State Law Under Which Class Action Waivers Are Substantively Unconscionable Preempted

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By Bernard J. Pazanowski  

The Federal Arbitration Act preempts Pennsylvania common law deeming class action waivers substantively unconscionable, the U.S. Court of Appeals for the Third Circuit ruled March 14, applying a U.S. Supreme Court decision from last term holding that the FAA preempted similar California common law (Quilloin v. Tenet HealthSystem Philadelphia Inc., 3d Cir., No. 11-1393, 3/14/12).

Applying AT&T Mobility LLC v. Concepcion, 79 U.S.L.W. 4279 (U.S. 2011), the opinion by Judge D. Michael Fisher said that the Pennsylvania law at issue “presents an even greater obstacle to the fulfillment of the FAA's purposes” than a New Jersey statute the appellate court recently struck down “because it is exactly the type of law that 'single[s] out the provisions of arbitration agreements.' ”

The court added that the lower court should have granted a request by Tenet HealthSystem Philadelphia Inc. to compel arbitration of an employment dispute with one of its former employees.

What Did That Form Say?

Janice Quilloin is a registered nurse with an associate's degree. She worked at a hospital owned by Tenet in 2006, but left, and was rehired two years later.

Although there was some dispute over whether she remembered doing so, both times Quilloin was hired, she signed an employee acknowledgment form, which acknowledged receipt of a “Fair Treatment Process” brochure. The form contained an arbitration agreement that stated that Quilloin “voluntarily” agreed to arbitrate “all claims and disputes … that are related in any way to my employment or the termination of my employment.” It also said that Quilloin had to pay a maximum out-of-pocket expense of one day's pay for the arbitration, and that Tenet would pay the remainder. It added that Quilloin “will pay all remaining fees and administrative costs.”

The FTP outlined the steps employees are required to follow to resolve disputes, including the time line for filing complaints and the amount of time in which they would “usually” be addressed. While the FTP stated that the employee and Tenet “will be responsible for the fees and costs of your own respective legal counsel,” it also said that the arbitrator “has the authority to award any remedy that would have been available” if the dispute was litigated. It added, “no remedies that otherwise would be available to you or the company in a court of law will be forfeited by virtue of the agreement to use and be bound by the FTP.”

When Quilloin asserted a collective action against Tenet under the Fair Labor Standards Act, it moved to enforce the arbitration agreement. Quilloin responded that the agreement was unconscionable. The district court held that genuine issues of material fact remained concerning the enforceability of the agreement and denied the motion to compel.

District Court Jurisdiction.

The Third Circuit noted that in Rent-a-Center v. Jackson, 78 U.S.L.W. 4643 (U.S. 2010), the U.S. Supreme Court confronted a contract that contained an agreement to arbitrate, and a specific agreement to arbitrate questions of arbitrability. To eliminate confusion, the Supreme Court distinguished “between the overall arbitration agreement (the 'contract'), and the agreement to arbitrate arbitrability (the 'delegation clause'),” the court here said.

But the plaintiff in Rent-a-Center only challenged the validity of the entire contract, it noted. “Because the delegation clause was severable from the contract, it was unaffected by the contract's validity; thus, the Supreme court held that in accordance with the valid delegation clause, questions of arbitrability (including the arbitrability of the overall agreement to arbitrate) must go to the arbitrator,” it said.

Tenet argued that Quilloin was therefore required to challenge some specific clause within the FTP and employee acknowledgement, rather than the arbitration agreement as a whole.

The court said that “Rent-a-Center is inapposite,” because the agreement at issue does not contain an agreement to arbitrate arbitrability, and because “unlike the contract in Rent-a-Center, the FTP and Employee Acknowledgement contained only one agreement to arbitrate. There was no need to distinguish between multiple agreements to arbitrate.”

The court said, “Because Quilloin did not agree to arbitrate the issue of arbitrability, and because she claims that the arbitration agreement, specifically, is unconscionable, the District Court did not err in addressing the validity of the agreement to arbitrate.”

Substantive Unconscionability.

