Last week, the Ninth Circuit issued its decision in Muniz v. UPS, holding that the trial court did not abuse its discretion in awarding the plaintiff close to $700,000 in attorneys' fees, even though the plaintiff's damages recovery was only $27,000 and the defendant defeated the majority of plaintiff's claims prior to trial. This result is an unpleasant example of how an employer can be largely victorious in defending an employment suit yet still lose big on attorneys' fees.
In Muniz, the plaintiff was given a performance improvement plan and later demoted, based on unsatisfactory performance. Plaintiff sued, alleging "kitchen sink" discrimination based on age and gender, and also alleged retaliation and negligent supervision and training. Plaintiff's age discrimination, retaliation, and negligent supervision claims (as well as plaintiff's claim for punitive damages) were defeated and/or voluntarily dismissed prior to trial (meaning UPS prevailed on these claims). The only claim that was actually tried was plaintiff's claim for gender discrimination based on being given a performance improvement plan and later demoted. The jury determined that plaintiff's demotion was motivated by gender discrimination but awarded plaintiff damages of only $27,000 (much less than plaintiff's plea to the jury to award her $700,000). The jury also concluded that plantiff's performance improvement plan was motivated in part by gender discrimination, but that UPS would have taken the same action for legitimate, non-discriminatory reasons. As such, the plaintiff was not permitted to recover damages (alleged emotional distress) associated with the performance criticism.
In sum, the defense largely prevailed in the case, having defeated all but one of plaintiff's claims and substantially limiting plaintiff's recovery. That is, until plaintiff filed a motion for recovery of attorneys' fees for prevailing on one FEHA discrimination claim. Plaintiff outrageously sought $1.9 million in fees for her limited success, including a claimed lodestar (number of hours expended times hourly rates) of $1.3 million (which included time spent litigating the claims that were defeated) and a requested 1.5 upward enhancement. The trial court denied the requested 1.5 multiplier and limited its analysis to the reasonableness of the $1.3 lodestar. In this regard, the trial court found that plaintiff's counsel's proffered hourly rates were unreasonable and reduced them slightly. The trial court also found that plaintiff's counsel had not sufficiently proven the number of hours expended on the litigation and, therefore, reduced the compensable total hours by 20 percent, bringing the fee award down to $773,000. At that point, the court considered UPS' argument that the fee award needed to be substantially reduced to account for plaintiff's very limited success and the extreme disproportion between the plaintiff's damages and the amount of fees sought. The trial court reduced the fees by only 10 percent and awarded plaintiff nearly $700,000 in fees.
UPS appealed to the Ninth Circuit, arguing primarily that the fee award should have reduced more than 10 percent to account for plaintiff's limited success. The Ninth Circuit disagreed, relying heavily on the deferential standard of review which gives a trial court broad discretion to set the amount of fees awarded. The Ninth Circuit held that the trial court could have reduced the fee award more, but that it could not be said that it was an abuse of discretion for the trial court not to do so. The court reasoned that a reduction for time spent on unsuccessful claims is proper only to the extent it can be demonstrated that certain hours were spent exclusively on the unsuccessful claims. Time spent, for example in discovery, on both successful and unsuccesful claims should not be reduced from a fee award. The Ninth Circuit concluded that the trial court properly considered these issues and did not abuse its discretion in determining the amount of fees to award.
The Muniz case is another one for the plaintiffs' bar arsenal. It will make it more difficult for employers fighting FEHA claims in California federal courts to successfully limit any award of attorneys' fees to a prevailing plaintiff, thereby effectively increasing the incentive to settle such claims early on. The full decision is here.
Today, the Fifth Circuit issued its decision in D.R. Horton v. NLRB, invalidating the NLRB's holding that D.R. Horton's arbitration agreement violated the NLRA by prohibiting employees from pursuing employment claims on a class or collective basis. The NLRB had reasoned that disallowing class and collective claims in arbitration and in court precludes employees from exercising their right under the NLRA to engage in collective, concerted activity for mutual aid and protection. The Fifth Circuit disagreed.
