Is arbitration a good fit for your company?

By William Hammel on 9.4.18
There are cons, as well as pros.

The recent Supreme Court decision in Epic Systems Corp. v. Lewis — approving the use of class or collective waivers in arbitration agreements — was undoubtedly a victory for employers.

With a waiver, the employee gives up his or her right to pursue claims against the employer on a class or collective basis. This means that when an employee brings a claim, there will be no obligation to notify other potential claimants. The waivers eliminate an “easy” mechanism for more employees to become plaintiffs themselves — either by default in the case of an “opt out” class action, or by “opting in” to a collective action.

The result could be a substantial reduction in the number of employees who assert claims, a reduction in the damages to which the employer is exposed, and a reduction in the significant costs and defense fees usually associated with defending class and collective actions.

What employer wouldn’t want that?

The “catch” is that mandatory waivers have been approved only in the context of arbitration. Which raises the question: Is arbitration the right thing for your company? Here are some points to consider.

Benefits of arbitration

• Proceedings are usually confidential.
• You don’t have the risk associated with a jury.
• You have some degree of control over the selection of the arbitrator.
• Arbitrations are usually resolved in less time and have limited options for appeal.
• Arbitrations can be less formal, with less technical adherence to rules of evidence and procedure.
• Arbitration awards are lower on average, and less likely to include punitive damages.
• Arbitration agreements can include waivers of class and collective actions.

Drawbacks of arbitration

• Agreements must be carefully drafted and can be difficult to enforce, especially in some jurisdictions.
• There are ways to get around the confidentiality requirements (for example, think about Gretchen Carlson and Roger Ailes).
• The looser rules of evidence and procedure can disadvantage employers as well as employees.
• Dispositive motions, such as motions for summary judgment or motions to dismiss, are rarely granted in arbitrations.
• Some arbitrators tend to “split the baby” in an attempt to keep both sides happy (or equally unhappy).
• Arbitration costs money, and the employer usually has to foot the bill — including the arbitrator’s hourly fee and retainer.
• Other parties with the authority to bring claims on behalf of an employee — including the Equal Employment Opportunity Commission and the U.S. Department of Labor — are usually not bound by arbitration agreements.

Despite the drawbacks, arbitration is usually worthwhile for larger employers (those with 50 or more employees), employers in industries that are particularly susceptible to wage and hour claims (telecommunications, retail, or food service), and employers who have insurance policies that cover the costs and fees related to arbitration.

Employers must decide whether to retain or begin an arbitration program after carefully considering the advantages and disadvantages of arbitration, many of which are unique to certain industries. The ability to avoid one jury trial in an employee-friendly jurisdiction may justify the higher cost of defending five separate claims in arbitration. And, obviously, preventing just one class or collective action can outweigh several years of increased costs associated with an arbitration program.

It is critical for employers to accurately quantify their risks and exposure, and then run a cost-benefit analysis to determine whether arbitration makes sense for their company.

When “clear and unmistakable” is neither clear nor unmistakable: Circuit split emerges as to whether arbitrator or court should decide class arbitrability when parties incorporate arbitration facility rules into their agreements

September 4 2018

K&L Gates – Andrew C. Glass, Robert W. Sparkes III, Roger L. Smerage and Elma Delic 

Less than a week apart, the U.S. Courts of Appeals for the Tenth and Eleventh Circuits issued similar rulings regarding class arbitration. Both courts examined the question of whether the incorporation of American Arbitration Association (“AAA”) rules into agreements with consumers or employees presents clear and unmistakable evidence that an arbitrator, rather than a court, should determine whether the agreements permit class arbitration. And both courts answered in the affirmative. [1] These decisions create a circuit split with the Third, Fourth, Sixth, and Eighth Circuits, which have each held that the incorporation of AAA rules alone does not delegate the question of class arbitrability to an arbitrator. [2] As discussed below, this split may lead to the U.S. Supreme Court granting certiorari to resolve the issue.

