Category: Arbitration Issues

By Gerald L. Maatman, Jr., Andrew Quay, and Eden Anderson

Duane Morris Takeaways:  A Second Circuit panel of Judges Gerard Lynch, Michael Park, and Beth Robinson reversed the Southern District of New York in Frazier v. X Corp., Case No. 24-1948 (2d Cir. Sept. 2, 2025), holding that X’s (formerly Twitter) refusal to pay ongoing arbitral fees did not amount to a “failure, neglect, or refusal … to arbitrate” that the district court was empowered to remedy under the Federal Arbitration Act (“FAA”).  The Second Circuit explained that under 9 U.S.C. § 4, district courts may only address a narrow category of disputes limited to whether arbitration must occur between particular parties over particular issues.  The decision follows related precedent set by the Third, Fifth, Ninth, and Eleventh Circuits and makes clear that a party’s decision not to abide by the procedural determinations of an arbitrator or arbitral body does not empower a district court to intervene and review.

The decision is an important primer for corporate counsel in handling disputes over ongoing arbitral proceedings.

Case Background

Plaintiff-Petitioners, seven former employees of Twitter, signed arbitration agreements committing them to resolve any employment-related disputes in binding individual arbitration.  The employees filed arbitration demands following their termination, believing that they had been denied severance and had been illegally discriminated against, among other claims.  After making certain payments of arbitral fees, Twitter asserted that the arbitration agreements required that the fees be apportioned equally between it and the former employees.  The agreements called for a pro-rata split of arbitral fees but incorporate by reference Judicial Arbitration and Mediation Services’ (“JAMS”) rules and policies, which required Twitter to pay all but the case initiation fees.  The employees sued to compel arbitration under 9 U.S.C. § 4, arguing that by refusing to pay the fees allocated to it by the arbitral body, Twitter was “refus[ing] to arbitrate” in accordance with the arbitration agreements.

At issue before the Second Circuit was whether Twitter’s refusal to pay ongoing arbitral fees constituted an outright refusal to arbitrate that the district court was empowered to remedy under 9 U.S.C. § 4.  The former employees took the position that by incorporating the arbitral body’s rules in the arbitration agreements, Twitter agreed to be bound by the arbitral body’s initial determination that Twitter was responsible for the disputed fees.  Therefore, the former employees argued, the district court could compel Twitter to pay the disputed fees under 9 U.S.C. § 4.

The Decision

The Second Circuit rejected the former employees’ argument.

It held that a party’s decision not to abide by the procedural determinations of an arbitrator or arbitral body is an intra-arbitration delinquency that arbitral bodies are empowered to manage.  Therefore, the former employees could not use 9 U.S.C. § 4 as a vehicle to seek judicial review of the arbitral body’s decision not to proceed with the arbitration process.

Implications Of The Decision

The Frazier decision marks another federal circuit keeping the courts out of disputes in ongoing arbitral proceedings over a party’s payment of fees or compliance with arbitral policies. Corporate counsel must consider the limited scope of permitted review under 9 U.S.C. § 4 when facing disputes in ongoing arbitral proceedings, whether over payment of fees or otherwise.

By Alex W. Karasik and Gregory S. Slotnick

Duane Morris Takeaways: On August 14, 2025, in Flores v. N.Y. Football Giants, Inc., No. 23-1185, 2025 U.S. App. LEXIS 20688 (2d Cir. Aug. 14, 2025), the U.S. Court of Appeals for the Second Circuit affirmed a decision from the Southern District of New York denying a motion to compel arbitration of claims of plaintiff Brian Flores (“Flores”) asserting race discrimination filed by the National Football League (“NFL”) and six of its member clubs.  In closely examining the arbitration provision at issue (and agreed upon by the parties), the Second Circuit found that the NFL’s internal arbitration framework, which provided the NFL Commissioner with unilateral control over arbitrator selection, substantive process of proceedings, and other discretionary decision-making powers, provided for arbitration “in name only” and fell short of requirements set forth in the Federal Arbitration Act (“FAA”).

According to the Second Circuit, the NFL Commissioner’s complete control over the NFL’s internal arbitrations pursuant to the NFL Constitution makes the process, “inherently biased” and leaves it outside the protections of the FAA.  The Second Circuit sternly concluded that, “[u]ltimately, the NFL’s arbitration provision is fundamentally unlike any traditional arbitration provision protected by the FAA,” and the agreement between Flores and the NFL to arbitrate his claims, “is plainly unenforceable under the most basic principles of the effective vindication doctrine,” requiring arbitration guarantee that Flores can “vindicate [his] statutory cause of action in [an] arbitral forum.”  Id. at *5.   As a result, Flores’s racial discrimination lawsuit will proceed in federal court and the NFL will likely need to go back to the drawing board to update its internal arbitration provisions so they comply with arbitration mandates under the FAA and prior court decisions.  All employers seeking to prepare and enforce arbitration provisions should heed the Second Circuit’s concerns with the NFL’s arbitration language and process to ensure their agreements comply with the FAA.

Case Background

Since 2008, Flores – the current defensive coordinator of the NFL’s Minnesota Vikings – has been employed as a football coach by a variety of NFL teams, including the New England Patriots (2008-2018), Miami Dolphins (2019-21), Pittsburgh Steelers (2022), and the Minnesota Vikings (2023-Present).  Id. at *5.  The operation and structure of the NFL and the relationship between the NFL, its member clubs, and the clubs’ employees (including NFL coaches), are governed by the NFL Constitution and Bylaws (the “NFL Constitution”).  Id. at *6.  The NFL Constitution “broadly empowers” the NFL Commissioner to manage the league’s affairs, including, but not limited to, the ability to interpret and establish league policy and procedure, discipline relevant parties, hire legal counsel to respond to conduct detrimental to the league, its member clubs or employees, or to professional football, and the full, complete, and final jurisdiction and authority to arbitrate disputes between relevant parties, including between employees and member clubs.  Id.  Flores’s employment agreement with the Patriots included a club-specific arbitration provision, incorporating by reference arbitration language in the NFL Constitution.  Id. at *9-10.