Relying on recent United States Supreme Court decisions starting with AT&T Mobility v. Concepcion, the Fifth Circuit held that the Federal Arbitration Act (FAA) requires that arbitration agreements be enforced according to their terms and that a provision prohibiting class-wide arbitration is an enforceable term. The Fifth Circuit further held that nothing in the NLRA or its legislative history evinces any Congressional intent to ovveride the FAA, and that general language in the NLRA relating to "mutual aid and protection" could not be interpreted as an expression of Congress' intent to override the FAA.
The NLRB argued that its ruling was valid because it did not require employers to allow class-wide arbitration. Instead, it simply required employers to allow employees to pursue relief on a class-wide basis either in arbitration or in court. The Fifth Circuit held that there was nothing in the NLRA suggesting that a prohibition on class-wide claims violates the NLRA. The court also held that requiring employers to allow employees to pursue class-wide claims (either in court or in arbitration) has the effect of disfavoring arbitration, in contravention of the FAA.
The Fifth Circuit's decision was not an all-out win for D.R. Horton, however. The Fifth Circuit held that D.R. Horton's arbitration policy reasonably could be interpreted as preventing employees from pursuing administrative claims with the NLRB (based on broad language explaining that the employee was waiving the right to file a lawsuit "or other civil proceeding" relating to an employment dispute). As a result, the court held that the NLRB properly ordered D.R. Horton to take corrective action to revise its policy to clarify that employees are not prohibited from filing charges with the NLRB.
The Fifth Circuit's decision in D.R. Horton is the first circuit court decision addressing the D.R. Horton issue in a direct appeal from a NLRB action. However, many courts throughout the country, including many in California and in the Ninth Circuit have similarly rejected the NLRB's D.R. Horton analysis and refused to follow it. It remains to be seen what the NLRB will do in response to the Fifth Circuit's decision. The NLRB could petition for review to the United States Supreme Court. In the meantime, the NLRB may continue to follow and apply its D.R. Horton analysis to invalidate class waivers in jurisdictions outside the Fifth Circuit. Alternatively, the NLRB could abandon its attack on class waivers consistent with the weight of court decisions rejecting the NLRB's analysis in this regard. Time will tell.
For now, arbitration agreements with class action waiver provisions remain an effective tool for employers to prevent class-wide employment claims.
The Fifth Circuit's decision is available here.
This week, the Ninth Circuit has issued two new decisions on the enforceability of arbitration agreements post-Concepcion. In the first case, Ferguson v. Corinthian Colleges, the court issued an opinion favoring enforcement of arbitration agreements by striking down over a decade of California-based precedent holding that arbitration may not be compelled where the action is one seeking public injunctive relief. This precedent was widely known as the “Broughton-Cruz” rule (which was also adopted by the Ninth Circuit in Davis v. O’Melveny & Myers). The Ninth Circuit correctly held that, in light of the Supreme Court’s instruction in Concepcion, courts cannot carve out particular types of claims (such as claims for public injunctive relief) from arbitration. In the Corinthian Colleges case, the plaintiffs were vocational students who alleged that the college misled them through misrepresentations about future employment opportunities. The plaintiffs sought an injunction to preclude the college from continuing to make such misrepresentations to recruit future students. Corinthian sought to compel arbitration of the plaintiffs’ claims, but a federal district court refused to enforce the arbitration agreement. The Ninth Circuit reversed, holding that the claims were arbitrable regardless of the fact that they sought public injunctive relief. While not an employment case, the Corinthian Colleges case provides further federal precedent preventing California district courts from refusing to enforce arbitration simply because a specific type of claim is at issue. This principle applies equally to disputes concerning arbitration agreements in employment cases. The Corinthian Colleges case is available here.
