Category: Arbitration Issues

By Eden E. Anderson, Gerald L. Maatman, Jr., and Jennifer A. Riley

 

Duane Morris Takeaways: On February 12, 2024, the Ninth Circuit issued its opinion in Johnson v. Lowe’s Home Centers, LLC, No. 22-16486 (9th Cir. Feb. 12, 2024).  It held that federal courts must follow the statutory standing analysis of the California Supreme Court in Adolph v. Uber Technologies, Inc., and not the U.S. Supreme Court’s different interpretation in Viking River Cruises, Inc. v. Moriana.  Additionally, in his concurrence, Judge Kenneth Lee opined that issues decided in individual arbitration of a PAGA claim should not have preclusive effect on the bigger non-individual PAGA claim. 

Case Background

The plaintiff in Johnson alleged PAGA claims against her former employer based on the employer’s alleged violations of the California Labor Code.  Applying all aspects of the U.S. Supreme Court’s decision in Viking River Cruises, Inc. v. Moriana, the district court compelled Johnson’s individual PAGA claims to arbitration and dismissed her non-individual PAGA claims for lack of statutory standing.  While the case was on appeal, the California Supreme Court issued its decision in Adolph v. Uber Technologies, Inc., which held that a PAGA plaintiff retains standing to maintain non-individual PAGA claims even after their individual PAGA claims are compelled to arbitration.

At issue on appeal in Johnson v. Lowe’s Home Centers, LLC was whether the non-individual PAGA claims should have been dismissed.

The Ninth Circuit’s Decision

The Ninth Circuit held that federal courts must follow the statutory standing analysis of the California Supreme Court in Adolph, and not the U.S. Supreme Court’s different interpretation in Viking River.  It thus vacated the ruling dismissing the non-individual PAGA claims and remanded the case to the district court to apply Adolph.

The Johnson decision is of further interest because of the concurring opinion of Judge Kenneth Lee.  His concurrence addressed the next big question in PAGA cases, i.e., the extent to which issues decided by the arbitrator in resolving individual PAGA claims will be binding in court in the litigation of the non-individual PAGA claims.  Judge Lee noted that individual arbitration is often “low-stakes” for companies, who sometimes even send non-lawyers, such as paralegals, to arbitration proceedings because the amount at issue is not worth a lawyer’s higher hourly rates.  However, as Judge Lee noted, if legal conclusions or factual findings in individual arbitration are binding, then companies would have little choice but to bring in the “legal cavalry” and devote substantial resources in individual arbitration, which would undermineg the efficiency of those proceedings, which is the whole “point” of enforcing arbitration agreements according to their terms.  Judge Lee reasoned that there is thus a “lurking tension” between the FAA and the suggestion in Adolph that issue preclusion can apply to the outcome of arbitration of an individual PAGA action.  Judge Lee expressed his view that application of issue preclusion in this context would contravene the FAA.

Implications For Employers

Whether in state or federal court in a PAGA action, the Ninth Circuit made clear that Adolph must be applied.  The concurring opinion in Johnson provides employers facing adverse rulings in individual arbitration with good arguments against the application of issue preclusion in the non-individual PAGA claim proceedings.

By  Eden Anderson, Rebecca Bjork, and Gerald Maatman, Jr. 

Duane Morris Takeaways: Last year, the Ninth Circuit held in Chamber of Commerce of the United States v. Bonta, 62 F.4th 473 (9th Cir. 2023), that California Assembly Bill (AB) 51 — a statute that attempted to criminalize employers’ use of mandatory arbitration agreements — was preempted by the Federal Arbitration Act.  In Bonta, the Ninth Circuit affirmed a preliminary injunction prohibiting the State of California from enforcing AB 51.  On January 1, 2024, following remand in the case, the district court entered a permanent injunction that enjoins the State from enforcing the Labor and Government Code sections enacted as part of AB 51, and awarding the plaintiffs, as prevailing parties, $822,496.  The district court’s order brings finality, judgment, and ultimate success to a strong coalition of employer interests who banded together to challenge California’s attempt to criminalize the use of mandatory arbitration agreements. 