In January 2019, while still under contract as a coach with the Patriots, Flores interviewed to be the head coach of the Denver Broncos.  Id. at *9.  Flores claims the Broncos discriminated against him because of his race in failing to hire him and that the Broncos only offered him an interview as a “sham” to satisfy the Rooney Rule – a long-standing requirement by the NFL that two opportunities to interview for each open coaching position be allotted to prospective candidates who are members of a racial minority group and/or a woman.  Id. 

One month later, in February 2019, Flores was hired as the head coach of the Dolphins.  Id.  In January 2022, Flores was fired following three seasons as head coach of the Dolphins.  Id. at *10.  After the Dolphins fired him, Flores interviewed for head coach positions with both the New York Giants and the Houston Texans, though he was not hired for either position due to what he alleges to be racial discrimination and retaliation.  Id. at *10-11.  In February 2022, Flores was hired as a senior defensive assistant and linebackers coach with the Steelers, signing an employment agreement that, like his agreement with the Patriots, included a club-specific arbitration agreement and incorporated by reference the NFL Constitution.  Id. at *11.  The same month, Flores filed a putative class action against the NFL, the Denver Broncos, New York Giants, and Miami Dolphins alleging claims of race discrimination under 42 U.S.C. § 1981, as well as state and local statutes.  Id. at *6.  In June 2022, the NFL and its relevant member clubs sought to compel Flores to arbitrate his claims pursuant to the employment agreements Flores signed with the Patriots and Steelers, respectfully.  Id. at *7-8.

The District Court found that Flores’s claims against the Broncos and the NFL clearly fell outside his club-specific arbitration agreement with the Patriots.  Id. at *10.  Although the District Court found that the NFL Constitution’s arbitration provision applied to Flores’s claims, the Court refused to enforce it, reasoning that it was illusory and unenforceable under Massachusetts state law because “the NFL and its member clubs have the unilateral ability to modify the terms of the NFL Constitution.”  Id.  As such, the District Court ordered that Flores’s claims against the Broncos and related claims against the NFL be litigated in federal court.  Id.  The NFL’s appeal to the Second Circuit followed.

The Second Circuit’s Decision

The Second Circuit affirmed the District Court’s decision denying the motion to compel Flores to arbitrate his claims against the NFL, the Broncos, the Giants, and the Texans.  Id. at *25-26.  Specifically, the Second Circuit concluded that Flores’s agreement under the NFL Constitution to submit his claims against the Broncos and the NFL to the unilateral substantive and procedural discretion of the NFL Commissioner (the principal executive of one of Flores’s adverse parties) provides for arbitration “in name only” and lacks the protection of the FAA.  Id. at *18.  It also held that Flores’s agreement to submit his claims against the Broncos and the NFL to the unilateral discretion of the NFL Commissioner is unenforceable because the agreement fails to guarantee Flores can “vindicate [his] statutory cause of action in [an] arbitral forum.”  Id.  The decision further confirmed that the District Court did not err or abuse its discretion in denying Defendants’ motion to compel arbitration or in denying Defendants’ motion for reconsideration.  Id. at *2.

The Second Circuit provided background on the FAA and its principles mandating that although the FAA establishes a “liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract,” not every self-described “arbitration agreement” falls within the FAA’s ambit.  Id. at *14.  Under the facts at issue here, the Second Circuit found that while Flores agreed to arbitrate his statutory claims by way of arbitration provisions in the employment agreement he entered with the Patriots, the relevant language granted the NFL Commissioner unilateral discretion over the arbitration process itself.  Id.  The Second Circuit held that such one-sided control undermines the fairness required for a valid arbitration agreement under the FAA because the NFL Constitution’s arbitration provision fails to provide: (i) an independent arbitral forum for bilateral dispute resolution, resulting instead in compelling one party (Flores) to submit disputes to the substantive and procedural authority of the principal executive officer of one of their adverse parties (the NFL); and (ii) the procedure to be used in resolving the dispute, instead allowing the NFL Commissioner to unilaterally dictate arbitral procedure.  Id. at *19-22.   The Second Circuit concluded that “the NFL’s arbitration provision is fundamentally unlike any traditional arbitration provision protected by the FAA,” is not afforded any special deference under the FAA, and that this served as an independent reason to affirm the District Court’s order denying the motion to compel Flores to arbitrate his claims.  Id. at *22.

Moreover, the Second Circuit found Flores’s agreement was “plainly unenforceable” under exceptions to the FAA since the arbitration provision “fails to provide Flores access to an arbitral forum” and in fact waives Flores’s right to pursue statutory remedies.  Id. at *22-24.  It reasoned that requiring Flores to submit statutory claims to the unilateral discretion of the executive of one of his adverse parties (the NFL Commissioner), without an independent arbitral forum, denied Flores arbitration in any meaningful sense of the word, rendering the agreement unenforceable.  Id. at *24.