The Ninth Circuit’s second arbitration decision this week was less arbitration-friendly. That case, Chavarria v. Ralphs Grocery, involved an employment arbitration agreement between a grocery store employee and the grocery chain. The employee filed a putative class action for alleged Labor Code violations and Ralphs sought to compel arbitration of the individual employee’s claim based on an arbitration policy the employee accepted as part of her employment application. The district court found the arbitration agreement unconscionable under California law and refused to compel arbitration. This week, the Ninth Circuit agreed with the district court’s holding that the agreement was unconscionable and unenforceable under California law (i.e. Armendariz and its progeny). The court specifically held that Concepcion and subsequent United States Supreme Court decisions do not affect the continued validity of state law unconscionability doctrine as a means for invalidating an arbitration agreement. Applying California’s unconscionability law, the court held that Ralphs’ arbitration agreement was procedurally unconscionable because it was presented to employees on a “take it or leave it” basis with no ability to negotiate, and the arbitration terms were not provided to employees until three weeks after they signed the agreement (i.e. the employment application). The court also agreed with the district court’s finding that the agreement was substantively unconscionable, meaning that it was unfairly one-sided so as to “shock the conscience.” The court focused on two provisions of the arbitration policy—the arbitrator selection provision and the costs provision. With respect to arbitrator selection, the court determined that the process would always result in the arbitrator being one proposed by Ralphs, which was unfairly one-sided. That is because the policy provided that each side could propose three arbitrators, followed by an alternating strike method allowing the party not demanding arbitration to strike first. In the court’s view, the party not demanding arbitration would always be Ralphs in any employee-initiated claim and that would always result in the last arbitrator standing being on Ralphs' list. (In this author’s view, that interpretation is a little tortured because in a typical case, the employee files a lawsuit in state court rather than “demanding” arbitration. The employee opposes arbitration and the employer has to “demand” it by making a motion to compel arbitration with the court. Ralphs also made this argument, but the Ninth Circuit rejected it.) The policy also specifically disallowed the use of AAA or JAMS arbitrators, which meant that those institutions’ rules for neutral arbitrator selection could not be used.
As to the costs provision in the policy, the Ninth Circuit held that this too was unconscionable. The policy itself is somewhat unclear, but generally provides that the arbitrator is to apportion arbitration-related fees to the parties at the outset of the proceeding subject to United States Supreme Court precedent on the subject and that if such precedent requires Ralphs to pay up to all of the arbitration fees, Ralphs would do that, but if United States Supreme Court precedent did not require such a result, then the arbitrator could apportion the arbitration fees/costs equally between the parties. The Ninth Circuit interpreted this provision as requiring the arbitrator in every case to impose substantial and prohibitive fees on the employee at the outset of the arbitration, so as to effectively preclude the employee from continuing with arbitration at all. On this basis, along with the unfair arbitrator selection provision, the court held that the agreement was substantively unconscionable. Having found that the agreement was both procedurally and substantively unconscionable, the court held that the arbitration agreement as a whole was unenforceable and that the employee could proceed with her claims in court. The Ralphs Grocery decision is available here.
The Ralphs Grocery decision, coupled with last week’s California Supreme Court decision in Sonic Calabasas, confirms that California state and federal courts will continue to recognize and apply California unconscionability law to review and potentially refuse to enforce employment arbitration agreements. Thus, litigation over the enforceability of these agreements is certain to continue, even though there have been huge employer-friendly gains in the last couple of years strengthening the enforceability of these agreements. The continued validity of the unconscionability doctrine serves as an important reminder to employers to review their arbitration policies and agreements to ensure that they pass muster under these standards. Employers are also reminded that important cases are still pending before the California Supreme Court on the issue of the enforceability of class action waivers in employment arbitration agreements and whether California's "Gentry" analysis for evaluating the enforceability of these waiver provisions is still valid in the wake of Concepcion. We will keep you updated on further developments in this area.
Today the California Supreme Court issued its opinion in Sonic-Calabasas v. Moreno, holding that an employment arbitration agreement is enforceable even where an employee is pursuing administrative remedies (typically for alleged unpaid wages) through the California Labor Commissioner.
The California Supreme Court had previously held in this same case that an arbitration agreement is unconscionable to the extent it seeks to preclude an administrative hearing before the Labor Commissioner. Following that ruling, however, the United States Supreme Court issued its decision in in AT&T Mobility v. Concepcion, striking down a similar California Supreme Court ruling that had found class action waivers is consumer contracts generally unconscionable and unenforceable. The United States Supreme Court thereafter ordered the California Supreme Court to reconsider its ruling in Sonic-Calabasas in light of Concepcion.
