By Joe Mulherin, Dick Schnadig, Nina Stillman and Mike Cleveland
Many employers have considered requiring, or now require, their nonunion employees to execute agreements promising to submit employment disputes, such as claims of employment discrimination, to arbitration rather than pursuing their claims in court. While there are downsides to such agreements, these employers view arbitration as a quicker, cheaper alternative to trial in court, where large jury verdicts and large legal bills can result. Such arbitration agreements are generally enforceable, but some employers have gone further and included provisions that may jeopardize the enforcement of the agreements, such as provisions foreclosing in arbitration remedies that might be available in court, like punitive damages. Still others have included provisions that courts have concluded make the agreements too one-sided to be enforceable, for example, language that makes the outcome binding on the employee, but not the employer.
A recent U.S. Supreme Court decision raises the possibility that arbitration agreements may possibly be used as an effective "class-action shield" that prevents employees from bringing class actions against their employer in court or in arbitration. This would result from requiring employees to sign arbitration agreements that compel them not only to arbitrate their employment claims, but to do so only on an individual basis.
A number of courts had held that the Federal Arbitration Act does not permit class arbitration unless the parties’ agreement expressly allows for it. Many commentators predicted that the United States Supreme Court would decide this issue in Green Tree Financial v. Bazzle, 123 S. Ct. 2402 (June 23, 2003). The Court instead ruled that the issue of whether an arbitration agreement permits class arbitration should be decided by the arbitrator. Although Green Tree was not an employment case, the decision will have a significant effect on how employers draft arbitration agreements with their nonunion employees.
In Green Tree, four consumers sued under South Carolina law, claiming that defendant Green Tree Financial, a commercial lending company, had failed to make legally required disclosures when it entered into loan contracts with them. Each contract contained an arbitration provision requiring arbitration of "all" contractrelated disputes, but none mentioned class arbitration. The consumers brought two separate actions in state court, seeking class certification. In the first action, the court certified a class and, at the request of the loan company, compelled arbitration. The arbitrator conducted the proceeding as a class arbitration and awarded the class over $10 million in damages, plus attorneys’ fees. In the second case, the loan company was also successful in forcing arbitration. The arbitrator (the same one as in the first case) certified a class, and awarded this class over $9 million in damages, in addition to attorneys’ fees.
Green Tree appealed both decisions, claiming that class arbitrations, in general, were not allowed. The Supreme Court of South Carolina held that, although the contracts were silent with respect to class arbitration, the contracts permitted class arbitration. The United States Supreme Court acknowledged that the contracts’ silence did, in fact, create an issue as to whether class arbitration was appropriate. Notwithstanding, the Court held that, based on the broad language of the arbitration clause empowering the arbitrator to resolve "[a]ll disputes . . . arising from or relating to" the contracts, the parties had agreed that an arbitrator would decide whether a class arbitration was allowable. The Court viewed the issue as one of contract interpretation, which historically has been reserved for the arbitrator. It emphasized that there are very few circumstances where the courts should decide an arbitration-related matter. For example, a court should act where the issue is "whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy." However, the question of whether an arbitration agreement prohibits class arbitration did not fall into one of those narrow exceptions. Because "the class arbitration was imposed on the parties and the arbitrator by the South Carolina trial court," the awards were vacated and sent back for the arbitrator to decide whether the language of the contract permitted class actions.
Before Green Tree, the clear majority of federal courts — the Second, Fifth, Sixth, Seventh, Eighth, Ninth and Eleventh Circuit Courts of Appeals — had determined that, absent an express agreement by the parties, there could be no class arbitration. In fact, it was generally accepted that the question of whether an arbitration agreement provided for class arbitration was an issue for the court, not the arbitrator. For example, the Seventh Circuit Court of Appeals in Champ v. Siegal Trading Co., 55 F.3d 269 (1995), answered with a resounding "no" when asked whether a district court had the authority to certify a class arbitration where the arbitration clause was silent on the issue. The court acknowledged that denying certification of a class would result in inefficiency and inequities for the potential class members. However, the court was compelled to "enforce the parties’ agreements as they wrote it, ‘even if the result is piecemeal’ litigation."
Green Tree,
though not an employment case, is clearly relevant to employment arbitration provisions. For employers with arbitration clauses that expressly forbid class arbitrations, the Green Tree opinion should allow them to compel employees to arbitrate their claims as individuals only. However, there is the possibility that such a provision will be deemed to be unconscionable and, hence, unenforceable. Employers with arbitration agreements that are silent regarding class arbitrations are placed, by Green Tree, at the will of arbitrators who will decide on a case-by-case basis whether agreements provide for class arbitration. While it has been suggested that arbitrators who desire to continue hearing arbitration cases for employers may be reluctant to interpret an arbitration agreement in favor of class arbitration, that is certainly not a given. Green Tree suggests that employers may want to draft new arbitration agreements that expressly forbid class-wide arbitration. But obtaining consent of incumbent employees to any new arbitration agreement may be problematic. For example, is the employer prepared to terminate an employee who refuses to sign? Also, an arbitration provision that bans class actions will likely be challenged as unconscionable. If such a challenge proves successful, employers would lose their shield against class actions in arbitration.Following Green Tree, the American Arbitration Association ("AAA") issued rules stating that arbitrators may decide whether class arbitration is appropriate when the agreement is silent with respect to class claims. Interestingly, the AAA is not accepting arbitrations where the parties’ agreement expressly prohibits class claims unless a court directs the parties to submit the dispute to arbitration. Indicating its view that Green Tree is not necessarily the final word even where the arbitration agreement explicitly forbids class actions, the AAA’s web site states: "The arbitrability of class arbitrations where the parties’ agreement precludes such relief is a developing area of law, and the Association awaits further guidance from the courts on this issue." Employers are also waiting for guidance on that issue.
Vedder Price is highly experienced in drafting arbitration agreements and in defending employers in arbitration. If you have any questions regarding employment-related arbitration agreements or are in need of counsel to represent your company in an individual or class arbitration, or if you have questions about class actions generally, please contact the authors of this article.
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