Relying on the foregoing reasoning, the Second Circuit affirmed the District Court’s order, finding: (i) Flores’s agreement under the NFL Constitution to submit his claims against the Broncos and the NFL to the unilateral substantive and procedural discretion of the NFL Commissioner provides for arbitration “in name only,” thus lacking the protection of the FAA; (ii) Flores’s agreement to submit his claims against the Broncos and the NFL to the unilateral discretion of the NFL Commissioner is unenforceable because the agreement fails to guarantee Flores can “vindicate his statutory cause of action in an arbitral forum,”; and (iii) the same unprotected and unenforceable agreement also cannot be used to compel Flores to arbitrate his claims against the Giants, Texans or related claims against the NFL.  Id. at *25-26.

Implications For Employers

The Second Circuit’s decision means Flores can continue litigating his race discrimination claims against the NFL and its member clubs in the public eye of federal court, despite the NFL’s attempts to force Flores into its internal private arbitration framework.  While the attention-grabbing headline provides Flores a major victory in keeping his race discrimination lawsuit alive, perhaps the most important takeaways are for companies or businesses with an arbitration clause or agreement in effect, as well as employers considering implementing same for employees.  Employers must ensure that any arbitration procedures, including arbitral forum and substantive process, comply with the FAA’s mandates to ensure bilateral and objective arbitration for all involved parties. 

The Second Circuit repeatedly held that although there was no dispute that both Flores and the NFL member teams signed the employment agreement and agreed to the referenced NFL Constitution’s arbitration provision, a process providing one party with unilateral discretionary control over arbitrator selection and substantive procedure amounts to arbitration “in name only,” and lacks the protection of the FAA.  As evidenced by the Second Circuit’s description of the relevant arbitration provision’s shortcomings, businesses seeking to ensure their arbitration agreements are enforceable should have counsel regularly review their existing arbitration language to confirm it is bilateral and objective, thus falling under the FAA’s protection.

By Gerald L. Maatman, Jr., Jennifer A. Riley, Samson C. Huang, and Betty Luu

Duane Morris Takeaway:  On July 7, 2025, in CRST Expedited, Inc. et al. v. The Superior Court of Fresno County, Case No. F088569 Cal. App. July 7, 2025), the California Court of Appeal for the Sixth Appellate District denied an employer’s petition for writ of mandate of a trial court’s decision that a worker’s dismissal of his individual PAGA claims did not bar him from pursuing claims on behalf of other aggrieved employees only. This tactic – known as a headless PAGA action – is the latest innovation of the plaintiffs’ class action bar and another challenge employers face in operating in the Golden Bear State.

Background

Defendant CRST Expedited, Inc. (“CRST Expedited”) employed Plaintiff Espiridion Sanchez (“Plaintiff”) as a tire maintenance technician from 2017 until 2018.  Id. at 5.  On March 22, 2019, Plaintiff provided written notice to the Labor & Workforce Development Agency (“LWDA”) and CRST Expedited asserting claims under the California Private Attorneys General Act (“PAGA”) on behalf of all current and former employees of CRST Expedited and cited nine Labor Code violations.  Id. at 6.  After receiving no response from the LWDA, Plaintiff filed a PAGA action on behalf of himself and other aggrieved employees against CREST Expedited. Id. 

In 2023, the trial court granted CRST Expedited’s motion to compel arbitration of Plaintiff’s individual PAGA claims and dismissal of the non-individual claims in light of the U.S. Supreme Court’s ruling in Viking River Cruises, Inc. v. Moriana, 596 U.S. 639 (2023) (“Viking River”).  Id. at 8.  In Viking River, the U.S. Supreme Court held that once an employee’s individual PAGA claims are compelled to arbitration, the employee lacks standing to represent other aggrieved employees as to their PAGA claims.  Id.   

The ruling in Viking River was short lived once the California Supreme Court issued its decision in Adolph v. Uber Technologies, Inc., 14 Cal.5th 1104, 1114, 310 Cal.Rptr.3d 668, 532 P.3d 682 (2003), which held that “an order compelling arbitration of the individual [PAGA] claims does not strip the plaintiff of standing as an aggrieved employee to litigate claims on behalf of other employees under PAGA.”  Id. 

Plaintiff sought reconsideration on that basis, and the trial court reinstated the nonindividual PAGA claims.  Id. at 9.

In 2024, the trial court granted Plaintiff’s unopposed motion to dismiss his individual PAGA claims.  Id. at 9.  In response, CRST Expedited sought dismissal of Plaintiff’s nonindividual PAGA claims on the grounds that Plaintiff no longer had standing because he dismissed his individual PAGA claims.  Id. at 9-10.  The trial court disagreed.  Id.

The California Court Of Appeal’s Ruling

The California Court of Appeal addressed whether the PAGA statute allows an aggrieved employee to recover civil penalties for violations of the Labor Code suffered only by other employees. 

To do so, the Court of Appeal conducted a thorough analysis of the statutory interpretation of the PAGA statute, ultimately finding that the PAGA statute is ambiguous.  Id. at 39.  Faced with an ambiguous statute, the Court of Appeal concluded it “must select the construction that comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general purpose of the statute.”  Id.

The Court of Appeal began its analysis by examining the legislative intent behind the use of the terms “and” and “or” in a 2003 amendment to the PAGA statute.   Id. at 40.  The 2003 amendment revised the statute to say:  “An aggrieved employee may recover the civil penalty described in subdivision (b) in a civil action filed on behalf of himself or herself and others.” Id. at 40. (emphasis added).  However, a review of the legislative history revealed that the revised language merely corrected a drafting error.   Id.  The Court of Appeal also held that it was unlikely that the original drafters could have anticipated a bifurcation of the individual and nonindividual PAGA claims — as recognized in such as Viking River — when amending the statute.  Id. at 41.

