Collective legal action is a vital tool for employees harmed by unlawful treatment at work. Pursuing a claim of workplace harassment, wage theft, or discrimination on an individual basis is often economically unviable, as the costs can easily exceed any possible recovery an employee may obtain. By banding together, employees who have suffered the same or similar harm at work can pool their financial and emotional resources to shine a light on wrongdoing and hold unscrupulous employers accountable.
Unfortunately, workers’ ability to collectively enforce their workplace rights has been substantially undermined by a handful of very recent U.S. Supreme Court decisions. Over the last decade the U.S. Supreme Court has expressed unprecedented animus toward class proceedings and moved to redefine the very nature of arbitration to preclude class arbitration.
This shift has been to the detriment of America’s consumers and workforce. Divided consumers and employees forced to undergo individual arbitration may experience massive procedural and economic inefficiency by having to duplicate their efforts in separate legal actions. Individual claims are frequently dropped for lack of resources, or, if pursued, are kept out of public view due to secrecy requirements. Siloing workers can also lead to contradictory judgments; that is, two employees of the same company who’ve suffered the same harm at the same time who are forced to arbitrate individually may get opposite decisions under the exact same facts. As most forced arbitration proceedings are confidential, both the employer wrongdoing and the contradictory outcomes avoid public scrutiny. This timeline, beginning in 1989, shares how the Court went from wholly unremarkable acceptance of class arbitration to deliberately denying access to class proceedings to groups of plaintiffs seeking to vindicate their legal rights collectively in the arbitral—and consequently, for many people, any—forum. Click on a moment in the timeline to review the case history.
Relevant Facts: A construction contract between parties included an arbitration clause containing a choice-of-law provision that required the contract to be governed by the law of “the place where the Project is located.” A dispute arose in relation to a California-based project and the appellant made a formal demand for arbitration. In response, the appellee filed an action in California state court seeking indemnity from two other parties involved in the dispute who were not subject to the contract. The state court denied the motion to compel arbitration, citing a state law that permitted a stay pending resolution of related litigation between a party bound to an arbitration clause and third parties who are not bound by it.
Question Before The Court: Whether the state law at issue was preempted by the Federal Arbitration Act (FAA), and whether, given this nation’s policy favoring arbitration, the application of the choice-of-law provision in this case was properly applied.
The Opinion: The U.S. Supreme Court focused on the terms of the arbitration clause in rendering its decision. The Court observed that the FAA confers a right to obtain an order directing that “arbitration proceed in the manner provided for in [the parties] agreement, and that “parties are free to structure their arbitration agreements as they see fit.” Thus, an arbitration clause’s terms can include the rules by which the claim is arbitrated, such as those found in a choice-of-law provision. The Court reasoned that when parties, as here, agree to arbitrate according to a particular state’s laws, and that state’s laws require a stay of arbitral proceedings, then staying those proceedings is giving the arbitration clause effect, as required by the FAA.
On the matter of preemption, the Court re-affirmed its position that states “cannot pass laws that require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.” To determine whether a state law conflicts with the FAA to the point of being preempted, one must ask whether the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress in passing the FAA. The Court then identified three purposes and objectives of the FAA: to place arbitration agreements on the same footing as other contracts, but not more so; to enforce agreements into which parties had entered; and to encourage the expeditious resolution of disputes.
Although not germane to its central decision here, in a footnote the Court addressed the problem of contradictory judgments arising from forced arbitration, which remains an inevitable biproduct of enforcing class, collective and joint action bans in forced arbitration: “[T]he FAA itself contains no provision designed to deal with the special practical problems that arise in multiparty contractual disputes when some or all of the contracts at issue include agreements to arbitrate. California has taken the lead in fashioning a legislative response to this problem, by giving courts authority to consolidate or stay arbitral proceedings in these situations in order to minimize the potential for contradictory judgments.”
Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003)
Relevant Facts: Multiple consumers separately received loans from Green Tree to buy mobile homes or to make home improvements. The loan contracts each included a choice of law provision and an arbitration clause. The consumers sued, independently of each other and Green Tree moved to compel arbitration in each action. The plaintiffs then separately sought class status. The court granted the class certification and also ordered arbitration. The class plaintiffs won over $10M in arbitration. The defendant appealed, claiming class arbitration was legally impermissible. The state Supreme Court ruled for the class plaintiffs, holding “that the contracts were silent in respect to arbitration, that they consequently authorized class arbitration, and that arbitration had properly taken that form.”
Question Before The Court: Can the question of whether a forced arbitration clause precludes class proceedings be determined by an arbitrator?
The Opinion: Under the facts, a plurality concluded that an arbitrator must determine whether a contract forbids class arbitration. To the Court, the relevant question was what kind of arbitral proceedings the parties agreed to – individual or class? In the Court’s view, the answer is to be determined as a matter of contract interpretation on a case by case basis, something the Court reasoned arbitrators are well situated to resolve. The Court held that because it was not a question of whether arbitration would occur, but what form of arbitration would occur—individual or class—the arbitrator could decide.
It is worth noting that the Justices, in speaking about the different types of arbitral proceedings, never questioned the permissibility of class proceedings in arbitration. On the contrary, this opinion reads as though it were a foregone conclusion that class arbitration was an entirely ordinary way to proceed. This assumption deteriorates in the next few cases, as the Court begins to redefine the very nature of arbitration as a bilateral process. In hindsight, one can see how this case set the stage for the enforceability of nearly all class action bans in forced arbitration clauses.
Stolt-Nielsen v. AnimalFeeds International Corp., 559 U.S. 662 (2010)
Relevant Facts: Petitioner shipping company entered into a contract with the respondent company, AnimalFeeds, that contained an arbitration clause. Later, AnimalFeeds brought a class action antitrust suit alleging price fixing. With no dispute over whether the claims would be resolved in arbitration, the only question was whether bringing the case as a class was permissible under the contract. Acknowledging that the contract was silent on the issue, the parties agreed to submit the question of whether the arbitration clause allowed for class arbitration to an arbitrator, and selected an arbitration panel. The panel determined that the agreement allowed for class arbitration. However, the district court vacated the award, claiming the arbitrators’ award was made in “manifest disregard” of the law. The appeals court reversed.
Question Before The Court: Whether class arbitration proceedings are permissible under an arbitration agreement that is silent on the matter.
The Opinion: The Court returned to its ruling in Bazzle in order to limit its effect on the ability of arbitrators to permit class arbitration. Noting that only a plurality, not a majority, asserted the position allowing an arbitrator, not a court, to decide whether a contract permits class arbitration, the Court explained, “Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted.”
The Court clarified that, because arbitration is a product of agreement by the parties arising out of a written contract, it is impermissible to require one party to submit to class arbitration if it didn’t agree to do so in the contract: “In bilateral arbitration, parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes. . . But the relative benefits of class action arbitration are much less assured, giving reason to doubt the parties’ mutual consent to resolve disputes through class-wide arbitration.” The Court concluded, “We think that the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.” The Court concluded that when the contract is silent on whether class arbitration is permissible, the arbitrator must determine the proper rule of law in the situation, but they cannot base their decision on the propriety of class arbitration on public policy.
Observers have noted that the Court’s reasoning regarding the effect of an arbitration clause’s silence here is the inverse of the Court’s view in its Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. decision. There, the Court embraced the presumption that arbitration clauses that are silent on whether a particular statutory claim is arbitrable should be assumed to be so. The result of the Court’s contrasting approach here leaves companies free to draft broad nonspecific arbitration clauses in order to force employees to arbitrate all statutory claims, which (by virtue of remaining silent on the type of arbitral proceeding) may also force any harmed employees to go it alone against their more-powerful employers.