Today the California Supreme Court issued its new decision in "Sonic II." The Court held that Concepcion precludes a finding that an arbitration agreement is unconscionable simply because it requires parties to arbitrate a Labor Code dispute instead of permitting the employee to first proceed with an administrative hearing before the Labor Commissioner. Thus, an arbitration agreement now may still be enforced even in Labor Commissioner proceedings and require the parties to arbitrate their dispute. However, the California Supreme Court held that while there is no categorical unconscionability rule for arbitration agreements that preclude an administrative hearing before the Labor Commissioner, an arbitration agreement can still be deemed unenforceable if determined to be procedurally and substantively unconscionable (based on unfair terms above and beyond precluding an administrative hearing). The Court stated: "As with any contract, the unconscionability inquiry requires a court to examine the totality of the agreement's substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided." The Court further stated that the agreement "must provide an employee with an accessible and affordable arbitral forum for resolving wage disputes." The Court basically held that the unconscionability standards it long ago set forth in Armendariz remain good law even after Concepcion.
The Court held that it did not have sufficient information to rule on the unconscionability issue as to the arbitration agreement between Moreno and Sonic-Calabasas. It therefore remanded the issue to the trial court to determine. The Court provided guidance to trial courts to assist in making unconscionability determinations, characterizing the inquiry as a detailed factual inquiry that still permits the court to consider (among other factors) the effect of the waiver of certain benefits of an administrative proceeding before the Labor Commissioner. The Court's opinion basically precludes a bright line rule on when an arbitration agreement will be deemed unconscionable and instead ensures that trial courts will continue to come out all over the map on these issues.
Justice Chin, joined by Justice Baxter, authored a vigorous dissent in which he criticized the majority's unconscionability analysis and stated that the Court's analysis contravenes Concepcion.
The full 100-plus page opinion is available here.
Today the Ninth Circuit issued its decision in Urbino v. Orkin Services of California, Inc., addressing how to properly analyze whether the amount in controversy element is satisfied for purposes of diversity jurisdiction in a PAGA action. As most California employers know, PAGA is a California statute that allows an employee to recover penalties (purportedly on behalf of the state) against an employer for various violations of the California Labor Code. Worse, the employee who is the named plaintiff can seek to recover penalties on behalf of all aggrieved employees. Most claims are filed in state court, but employers retain the option to remove the action to federal court if the requirements for diversity jurisdiction are met. One of those requirements is that the amount in controversy must exceed $75,000. In determining whether the amount in controversy meets this jurisdictional threshold, the question becomes whether courts should look only at the amount of the named plaintiff's claim, or whether courts should look at the aggregate amount of the claim as to all "represented" employees. California district courts have disagreed over the answer to this question. Today, the Ninth Circuit resolved the question, holding that only the claim of the named plaintiff (and not the aggregate claims of all aggrieved employees sought to be represented) may be considered in determining whether the amount in controversy requirement is satisfied. The result of this decision will be that far fewer PAGA claims will be capable of removal to federal court based on diversity jurisdiction. The full opinion of the court is here.
The recent U.S. Supreme Court Case regarding the Defense of Marriage Act (Windsor v. Schlain, No. 12-307 (U.S. 2013)) has numerous immigration consequences for certain same-sex spouses that are married. The June 26, 2013 decision opens the door for many immigration benefits for certain qualifying spouses.
If the marriage takes place in a state that recognizes a same-sex marriage, then U.S. Citizenship & Immigration Services (US CIS) will allow the U.S. Citizen or permanent resident partner to sponsor their foreign national spouse for permanent residency in the U.S. Currently, there are 14 states where the marriage will be recognized as valid for immigration purposes, including California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, Washington DC.
And the U.S. Citizen spouse could even sponsor the foreign national partner on a fiancé visa if they are overseas and plan to marry within 90 days of entry to the U.S.
In addition, it will allow non-immigrants who are applying for a temporary visa (such as H-1B, L-1, TN, etc.) to have their spouses join them on a derivative visa if their same-sex marriage is recognized as valid in the overseas country where the marriage took place. Currently, there are 15 countries that recognize same sex-marriages including Argentina, Belgium, Brazil, Canada, Denmark, France, Iceland, Netherlands, New Zealand, Norway, Portugal, South Africa, Spain, Sweden, and Uruguay.
US CIS has indicated that the place of marriage (celebration) will dictate eligibility as opposed to the current place of residency. For example, if a couple marries in California and then moves to Wyoming, then they will still be able to petition for permanent residency since the location of the ‘place of celebration” of the marriage controls.
Spouses may also marry overseas in a country that recognizes same-sex marriages and US CIS will recognize that marriage for visa purposes.