Finding that the analysis of legislative intent was inconclusive, the Court of Appeal analyzed the purpose of the PAGA statute.  Id.  It opined that the primary objective of the PAGA statute is to maximize enforcement of labor laws and deter employer violations.  Id. at 42.  As such, requiring arbitration of individual claims before pursuing non-individual claims would undermine those enforcement efforts.  Id. 

To achieve effective enforcement, the Court of Appeal held that the PAGA statute should be interpreted to allow “PAGA plaintiffs and their counsel the flexibility to choose among bringing a PAGA action that seeks to recover of civil penalties on (1) the LWDA’s individual PAGA claims, (2) the LWDA’s nonindividual PAGA claims, or (3) both.”  Id. at 47.  The Court of Appeal emphasized that this interpretation does not eliminate or weaken the PAGA standing requirements, as a plaintiff must still be an aggrieved employee to bring a headless PAGA action.  Id. at 47-48.

In sum, the Court of Appeal reaffirmed that a broad construction of the statute permits an aggrieved employee to pursue a headless PAGA action.

Implications For Companies

The CRST Expedited decision confirms that aggrieved employees can pursue representative PAGA actions on behalf of other aggrieved employees even if their individual claims are subject to arbitration or dismissed. 

The ruling underscores the importance for employers to reassess their arbitration strategies and compliance practices, as the enforcement of labor laws through the PAGA remains robust despite contractual arbitration clauses. 

It remains to be seen whether the landscape of the headless PAGA action will be turned on its head in light of the California Supreme Court’s decision to review Leeper v. Shipt, Inc.,107 Cal.App.5th 1001, 328 Cal.Rptr.3d 632 (2024), which effectively eliminated the headless PAGA action.  We will continue to follow the developments in PAGA and keep our blog readers informed.     

By Gerald L. Maatman, Jr., Rebecca S. Bjork, and Eden E. Anderson

Duane Morris Takeaway: In 5-Star General Store, et al. v. American Express Co., 2024 U.S. Dist. LEXIS 217246 (D.R.I. Dec. 2, 2024), Judge Mary McElroy of the U.S. District Court for the District Court of Rhode Island held that the defendants could not move to compel arbitration on the issue of whether it was required to pay filing fees to the American Arbitration Association. This ruling presents an unusual twist to arbitration issues typically resolved by federal courts and is a cautionary warning for companies.

Background

The 5-Star General Store case is an antitrust action brought by merchants who resolved certain claims with American Express entities in arbitration relating to the acceptance of the defendants’ credit cards for purchases at their stores. After the final order was issued, the defendants refused to pay their share of the filing fees to the American Arbitration Association, which totaled more than $17 million. The AAA administratively closed the case and the plaintiffs filed a class action relative to those fees. The defendants moved to compel arbitration of the lawsuit’s claims and to strike the plaintiffs’ class allegations.

The Court’s Ruling

The court denied the defendants’ motion to compel arbitration on whether they were required to pay the AAA filing fees and denied the defendants’ motion to strike the plaintiffs’ class allegations. The plaintiffs sought to represent more than 5,000 merchants accepting the defendants’ cards. They argued that the defendants had waived their right to arbitration by failing to pay their share of the arbitration fees because they were in default of the agreement under § 3 of the FAA. First, the court ruled that it, not an arbitrator, had the authority to decide whether the defendants defaulted on the arbitration agreement. Although the court found no controlling case law authority directly on point, it decided to follow the Fifth, Ninth, Tenth and Eleventh Circuits, which have held that courts may decide whether failure to pay arbitration fees constitutes a default under § 3.

Second, the court focused on whether the defendants were in default of the agreement. Relying on Black’s Law Dictionary, which defines “default” as “the omission or failure to perform a legal or contractual duty; esp., the failure to pay a debt when due,” the court found the issue to be clear and concluded that the defendants defaulted on the arbitration agreement. Id. at *12. It also opined that a second arbitration likely would not fare any better than the first and the parties would end up before the court again.

Third, the court rejected the defendants’ claim that the plaintiffs lacked clean hands and therefore should not be allowed to pursue their claims in court. The court reasoned that the plaintiffs did not change their theory of their case sufficiently when filing the instant case to rescind the defendants’ waiver of arbitration. Therefore, the court denied the defendants’ motion to compel arbitration.

Finally, the court also denied the defendants’ motion to strike the plaintiffs’ class allegations because the class was ascertainable by objective means and the class definition was not “fail safe” because it did not contain a legal conclusion that determines eligibility for class membership. Id. at *32-33. The court further considered and rejected the defendants’ claims that the plaintiffs’ requests for injunctive and declaratory relief under Rule 23(b)(2) and 23(c)(4), including certification of issues classes, should be stricken at the pleading stage.

Implications For Companies:

This ruling should serve as a cautionary tale to companies that regularly seek to enforce mandatory arbitration agreements when those agreements require individual arbitration. The defendants’ failure to pay filing fees for thousands of individual arbitrations could lead to a complete waiver of the ability to compel arbitration of the claims in the future.

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.

Duane Morris Takeaways:  On July 19, 2024, in Lopez v. Aircraft Service International, Inc., Case No. 23-55015 (9th Cir. July 19, 2024), the U.S. Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act’s (FAA) transportation worker exemption applies to an airplane fueling technician.  Even though the technician had no hands-on contacts with goods, the Ninth Circuit held that was not required because fuel is necessary to flying the plane that holds the goods.  The decision is yet another from the Ninth Circuit broadly applying the FAA’s transportation worker exemption, in spite of multiple recent decisions from the U.S. Supreme Court directing narrow that loop hole to mandatory arbitration.  The Lopez decision presents an obstacle for employers seeking to enforce arbitration agreements and class action waivers within the Ninth Circuit, thereby opening the door to arguments that workers who do not even handle goods in the stream of commerce are exempt from arbitration if their work somehow supports the mechanism by which the goods travel.

