Employers May Be Able To Prevent Class-Action Lawsuits By Including Waiver Of Those Claims In Arbitration Provisions

Article authored by Carl L. Fessenden and Clayton T. Cook

Until recently, California courts regularly held that arbitration provisions which require a person to waive their rights to pursue a class-action lawsuit were unconscionable. However, in late April 2011, the U.S. Supreme Court changed that in its ruling in AT&T v. Concepcion, 131 S.Ct. 1740 (2011).  In AT&T, the Court held 5-4 that the Federal Arbitration Act (FAA) preempted California state law, thereby allowing California businesses to include contract provisions requiring consumers to submit their claims toindividual arbitration. The AT&T decision allows businesses to demand that consumers waive their right to pursue class-action lawsuits.

Prior to AT&T, the validity of arbitration agreements in California depended on Discover Bank v. Superior Court, 36 Cal.4th 148 (2005). In Discover Bank, the California Supreme Court held that class-action waivers in adhesion contracts were unconscionable because of the business/employer’s superior bargaining power. However, Justice Antonin Scalia, in the majority opinion for AT&T, held that any state laws which allow class-action proceedings, even where the contract explicitly says differently, “[interfere] with fundamental attributes of arbitration and this creates a scheme inconsistent with the FAA.”

Although the AT&T decision did not specifically apply to the employer/employee context, its holding should apply to that relationship. Many employers already have arbitration provisions in their employment agreements. For those employers, they should consider including class-action waivers in those provisions. For those employers without arbitration agreements, they may want to consider requiring employees to agree to arbitration in order to prevent class-action claims. Doing so may help reduce the financial exposure presented by employment lawsuits, especially those involving wage and hour and employment discrimination class-actions.

The ruling in AT&T is yet to be interpreted by California courts, and it is expected that the AT&T ruling may meet opposition from the legislature and the Equal Employment Opportunity Commission. However, for the time being, AT&T provides refuge for employers from the ever-increasing wage and hour and discrimination class-actions in employment law.