In sum, this holding made it substantially more difficult for people bound by forced arbitration clauses to hold companies accountable as it effectively siloes each prospective claimant unless their contract expressly provides that class arbitration is permissible. Moreover, since most forced arbitration clauses actually foreclose class actions in a judicial forum, if they speak to the issue at all, this leaves many plaintiffs unable to access class proceedings in any forum. In her dissent, Justice Ginsberg addressed this injustice, averring, “If the Court is right that arbitrators ordinarily are not equipped to manage class proceedings . . . then the claimant should retain the right to proceed in that format in court.”
AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)
Relevant Facts: Consumers who responded to an advertisement for a free phone were subsequently charged a fee on their bill, so they sued AT&T for fraud. Their action was joined with others in a nationwide class proceeding. The defense invoked a forced arbitration clause in the consumer contract to force the class action out of the judicial forum and into individual arbitration. A question arose as to availability of class proceedings for the claims as the arbitration clause at issue contained a class action ban. If enforced, pursuit of valid claims would have been financially untenable because each individual claim was only valued at approximately $30 apiece—far less than the cost of legal proceedings. The district court acknowledged that fact and found the class action ban unconscionable under state law. The appeals court affirmed and held that the state law on which the ruling was based was not preempted by the FAA.
Question Before The Court: Whether the FAA preempts a state law holding that class action bans in forced arbitration agreements are unconscionable.
The Opinion: The Court began by addressing the application of the state law of unconscionability, saying, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward. The conflicting rule is replaced by the FAA. But the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or unconscionability, is alleged to have been applied in a fashion that disfavors arbitration.” The Court continued, “[a]lthough the Section 2 savings clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” The Court then ruled that the FAA preempts states from barring enforcement of class waivers in arbitration clauses, even for public policy reasons that have nothing to do with arbitration.
Focusing on the use of the class action ban to require individual proceedings, the Court provided, “Arbitration is a matter of contract and the FAA requires courts to honor the expectations of the parties. But [if] what parties have agreed to . . . is not arbitration as envisioned by the FAA and lacks its benefits . . . [it] may not be required by state law.” Rooting its reasoning in concern for defendants to appeal large adverse judgments from class arbitral proceedings, the Court declared that arbitration is poorly suited to the higher stakes of class litigation, finding that “the overarching purpose of the FAA is to ensure the enforcement of private arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of class wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
The Court then swatted away the argument that “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system” by quipping that “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”
With this case the Court unambiguously elevated the importance of enforcing a contractual term to arbitrate above almost any other concern. Justice Thomas, in his concurrence, observed that based on the majority’s holding, to win on an FAA Section 2 savings clause argument now would require “a party successfully assert a defense concerning the formation of the agreement to arbitrate, such as fraud, duress, or mutual mistake. . . Contract defenses unrelated to the making of the agreement—such as public policy—could not be the basis for declining to enforce an arbitration clause.”
American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013)
Relevant Facts: To challenge American Express’ (“AMEX”) practice of charging businesses roughly 30% more than competitors like Visa and MasterCard to accept their cards, a group of small business owners filed a class action antitrust suit against the company. Because their contracts contained a forced arbitration clause with a class action ban, AMEX moved to compel individual arbitration. The small business owners argued that the arbitration clause was unenforceable because the cost of expert analysis required to prove their antitrust claims would greatly exceed the maximum recovery for any individual, leaving them with no way to effectively vindicate their rights.
Question Before The Court: Whether a class action ban in an arbitration clause is enforceable under the Federal Arbitration Act when the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.
The Opinion: Although the thrust of the business owners’ argument was focused primarily on their inability to hold AMEX accountable for breaking the law if forced into individual arbitration, the Court set its sights on the financial aspects of the case. The Court asserted “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” To many observers’ disbelief, the Court professed, “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims. The latter interest . . . is unrelated to the FAA. Accordingly, the FAA [favors] the absence of litigation when that is the consequence of a class action waiver, since its principle purpose is the enforcement of arbitration agreements according to their terms.”
