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Mar 19

U.S. Supreme Court Reinforces Allowance For Arbitration Agreements That Waive Class Action Claims

With a curt two sentence and unanimous holding, the U.S. Supreme Court in late February 2014 evinced its exasperation with the California courts and their failure to not enforce contractual arbitral provisions subject to the Federal Arbitration Act. By vacating the California appeals court’s ruling upon a petition for certiorari to the U.S. Supreme Court without benefit of even a full briefing or oral argument, the Supreme Court remanded CarMax Auto Superstores Calif., LLC v. Fowler, 2014 U.S. LEXIS 1611 (Feb. 24, 2014), and harshly slapped down the California courts for failing to follow the U.S. Supreme Court’s prior holding in American Express Co., et al. v. Italian Colors Restaurant et al., 133 S. Ct. 2304 (2013).

In American Express, the Supreme Court held in 2013 that the Federal Arbitration Act did not permit courts to invalidate contractual waivers of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a statutory claim exceeded the potential recovery. Thus, despite the efforts of the California courts to the contrary, California courts must now rigorously enforce arbitration agreements according to their terms given that arbitration is a matter of contract. Moreover, the Court found that public concerns regarding small individual financial recoveries not justifying the cost of litigation were insufficient to establish procedural or substantial unconscionability sufficient to void the arbitration agreement between parties. The American Express decision rejected the claims of plaintiffs that an arbitration agreement’s prohibition of class claims effectively prevented plaintiffs from obtaining a remedy since the expense to prove an individual claim exceeded the cost of the recovery.

Given the Supreme Court’s insistence that courts follow the FAA to enforce the federal public policy in favor of valid arbitration agreements, it is now important for even a mid-size California employer to consider implementing a properly-drafted arbitration agreement with its employees that expressly forbids class claims. While smaller California employers may deem the cost of paying for arbitration too great given the lack of a sufficiently large employee (or former employee) population to warrant a concern about costly class claims, at the very least consultation with counsel is useful to evaluate the risk of costly class litigation occurring.

While an interesting legal question remains in California regarding whether the Private Attorney General Act (the “sue your boss” law known as “PAGA”) allows class claims despite a well drafted arbitration agreement either not allowing or expressly forbidding employment law class claims, PAGA is generally unappealing to Plaintiff’s counsel since successful litigants must forfeit 75% of the value of their claim to the state of California.

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