Are Arbitration Agreements Necessary for Class-Action Waivers To Be Enforceable?

• Author: Prats, Jacqueline
• Position: Labor and Employment Law

Much ink has recently been spent on the Supreme Court's May 2018 decision on the enforceability of class-action waivers in arbitration agreements. In a 5-4 decision, the Supreme Court in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, 1620 (2018), added another opinion to its pro-arbitration jurisprudence and settled an argument that had been recently gaining steam in the context of employment agreements containing arbitration provisions and class-action waivers. The Epic Systems plaintiffs argued that [section]7 of the National Labor Relations Act (NLRA) guaranteed a right to class or collective procedures by virtue of its protection of concerted activity, so any arbitration agreement with a class-action waiver violated [section]7. (1) The Supreme Court concluded, however, that "[n]othing in our cases indicates that the NLRA guarantees class and collective action procedures." (2)

Epic Systems involved a class-action waiver (3) in an arbitration agreement, but the reasoning of the decision indicates that [section]7 does not protect class-wide procedures at all, regardless of whether an arbitration agreement is involved. For employers, this decision raises the question of whether, contrary to popular belief, an arbitration agreement is required to enforce a class-action waiver. Although many employers may be well-advised to consider implementing class-action waivers, arbitration is not a one-size-fits-all solution, and not every employer wants to resolve employment disputes via arbitration.

This article briefly reviews the importance of class-action waivers, the history of their development, and the potential pitfalls of arbitration. Then it examines whether standalone class-action waivers in employment agreements would be enforceable in Florida.

The Need for Class-Action Waivers

It may be self-evident why employers would be interested in requiring their employees to sign class-action waivers: Class actions can be extraordinarily expensive. A recent survey indicates spending on class actions is set to hit $2.39 billion this year and shows no signs of slowing down. (4) Indeed, spending on the defense of class action lawsuits is up for the third year in a row in 2018. (5) Of the companies surveyed, some 59 percent faced some kind of class-action proceeding. Of those proceedings, labor and employment cases made up the largest share, (6) with wage and hour claims in particular making up a large share of labor and employment class actions. (7) It is no wonder why more employers are requiring their employees to sign class-action waivers. (8)

The Arbitration Agreement as the Vehicle for the ClassAction Waiver

Conventional wisdom posits that such class-action waivers must be presented to employees using the vehicle of an arbitration agreement. This may be because, perhaps counter-intuitively, the popularity of the arbitration agreement came first. (9)

The trend of including class-action waivers within arbitration agreements did not emerge until around the late 1990s, (10) when trade-journal articles began to appear suggesting arbitration agreements could be used to shield corporations from class-action litigation. (11) By this time, there had already been a move in the courts toward enforcing arbitration agreements. (12)

The growing popularity of arbitration agreements with class-action waivers among employers was met with waves of challenges to their enforceability; so far, none of these challenges have had any widespread or lasting success. (13) As one arbitration-skeptical scholar put it, "corporate lawyers created the [class-]action waiver and wrapped their newborn in the cloak of an arbitration clause, protecting it against attack with the now sacrosanct policies of the [Federal Arbitration Act (FAA)]." (14)

As a result, the proportion of American workers subject to mandatory arbitration agreements, which include class-action waivers, has vastly increased. In 26 years, the proportion of workers subject to mandatory arbitration agreements has grown from around 2 percent in 1992 to more than 55 percent in 2018. Of the employers who use mandatory arbitration agreements with their employees as of 2018, roughly 30 percent include a class-action waiver in their arbitration agreements. (15)

Arbitration Agreements: Not Necessarily Desirable

As reliable as enforcement of class-action waivers in arbitration agreements is, not every employer prefers arbitration over litigation. Proponents of arbitration often claim arbitration is simpler, less formal, and more flexible than litigation in the court system. (16) Indeed, some studies indicate arbitration can be concluded in a fraction of the time litigation would take. (17) But many of arbitration's purported advantages can cut both ways. For example, it is extremely difficult to successfully vacate the final decision in a binding arbitration--in the event of an unfavorable result for the employer, such result is often permanent. (18) Employers may also be in for a sour surprise when they first learn about the variety of fee structures for employment arbitration. Arbitration, while frequently touted as being less expensive than litigation, requires high initial filing fees as compared to litigation. Arbitration also requires costs not incurred during litigation, such as the arbitrator(s') compensation and expenses. (19) Some employment arbitration fee schedules, including the American Arbitration Association's, allocate most of these costs to the employer. (20)

Arbitration Agreements: Not Necessarily Necessary?

So, must employers desiring protection from class actions use arbitration agreements in order to impose enforceable class-action waivers? Maybe not.

The caselaw addressing standalone class-action waivers is dwarfed by the caselaw addressing class-action waivers within arbitration agreements, perhaps because the trend toward requiring class-action waivers occurred after the trend toward arbitration agreements. However, the reasoning behind many of the arguments in support of enforcing class-action waivers in arbitration agreements should also apply in favor of enforcing standalone waivers. The two major categories of attacks on class-action waivers in arbitration agreements are 1) attacks based on the doctrine of unconscionability; and 2) attacks based on the premise that particular statutes confer a substantive, nonwaivable right to class-wide proceedings. (21)

* Unconscionability--In Florida, a party seeking to assert the defense of unconscionability must show both procedural and substantive unconscionability. (22) An analysis of procedural unconscionability implicates, for example, an imbalance in bargaining power between the parties, the parties' ability to understand or review the contract, or the presence or absence of "meaningful choice" in the parties' decision to enter the contract. (23) Substantive unconscionability exists when a contract or its terms are "so outrageously unfair as to shock the judicial conscience" such that "no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other." (24) The two prongs of an unconscionability analysis are weighed against one another on a sliding scale. Thus, although both procedural and substantive unconscionability must exist for the defense to succeed, they "need not be present in the same degree.... [T]he more substantively...