Participation waivers test Federal Arbitration Act’s limits

The U.S. Supreme Court's recent Federal Arbitration Act cases leave an open question: Are there limits to what an arbitration agreement can waive? Under the rules announced in Epic Systems and Lamps Plus, an employer can present a new hire with a take-it-or-leave-it agreement to arbitrate employment claims on an individual basis only. By signing, the employee waives the right to bring a class action. Even if the agreement is ambiguous or silent about class procedures, it can still bar groupwide arbitration. This precedent transforms arbitration agreements into powerful tools for busting up workers' class actions before they start, and since wage claims are often too small for workers and their attorneys to pursue individually, a waiver of the right to group action often prevents employees from bringing wage claims at all.

Employers are now testing the limits of the Supreme Court's waiver rules by trying to enforce class "participation" waivers in cases that are not even proceeding in arbitration. This goes too far. So-called "participation" waivers don't just try to bar employees from bringing a class or collective action in arbitration; they bar participating in such an action that someone else brings, regardless of the forum.

This comes up often when the named employee in a class action doesn't sign an arbitration agreement, but other employees do. The case proceeds in court, but employers maintain that the employees who signed participation waivers should be barred from serving as class members. Sometimes employers roll out these waivers to their current workforce after getting hit with a class action, arguing that there is no cohesive class of injured workers since many individuals in the potential class have signed agreements waiving the right to participate.

But if a case proceeds in court, and not in arbitration, then the Supreme Court's justification for enforcing class waivers is lost. The thought behind enforcing class-action waivers is to ensure a speedy arbitration hearing unencumbered by class procedures. According to the U.S. Supreme Court in Concepcion, collective proceedings can interfere with arbitration's principal benefit as a fast and efficient alternative to court. To protect the "fundamental attributes of arbitration," parties should be able to forego groupwide procedures.

When a case is pending in court, there are no "fundamental attributes of arbitration" at stake. The forum for the dispute has already been determined, and it's not one with the chief purpose of speed and simplicity. On the contrary, courts are well equipped to handle complicated proceedings involving tens or hundreds of thousands of people. Although the Supreme Court has imbued arbitration agreements with the extraordinary power to waive class procedures, it has not imbued them with limitless power to waive such procedures in any forum.

Employers say that participation waivers must be upheld because they are contained in arbitration agreements, and the FAA lets parties contract for how they will resolve disputes. While the Supreme Court has said that arbitration agreements must be enforced just like other contracts and that the efficiency of bilateral arbitration serves as one of its "principal advantage[s]," none of these pronouncements give arbitration agreements the authority to alter the procedural rules applicable in court. The FAA only applies to arbitration--its purpose was never to reach into court proceedings and tell judges what to do.

Meanwhile, a waiver of the right to participate in a pending class action violates California's policy against interfering with the right to maintain a wage claim in a class proceeding. It's true that this policy is preempted by the FAA when it comes to enforcing an agreement to "submit to arbitration" or "settle by arbitration" a controversy between the parties, but the FAA doesn't address waivers of the right to participate in another party's case outside of arbitration. Simply put: The right to participate in a pending class action falls outside the scope of the FAA.

As the Supreme Court has said many times, the proper venue for a case is determined by the named parties' agreement. If the named parties never agreed to arbitrate and their case is pending in court, there should be no issue of enforcing a waiver contained in an arbitration agreement signed by a third-party class member. Courts should not enforce such waivers outside of arbitration to deny discovery or class certification, and certainly not to prevent workers from participating in a classwide recovery of unpaid wages. 