US CIS is expected to provide more guidance on this in the months to come. See here.
For more information, please contact Greg Berk, Chair of the CDF Immigration Practice Group.
Yesterday the United States Supreme Court issued two decisions important for employers litigating harassment and retaliation claims under Title VII. In the first case, Vance v. Ball State University, the Court decided an important issue relating to an employer's liability for harassment of an employee by a "supervisor." More specifically, the Court decided a dispute concerning what it means to be a "supervisor"--i.e. does the employee need to have authority to hire and fire and make similar decisions or is it enough if the employee directs the daily work of others(the latter approach being the approach endorsed by the EEOC)? This issue is significant because employer liability for harassment under Title VII varies depending on whether the alleged harasser is a supervisory employee or a co-worker. If the harasser is a supervisor, the employer generally is vicariously liable for the harassment. If the harasser is not a supervisor but a co-worker of the victim, then the employer generally only is liable if it knew or should have known of the harassment and failed to take prompt and effective remedial action. Prior to yesterday's decision, courts disagreed over the meaning of the term "supervisor" and thus parties to harassment suits under Title VII generally had to litigate whether the alleged harasser qualified as a supervisor (with Plaintiffs' attorneys of course arguing broadly for supervisor status, and employers urging a narrow view of supervisor status).
In yesterday's 5-4 decision, the Supreme Court provided the needed clarification and guidance on this issue, defining the term "supervisor" narrowly in a way that benefits employers. The Court held that to be considered a supervisor, the employee must be empowered by the employer to take "tangible employment actions against the victim." This means that the employee must have the power to effect "a significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits." The Court rejected as "nebulous" the EEOC's (and many circuit court's) definition of a supervisor to include anyone with the ability to significantly direct another's daily work.
The Supreme Court's decision is a favorable one for employers because it narrows the circumstances under which employers can be held vicariously liable for harassment, and should reduce litigation costs that previously had to be expended litigating whether the alleged harasser was a supervisor or not. The full decision in Vance is available here.
In another employer-friendly Title VII decision issued yesterday, University of Texas Southwestern Medical Center v. Nassar, the Court (also in a 5-4 decision) decided a split among the circuits concerning the standard for proving retaliation claims under Title VII (meaning claims that an employee was retaliated against for complaining about discriminatory practices in violation of Title VII). Prior to yesterday's decision, some courts had held that an employee need only prove that a retaliatory motive was "a motivating factor" behind the adverse employment action. Other courts held that an employee, in order to prevail, has a higher burden of proving that a retaliatory motive was the "but for" cause of the adverse employment action. The Supreme Court has now spoken and held that the standard for proving a retaliation claim under Title VII is "but for" causation. This decision similarly is favorable for employers litigating Title VII retaliation claims because it makes it more difficult for the plaintiff to prove and prevail on the claim. The full decision in Nassar is available here.
It has been a good week for employers on the United States Supreme Court front.
Today the United States Supreme Court issued its opinion in American Express Co. v. Italian Colors Restaurant, holding that courts may not invalidate a contractual waiver of class arbitration simply because the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery he or she might receive. This case is not an employment case, but a case involving a merchant with a credit card contract with American Express. The merchant brought a class action against American Express, alleging violation of antitrust laws resulting in merchants being charged excessively high rates. The contract between American Express and its merchants contained an arbitration agreement whereby the merchants had to agree that any disputes would be resolved by binding arbitration and that there would be no right to have claims decided on a class basis in arbitration. Pursuant to this contractual agreement, American Express sought to compel individual arbitration of the merchant’s claim. The trial court granted the motion to compel arbitration but the court of appeal reversed, holding that the prohibitive costs the merchant would face in arbitration to prove an antitrust violation precluded effective vindication of statutory rights and rendered the class waiver unenforceable. Specifically, the individual merchant only stood to recover between $12,000-$38,000 in damages, but it would cost at least several hundred thousand dollars, and possibly more than one million dollars, to prove the violation through expert analysis. The court of appeal concluded that requiring an individual to bear such cost in arbitration while precluding class wide relief, effectively eviscerated the right to pursue the action in the first place. The United States Supreme Court granted certiorari and reversed.