Case Background

Danny Lopez worked as a fueling technician at Los Angeles International Airport.  He added fuel to airplanes.  After Lopez filed a wage & hour class action against his employer, the employer moved to compel arbitration.  The district court denied the motion, concluding that Lopez was an exempt transportation worker because he was directly involved in the flow of goods in interstate or foreign commerce.  It reasoned that, although Lopez did not handle goods in commerce, he was directly involved in the maintenance of the means by which the goods were transported.  The employer appealed on the grounds that the FAA’s transportation worker exemption is to be narrowly construed and that Lopez did not have any hands-on contact with goods and direct participation in their movement.

The Ninth Circuit’s Decision

The Ninth Circuit began its analysis by mentioning the U.S. Supreme Court’s 2022 decision in Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022).  In Saxon, the U.S. Supreme Court instructed that the transportation worker exemption is to be narrowly construed and does not turn on the industry within which the work is performed.  Saxon held that airline ramp agents are nonetheless transportation workers exempt from the FAA because, in loading and unloading cargo onto airplanes, ramp agents play a “direct and necessary role in the free flow of goods across borders” and are “actively engaged in the transportation of those goods across via the channels of foreign or interstate commerce.” Id. at 458.  Perceiving that the transportation worker exemption continued to be misapplied by lower courts, the U.S. Supreme Court repeated this same guidance this year in Bissonnette v. Le Page Bakeries Park St., LLC, 601 U.S. 246 (2024), and cautioned that the exemption should not be applied broadly to all workers who load and unload goods as they pass through the stream of interstate commerce.

While mentioning this recent controlling authority, the Ninth Circuit harkened back to its 2020 analysis of the transportation worker exemption in Rittman v. Amazon.com, Inc., 971 F.3d 904 (9th Cir. 2004), deeming it consistent with Saxon and Bissonnette.  In Rittman, the Ninth Circuit held that Amazon delivery drivers making local, last mile deliveries of products from Amazon warehouses to customers’ homes were exempt transportation workers engaged in interstate or foreign commerce.  Applying “the analytical approach applied in Rittman,” the Ninth Circuit  concluded that Lopez was an exempt transportation worker because his fueling of airplanes was a “vital component” of the plane’s ability to fly.  Id. at 12.

Implications Of The Decision

The Lopez decision is yet another from the Ninth Circuit broadly applying the FAA’s transportation worker exemption, in spite of multiple recent decisions from the U.S. Supreme Court directing narrow interpretation.  The Lopez decision opens the door to arguments that workers who do not even handle goods in the stream of commerce are exempt from arbitration if their work somehow supports the mechanism by which the goods travel.

By Gerald L. Maatman, Jr., Eden E. Anderson, Rebecca S. Bjork, and Ryan T. Garippo

Duane Morris Takeaways:  On July 1, 2024, in Wallrich, et al. v. Samsung Electronics America, Inc., No. 23-2842, 2024 WL 3249646 (7th Cir. July, 1, 2024), the U.S. Court of Appeals for the Seventh Circuit dealt a major blow to mass arbitrations.  This decision strengthens protections for companies that utilize arbitration agreements as an effective way to limit their potential classwide exposure. The Seventh Circuit’s opinion is required reading for any corporation utilizing arbitration programs.

Case Background

Samsung Electronics, Co. Ltd. and Samsung Electronics America, Inc. (collectively “Samsung”) are two affiliates that manufacture and sell consumer electronics.  “When consumers purchase or use Samsung devices, they automatically agree to Samsung’s terms and conditions.”  Id. at *1.  Like many other companies, Samsung’s terms and conditions contain an arbitration provision, which specifies that “all disputes” between Samsung and its customers shall be arbitrated before the American Arbitration Association (the “AAA”).  Id.

Pursuant to those terms and conditions, “[a] group of 35,651 Illinois consumers . . . filed arbitration demands before the AAA alleging they purchased Samsung devices and that those devices unlawfully collected and stored sensitive biometric data in violation of the Illinois Biometric Information Privacy Act.”  Id. at *2.  This tactic — commonly known as a mass arbitration demand — is often used by plaintiffs’ lawyers as an attempt to secure a quick settlement out of a defendant.  The tactic is sometimes successful because a defendant is often forced to pay expensive arbitration filing fees in order to initiate an arbitration. Often it is more cost effective for the defendant simply to settle the claims altogether rather than pay the filing fees and other expenses of litigation.  For this reason, numerous federal courts have held that while this tactic may be permissible, “mass arbitration interferes with the fundamental attributes of arbitration promoted by the [Federal Arbitration Act].”  See, e.g., Lamour v. Uber Technologies, Inc., No. 16-CV-21449, 2017 WL 878712, at *6 (S.D. Fla. Mar. 1, 2017) (quotations and citations omitted).

Against that backdrop, counsel for the claimants in Wallrich attempted to deploy mass arbitration tactics in this litigation.  After the consumers filed their arbitration demands, “the AAA requested $4,125,000 from Samsung, representing Samsung’s share of the initial administrative filing fees.”  Wallrich, 2024 WL 3249646, at *2.  The only difference between this case and others was that Samsung refused to pay the fees.  The AAA then offered the consumers the opportunity to pay the $4,125,000.  They also declined.  And, as a result, the AAA terminated the proceedings and paved the way for a federal class action lawsuit.