Case Background

AB 51, effective January 1, 2020, added Section 432.6 to the California Labor Code and Section 12953 to the California Government Code.  Labor Code Section 432.6 makes it a misdemeanor for employers to require employees or applicants to waive “any right, forum, or procedure for violation of any provision of the California Fair Employment and Housing Act” or the California Labor Code.  Government Code Section 12953 makes it an unlawful employment practice to violate Labor Code Section 432.6.

In December 2019, the U.S. Chamber of Commerce, California Chamber of Commerce, National Retail Federation, California Retailers Association, National Association of Security Companies, Home Care Association of America, and the California Association for Health Services at Home (“Plaintiffs”) filed a complaint against the State of California challenging AB 51 as preempted by the Federal Arbitration Act (FAA).

The district court granted the Plaintiffs’ motion for a preliminary injunction, finding that Plaintiffs were likely to succeed on the merits.  California appealed, and challenged only the district court’s holding that AB 51 was likely to be preempted by the FAA.  A divided panel of the Ninth Circuit initially reversed the district court in a September 2021 opinion but, after a rehearing petition was filed, the Ninth Circuit withdrew its opinion and issued a new opinion, which affirmed the district court’s preliminary injunction order and held that the FAA preempts AB 51.

The District Court’s Issuance Of A Permanent Injunction

After the decision, the case was remanded to the district court and, on January 1, 2024, the district court issued an order permanently enjoining the State of California from enforcing Labor Code Section 432.6 and Government Code Section 12953.  Additionally, the district court awarded the Plaintiffs, as prevailing parties, $822,496 in attorneys’ fees.  The order was obtained via stipulation of the parties whereby they agreed that the Ninth Circuit’s decision in Bonta was dispositive of the legal issues in the case and further agreed to the amount of attorneys’ fees to be paid by the State.

Implications For Employers

The district court’s order brings finality, judgment, and ultimate success to a strong coalition of employer interests who banded together to challenge AB 51.  Employers in California may permissibly use mandatory arbitration agreements.  However, the use of mandatory arbitration agreements potentially can be problematic when it comes to enforcing the agreement.  When an applicant or employee must sign an arbitration agreement as a condition of employment, the agreement is a contract of adhesion that will likely be found to be procedurally unconscionable.  Thus, a court may refuse to enforce a mandatory arbitration agreement if there are also terms in the agreement that are substantively unconscionable and non-severable.

By Gerald L. Maatman, Jr. and Tyler Zmick

Duane Morris Takeaways:  In Ipina v. TCC Wireless, 2023 IL App (1st) 220547-U (Nov. 9, 2023), the First District of the Illinois Appellate Court held that T-Mobile retailer TCC Wireless was barred from enforcing an arbitration clause in the plaintiff’s employment agreement based on TCC’s actions in an earlier-filed privacy class action it settled.  The Court determined that TCC was collaterally estopped from compelling the plaintiff’s claims to arbitration because TCC had unsuccessfully moved to send nearly identical claims to arbitration in the earlier-filed case.  In doing so, the Illinois Appellate Court embraced a broad view of the circumstances in which “offensive” collateral estoppel is warranted in the class action context – that is, when a party may be prohibited from making an argument that was already raised and rejected in an earlier case.

Background

Plaintiff Stephanie Ipina alleged that while employed by Defendant TCC Wireless, she used a fingerprint-based timekeeping device to clock in and out of work.  According to Plaintiff, her use of the timekeeping device resulted in TCC collecting her biometric data.  Plaintiff claimed that TCC did not give her prior notice that it would be collecting her biometric data or obtain her prior written consent, and that TCC disclosed her data to TCC’s “payroll provider” without Plaintiff’s consent.  Based on these allegations, Plaintiff asserted that TCC violated §§ 15(b) and 15(d) of the Illinois Biometric Information Privacy Act (the “BIPA”).

