Later, Ms. Everett formed a competing business, and a dispute ensued as to certain non-compete obligations. The U.S. Court of Appeals for the Seventh Circuit determined that Ms. Everett, in her personal capacity, was subject to mandatory arbitration, even though she did not agree to arbitrate in her personal capacity. The court reasoned that “Ms. Everett’s ownership interest in [the LLC] was itself a direct benefit of the agreement [containing the arbitration clause].”

Another case decided last month in the U.S. Court of Appeals for the Third Circuit, White v. Sunoco, 870 F.3d 257 (3d Cir. 2017), presents an example where the court determined that there was no enforceable obligation to arbitrate. In that case, a consumer signed a Citibank credit card agreement with an arbitration clause and a class-action waiver. When Sunoco did not honor one of the card’s features—a 5 percent rebate at Sunoco gas stations—the customer brought a class-action lawsuit against Sunoco, which was not a party to the credit card agreement (or the arbitration clause). Sunoco moved to compel arbitration, and the court denied the motion, finding that there was no agreement between the consumer and Sunoco to arbitrate disputes.

While there is a pro-arbitration federal policy, courts across the country sometimes differ on what that means and how to implement it. And this particular area of law has been evolving rapidly, and it will continue to do so as it receives attention from the nation’s highest court.

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