Rather than pursue a class action, the consumers then “filed a Petition to Compel Arbitration” in the U.S. District Court for the Northern District of Illinois.  Id.  They sought, among other things, “an order compelling Samsung to pay its AAA filing fees and to arbitrate the claims.”  Id.  In support of that petition, the consumers submitted their: (1) “arbitration demands before the AAA”; (2) “copies of Samsung’s terms and conditions”; (3) a spreadsheet containing the consumers’ names and addresses; and (4) “the AAA’s determination that the consumers had met the AAA filing requirements.”  Id.  The consumers did not submit any proof, however, that they were actually customers of Samsung.  Id. at *7.  But regardless, the district court still entered an order compelling Samsung to pay the filing fees and to arbitrate the disputes.  Samsung then appealed that decision.

The Seventh Circuit’s Opinion

On appeal, the Seventh Circuit dealt a major blow to mass arbitration tactics and reversed the order of the district court.  The Seventh Circuit held, in a unanimous opinion, that “the consumers effectively needed to present evidence that they were in fact Samsung customers” in order to arbitrate the dispute.  Id. at *6.  It also held that the consumers had not met their burden of doing so.

The Seventh Circuit explained that “arbitration demands are nothing more than allegations, much like a complaint filed in a district court.”  Id.  As such, they are not proof that the consumers were actually Samsung customers.  Similarly, copies of the terms and conditions “do nothing to show that any of the consumers purchased a Samsung device” nor did the AAA’s determination as to the filing requirements make such a showing either.  Id.  And last, the Seventh Circuit explained that the “spreadsheet of only names and addresses likewise fails to show that any of those named were Samsung customers.”  Id.  Accordingly, none of the “evidence” submitted by the consumers was sufficient to address their burden.

Further, the Seventh Circuit noted that the “consumers could have submitted almost anything to meet their burden of proving the existence of an arbitration agreement.  For example, they could have submitted receipts, order numbers, or confirmation numbers from their purchases of Samsung devices.  Or even more directly, they could have submitted declarations attesting to the allegations in their arbitration demands.  They did not.”  Id. at *7.  The major difference, however, was that all 35,651 consumers would have needed to submit such proof.  In the absence of such evidence in the record, the Seventh Circuit was left with no choice but to reverse the district court.

The Seventh Circuit concluded that a motion to compel arbitration is akin to a motion for summary judgment and, therefore, “does not allow second chances.”  Id.  “The consumers had the opportunity to present their evidence, and they failed to do so.”  Id.  Consequently, the mass arbitration tactics on display here seem to have been permanently halted.

Implications For Companies

The importance of Wallrich, et al. v. Samsung Electronics America, Inc. cannot be understated.  Companies faced with mass arbitration threats can now force each and every purported claimant to submit proof that his claim is subject to an arbitration agreement.  If a claimant does not come forward with such proof, the company may be able to refuse to pay any filing fees and avoid mass arbitration altogether.  As a result, corporate counsel can rest easy knowing that it is more difficult for their arbitration agreements to be weaponized against them.

That said, the importance of arbitration agreements also must be emphasized.  The Illinois Biometric Information Privacy Act (“BIPA”) is one of plaintiff’s counsel’s favorite litigation targets.  When utilized on a class-wide basis, claims under the BIPA are defined by its “draconian exposure” and its “job-destroying liability.”  Cothron v. White Castle System, Inc., 216 N.E. 3d 918, 940 (Ill. 2023) (Overstreet, J., dissenting).  However, if each BIPA plaintiff is required to arbitrate his claims individually, a company’s exposure becomes significantly less and, in some circumstances, even de minimis.  Accordingly, corporate counsel should also consider this factor as one of the benefits to implementing an arbitration program as an effective strategy to limit classwide relief.

By Gerald L. Maatman, Jr., Tiffany E. Alberty, Eden E. Anderson and Rebecca S. Bjork

Duane Morris Takeaways:  On June 14, 2024, in Hartsfield, et al. v. Frontier Airlines, Inc., Case No. 23-CV-2093 (D. Colo. June 14, 2024), Magistrate Judge Kathryn A. Starnella for the U.S. District Court for the District of Colorado recommended granting Frontier Airline’s motion to compel arbitration and dismiss the class claims of the Plaintiffs. This decision further illuminates the power of clear and conspicuous terms and conditions that allow for arbitration clauses and class action waivers.

Case Background

Plaintiffs and the putative class representatives (“Plaintiffs”) are individuals who sued Frontier Airlines, Inc. (“FA”) for alleged misrepresentations associated with its GoWild! Pass Program (“Pass Program”), a program that allowed participants to book unlimited number of airline flights for a specific period of time. When signing up for the Pass Program, Plaintiffs had to click “Join Now” button, thereby confirming that they agreed to the Terms & Conditions (“T&C”). When clicking “Join Now” button, the T&C was hyperlinked above, which opened another window to the actual T&C. The T&C was presented multiple times throughout the enrollment process, and even after purchase through a confirmation email, which expressly stated that the participant in the Pass Program is subject to the T&C. Id. at 2-3.

The T&C contained an arbitration clause that clearly outlined any Pass Program dispute would be subject to arbitration and governed by Colorado law. The T&C also contained a class action waiver.

For these reasons, FA moved to compel arbitration under the T&C and dismiss the class claims. Plaintiffs claimed that the arbitration clause was invalid because they never assented to the T&C, and that FA did not provide a conspicuous notice of T&C to which they agreed, thereby making it unconscionable and unenforceable.