Plaintiff’s complaint also described a prior BIPA class action entitled Garcia v. TCC Wireless, which had been brought against TCC based on the same timekeeping device used by the Plaintiff in Ipina.  In Garcia, TCC responded to the complaint by moving to compel arbitration pursuant to the plaintiff’s employment agreement, which stated that “[a]ny dispute arising out of or relating in any [way] to Employee’s employment with [TCC] . . . shall be resolved by binding arbitration . . . . except for (i) the institution of a civil action seeking equitable relief, or (ii) the institution of a civil action of a summary nature where the relief sought is predicated on there being no dispute with respect to any fact.”  Id. ¶ 7.

The trial court in Garcia denied TCC’s motion to compel because TCC did not dispute that it collected employees’ biometric data without consent, and therefore the plaintiff’s claims were subject to the arbitration clause’s “carve-out” for claims “of a summary nature where no facts are in dispute.”  Id. ¶ 23.  The parties in Garcia later reached a class-wide settlement, after which TCC produced a list of 899 employees to include in the settlement class.  Due to TCC “compil[ing] the class incorrectly,” however, Plaintiff Stephanie Ipina and other TCC employees were omitted from the list of class members eligible to receive payments in connection with the Garcia settlement.

In response to the complaint filed in the Ipina case (on behalf of Plaintiff and other individuals who should not have been omitted from the settlement class in Garcia), TCC moved to compel Plaintiff’s BIPA claims to arbitration based on the same employment agreement provision at issue in Garcia.  In opposing the motion, Plaintiff argued that TCC was collaterally estopped from compelling arbitration based on TCC’s motion to compel arbitration having been denied in the Garcia action.  The trial court granted TCC’s motion, however, reasoning that collateral estoppel did not apply because unlike in Garcia, in the present case TCC denied the factual allegations set forth in the complaint.

The Illinois Appellate Court’s Decision

On appeal, the Illinois Appellate Court reversed the trial court and held that TCC was collaterally estopped from enforcing the arbitration provision in Plaintiff’s employment agreement.

The Court noted that collateral estoppel is an equitable doctrine that “promotes fairness and judicial economy by preventing the relitigation of issues that have already been resolved in earlier actions.”  Id. ¶ 21 (internal quotation marks and citation omitted).  A party seeking to collaterally estop its opponent from raising a particular argument must show that (i)  the current issue is identical to one that was resolved in a prior action; (ii) the court in the previous matter entered a final judgment on the merits; and (iii) the party against whom estoppel is being asserted was a party, or in privity with a party, to the prior litigation.

The Appellate Court summarized TCC’s litigation conduct in Garcia by noting that in that case, TCC did not dispute that it collected employees’ biometric data without consent; in light of that fact, the court in Garcia denied TCC’s motion to compel arbitration because of the arbitration provision’s exception for claims of a summary nature where no facts are in dispute; the court also denied TCC’s motion to reconsider the order denying TCC’s motion to compel arbitration, which denial TCC did not appeal; and the parties subsequently settled the case on a class-wide basis.

Based on these facts, and contrary to the trial court’s order, the Appellate Court ruled that Plaintiff had shown that the collateral estoppel elements were established, and that the trial court erred in not applying the doctrine.

First, the Appellate Court rejected TCC’s attempt to distinguish the present case from Garcia on the basis that unlike Garcia, in this case TCC had denied the allegations in Plaintiff’s complaint.  According to the Appellate Court, this argument was contradicted by the position TCC had taken throughout the litigation, which is that Plaintiff should have been included in the Garcia settlement because TCC collected her biometric data before she signed a consent form.  Because “TCC is bound by these admissions,” the Appellate Court ruled that the issue in the present case was identical to the issue resolved in Garcia because TCC had effectively conceded the plaintiffs’ factual allegations in both cases. Id. ¶ 25.

