Out of the frying pan: defendants leap into the fire with their relentless push toward individual arbitrations

Since at least 2011, when the U.S. Supreme Court decided AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), seeking to reinvent the 1925 Federal Arbitration Act as a get-out-of-jail-free card for corporations, nearly every wage and hour class action faces a question whether defendants will seek to compel the plaintiffs, class members, and federal Fair Labor Standards Act opt-ins to individual arbitration. This, of course, stems from no desire to arbitrate individually with dozens, hundreds or thousands of plaintiffs, class members and opt-ins, but from the misguided notion that obtaining an order requiring such a course would result in less costly litigation than resolving the claims on a class-wide basis. Alternatively, defendants may place stock in the even less-plausible scenario, that requiring individual arbitrations would lead plaintiffs, class members, the opt-ins, or plaintiffs' counsel to pull up their stakes and abandon the camp. More often than not, in my experience, this strategy is an expensive failure.

In California, any fee-splitting and statutory remedy limitations defendants hope to achieve in arbitration are precluded, and will be severed from any agreement to arbitrate. Armendariz v. Foundation Health Psychcare Services, 24 Cal. 4th 83, 114 (2000), is still good law standing for the proposition that arbitration cannot be used to limit workers' substantive rights to pursue their statutory remedies. Even Justice Antonin Scalia's Concepcion opinion recognized the continuing viability of unconscionability defenses to arbitration clauses, citing Armendariz. See also Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013) (Sonic II) (holding that Armendariz survived Concepcion).

Accordingly, defendant employers will be required to bear almost all of the costs of employment arbitration, with plaintiffs, class members and opt-ins retaining the right to pursue all of their valuable claims to their fullest extent. Take a case (like one I am litigating now) with nearly 400 plaintiffs and opt-ins (not to mention more than 100 others who are putative class members without arbitration agreements). Some have been compelled to arbitration, so we have filed nearly 160 individual arbitrations to date. For those in California who did not agree to arbitrate, we have moved for class certification in district court. And, there are still representative Labor Code Private Attorneys General Act claims pending, since PAGA actions are qui tam cases on behalf of the state of California and the state cannot be forced into arbitration, as the California Supreme Court explained in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014).

How much will all of this cost the defendants to litigate -- before they have even paid a dime to eliminate any risk of liability? We do not need to speculate. Many defendants have experimented with this approach, and have found the fire of serial arbitrations plus PAGA plus court litigation of non-arbitrants' claims burns much hotter than the frying pan of a sensible, class-wide resolution. A couple examples suffice:

Plaintiffs sued 24-Hour Fitness in 2006, alleging wage and hour class claims. Beauperthuy v. 24 Hour Fitness, 06-0715 SC (N.D. Cal.). As in my case, the 24-Hour Fitness plaintiffs in 2011 successfully obtained conditional FLSA certification in the Northern District of California, but the court decertified the action subsequently. Plaintiffs and opt-ins in Beauperthuy thereupon filed 983 individual demands for arbitration with JAMS. Ultimately, 24-Hour Fitness was ordered to proceed to arbitration with the first 16 of these claims, and each was scheduled for a three-day hearing. Let us assume the out-of-pocket cost for each arbitration paid by 24-Hour Fitness approximated $30,000. Beyond this $30,000/claimant, defendants had already incurred extensive fees litigating the 16 arbitrations nearly to conclusion -- let us imagine approximately $1 million in fees.

The district court explained, "Unfortunately, the arbitration process has been anything but easy and efficient. More than 16 months have passed since decertification, yet not a single claim has been arbitrated. Instead, counsel's meet-and-confer process has devolved into a volley of mutual recriminations and allegations of bad faith. Each side accuses the other of drawing out the proceedings with procedural games aimed solely at gaining leverage for settlement. Counsel's dysfunctional relationship eventually culminated in a declaration of 'war.'" Beauperthuy, 06-0715 SC, 2012 WL 3757486, at *2 (N.D. Cal. July 5, 2012).

Having thus already spent almost $100,000 per claimant for 16 claims, before any awards for the claimants and fee-/cost-shifting, and with many hundreds more arbitrations coming close behind, 24-Hour Fitness mediated the case. In early 2013, they finally settled for $17,448,500, approximately $20,000/each for 862 remaining plaintiffs (after some of the 983 were eliminated by bankruptcy or other resolutions). As part of this resolution, in late 2013, the district court specifically approved more than $6.5 million in fees and litigation-related costs. In other words, choosing individual arbitrations had cost nearly six times per claimant what 24-Hour Fitness ultimately paid on claims (i.e., $120,000 = $100,000 costs/arbitration + $20,000/each per the settlement). 24-Hour Fitness left the frying pan, came through the fire, only to return to the frying pan-- the worst of all worlds.

In another example, plaintiffs represented by Nichols Kaster sued AIMCO in 2007 (07-2069, N.D. Ill.), obtained FLSA conditional certification, and in 2008 took the unusual step of moving to compel arbitration as to 310 of the plaintiffs and opt-ins, and having the motion granted. AIMCO moved to transfer the case, to decertify, but ultimately, was forced to begin arbitrating - and paying for arbitrations -- of the employees' claims at AAA. Only seven arbitrations had occurred when AIMCO capitulated and decided to settle all of the outstanding claims -- and, this was after AIMCO succeeded in five of the seven arbitrations. Defendants had spent an average of $34,881 per claimant. Though it was less than the approximately $120,000 per 24-Hour Fitness arbitration claimant, it was far more than AIMCO undoubtedly paid per claimant to the 334 individuals who ultimately participated in the settlement (which was filed under seal).

In my experience, these costs per arbitration -- between $35-$120K -- are very common. If you have a case with 500 plaintiffs, and imagine $100K each times 500 arbitrations, defendants' exposure realistically is $50M in arbitration costs. The question is whether plaintiffs would settle earlier in the process for substantially less. Typically, yes. Average early class settlements in misclassification cases tend to be far less than $10,000/person, according to a study of over 600 settlements by NERA Economic Consulting.

It is noteworthy that although the context -- individual arbitrations after Concepcion -- is still less than a decade old -- the concept is not. Through the Teamsters approach in discrimination cases, and other defense strategies requiring individual proof of claims, employers facing class litigation have long sought to fight a war of attrition, seeking to shrink class relief by making each individual assert his/her claims. However, just as in the arbitral forum, the approach has often created a frying pan/fire choice for defendants. See, e.g., Kraszewski v. State Farm General Ins. Co., 79-1261 (N.D. Cal.) (hearings ordered to determine individual liability and damages; 982 claims filed; each claimant won over $219,000; claims resolved for approximately $185 million, plus approximately $65 million in fees and costs); Cremin v. Merrill Lynch Pierce Fenner & Smith, Inc., 96-3773 (N.D. Ill.) (class members required to present individual claims; 912 claims filed; $2,203,822, exclusive of attorneys' fees and costs, awarded in the first hearing; plaintiffs prevailed in seven of eight hearings conducted, before Merrill Lynch settled with remaining claimants, paying approximately $250 million). See also, e.g., Martens v. Smith Barney, Inc., 96-03779 (S.D.N.Y.) (defendant paid approximately $150 million, after over 1,000 discrimination victims proceeded to arbitration).

If you are a defense counsel representing a corporate employer faced with a putative wage and hour class, collective, and/or representative action, before having a knee-jerk instinct to start demanding they file with AAA or JAMS, consider your client's best interest at the end of the day. Your client will save a lot of time and money with an efficient, global resolution, rather than blowing up the case and fighting with plaintiffs' lawyers like me in court and arbitration over each of the smithereens. 