The Court’s Opinion

Under the Federal Arbitration Act, (“FAA”), the Court noted that it “must rigorously enforce arbitration agreements according to their terms.” Id. at  4 (citing Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 230 (2013)). The Court also opined that it must  apply state contract law principles to determine validity and enforceability. Id.

Plaintiffs argued that no contract existed between the parties, because the T&C and its arbitration clause were “obscure” and failed to prove a “reasonably conspicuous notice.” Id. 5. The Court disagreed. It recognized that Plaintiffs “merely had to click on a single bold and underlined link” that would directly open the T&C which included the arbitration clause. The Court, highlighted that the link was offered multiple times to Plaintiffs during the sign up process and after purchase. Id. at 5-6.

Plaintiffs also argued that regardless if there was a valid contract, the arbitration agreement was unconscionable and thus unenforceable. The Court used a multi-factor test to determine a contractual provision’s conscionability, including: (1) a standardized agreement executed by parties of unequal bargaining strength, (2) lack of opportunity to read or become familiar with the document before signing it; (3) use of fine print in the portion of the contract containing the provision; (4) absence of evidence that the provision was commercially reasonable or should reasonably have been anticipated; (5) the terms of the contract, including substantive unfairness; (6) the relationship of the parties, including factors of assent, unfair surprise and notice; and (7) and all the circumstances surrounding the formation of the contract, including its commercial setting, purpose and effect. Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo. 1986).

Plaintiffs claimed the unconscionability stemmed from unequal bargaining strength, convoluted presentation of the agreement, commercially unreasonable application and as it was substantively unfair. The Court was not persuaded by these arguments, as it found that circumstances here did not support that idea that the arbitration agreement was “snuck in or forced upon an unsuspecting or unsophisticated customer with no options.” Id. at 8 (citing Davis, 712 P.2d at 991). While the Court agreed that there was unequal bargaining strength, it held that FA provided Plaintiffs ample opportunities to read the T&C, which were not in fine print, thus there was no surprise or lack of notice. Finally, the Court found that the dispute fell within the scope of the arbitration agreement because the language was clear as to “any dispute in connection with Member and Frontier.” Id. at 9.

As it applies to the class action status, the T&C explicitly state that any case brought under the Pass Program can only be pursued in an individual capacity and not as a purported class-wide action. Because Plaintiff provided no arguments that the class action waiver was unconscionable, the Court held that the class action waiver bars Plaintiffs’ collective claims.

Implications For Employers

The holding in Hartsfield, et al. v. Frontier Airlines, Inc. highlights the enforceability of an arbitration through clear and conspicuous T&C.

T&C can completely change the landscape where a dispute can be raised, the choice of law, and the existence of any class claims. Giving individuals ample opportunities to review the T&C they are agreeing to is equally important. As such, corporate counsel, therefore, should take note any T&C, where modifications can or should be made to ensure enforceability of specific clauses like an arbitration agreement and class action waiver.

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.

Duane Morris Takeaways:  On June 10, 2024, the Ninth Circuit issued its en banc opinion in Olson, et al. v. State of California, et al., Case No. 21-55757, 2024 WL 2887392 (9th Cir. June 10, 2024).  The en banc panel affirmed the dismissal of the Plaintiffs’ lawsuit challenging the constitutionality of A.B. 5, which mandates application of the “ABC test” for independent contractor classification to workers in certain industries.  The Ninth Circuit found no equal protection violation in applying the “ABC test” to certain gig workers, yet applying the easier-to-satisfy “Borello” test to other gig workers. 

California employers in industries subject to A.B. 5 and its more rigorous “ABC test” for independent contractor classification should take heed of the Olson ruling. 

Case Background

Postmates, an application-based goods delivery platform, Uber, and two individual workers for those companies sued the State of California and Attorney General of California seeking declaratory and injunctive relief based on the allegation that A.B. 5 violates the Equal Protection Clauses, the Due Process Clauses, and the Contract Clauses of the United States and California Constitutions.  They sought a preliminary injunction to prevent enforcement of A.B. 5.

Enacted in 2018, A.B. 5 codified and expanded upon the California Supreme Court’s holding in Dynamex Operations W., Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), which held that the “ABC test” applies in determining the proper classification of workers as independent contractors or employees under California wage orders.  Under A.B. 5, subject to specified exemptions, the “ABC test” applies beyond the wage orders to other labor and employment legislation, including workers’ compensation, unemployment insurance, sick and family leave, and disability insurance.

The “ABC test” is, as its name suggests, is comprised of three parts, with the burden being on the hiring entity to show, A: the worker is free from the control and direction of the hirer, B: the worker performs work outside the usual course of the hiring entity’s business, and C: the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.  This test is more challenging to meet that the traditional “Borello” test that was applied prior to A.B. 5’s enactment, which considers a larger number of factors, with the focus being the hiring entity’s right to control the manner and means of the work.

One statutory exemption from A.B. 5’s coverage applies to “referral agencies,” i.e., businesses that provide clients with referrals to service providers.  However, A.B. 2257, enacted in 2019, modified this exemption to carve-out referral agencies, like Uber and Postmates, that provide delivery, courier, or transportation services.  Consequently, categories of referral agencies are treated differently under the law, with referral agencies like Postmates and Uber subject to the “ABC test,” and referral agencies that provide other services, for example, Wag!, a dogwalking service, and TaskRabbit, which provides on-demand help with daily tasks, subject to the easier-to-meet “Borello” test.  It was that differential treatment that Plaintiffs alleged was unconstitutional.