Second, the Appellate Court found that the trial court in Garcia entered a “final judgment on the merits” when it issued an order granting final settlement approval and dismissing the case with prejudice.  Acknowledging the split in authority as to whether a settlement agreement qualifies as a “final order on the merits,” the Appellate Court sided with those decisions reflecting the proposition that “policy reasons counsel in favor of applying the doctrine of collateral estoppel to interlocutory judgments after settlement and dismissal with prejudice.”  Id. ¶ 28 (citation omitted).  As stated by the Appellate Court, “[c]ollateral estoppel exists to prevent litigants from doing exactly what TCC attempts.  The doctrine’s purpose is to prevent a party from losing an issue on the merits, but then relitigating it before a different judge to procure the desired result.”  Id. ¶ 29.  Thus, the Appellate Court found that Plaintiff satisfied the second element.

Third, the Appellate Court held that the last collateral estoppel element was satisfied because TCC was the defendant in Garcia and was the same party against whom estoppel was being asserted in the present case.  See id. ¶ 30 (“TCC was a party in Garcia, where it had the same incentive to fully litigate the enforcement of the arbitration clause (and in fact did so).”).  However, the Appellate Court also noted that while both parties argued on appeal the issue of Plaintiff’s privity, that was is “irrelevant” because “the privity requirement only applies to the party against whom estoppel is asserted.”  Id.

Implications For Corporations

Ipina is an important reminder that a litigation decision made in one case can have potentially significant consequences for that party in an entirely separate action.  As illustrated in the Ipina case, a party’s position in one matter (e.g., a defendant conceding the truth of certain factual allegations in a complaint) can be used to limit (or entirely foreclose) that party’s ability to raise a defense in another matter – regardless of how strong the defense might be on the merits.

Thus, corporate defendants should always think about the “big picture” when deciding on a course of action to take in defending a lawsuit.  They should consider not only how a defense position may impact that particular litigation, but also how the position could affect separate and seemingly unrelated actions involving the same (or a related) party, whether in cases that are currently pending or that may be filed in the future.

By Gerald L. Maatman, Jr., Rebecca S. Bjork and Derek Franklin

Duane Morris Takeaways: Mass arbitration continues to be a formidable tool for plaintiffs’ attorneys seeking to deal with class action waivers in arbitration agreements. This trend is aptly demonstrated by a new ruling in Wallrich, et al. v. Samsung, Case No. 22-CV-5506 (N.D. Ill. Sept. 12, 2023), where Judge Harry D. Leinenweber of the U.S. District Court for the Northern District of Illinois ordered the defendants – who had been served with just shy of 50,000 arbitration demands – to pay the arbitration fees and submit to arbitrating consumers’ claims that the defendants had committed violations of the Illinois privacy laws.  Those fees had been waived by the arbitration authority, as allowed by a provision in its’ supplemental rules, but the Court sided with the plaintiffs, who had moved to compel arbitration after the fees were waived, and seeking also to require the defendants to pay them.

Case Background

The Named Plaintiffs filed 49,986 arbitration claims with the American Arbitration Association (“AAA”) on September 7, 2022 on behalf of consumers who are users of Samsung mobile devices. Id. at 2, 5.  They alleged that the defendants had unlawfully collected their biometric information in violation of the Illinois Biometric Information Privacy Act.  The user agreement required all disputes be resolved in final, binding arbitration and it prohibited class actions.  Id. at 3.

The agreement also required use of the services of the AAA and explicitly invoked the AAA’s rules, including its supplemental rules relating to arbitration fees.  Id.  On September 27, 2022, Samsung refused to pay its portion of the initial arbitration fees to the AAA because it believed the claimants included deceased individuals and others who did not reside in Illinois.  Id. at 6.  Plaintiffs responded by moving to compel arbitration on October 7, 2022.  Id. at 7.

