Thinking through Concepcion, Oxford Health and Iskanian

Justice Antonin Scalia, not a Californian and understandably unfamiliar with California employment law practice, authored the majority opinion in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). He concluded that class arbitration permitted by Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), has no basis in law and a court deprives parties to a bilateral arbitration agreement of due process rights by compelling class arbitration. While management lawyers (including this author) lauded the result, several statements in the opinion have limited validity, appear result-oriented, and may cause one to jump to conclusions. Whether Concepcion prohibits class arbitration waivers will be decided in the forthcoming state Supreme Court case, Iskanian v. CLS Transportation Los Angeles, LLC, S204032.

The Predicate Case

Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), held that an arbitration panel exceeded its power under Section 10(a)(4) of the Federal Arbitration Act (FAA) by imposing class arbitration where the agreement was silent on the issue.

Concepcion's Flaws

A year after Stolt-Nielsen, Justice Scalia's majority opinion in Concepcion offered several truisms that might have been more carefully considered:

First, class arbitration includes absent parties, necessitating additional and different procedures involving "higher stakes." The opinion explores downsides to handling disputes in class arbitration, but gives no credit to or ignores the upsides.

Second, "Confidentiality becomes more difficult." This ignores the fact that parties often enter into protective orders per CCP Section 2025.420. Even without such an order, information likely to be considered "confidential" in a wage class action is very limited .

Third, "while it is theoretically possible to select an arbitrator with some expertise relevant to the class-certification question, arbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification, such as the protection of absent parties." In fact, many California arbitrators are former judges or litigators who have handled class actions, are familiar with class-action procedures, and are equally familiar with protective orders. That class arbitration, to the extent it is manufactured by Discover Bank, is inconsistent with the FAA, may be true as to the FAA, but not necessarily with respect to the California arbitration procedures.

Fourth, Concepcion suggests class arbitration sacrifices arbitration's informality and slows the process. Justice Scalia cites a study of American Arbitration Association cases covering a very brief period of time. However, experience suggests that while the process may be slower, it's not by much in California.

Fifth, class arbitration necessarily costs more. In fact, since the class shares the costs of administration, the costs may be less for each class member than they would have been for a single claimant in arbitration. In most employment cases in California, the employer must pay virtually all of the costs. See Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000).

Sixth, Justice Scalia suggests class arbitration is "more likely to generate a procedural morass than a final judgment." This is because "[i]n bilateral arbitration, parties forgo the procedural rigor and appellate review of the courts." What "procedural rigor" would be more compromised in class as opposed to individual arbitration is unclear. The rules of evidence may be less strictly adhered to, but that may also be the case in a bench trial. Before an arbitrator may decide the merits of a claim, he must first decide whether the class itself may be certified, whether named parties are adequate representatives, and how discovery for the class should be conducted. Regardless of forums, class actions, which have historically streamlined litigation, involve more complex procedures.

Seventh, class arbitration requires procedural formality. This suggests that arbitrators are procedurally sloppy in individual arbitrations. But Armendariz requires adequate discovery rights be available for an agreement to be enforceable. See Fitz v. NCR Corp., 118 Cal. App. 4th 702 (2004). Formality is not a risk, and the concern that "if procedures are too informal, absent class members would not be bound by the arbitration" may be dispelled.

Eighth, Justice Scalia notes that "[f]or a class-action money judgment to bind absentees in litigation, class representatives must at all times adequately represent absent class members, and absent members must be afforded notice, an opportunity to be heard, and a right to opt out of the class." There is no sound reason that this cannot be followed in class arbitration as it would be in civil court.

Ninth, Justice Scalia opines it is "odd to think that an arbitrator would be entrusted with ensuring that third parties' due process rights are satisfied." If the forum providing the arbitrator requires its arbitrators to follow its rules, the very suggestion of arbitrator dereliction of duty or disregard of the parties' rights is unwarranted. Putative class members are more than third parties, and if the class is certified, they become full parties to the litigation. Indeed, it would be odd to think that a qualified arbitrator would not be entrusted with ensuring protection of third-party rights.

Tenth, class arbitration increases risks to defendants because the absence of multilayered review makes it more likely that errors will go uncorrected. What errors? In whose favor? The assumption appears to be that an arbitrator in a class action will be more likely to commit errors than in an individual arbitration and will disfavor defendants. This hypothetical risk equally attends individual and class-wide arbitration. Most companies seek arbitration to avoid the greater risk of runaway jury verdicts.

