Recently, the United States Supreme Court gave employers a big boost on the enforceability of class action waivers in arbitration agreements. In American Express Co. v. Italian Colors, Justice Scalia wrote a forceful opinion holding that a class action waiver in an arbitration agreement is enforceable, even as to federal anti-trust claims, and even if the plaintiffs convince a trial court that the cost of proving their claims on an individual basis would deter such litigation.

Justice Scalia’s opinion built on other recent decisions favoring arbitration, including: (1) AT&T Mobility v. Concepcion, in which the Court held that California state law invalidating class action waivers in the consumer arbitration agreements is preempted by the Federal Arbitration Act (“FAA”) and unenforceable; and (2) CompuCredit Corp. v. Greenwood, where the Court held that the FAA’s federal policy and presumption in favor or arbitration is so strong that another federal statute would bar arbitration only if Congress clearly said so in the statute (which is rarely the case). Now, in American Express, the Court holds that a party cannot bypass a class action waiver in an arbitration agreement by showing that the cost of proving up a particular type of federal claim is likely (or even certain) to exceed any possible economic recovery in the absence of the class action mechanism. This decision should end the debate about the enforceability of class action waivers in arbitration agreements and should push the remaining judicial holdouts (like the California Supreme Court) to accept the enforceability of class action waivers, at least in cases covered by the FAA.

This action arose from an antitrust claim brought by merchants against American Express. The Second Circuit held that, because the antitrust claims were economically viable only if brought as a class action, the class action waiver in the merchants’ arbitration agreement with American Express had to be set aside. The basis for the lower appellate court’s decision was both that: (1) the antitrust statute is a federal law, so it is not subject to FAA preemption; and (2) previous Supreme Court precedent had allowed an invalidation of terms in an arbitration agreement that effectively precluded the enforcement of a federal claim. The Supreme Court granted review.

Justice Scalia’s decision seems to be written to clear away various arguments that have been made since Concepcion, attempting to limit the scope of that decision.  First, Justice Scalia rejects the notion that Concepcion was just a federal preemption decision with no application to other federal statutes (which should have already been clear from CompuCredit).

Second, Justice Scalia rejects the notion that “class action waivers must be set aside if they interfere with the enforcement of federal rights,” a proposition the plaintiffs attempted to draw from an earlier Supreme Court precedent.

Justice Scalia explains that the rule suggested by that prior decision was only intended to apply to cases where an arbitration agreement precludes the assertion of a type of claim altogether, not merely where the cost of proving an individual violation of the statute exceeds the economic value of the claim.

In support of this reading of prior cases, Justice Scalia points out two precedents that show how narrow the “effective vindication” exception is meant to be: (1) Gilmer v. Interstate/Johnson Lane Corp., where the Court had no qualms about enforcing a class action waiver in an arbitration agreement even though it was applied to an age discrimination claim under the ADEA, which expressly allows for collective actions; and (2) Vimar Seguros y Reaseguros v. M/V Sky Reefer, where the Court enforced a forum selection clause requiring arbitration in a foreign country, rejecting the argument that this forum selection clause was unenforceable because it made the claim economically unviable.

Finally, Justice Scalia goes back to Concepcion, finding that it deals the death blow to the plaintiffs: “Truth to tell, our decision in AT&T Mobility all but resolves this case. There we invalidated a law conditioning enforcement of arbitration on the availability of class procedure because that law ‘interfere[d] with fundamental attributes of arbitration. . . . We specifically rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”

How does this decision impact wage and hour cases in California?  First, it destroys any argument that Concepcion was limited to consumer cases where the arbitration agreement contained overgenerous provisions designed to make individual arbitration economical.

Second, in cases filed under the federal wage and hour law, the Fair Labor Standards Act (“FLSA”), it eliminates any argument that FLSA collective actions are immune from class/collective action waivers in arbitration agreements.

Finally, it eliminates the argument that the California Supreme Court’s decision in Gentry v. Superior Court is distinguishable from Concepcion because it involved some kind of unwaivable statutory right.

Based on the recent decision,we expect plaintiffs and their counsel will now argue that, under the FAA and California law, unconscionability still exists as a defense to the enforcement of arbitration agreements, and they will redouble efforts to craft arguments that a particular arbitration agreement is unconscionable for some reason other than the existence of a class action waiver.

For employers who choose to implement mandatory arbitration policies, the question has been whether to leave such policies silent about class action claims or instead to include language prohibiting such procedures. The Supreme Court’s recent decisions may change the answer to this question.

While American Express clearly validates the enforceability of class action waivers, the Court’s decision just weeks earlier in Oxford Health Plans, LLC v. Sutter, suggests that under arbitration agreements that are silent about class action claims, the arbitrator will make the decision whether or not to allow class claims in arbitration, and courts will be unable to correct such arbitrator’s decisions to allow class claims in arbitration, even when they are clearly wrong. The risk of such a result should encourage employers who employ more than 20 non-exempt employees (i.e. who are at risk of class action wage/hour claims) and who currently have “silent” arbitration agreements to seriously consider updating their arbitration policy to include an express class action waiver.

To implement an effective arbitration program or to have your existing arbitration policy and agreements reviewed to ensure their enforceability in the face of such expected attacks, contact your Labor and Employment attorney at Hill, Farrer & Burrill LLP.