In addressing the consequence of this holding on the plaintiffs’ ability to obtain relief, the Court surmised that “[t]he ‘effective vindication doctrine’ [from Mitsubishi Motors] comes from a desire to prevent ‘prospective waiver of a party’s right to pursue statutory remedies’, but the 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 majority held that “the FAA does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiffs’ cost of individual arbitration of a federal statutory claim exceeds the potential recovery.” Justice Antonin Scalia, writing for the majority, was unmoved by the unavoidable observation that an unaffordable path to justice, practically speaking, is no path at all.
Justice Scalia went to great lengths to frame the case as merely about a number of small-dollar claims, rather than about a large group of people attempting to join forces to hold a massive corporation accountable for widespread fraud under federal antitrust statutes. By avoiding the law enforcement arguments, the Court’s ruling has permitted powerful corporations to put class bans into their boilerplate contracts of adhesion to suppress all consumer claims for willful violations of the law. After all, no sane person is going to spend over six figures of their own money to pursue a claim in individual arbitration for a claim that would at most render an award worth less than $5,000.
Justice Elena Kagan, in her dissent, spoke directly to this problem: “The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse. . . Throughout, the majority disregards our decisions’ central tenant: An arbitration clause may not thwart federal law, irrespective of exactly how it does so.”
Epic Systems, Corp. v. Lewis, 138 S. Ct. 1612 (2018)
Relevant Facts: In granting certiorari, the U.S. Supreme Court consolidated three different cases with similar facts. All involved claims by workers for unpaid wages by a more-powerful employer. In each instance, when the workers tried to band together to enforce their right to their unpaid wages, the employer invoked of a class ban in the company’s forced arbitration provision. The class ban required the workers to arbitrate all claims on an individual basis, which, due to the expense involved, inter alia, would have effectively ended the workers’ lawsuits before they ever reached the merits. To retain their right to go to court, the employees argued that the National Labor Relations Act (NLRA) protects their right to act collectively for their “mutual aid or protection.” The class ban in the company forced arbitration clause, the employees argued, violated that NLRA guarantee, so was unlawful and unenforceable.
Question Before The Court: Whether arbitration agreements with individual employees that bar them from pursuing work-related claims on a joint basis in any forum are illegal because they limit the employees’ right under the NLRA and NLGA to engage in “concerted activities” in pursuit of their “mutual aid or protection,” and are therefore illegal and unenforceable under the Federal Arbitration Act’s (FAA) “savings clause.”
The Opinion: The U.S. Supreme Court held that the FAA requires collective action bans to be enforced. In so finding, the Court determined that the NLRA did not apply in the case before it since, in its view, the NLRA was designed to serve as a mechanism for workers to organize a union in their workplace, but that workers’ right to act collectively for “mutual benefit or protection” does not extend to collective legal action. The Court reasoned that, since the NLRA didn’t protect a right to collective legal action, class bans in forced arbitration clauses limiting workers’ ability to band together against a more-powerful employer are not illegal, and, by extension, the FAA’s “savings clause” did not apply. It further asserted that even were the illegality defense available, it still could not be applied because doing so would impermissibly “disfavor arbitration”—an act the Court ruled in Concepcion would violate the FAA. The Court then reiterated its position in Concepcion that courts cannot render arbitration contracts unenforceable for public policy reasons.
In reaching its holding, the majority expressed open disdain toward the employees’ effort to retain their right to band together. It portrayed the illegality defense asserted by the workers as an attempt to “attack the individualized nature of the arbitration proceedings,” and claimed that the employees’ demand to enforce their rights collectively was really intended to “interfere with one of arbitration’s fundamental attributes.” In making this point, the Court ignored the fact that the attributes it was holding up as sacrosanct had only been used to characterize arbitration proceedings for less than a decade and were wholly a product of the Court’s own recent decisions—observations that Justice Ruth Bader Ginsberg pointed out in her scathing dissent.
