A divided United States Supreme Court recently handed down the latest in a series of wins for employers, manufacturers, retailers, and other businesses looking to use arbitration as a means to mitigate the risks of possible class-action litigation. This time, in Lamps Plus, Inc. v. Varela, the Supreme Court overturned the Ninth Circuit Court of Appeals, finding that an employer could not be compelled to arbitrate similar claims by its employees on a class-wide basis, even though its employment agreement was ambiguous as to whether the arbitration of similar claims be conducted on a class-wide basis, instead of individually.
I. A clear, albeit controversial, trend in favor of individual arbitration
Arbitration agreements, which are strongly favored under the Federal Arbitration Act (“FAA”), can be a powerful tool for potential class-action defendants, both to mitigate the risks of potential exposure and to make those risks more predictable. But a contract is only useful to the extent it can be enforced. Fortunately for potential defendants, there has been a string of Supreme Court decisions in recent years empowering businesses to use arbitration clauses to narrowly define the procedures by which class-wide claims can be asserted.
These decisions have been controversial, and most have been decided along roughly the same ideological divide. But there has been a clear trend in favor of the enforceability of arbitration agreements that limit or exclude class-wide arbitration actions.
For example, Stolt-Nielsen S.A. v. AnimalFeeds International Corp. was a 2010 case in which the Supreme Court concluded that silence was no substitute for the requisite “affirmative consent” to class arbitration, meaning that class-wide arbitration cannot be compelled based on an agreement that is simply silent as to the availability of class-wide remedies.
The following year, in AT&T Mobility LLC v. Concepcion, the Supreme Court found that the FAA preempted a California statute providing that any class-action waiver in a consumer contract was unconscionable and, therefore, unenforceable. This 5-4 decision held the state statute was inconsistent with the FAA’s “overarching purpose” of ensuring “the enforcement of arbitration agreements according to their terms, so as to facilitate informal, streamlined proceedings.”
Then in the 2013 case of American Express Co. v. Italian Colors Restaurant, SCOTUS rebuffed another attempt to invalidate contracts that affirmatively waived the right to class arbitration. There, the Second Circuit had found a class-action waiver in American Express’s merchant agreement to be unenforceable, on the grounds that individually arbitrating each claim would be prohibitively expensive, since the costs of the arbitration would almost always exceed the potential recovery on any one claim. On appeal, a divided Supreme Court found that this sort of practical analysis was beyond the courts’ authority and ran counter to the principle, embodied in the FAA and recent case law, that parties should be free to agree to arbitrate, or not, as they see fit.
And just last year, in Epic Systems Corp. v. Lewis, the high court—once again split 5-4 along ideological lines—found that the National Labor Relations Board had overstepped its authority by finding that the National Labor Relations Act’s protection of employee “concerted activities” taken for their “mutual aid or protection” gave employees the right to pursue class claims and displaced the FAA in interpreting arbitration agreements between employers and employees. Recognizing that whether to arbitrate on an individual or class-wide basis is one of the “fundamental attributes” of an arbitration agreement’s character, the majority held that class-action waivers are just as enforceable in employment agreements as in any other arbitration agreement.
II. The recent Lamps Plus decision
This brings us to the recent Lamps Plus case, decided on April 24, 2019. It arose from a corporate data breach in which a hacker gained access to the personal financial and tax information of 1,300 company employees. Many of these employees had been required by the employer to sign contracts at the start of their employment, each of which included a clause requiring disputes regarding their employment to be submitted to binding arbitration. The arbitration language, however, was ambiguous as to whether similar claims would be arbitrated in separate proceedings or together, on a class-wide basis.
Frank Varela was one of the employees whose personal information had been compromised in the data breach, and he filed a civil lawsuit in the Central District of California seeking to assert claims under state and federal law, both individually and as a representative of a putative class of similarly situated employees. The employer moved to dismiss the civil case and to compel arbitration, specifically requesting that arbitration be on an individual rather than class-wide basis.
The trial court granted the employer’s motion to dismiss, but its order specified that arbitration would proceed on a class-wide basis. The employer appealed to the Ninth Circuit, which affirmed the trial court’s ruling, reasoning that ambiguities in the employment agreement—which was mandatory for the employees and was drafted exclusively by the employer—should be construed against the employer and in favor of the employees’ right to assert claims as a class.
The Supreme Court granted certiorari and struck down the lower courts’ rulings. Chief Justice Roberts authored the majority opinion and was joined by the court’s four other conservative-leaning justices (Thomas, Alito, Gorsuch, and Kavanaugh). The remaining four justices each filed dissenting opinions.
The court accepted the Ninth Circuit’s conclusion that the arbitration clause was ambiguous as to whether arbitration would be conducted individually or on a class-wide basis. Even though the agreement never specifically mentioned class-wide proceedings, some of its language—for example, its statement that arbitration would be “in lieu of any and all lawsuits or other civil legal proceedings”—was “capacious enough to include class arbitrations” as a potential remedy.
