Supreme Court Further Affirms the Right to Enforce Arbitration Agreements, Including Class Action Waivers

July 2013

Italian Colors Restaurant in Oakland, California, along with several other restaurants, filed a class action suit against American Express alleging the company’s high, and often hidden, fees were forced upon the restaurants in a monopolistic fashion.  American Express moved to enforce its arbitration agreements with each restaurant.  The arbitration agreements prohibited class action claims.  In response, the Restaurants argued that arbitration was cost prohibitive on an individual basis which would involve arbitration costs/fees in approximately the same amount, the Restaurants each stood to recover — $40,000. These issues parallel the discussion taking place regarding mandatory arbitration agreements in employment.

The United States Supreme upheld the American Express arbitration agreement stating courts cannot invalidate a contractual provision in which the parties waived the right to class arbitration, even if the costs of individual arbitration are prohibitive. The Court reasoned that the Federal Arbitration Act (FAA) reflects the principle that courts must “rigorously enforce” the terms of arbitration agreements as a matter of contract.  The decision is potentially good news for employers with arbitration agreements or considering mandatory arbitration for their work force.

Employers have argued in favor of arbitration enforcement for years due to the exponential growth of damages once a class action is certified.  Application of this holding will vary among employers depending upon whether their business or employees are involved in interstate commerce.  If engaged in interstate commerce, and not involved in the transportation industry, the Italian Colors holding will apply to California employers.  

The California Supreme Court is presently considering similar issues to resolve a conflict amongst lower courts in Iskanian v. CLS Transportation of Los Angeles.  In the 2007 case, Gentry v. Superior Court, the California Supreme Court found that a statutory right to receive overtime pay could not be waived and that a class arbitration waiver could not be enforced against a former employee's overtime pay claim because the waiver would have made it impractical for the former employee to bring forth his claim and vindicate his rights. In Iskanian, the California Supreme Court will reconsider Gentry and also consider the related issue of whether arbitration agreements may override the statutory right to bring representative claims under the Labor Code's Private Attorneys General Act of 2004. This eagerly anticipated decision should resolve the current conflict between the California courts and the U.S. Supreme Court and provide much-needed clarity to employers who rely on the enforcement of class arbitration waivers to limit class action liability. Until the California Supreme Court reaches a decision in Iskanian, which is expected in the near future, it is unclear whether California courts will enforce class arbitration waivers that are not governed by the FAA. The fact that the U.S. Supreme Court has reiterated its position on this issue is a hopeful sign for employers. Employers should ensure that class arbitration waivers are explicit and should continue to review arbitration provisions with legal counsel to ensure they do not run afoul of the legal standards regarding procedural and substantive unconscionability.

Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.