The Court’s Decision

Judge Leinenweber compelled arbitration of the claims of living, Illinois resident petitioners and ordered the respondents to pay the AAA arbitration fees. He first concluded that the arbitration agreements are valid between Samsung and those who actually are its consumers.  Id. at 21-22.  Second, he noted that as to the petitioners that respondents suspected were either deceased or not Illinois residents, he explained that petitioners’ counsel used Samsung’s own customer list to remove ineligible petitioners.  Id.  Third, he determined that the arbitration agreement left questions of arbitrability to the arbitrator, thereby declining to rule on respondents’ argument that the collective action waiver in the agreement applies to mass arbitrations, which would bar petitioners’ claims with the AAA.  Id. at 25.  Finally he ruled that he had the authority to construe and enforce the AAA’s rules about arbitration fees, and determined that respondents are required to pay approximately $4.13 million in fees.  Id. at 30, 33-34.

Implications For Employers

As corporations who employ large numbers of individuals in their workforces know, agreements to arbitrate claims related to employment-related disputes are common.  They serve the important strategic function of minimizing class action litigation risks.  But corporate counsel also are aware that increasingly, plaintiffs’ attorneys have come to understand that arbitration agreements can be used to create leverage points for their clients.  Mass arbitrations seek to put pressure on respondents to settle claims on behalf of large numbers of people, even though not via the procedural vehicle of filing a class or collective action lawsuit.   As a result, corporate counsel should carefully review arbitration agreement language with an eye towards mitigating the risks of mass arbitrations as well as class actions.

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

Duane Morris Takeaways: On July 17, 2023, the California Supreme Court issued its long-awaited decision in Adolph v. Uber Technologies, Inc., No. S274671 (July 17, 2023), addressing standing requirements under the Private Attorneys General Act of 2004 (“PAGA”).  The Supreme Court held that, once a PAGA plaintiff’s individual claims are compelled to arbitration, the plaintiff retains standing to maintain non-individual, representative PAGA claims in court so long as they are an aggrieved employee.  If the plaintiff loses in arbitration, they are not aggrieved and therefore lack standing.  However, if the plaintiff prevails or settles their individual claims in arbitration, they can then return to court to prosecute their non-individual PAGA claims.  For companies facing PAGA claims, the ruling in Adolph is required reading, as it will usher in a new period of workplace litigation in California.

Case Background

Erik Adolph, an Uber delivery driver, alleged that Uber misclassified him as an independent contractor.  Although Adolph initially sought to maintain a class action, those efforts were thwarted by a class action waiver in his workplace arbitration agreement.  Adolph then amended his complaint to allege PAGA claims.  The trial court denied Uber’s motion to compel arbitration, and the Court of Appeal affirmed on the basis of California’s prior rule, under Iskanian v. CLS Transportation, 59 Cal. 4th 348 (2014), that PAGA claims cannot be split into individual and non-individual parts and that a PAGA claim was non-arbitrable.

Uber filed a Petition for Review and, while it was pending, the U.S. Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1906 (2022), holding that PAGA claims are divisible and that the Federal Arbitration Act preempted California law insofar as it precluded arbitration of an individual PAGA claim.  The U.S. Supreme Court further opined that, once a PAGA plaintiff’s individual claims are compelled to arbitration, they lose standing to pursue non-individual PAGA claims.  Against this backdrop, the California Supreme Court granted review in Adolph.

The California Supreme Court’s Decision

In a unanimous decision, the California Supreme Court disagreed with Viking River’s interpretation of PAGA standing.  The California Supreme Court held that, so long as an employee alleges they are aggrieved by a violation, they maintain standing under the PAGA.  Thus, even after individual PAGA claims are compelled the arbitration, the plaintiff retains standing to pursue non-individual PAGA claims in court.