In today’s decision (a 5-3 decision authored by Justice Scalia), the Supreme Court held that the Federal Arbitration Act (FAA) requires that arbitration agreements be enforced according to their contractual 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 Court made clear that neither the antitrust laws nor Rule 23 of the Federal Rules of Civil Procedure contains any congressional command that individuals be permitted to pursue antitrust violations on a class basis. The court further rejected application of an "effective vindication" exception used by some courts to invalidate class waivers in arbitration agreements. Under that exception, which the Court emphasized originated from dicta in an earlier Supreme Court decision, courts sometimes invalidate arbitration agreements that operate to prospectively waive a party's rights to pursue a statutory remedy. The Court held that there was no reason to apply any such exception in this case because the arbitration agreement did not result in a waiver of the merchant's right to pursue an antitrust claim. The merchant could still pursue the claim in arbitration, even though not on a class basis. "[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy." The court further reasoned that if courts could invalidate arbitration agreements based on a principle of cost versus benefit analysis of individual versus class wide claims, this would require courts, in ruling on a motion to compel arbitration, to undertake an analysis of the legal requirements for success on the merits on a claim, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success. "Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure." The Court thus held that the arbitration agreement, including its class waiver, was enforceable as written under the FAA.
Today's Supreme Court decision is yet another example of the Court's strong position on enforcing arbitration agreements, including class waivers, according to their terms and the parties' intentions. While this is not an employment action, the analysis and reasoning in the decision carries over to cases interpreting the enforceability of arbitration agreements and class waivers in the employment context and may well impact the California Supreme Court's upcoming analysis in important employment cases pending before it on the issue of enforceability of employment arbitration agreements in California, including on the issue of class waivers. As readers of this blog know, the California Supreme Court is expected to decide this year whether the United States Supreme Court's recent decision in AT&T Mobility v. Concepcion (and the FAA) preempt California laws relating to the enforceability of arbitration agreements and class waivers in such agreements in employment cases, particularly in wage and hour class actions and PAGA representative actions.
As we reported last month, the D.C. Circuit Court of Appeals recently issued a decision invalidating the NLRB’s rule requiring employers to post an Employee Rights poster to apprise employees of their rights under the NLRA. This past Friday, another court weighed in and similarly concluded that the posting rule is unenforceable. In Chamber of Commerce v. NLRB, the Fourth Circuit Court of Appeals held that the NLRB exceeded its authority in adopting the posting rule. The court reasoned that the NLRB’s role is a reactive one, intended to address unfair labor practice charges, and that the NLRB exceeded this role when it acted in a proactive manner adopting a workplace posting rule. While the outcome of the Fourth Circuit decision is the same as the D.C. Circuit’s earlier decision, the reasoning behind the two decisions is somewhat different. The D.C. Circuit punted the issue of whether the NLRB had authority to issue the posting rule, instead ruling that the posting rule was invalid because it violated employers’ free speech rights. The Fourth Circuit more strongly held that the NLRB plainly lacks authority to issue such a proactive posting rule. It is unclear whether the NLRB will appeal to the United States Supreme Court or accept the adverse rulings of these two courts and abandon efforts to maintain the posting rule. The most recent Fourth Circuit decision is here.
Last week the United States Supreme Court issued its decision in Oxford Health Plans LLC v. Sutter, refusing to vacate an arbitrator’s finding that a doctor’s arbitration agreement with a health plan permitted class-wide arbitration. Sutter, a pediatrician, had entered into a fee for service contract with Oxford Health, whereby Oxford Health agreed to pay Sutter certain rates for services he provided patients. Sutter initiated a lawsuit on behalf of himself and other doctors also under contract with Oxford Health, alleging that Oxford Health failed to pay the doctors in accordance with the contract terms. Oxford Health moved to compel arbitration, relying on the following arbitration provision in the contract with Sutter:
“No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of the American Arbitration Association before one arbitrator.”
The agreement did not expressly authorize nor expressly prohibit claims from proceeding in arbitration on a class-wide or collective basis. However, the parties agreed that the arbitrator should decide whether the agreement permitted class-wide arbitration or whether Sutter would be limited to pursuing only his individual claim in arbitration. The arbitrator thereafter concluded that the agreement permitted class-wide arbitration. The arbitrator reasoned that the agreement’s use of the term “civil action” was not limited to only certain types of civil actions, that a class action is a common type of civil action, and that by agreeing that all “civil actions” (without limitation) would be resolved by way of arbitration, the parties must have intended to include class claims in its scope.