But that ambiguity was not enough to force class-wide arbitration. Irrespective of state-law principles that ambiguous contractual language should be construed against its drafter, arbitration remains “a matter of consent, not coercion,” according to the majority, so there must be an “affirmative contractual basis for concluding that the parties agreed to class arbitration.” Relying heavily on the Stolt-Nielsen opinion discussed above, the majority ruled that without a clear expression of the parties’ intent to arbitrate on a class-wide basis, courts cannot force them to do so. An ambiguous contract is, by its very nature, not a clear expression of intent. Therefore, each employee’s claim was subject to individual arbitration, rather than a single class-action.
In a scathing dissent, Justice Ginsberg lamented what she sees as the Court’s consistent use of the FAA “to deny employees and consumers effective relief against powerful economic entities.” She found it ironic for the majority to invoke “the first principle” that “arbitration is strictly a matter of consent,” when employment agreements like the one at issue here are often presented on a take-it-or-leave it basis, and she decried the “Hobson’s choice employees face: accept arbitration on their employer’s terms or give up their jobs.”
Justice Sotomayor authored a dissent of her own, in which she took issue with the majority’s characterization of class arbitration as fundamentally different from individual arbitration, characterizing it as “simply a procedural device,” which “an employee who signs an arbitration agreement should not be expected to realize that she is giving up.”
Justice Kagan’s dissent focused on the authorship of the employment agreement, arguing that it should be construed against its drafter—the employer—under general principles of contract law adopted in every state, which are not abrogated by the FAA.
Justice Breyer also authored a dissent, focused largely on the threshold question of whether the order compelling arbitration a “final” order was vesting the appellate courts with jurisdiction even to hear the appeal.
This case fits the mold of recent Supreme Court cases addressing class arbitration, which have consistently affirmed the validity of arbitration agreements and pushed back on efforts to limit their applicability or enforceability. Although the dissenting opinions evidence just how controversial the use of arbitration clauses remains, the majority opinion further entrenches arbitration agreements as a bulwark against class-action liability. Given the current makeup of the Supreme Court, the trend is unlikely to be reversed any time soon.
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Attorneys: Douglas Hill
Missouri Supreme Court: There Must be Sufficient Evidence at Trial to Support Each Alternative of a "Disjunctive" Jury InstructionMarch 7, 2019 | Noemi Donovan
The Missouri Supreme Court's recent holding in Kader v. Bd. of Regents underscores the importance of ensuring that each alternative of a disjunctive verdict directing instruction is supported by sufficient evidence at trial. Because the Court found there was not substantial evidence to support each alternative of the circuit court's disjunctive instructions, the instructions were erroneous and prejudicial. As a result, it reversed the $2.5 million verdict in favor of plaintiff Kader, a former Harris-Stowe State University ("HSSU") professor, who filed claims of national origin discrimination and retaliation against HSSU under the Missouri Human Rights Act.
Kader, an Egyptian national, came to the United States in 1999 to pursue her graduate education. After working on the faculty at HSSU while completing her doctorate, she was promoted to assistant professor upon completion of her studies when she received her degree. In a performance review several years later, Kader believed she received lower ratings because of her race, religion and national origin and filed a discrimination complaint with HSSU.
Plaintiff worked at HSSU under a J-1 visa, which is a non-immigrant visa for individuals approved to participate in work and study based exchange visitor programs. A J-1 visa requires an employer sponsor and the facility where she attended graduate school originally sponsored her visa from 2007 until 2010. HSSU supplied information needed to maintain her visa while she was on the HSSU faculty and indicated it would assist her with obtaining a new visa when her J-1 expired. Typically, exchange visitors on J-1 visas return to their home countries for at least two years when their visas expire and then apply for a new visa if they decide to return. Kader did not want to return to Egypt so she filed for a waiver of the two year waiting period to obtain an H1-B visa and continue teaching at HSSU.
While waiting to learn if she received a waiver of the two year waiting period, she applied for an O-1 extraordinary person visa as an alternate means to obtain work authorization. She requested HSSU provide documentation to supplement her O-1 application, which HSSU supplied. When Kader had not heard about whether her visa was granted, she contacted the United States Citizenship and Immigration Services and learned it had requested additional information from HSSU, but had not received a response. Two days before her J-1 visa expired, plaintiff contacted HSSU about her O-1 application and the request for additional information. HSSU denied receiving the request. The O-1 application was then denied and HSSU did not appeal the denial.
Kader then did not receive the waiver she sought in conjunction with her H1-B visa request before her J-1 visa expired. Because she no longer had J-1 status, she was required to leave the U.S. within 30 days unless she obtained another visa. HSSU notified her that her contract for the next academic school year would not be renewed because she lacked a valid visa.
Kader filed suit against HSSU, alleging race and national origin discrimination and retaliation under the MHRA. The jury returned a verdict in plaintiff's favor on retaliation and national origin discrimination for $750,000 in actual damages and $1.75 million in punitive damages. HSSU appealed, asserting that two disjunctive jury instructions were erroneous and prejudicial. Specifically, HSSU argued that the instructions permitted the jury to find HSSU liable for conduct that is not actionable under the MHRA.