As to logistics, the Supreme Court clarified several things.  First, even though individual PAGA claims may be pending in arbitration and non-individual PAGA claims pending in court, the claims all remain one action, and the court action may be stayed pending completion of arbitration.  Second, if the plaintiff loses in arbitration, at that juncture, the plaintiff no longer has standing to maintain non-individual PAGA claims.  Third, if the plaintiff prevails in arbitration or settles their individual claims, they continue to possess standing to return to court to pursue non-individual PAGA claims on behalf of others.

Implications for Employers

In the wake of Adolph, the stakes for employers in individual PAGA arbitrations are high.  Employers facing PAGA claims should conduct an early assessment of the plaintiff’s individual claims and if unmeritorious aggressively defend the matter because a win in arbitration will extinguish the case in court as well.  We also anticipate that PAGA plaintiffs may begin alleging their aggrieved employee status, yet disclaiming any individual relief, in order to bypass arbitration altogether.  It remains to be seen if that pleading strategy will be condoned by California courts.

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

Duane Morris Takeaways: On June 23, 2023, the U.S. Supreme Court issued a 5-4 ruling that is welcome news to parties seeking to enforce arbitration agreements.  In Coinbase, Inc. v. Bielski, No. 22-105 (U.S. June 23, 2023), the Supreme Court decided that district courts must stay all proceedings after denying a motion to compel arbitration once the moving party appeals the denial.  Such appeals are allowed on an interlocutory basis under the Federal Arbitration Act (FAA), but the FAA is silent as to a stay pending appeal.  This ruling is significant because parties seeking to resolve claims in arbitration will no longer be required to litigate whether the district court should stay its consideration of the case until their appeal is decided.  They also will be spared proceeding with discovery and motion practice in the district court while their appeal of the denial of arbitration is pending.  As the majority explained in its opinion, this will further the purposes of arbitration (efficiency, less expense, and less intrusive discovery), save scarce judicial resources, and reduce pressure on defendants to settle.

Case Background

Abraham Bielski brought a class action lawsuit in the U.S. District Court for the Northern District of California against Coinbase, Inc., a company that operates an online platform where users buy and sell cryptocurrencies as well as government-issued currencies.  Slip Op. at 1.  Coinbase’s User Agreement contained a provision requiring binding arbitration of any disputes arising from use of the platform. Id. As a result, Coinbase moved to compel arbitration, but the district court denied its motion.  Id. at 1-2.  Coinbase filed an appeal to the Ninth Circuit under 9 U.S.C. § 16(a), the FAA’s provision that allows interlocutory appeals of denials of such motions.  Id. at 2.  At the same time – as is customary – Coinbase moved the district court to stay proceedings pending the Ninth Circuit’s decision on the arbitrability of the dispute between itself and Bielski.  Id.  The district court denied the motion, so Coinbase had to expend even more resources asking the Ninth Circuit to order a stay of the district court’s proceedings.  That motion, too, was denied, based on Ninth Circuit precedent holding that a denial of a motion to compel arbitration does not automatically stay proceedings.  Id. (citing Britton v. Co-op Banking Group., 916 F.2d 1045, 1412 (9th Cir. 1990).  The U.S. Supreme Court granted certiorari to resolve a split between the circuit courts on the issue, citing Bradford-Scott Data Corp. v. Physician Computer Network, Inc., 128 F.3d 504, 506 (7th Cir. 1997), among other circuit court decisions contrary to the Ninth Circuit’s rule.

The Supreme Court’s Decision

Justice Kavanaugh authored the majority opinion, which was joined by Chief Justice Roberts and Justices Alito, Gorsuch and Barrett.  The question presented was “whether the district court must stay its pre-trial and trial proceedings while the interlocutory appeal is ongoing.”  Slip Op. at 1.  In explaining its answer, which is “yes,” the majority first pointed to the section of the FAA that allows interlocutory appeals where motions to compel arbitration are denied by federal district courts, noting that it is “a rare statutory exception to the usual rule” precluding appeals before final judgment.  Id. at 1, 3.  The Congress did not include any language in § 16(a) of the FAA relating to stays during the interlocutory appeal process.  However, the majority placed the enactment of that section within “a clear background principle prescribed by this Court’s precedents” – namely, that an appeal “divests the district court of its control over those aspects of the case involved in the appeal.”  Id. (citing Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982).  Indeed, Justice Kavanaugh traced that principle all the way back to a Supreme Court decision issued in 1883 entitled Hovey v. McDonald, 109 U.S. 150, 157 (1883).