Background

In Spirit Airlines, Inc. v. Maizes, members of Spirit’s $9 Fare Club initiated class arbitration against Spirit alleging that they did not receive the benefits that were guaranteed in exchange for their yearly membership fees. [3] Spirit sought to enjoin the class arbitration. [4] It argued that the applicable arbitration agreement did not provide for class proceedings. [5] A federal district court denied the injunction, ruling that because the arbitration agreement incorporated Rule 3 of AAA’s Supplementary Rules for Class Actions, an arbitrator rather than a court must determine the question of class arbitrability. [6]

DISH Network LLC v. Ray reached a similar outcome. There, a DISH Network employee initiated an arbitration asserting state law class claims as well as collective claims under the federal Fair Labor Standards Act. [7] In construing the arbitration clause, the arbitrator decided that class arbitrability was not a gateway issue for a court but instead a question for the arbitrator. [8] In turn, the arbitrator ruled that the applicable arbitration agreement provided for both class and collective proceedings. [9] DISH Network petitioned a federal district court to vacate the ruling, but the court denied the petition. [10]

Analysis

On appeal, both the Tenth and Eleventh Circuits focused on the impact the parties’ incorporation of AAA rules had on the class arbitrability question. Both courts did so by assuming, without deciding, that the class arbitrability question is a so-called “gateway” question of arbitrability that a court decides unless the parties delegate it to an arbitrator through “clear and unmistakable” language in their arbitration agreement. [11]

Addressing the effect of the parties’ incorporation of AAA rules on the gateway question, both courts relied upon existing circuit precedent to conclude that such incorporation is “clear and unmistakable” evidence of delegation of gateway questions to arbitrators. In Maizes, the Eleventh Circuit followed the reasoning in Terminix International Co. v. Plamer Rach Ltd. Partnership[12] and concluded that “the agreement’s choice of American Arbitration Association rules, standing alone, is clear and unmistakable evidence that Spirit intended that the arbitrator decide th[e] question” of class arbitrability. [13] The Ray court concluded that the Tenth Circuit’s “holding in Belnap (v. Iasis Healthcare [14]) is instructive,” such that “when contracting parties incorporate the AAA rules into a broad arbitration agreement, … such an incorporation clearly and unmistakably evinces their intent to arbitrate arbitrability.” [15] The courts also found support for their holdings in the state contract law applicable to each case. [16]

Both courts also noted that other circuits—namely the Third, Fourth, Sixth, and Eighth—have come to the opposite conclusion. Those circuits have held that incorporation of an arbitration facility’s rules into the arbitration agreement is not “clear and unmistakable” evidence that the class arbitrability issue should be delegated to the arbitrator. [17] The courts based their decisions in large part on Supreme Court arbitration jurisprudence. But the Eleventh Circuit, while “respect[ing] the work of [its] sister circuits, … read Supreme Court precedent differently,” concluding that jurisprudence “address[ed] the question of whether an agreement allows class arbitration at all, separate from the issue of who decides the question to begin with.” [18] The Tenth Circuit was not so courteous. The court expressly “disagree[d] with the reasoning of these circuits.” [19] The Ray court separated the issue of whether the class arbitrability question is a gateway question from the issue of whether, assuming it is, the parties nevertheless delegated it to the arbitrator. In doing so, the court noted that “[t]he fundamental differences between bilateral and classwide arbitration,” which underlie the Supreme Court jurisprudence, “are irrelevant to us at this second stage of the analysis.” [20]

Potential Implications

A distinct line has been drawn. At least four circuits had previously ruled that incorporating arbitration rules like the AAA rules was not by itself “clear and unmistakable” evidence that the parties intended to delegate the class arbitrability issue to an arbitrator, even if those rules provide that an arbitrator may determine whether the agreement provides for class proceedings. But now the Tenth and Eleventh Circuits have positioned themselves on the other side of the line. If the parties seek, and the Supreme Court grants, certiorari, it likely will be to decide the narrow issue presented in the Tenth and Eleventh Circuit decisions. It remains to be seen whether these decisions can adequately present the undecided question underlying all of these cases––namely whether the class arbitrability question is, in fact, a threshold question of arbitrability that a court decides absent clear and unmistakable evidence of delegation.