During trial, the court instructed the jury to rule in plaintiff's favor on her national origin discrimination claim if: (1) the jury found HSSU failed to do one or more of five listed acts, including HSSU did not appeal the denial of the O-1 visa petition; (2) plaintiff's national origin or discrimination complaints were a contributing factor to HSSU's failure to do any of those acts; and (3) such failure damaged plaintiff.
Similarly, the other disjunctive jury instruction at issue on the retaliation claim also instructed the jury that it must return a verdict for plaintiff if (1) plaintiff made complaints of discrimination; (2) HSSU failed to do any one of five acts, one of which was not appealing the denial of the O-1 visa petition; (3) plaintiff's complaints of discrimination were a contributing factor in defendant's failure to do one of the five acts; and (4) defendant's actions directly cause or contributed to plaintiff's damages.
The Missouri Supreme Court emphasized that for disjunctive verdict directing instructions to be appropriate, each alternative must be supported by substantial evidence. Such an instruction is prejudicial when substantial evidence does not support each disjunctive alternative because there is no way to determine which theory the jury chose. Therefore, there must have been substantial evidence at trial that HSSU's failure to appeal the denial of plaintiff's O-1 visa application constituted an unlawful employment practice under the MHRA. Because there was no evidence, the circuit court erred by including a disjunctive instruction that HSSU's failure to seek an appeal of the O-1 visa application in its disjunctive jury instructions.
The outcome in this case serves as an important reminder to defendants that if the plaintiff has failed to introduce sufficient evidence at trial of some element of claimed unlawful conduct, any disjunctive jury instruction proffered by the plaintiff that includes the unsupported claim should be challenged.
Missouri Supreme Court Compels Arbitration, Finding Adequate Consideration for Arbitration Agreement with At-Will EmployeeMarch 4, 2019 | Lisa Larkin
In Soars v. Easter Seals Midwest, 563 S.W.3d 111 (Mo. banc 2018), the Missouri Supreme Court ordered that at-will employee’s case be arbitrated and denied the employee’s challenge to the validity of the arbitration agreement as a whole.
As a condition of employment with Easter Seals Midwest (ESM), a charitable organization, each new, at-will employee is required to sign an arbitration agreement. The arbitration agreement provides that, as consideration for employment, the employee will submit all disputes and claims arising out of the employment to binding arbitration. In turn, ESM also agrees to submit all disputes and claims arising out of the employment to binding arbitration. The ESM arbitration agreement also included a delegation clause providing that the arbitrator and not any court had the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of the arbitration agreement.
Plaintiff Lewis Soars signed the arbitration agreement as a condition of his at-will employment with ESM, and three months later. ESM terminated his employment after he refused to participate in an internal investigation involving accusations against him of abuse or neglect of ESM’s clients. In response, he filed suit against ESM in circuit court for wrongful discharge and race discrimination. ESM filed a motion to compel arbitration. Plaintiff argued the arbitration agreement and delegation clause lacked consideration and mutuality and were unconscionable. The circuit court denied ESM’s Motion to Compel Arbitration, and the Court of Appeals affirmed.
The Supreme Court, however, reversed. It held that arbitration must be compelled if the parties signed an arbitration agreement that contains a valid delegation clause mandating that the arbitrator has “exclusive authority to decide threshold issues of interpretation, applicability, enforceability, or formation.” Whether or not the arbitration agreement as a whole is valid is for the arbitrator to determine so long as the delegation provision, standing alone, is valid. In this case, the Court found that in the delegation provision both parties mutually agreed to arbitrate all threshold questions of arbitrability. “Because neither ESM nor Soars retains any unilateral right to amend the delegation clause nor avoid its obligations, the delegation clause is bilateral in nature and consideration is present.”
Significantly, and surprisingly, this is the Missouri Supreme Court’s first opinion holding that referral to an arbitrator should occur, notwithstanding a party’s challenge to the validity of the arbitration agreement as a whole. While the United States Supreme Court has made this same ruling numerous times over many decades, this was the Missouri Supreme Court’s first occasion to consider the issue.
Notably, the Court found that an initial offer of at-will employment was sufficient consideration for the contractual promise to arbitrate claims. This was a major point of disagreement for the dissenting justice, who would have concluded that the arbitration agreement was unenforceable because at-will employment, which by its very nature is no employment contract at all, can provide no legal consideration for the arbitration agreement. According to the dissent, because a fundamental component of the at-will employment relationship is the ability for either party to terminate the relationship at any time, there was no valid contract to support the arbitration agreement or the delegation provision.
Going forward, the majority’s decision should provide comfort to employers that, under Missouri law, their arbitration agreements with at-will new-hires are enforceable and may include provisions placing all claims and controversies into the hands, in the first instance, of the arbitrator, including all objections to the existence, interpretation, application, and enforceability of the arbitration agreement itself.
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