The majority bluntly stated that “[t]he Griggs principle resolves this case.”  Id. at 3.  Relying on “common practice” and common sense, they note that leading treatises on litigation in federal courts consider issuing stays pending interlocutory appeals of denials of arbitration to be “the sounder approach” and desirable.  Id. at 4-5.  The Supreme Court reasoned that it makes sense that “absent an automatic stay of district court proceedings, Congress’s decision in § 16(a) to afford a right to an interlocutory appeal would be largely nullified.”  Id. at 5.

Beyond this reasoning, the majority also noted the purposes of arbitration and explained that automatic stays will preserve those objectives of efficiency, reduced litigation cost, and reduced discovery burdens on the parties.  Id. at 6.  Defendants in class actions in particular are subject to immense pressure to settle cases where arbitration motions are denied, presenting a “potential for coercion . . . where the possibility of colossal liability can lead to what [are] called ‘blackmail settlements.’” Id. at 6.

The majority also noted that allowing a case to proceed simultaneously in district court and the court of appeals leads to a distinct possibility that scarce judicial resources will be wasted if, for example, the parties litigate a dispute in the district court, only for the court of appeals to reverse and order that very same dispute to binding arbitration.  Id.

Implications for Employers

As any employer knows who has been sued by a named plaintiff in a class action despite that plaintiff having signed an arbitration agreement with a class action waiver, the Supreme Court’s decision in Coinbase is a very welcome development.  With potentially thousands of absent class members’ claims at issue, a district court’s denial of an employer’s motion to enforce its arbitration agreement can be an earth-shattering development.  In addition, employers with nationwide operations now have a single, uniform rule that applies to this situation, bringing certainty to the law and one common rule in each and every circuit court.  The Supreme Court’s decision is, therefore, a highly significant development in the law regarding arbitration.

By Eden Anderson and Rebecca Bjork

Duane Morris Takeaway: In Pace, et al. v. Hamilton Cove, Case No. A-0674-22 (N.J. Super. Ct. App. Div. May 18, 2023), the New Jersey Superior Court, Appellate Division, found a class action waiver unenforceable without an explicit arbitration clause in a lease agreement.  The ruling should be a required read for businesses trying to implement an enforceable class action waiver, as it demonstrates why it is necessary to include such a provision in a contract that includes an arbitration clause.

Case Background

Two tenants of a residential apartment complex filed a putative class action against their landlord alleging claims of common law fraud and for violation of New Jersey’s Consumer Fraud Act (CFA).  The tenants alleged that the landlord made false promises concerning the amount of security that would be provided at the complex, which was located in a high crime area. The advertisements for the complex promised that it would have “elevated, 24/7 security.” Id. at 3. Specifically, during a tour of the apartment complex, the plaintiffs were assured that there would be in person security stationed near building entrances day and night.

The plaintiffs contended that despite the promises made by the defendants, the sole security was a front desk greeter who were present only during regular business hours and was often not stationed at the desk at all.  The plaintiffs asserted that they relied upon the representations made by the defendant when selecting and moving into the apartment complex, that defendants engaged in an unconscionable business practice in violation of the CFA, and that tenants overpaid for the apartments because they did not receive the full value promised, constituting an ascertainable loss. Id. The tenants’ lease included a class action waiver, but no mandatory arbitration clause.