The full repercussions of this opinion have yet to be felt. Time will tell what this case will mean for workers who seek avail themselves of the “mutual aid or protection clause” of the NLRA in the future; and the winnowing of the FAA “savings clause” in this opinion creates doubt as to how an employee may use the provision to defend against forced arbitration moving forward. One thing is certain: as a result of this decision, the number of employers who use class and collective action bans in their forced arbitration clauses will increase, and, as a result, millions of wronged employees will be deprived of any meaningful way to challenge unlawful abuse in the workplace.
Lamps Plus, Inc. v. Varela, No. 17-988 (U.S. Apr. 24, 2019)
Relevant Facts: An employee of Lamps Plus fell prey to a phishing scheme and accidentally released the tax information of thousands of the company’s workers. After Frank Varela discovered a fraudulent tax return had been filed in his name, he filed a putative class action lawsuit in federal court against Lamps Plus on behalf of the employees whose information was compromised. Lamps Plus responded by filing a motion to compel individual arbitration. The District Court granted the order to compel arbitration, but denied the company’s effort to break the class. Under the state law doctrine contra proferentem, ambiguous language in a contract should be interpreted in a favor of the non-drafting party. Because the language in the arbitration clause drafted by Lamps Plus was ambiguous, the court allowed class arbitration proceedings to move forward. The appellate court affirmed.
Question Before The Court: Whether the Federal Arbitration Act bars courts from applying a neutral principle of state contract interpretation to an ambiguous contract term when doing so would result in the authorization of class arbitration proceedings.
The Opinion: Under California law, the doctrine of contra proferentem provides that ambiguous contract terms should be interpreted against the drafter. Because the arbitration provision at issue here was ambiguous, the Ninth Circuit interpreted it in a way most favorable to the non-drafting employee required to accept it, allowing class arbitration to move forward.
Relying on precedent from just the last decade, the U.S. Supreme Court reversed, holding that an arbitration contract must expressly authorize class arbitration in order for parties to access the arbitral forum collectively. In the Court’s view, the “traditional individualized arbitration contemplated by the FAA”—and the benefits the Court has assigned to it—are undermined by class arbitration. To the Court, class arbitration is too expensive and poses too great a risk to defendants to be permitted save in very limited circumstances.
Additionally, the Court addressed the appellate court’s use of contra proferentem, and ruled that the FAA’s predilection for individual arbitration prevents courts from applying a state’s general contract principles to ambiguous contract terms if doing so would result in the authorization of class arbitration. In the majority’s view, “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration provision agreed to ‘sacrifice the principal advantage of arbitration.’”
Instead of applying the general state contract law applied equally to all other ambiguous contract terms, the Court explained, “the FAA provides the default rule for resolving certain ambiguities in arbitration agreements. . . . Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis. The doctrine of contra proferentem cannot substitute for the requisite ‘contractual basis’ for concluding that the parties agreed to class arbitration.”
All four justices in the minority authored separate dissents. Justice Breyer focused on jurisdictional issues. Justice Sotomayor argued against the preemptive effects of the majority’s holding. Justice Kagan excoriated the majority’s blatant anti-class action judicial activism that laid at the heart of their decision to render the state’s “plain-vanilla rule of contract interpretation” preempted when applied to arbitration contracts.
Justice Ginsburg lambasted the majority’s woeful straying from the legislative purpose of the FAA at the expense of employees and consumers. “Piling Pelion on Ossa,” she wrote, “the Court has hobbled the capacity of employees and consumers to band together in a judicial or arbitral forum. . . . Employees and consumers forced to arbitrate solo face severe impediments to the ‘vindication of their rights’. . .mandatory individual arbitration continues to thwart ‘effective access to justice’ for those encountering diverse violations of their legal rights. The Court. . . has facilitated companies’ efforts to deny employees and consumers the ‘important right’ to sue in court, and to do so collectively, by inserting solo-arbitration-only clauses that parties lacking bargaining clout cannot remove.”