Eleventh, "when damages allegedly owed to tens of thousands of potential claimants are aggregated and decided at once, the risk of an error will often become unacceptable. Faced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims." Once again, this is a wholly unwarranted aspersion. Defendants settle questionable claims every day, not because a fact-finder might get it wrong, but because all litigation is expensive.

Twelfth, "arbitration is poorly suited to the higher stakes of class litigation" because appeal of an arbitrator's decision is limited to corruption, fraud or undue means - i.e., misconduct rather than mistake. The assumptions that the risk of error is greater before a qualified arbitrator than in civil court and that correction of a civil court error on appeal is assured are unwarranted.

The majority opinion purportedly protects defendants from small dollar claims that no attorney would likely prosecute - is that accurate?

Defense Counsel's First Reaction to a Civil Action.

Many defense attorneys have only one response to civil complaints when the named plaintiff has signed an arbitration agreement with a class-action waiver: move to compel individual arbitration. Defense counsel should give more thought to the risks and alternatives before filing the motion.

First, a plaintiff's attorney facing a possible motion to compel might not send a demand or file a class complaint without first learning the names and contact information of similarly situated persons. If the defendant's motion to compel individual arbitration is successful, the defendant may be faced with a barrage of individual demands for arbitration. Whether plaintiff's counsel can in individual arbitration get contact information of similarly situated employees pursuant to Belaire-West Landscape, Inc. v. Superior Court, 149 Cal. App. 4th 554 (2007), is unclear.

Second, arbitrator fees are expensive - it may cost $50,000 to fully adjudicate an individual claim. Arbitrators' fees at that rate in just 30 cases would be $1.5 million.

Third, the defendant's preferred attorney may not be available for all of the proceedings. Consolidation of claims in different jurisdictions might be impossible. The defendant might be compelled to retain several attorneys - not only sending its legal fees soaring, but resulting in inconsistent advice, strategic decisions and representation.

Fourth, Although resolving class litigation may take longer, when there is exposure to multiple claimants disputing the same issues before multiple arbitrators, the risk of inconsistent decisions is exponential. An arbitrator's award is not a reliable precedent, and inconsistent awards may leave some employees enriched, others not.

Fifth, the opportunity for early settlement may be greater in class litigation. Class settlements, however, typically include attorney fees, and a plaintiffs' attorney with a class of even a few hundred putative members may be more willing to accept a discount in early mediation than settling for a much smaller amount in one of a number of individual cases. Alternatively, an attorney representing claimants in numerous individual arbitrations over the same issues might use the fees earned in settling the first few cases to underwrite the remaining ones.

Sixth, before a motion to compel individual arbitration is filed, there may be the opportunity to negotiate an agreement to resolve the dispute in a class arbitration, and to select a former class-action litigator or retired judge with requisite experience who can handle the procedural issues. While the civil complaint is pending, the agreement could include trial court review of the preliminary and final settlement agreements and, possibly, review by the appellate court or another qualified arbitrator.

Oxford Health

Oxford Health Plans LLC v. Sutter, 2013 DJDAR 7319 (U.S. June 10, 2013), confirms the right to an arbitrator to determine whether the parties have agreed to class-action procedures. In that case, the parties had simply agreed that no dispute arising under their agreement would be instituted before any court. The parties later asked the arbitrator to decide whether their agreement authorized class action, and despite the absence of the word "class" or term "class action" in the document, he reasoned that a class action was one possible form of civil action that could be brought. The arbitrator concluded that the parties intended that a class action could be maintained. Accordingly, if the issue is put to the arbitrator and she interprets the agreement to permit class arbitration, the determination is subject only to limited review under the FAA. Once a civil action is filed, neither Concepcion nor Oxford Health prohibits parties from agreeing to arbitrate on a class basis, but subject to approval of the trial court of any preliminary and final settlement.

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Class arbitration may not be preferred in most circumstances. Merits of the claim, amount of damages involved, likelihood that other individuals will sue, loyalty of putative class members to the employer and whether they will opt out, and many other factors should be assessed. Assuming that there is no class waiver or that such a waiver is unenforceable, forgoing a motion to compel individual arbitration and proposing class arbitration might be unwise and unwarranted in many instances. In Concepcion, AT&T Mobility clearly evaluated all of these factors, and fought hard for and successfully obtained the decision it sought

Nonetheless, in appropriate wage disputes, defense counsel should thoroughly explore the risks of compelling individual arbitration and determine whether class arbitration is an available option or could result from negotiation with opposing counsel. In some instances, where the risk of liability is high and damages can be readily determined, clients may strongly favor wholesale resolution of an important issue in a single proceeding. Simply filing a motion to compel individual arbitration without a strategic discussion may be irresponsible or unethical - and may risk losing a client.