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ARBITRATION UPDATE:
• Class Actions: When Can Employees Use Arbitration for Class Action Claims?
Two recent Supreme Court decisions address the issue of whether arbitration can be used to resolve class action claims. In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), the Supreme Court held that a party may not be compelled to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. In AT&T Mobility LLC v. Conception, 131 S. Ct. 1740 (2011), the Court held that class action arbitration was not available when the arbitration agreement expressly disclaims class action arbitration. Not surprisingly, the lower courts are now beginning to address the situations which are not directly controlled by these decisions. An interesting example is a recent decision in California where the issue was whether the courts or the arbitrator should decide whether the arbitration agreement authorized class action arbitration. Yahoo!Inc. v. Bryan Iversen, 2011 U.S. Dist. LEXIS 117149 ( N.D Cal 2011).
In the Yahoo case, the plaintiff was an employee of Yahoo who filed a class action claim in arbitration. Yahoo responded with a lawsuit, claiming that the arbitration agreement said nothing about class arbitration; that Yahoo had not agreed to class arbitration; and, therefore, the plaintiff should be limited to arbitrating only his personal claim. In response, plaintiff argued that the arbitration agreement incorporated the rules of the American Arbitration Association (“AAA”) for employment disputes, which include Supplementary Rules for Class Arbitration. Plaintiff argued that by incorporating those rules into its arbitration agreement, Yahoo had effectively consented to class arbitration.
The court found that there was a genuine dispute as to whether the arbitration agreement authorized class arbitration. That issue, the court said, should be decided based on the intent of the parties as expressed in their arbitration agreement. The court then concluded that the incorporation of the AAA rules for class action into the arbitration agreement clearly demonstrated that the arbitrator should decide whether the class action claims were permissible under the contractual arbitration procedure.
The ultimate issue in this case was whether Yahoo agreed to class arbitration. Yahoo argued that the agreement was silent on that issue and, therefore, there was no agreement to class arbitration. However, the arbitration agreement incorporated the AAA rules which did include provisions for class arbitration. We seriously question whether it can credibly be argued that a party who adopts AAA rules which include provisions for class arbitration has thereby agreed to entertain such claims in its grievance procedure. It seems more logical to assume that those rules will apply only if the arbitration agreement authorizes class arbitration; otherwise any party who adopts the AAA rules for employment disputes will be deemed to have agreed to class arbitration. The fact remains that the reference in the AAA rules to class arbitration was the predicate for the claim that Yahoo had agreed to class action grievances.
The takeaway from this is that if companies want to avoid class arbitration, their arbitration agreement should explicitly state, in substance, that all employment-related claims must be arbitrated and that the arbitration process can be used only for individual claims and not for class or group claims.
• Arbitration Agreements: Errors in Drafting Can Nullify a Clause Intended to
Prevent Class Action Arbitration
A recent decision by a federal District Court in Illinois illustrates how careless drafting of an employment arbitration agreement can render the agreement unenforceable. Domin v. River Oaks Imports, Inc., DLR, October 2, 2011. In this case, the plaintiff, Domin, signed an employment agreement when he was hired in which he agreed to arbitrate all employment-related disputes that arose during his employment. After he was fired, he filed a lawsuit claiming that he had been sexually harassed and fired in violation of Title VII. The company moved to dismiss the lawsuit and to compel Domin to arbitrate his claim. The Court held that the arbitration agreement was unenforceable and that the lawsuit could proceed.
The Court’s decision turned on a fundamental principle of contract law—namely, the rule that a contract is enforceable only if there was legal “consideration” to support it. That means that Domin must have received some benefit from the contract or the company must have suffered some detriment. The Court found that the language of the contract manifested that there was no consideration in the arbitration agreement, and, therefore, it was unenforceable.
The arbitration agreement contained an unusual provision which provided: “Although I understand that signing this arbitration agreement is not required as a condition of my employment, I desire to take advantage of the benefits of arbitration.…” Based on this language, the Court found that the company “did not offer employment to Domin in exchange for Domin’s agreement to arbitrate.” Therefore, the agreement lacked consideration unless there was something else in the agreement that benefitted Domin and could establish consideration.
The company argued that the arbitration agreement itself provided consideration because it gave both parties the “benefit” of expedited dispute resolution. The Court rejected this argument because the agreement referred only to Domin’s obligation to arbitrate and imposed no comparable obligation on the company. The Court seemed to agree that consideration would have been present if the agreement to arbitrate required both parties to submit their complaints to arbitration. Without that mutuality, the Court ruled that there was no consideration for Domin’s pledge to arbitrate and, therefore, the arbitration agreement was unenforceable.
Different contract language could have avoided this result. Typically, an employee who agrees in a pre-hire agreement to arbitrate all employment disputes is getting consideration for that promise—namely, a job. But the language in this arbitration agreement—which specified that arbitration was not a condition of employmentcancelled that argument. In addition, consideration would have been present if both parties were obligated to arbitrate.
In sum, the arbitration clause in this case would have been enforced if both parties had an obligation to arbitrate disputes or if the agreement specified that the employee’s acceptance of arbitration was a pre-condition for his employment.