Oxford Health petitioned to vacate the arbitrator’s decision, but its efforts were unsuccessful. While the arbitration process continued, the United States Supreme Court issued its decision in Stolt-Nielsen v. Animal Feeds International, 559 U.S. 662 (2010), holding that a party cannot be compelled to arbitrate claims on a class basis unless there is a contractual basis for concluding that the party agreed to do so. In Stolt-Nielsen, the parties (very unusually) stipulated that they had no agreement concerning the use of class-wide arbitration. Notwithstanding this fact, a panel of arbitrators ordered class-wide arbitration. In those circumstances, the Supreme Court held that the arbitration panel exceeded its authority because it did not conclude class-wide arbitration was appropriate based on interpretation of the parties’ contract. It could not have done so, given that the parties stipulated their contract did not cover the issue of class arbitration. Instead, the panel ordered class arbitration as a matter of public policy. According to the Supreme Court, this was not a proper exercise of the arbitrator’s power and as, such, the order was overturned.
Relying on Stolt-Nielsen, Oxford Health renewed its efforts to undo the arbitrator’s decision that the claims against it could proceed on a class basis in arbitration. This time the challenge made its way to the Supreme Court, which issued its decision last week, disagreeing with Oxford Health’s position and limiting the scope of Stolt-Nielsen. In its unanimous opinion, the Supreme Court held that this case was different than Stolt-Nielsen because in Stolt-Nielsen the parties had stipulated that they had no agreement concerning the use of class arbitration. Here, by contrast, the parties simply disagreed about whether or not the subject was covered by the arbitration provision in their contract. More significantly, the parties specifically agreed that the arbitrator should decide, as a matter of pure contract interpretation, whether the agreement permitted class arbitration. By giving the arbitrator this power, the parties largely forfeited any meaningful judicial review of the arbitrator’s decision. The Supreme Court explained that judicial review of an arbitrator’s rulings is extremely limited under the Federal Arbitration Act and a decision will only be vacated if clearly in excess of the arbitrator’s authority. A decision that is simply a “wrong interpretation” is not in excess of authority. The arbitrator was authorized to interpret the contract and did so. The fact that he may have gotten the result wrong is not a proper ground for reversal.
The Supreme Court hinted that had Oxford Health not stipulated that the arbitrator should decide the issue of class arbitration, Oxford Health could have argued that the issue was an issue of arbitrability in the first instance and one that a court, not an arbitrator, must decide. If a court had issued the decision, judicial review would have been broader and the outcome quite possibly different.
The Oxford Health case is a good reminder that employers must carefully review the language of their arbitration agreements to ensure that the subject of class/collective arbitration is expressly addressed and prohibited. Employers should also consider and address in their agreements the issue of whether an arbitrator or a court will decide issues of arbitrability pertaining to the agreement. Limited judicial review is great when the decision is in your favor, but cuts the other way too—as the Oxford Health case demonstrates. The Oxford Health case is available here.
In a related development in California, yet another California has weighed in on the issue of whether a class waiver provision in an arbitration agreement precludes an employee from pursuing a representative claim under PAGA. California state and federal courts have disagreed on this issue, with some concluding that class and representative claims, including those brought under PAGA, may be barred by an arbitration agreement, and others concluding that an arbitration agreement cannot preclude an employee from pursuing a representative action under PAGA. Earlier this month, the Sixth District Court of Appeal handed down a decision in the Plaintiffs’ camp, holding that a plaintiff may pursue a representative claim under PAGA, notwithstanding an otherwise valid arbitration agreement precluding class/collective claims. The decision is Brown v. Superior Court (Morgan Tire & Auto) and the decision is here. Employers should note that the California Supreme Court is expected to resolve the issue of whether representative PAGA claims are excluded from the scope of an otherwise valid class waiver provision in an arbitration agreement sometime in the next year in Iskanian v. CLS Transportation (which reached the opposite conclusion with respect to the impact of a class waiver provision on a PAGA claim). In the meantime, employers can expect continued assertion of PAGA claims by Plaintiffs’ lawyers in an effort to circumvent applicable arbitration agreements with class waivers.
We will continue to post developments as they arise in this important area.