The district court held that the arbitration agreement may be substantively unconscionable because it potentially barred attorneys' fees, possibly included a class action waiver, and potentially allowed Tenet to “run out the clock” on the statute of limitations.

The court explained that a contract is substantively unconscionable when it unreasonably favors the party asserting it.

On the attorneys' fees issue, the Third Circuit said that the arbitration agreement “is ambiguous regarding the award of attorneys' fees,” but the Supreme Court “has clearly established that ambiguities in arbitration agreements must be interpreted by the arbitrator.”

Pennsylvania Law Preempted.

Looking at the class action waiver issue, the appeals court said that under Pennsylvania law “class action waivers are substantively unconscionable where 'class action litigation is the only effective remedy' such as when 'the high cost of arbitration compared with the minimal potential value of individual damages denie[s] every plaintiff a meaningful remedy.”

In this case, however, the arbitration agreement did not contain an express class action waiver. The court said, “Silence regarding class action arbitration generally indicates a prohibition against class arbitration, but the actual determination as to whether class action is prohibited is a question of interpretation and procedure for the arbitrator.”

The court added that “even if the agreement explicitly waived Quilloin's right to pursue class actions, the Pennsylvania law prohibiting class action waivers is surely preempted by the FAA under Concepcion.” It explained that after the district court in this case handed down its opinion, the Concepcion court held that “ '[a]rbitration is poorly suited to the higher stakes of class litigation' because (1) 'the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration--its informality[,]' (2) it is 'at the very least odd to think that an arbitrator would be entrusted with ensuring that third parties' due process rights are satisfied[,] and (3) 'class arbitration greatly increases risks to defendants.' ”

The California law at issue in Concepcion did not deem class action waivers per se unconscionable, but was based on the fact that class actions are necessary to keep small-dollar claims from slipping through the cracks. The Supreme Court, however, said that “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”

Finding a similar New Jersey law preempted in Litman v. Cellco P'ship, 655 F.3d 225 (3d Cir. 2011), the Third Circuit said, “a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration is desirable for unrelated reasons.”

The Pennsylvania law in this case “is clearly preempted under Concepcion and Litman,” the court said. It is not much different from the California law that “is unquestionably preempted by the FAA,” it said. It added, “Like the California law, Pennsylvania law does not render class action waivers per se unconscionable. Rather, Pennsylvania finds such waivers substantively unconscionable where 'class action litigation is the only effective remedy' such as when 'the high cost of arbitration compared with the minimal potential value of individual damages denie[s] every plaintiff a meaningful remedy.' ”

The court also said that, like the New Jersey law in Litman, the Pennsylvania law imposes class arbitration despite an agreement for individual arbitration “and is therefore preempted.”

Running Out the Clock.

As for running out the clock, the appeals court said that Quilloin did not “explain how a process allowing an employee the full amount of time permitted under law is unconscionable, even if the employer is given guidelines, rather than strict parameters, within which it may respond.” Furthermore, it said that if Tenet drags its feet, Quilloin can file a motion to compel arbitration.

Quilloin also argued that the arbitration agreement was procedurally unconscionable because she was not given notice of the arbitration agreement, no one explained its terms to her, and she had little time or choice but to accept its terms. The court noted that even though Quilloin did not necessarily remember signing the agreement, she did so twice. “She had a college degree, and chose to agree to the arbitration agreement on more than one occasion,” it said.

The court also rejected “Quilloin's argument that there was unfair surprise or a lack of time to consider or learn the meaning of the terms of the agreement.” It said, “Quilloin did not lack a meaningful choice in agreeing to arbitrate, and thus she raised no genuine dispute of material fact with regard to procedural unconscionability.”

Judges Thomas M. Hardiman and Joseph A. Greenaway Jr. joined the opinion.

James N. Boudreau, Greenberg Traurig, Philadelphia, argued for Tenet. Gary F. Lynch, Carlson Lynch, New Castle, Pa., argued for Quilloin.


Full text at http://pub.bna.com/lw/111393m.pdf.