The district court denied Plaintiffs’ motion for preliminary injunctive relief, concluding that A.B. 5 was rationally related to a legitimate state interest.  While Plaintiff’s’ appeal of that ruling was pending, California voters approved Proposition 22, a ballot initiative that classifies rideshare and deliver drivers as independent contractors, notwithstanding A.B. 5.  Thereafter, the district court dismissed the lawsuit, and Plaintiffs’ appealed that ruling too.

A three-judge panel of the Ninth Circuit reversed, in part, concluding that the district court erred by dismissing the Equal Protection claims.  However, the Ninth Circuit then granted rehearing en banc.

The Ninth Circuit’s En Banc Opinion

The Ninth Circuit first noted, as some readers may be wondering, that Proposition 22 did not moot the appeal because Postmates and Uber were still facing a number of claims for alleged violations of A.B. 5 that predated Proposition 22’s passage.

The Ninth Circuit then addressed the Equal Protection claim.  It explained that, even if it were true that the application-based business models of Postmates, Uber, Wag!, and TaskRabbit were similar, there were rational reasons for applying a different worker classification test to workers that provide delivery, courier, or transportation services.  Such disparate treatment was rational because Postmates and Uber were seemingly perceived by the legislature as “substantial contributors” to the ills that A.B. 5 sought to remedy, including worker misclassification and “erosion of the middle class,” and were pioneers in the on-demand-app-based industry whose business models others might try to replicate.  Id. at p. 21-22.  The Ninth Circuit further emphasized that, for a “referral agency” like Wag! or TaskRabbit to be exempt from A.B. 5, it needs to satisfy multiple requirements, so the availability of the referral agency exemption remains “limited.”  Id. at 23.

The Ninth Circuit further opined that, even though A.B. 5 contains many exemptions, it is entirely rational for the ABC test to apply in some contexts, and for the Borello test to apply in others, because the legislature supposedly wanted the ABC test to apply in industries where worker misclassification was historically problematic (and not because certain industries successfully pushed through legislative exemption).

Implications Of The Decision

We anticipate U.S. Supreme Court review will be sought.

The Olson opinion deals a blow to efforts to challenge A.B. 5’s enforcement.  California employers in industries subject to A.B. 5 must satisfy the more rigorous ABC test to establish they have properly classified workers as independent contractors, whereas employers in industries not subject to A.B. 5 bear a lesser burden under the Borello test.  That differential treatment is, in the Ninth Circuit’s view, constitutionally sound.

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.,

Duane Morris Takeaways:  On May 22, 2024, the California Court of Appeal held in Hernandez v. Sohnen Enterprises, Inc., 2024 WL 2313710 (Cal. App. May 22, 2024), that the Federal Arbitration Act (“FAA”) preempts the California Arbitration Act’s provisions that impose forfeiture of the right to arbitration for late payment of arbitration fees.  Although employers should continue to closely monitor and fully adhere to arbitration fee payment deadlines, the Hernandez decision recognizes that mistakes can occur and should not result in the overly harsh penalty of forfeiture of the arbitral forum.  The decision creates a split of authority within the California Courts of Appeal that may ultimately need to be resolved by the California Supreme Court.

Case Background

After Hernandez initially filed various claims against her employer in court, the parties stipulated to move the claims into arbitration and to stay the court case.  The applicable arbitration agreement provided that it was governed by the FAA and that the Federal Rules of Civil Procedure (“FRCP”) would apply in arbitration.  After Hernandez’s demand was filed in arbitration, JAMS requested payment from the employer of its share of the filing fees.  The employer paid those fees one week past the 30-day statutory deadline of Section 1281.97 of the California Code of Civil Procedure (“Section 1281.97”).  Hernandez then filed a motion to withdraw from arbitration and to lift the stay of the court case.

The trial court granted the motion. It concluded that the employer’s late payment of arbitration fees was a material breach of the arbitration agreement.  The court also imposed monetary sanctions against the employer.  The employer appealed on the basis that the arbitration agreement was governed by the FAA and that the FAA preempted Section 1281.97.

The Court Of Appeal’s Decision

The Court of Appeal reversed.  It held that, because the parties agreed that the FAA and FRCP would apply to the arbitration agreement and in arbitration, the procedures of the California Arbitration Act, including Section 1281.97’s 30-day arbitration fee payment deadline, did not apply.  Additionally, the Court of Appeal held that, even if Section 1281.97 applied, it was preempted by the FAA.

Under the FAA and its “equal treatment” principle, arbitration agreements must be treated the same as any other contract and can only be invalidated based on generally applicable contract defenses.  The Court of Appeal held that Section 1281.97 violated this equal treatment principle because it mandates a finding of material breach (and resulting waiver of the right to arbitration for late payment of arbitration fees) that would not apply generally to all contracts.  The Court of Appeal noted that, ordinarily, a party to a contract can argue substantial compliance, but Section 1281.97 precludes such an argument because it mandates strict adherence to fee payment deadlines.  Additionally, the Court of Appeal found that Section 1281.97 frustrates the FAA’s objective of cheaper, more efficient resolution of disputes by increasing the overall cost of litigation and wasting resources already invested in arbitration.

Implications Of The Decision

The Hernandez decision marks the first time the California Court of Appeal has held that Section 1281.97 is preempted by the FAA.  The decision creates a split in authority amongst the California Courts of Appeal.  Other appellate courts in California have concluded that Section 1281.97 promotes the goals of the FAA because, in requiring prompt payment of arbitration fees, arbitrations can proceed without delay.  Employers must continue to closely monitor arbitration fee payment deadlines to ensure timely payment.  However, if a mistake happens, the Hernandez case may, if followed by trial courts, provide relief so long as the applicable arbitration agreement makes clear that the FAA and federal law, and not the California Arbitration Act or California law, govern.