The defendants filed a motion to dismiss for failure to state a claim, or in the alternative, to strike the class allegations. The defendants stated that the leases were not contracts of adhesion and that the class action waivers included in the lease agreements were valid and enforceable. The plaintiffs argued the leases were contracts of adhesion, the class action waivers were unconscionable, and the case law supporting the enforceability of class action waivers was inapplicable to this case.

The trial court denied the defendants’ motion. On the defendants’ appeal, the New Jersey Appellate Division affirmed the trial court’s ruling.

The Court’s Ruling

The Appellate Division acknowledged state and federal precedent upholding the enforceability of class action waivers in arbitration agreements, including the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).  The Appellate Division stated that an arbitration agreement necessarily involves a waiver of a party’s right to have claims litigated in court, and here, in contrast, there was no agreement to arbitrate contractual disputes. The Appellate Division held, however, that the policies favoring arbitration and encouraging enforcement of arbitration agreements, as expressed in the Federal Arbitration Act and the New Jersey Arbitration Act, are irrelevant when an arbitration agreement is not at issue.

Instead, the Appellate Division determined that New Jersey’s policy favoring class actions applied, and that “there is no societal interest in enforcing a class action waiver in a contract that does not contain a mandatory arbitration provision.” Id. at 15.  Accordingly, the Appellate Division determined that the plaintiffs were not bound to arbitration and were free to litigate their claims in court.

Implications Of The Decision

Any business trying to implement an enforceable class action waiver should include such a provision in a contract that includes an arbitration clause. Had the landlord here included an arbitration clause in its lease, the outcome of the case may have been very different and class litigation avoided.

By Eden Anderson and Rebecca Bjork

Duane Morris Takeaways: The scope of claims that can permissibly be arbitrated under the Federal Arbitration Act (“FAA”) may narrow once again.  Last year saw the enactment of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, which amended the FAA to preclude a pre-dispute agreement to arbitrate claims involving allegations of sexual harassment or sexual assault.  With that amendment, plaintiffs who file claims — either individual claims or putative class action claims — that relate to a sexual harassment or sexual assault dispute may now, at their option, pursue such claims in court and cannot be compelled to submit those claims to arbitration. Now Congress may soon consider that sort on ban for claims involving race discrimination.

Proposed Legislation

Sen. Cory Booker and Rep. Hank Johnson announced plans this week to introduce a bill — the Ending Forced Arbitration of Race Discrimination Act of 2023 — to further amend the FAA to preclude arbitration of race discrimination claims.  While the parameters of the proposed bill are as yet unclear, presumptively it will seek to preclude arbitration of both individual and class action race discrimination claims, and possibly more.

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act was initially drafted to cover all claims alleging “sex discrimination disputes,” but was then narrowed to only apply to sexual harassment and sexual assault claims.  If Congress was not willing to ban arbitration of sex discrimination claims, it may not be willing to ban arbitration of race discrimination claims.

Implications For Employers

As states and Congress continue to take steps to limit the use of arbitration, it remains critical for businesses and employers to regularly review their arbitration agreements to ensure compliance with an often-changing landscape of laws.

As the FAA approaches its 100-year anniversary, its impact will be less profound if Congress continues to enact claim-specific carve outs.

By Gerald L. Maatman, Jr. and Jennifer A. Riley

Duane Morris Takeaway: Of all defenses, a defendant’s ability to enforce an arbitration agreement containing a class or collective action waiver may have had the single greatest impact in terms of shifting the pendulum of class action litigation. With its decision in Epic Systems Corp. v. Lewis, et al., 138 S. Ct. 1612 (2018), the U.S. Supreme Court cleared the last hurdle to widespread adoption of such agreements. In response, more companies of all types and sizes updated their onboarding materials, terms of use, and other types of agreements to require that any disputes be resolved in arbitration on an individual basis. To date, companies have enjoyed a high rate of success enforcing those agreements and using them to thwart class actions out of the gate.

Statistically, corporate defendants fared well in asserting the defense. Across various areas of class action litigation, the defense won approximately 68% of motions to compel arbitration (roughly 69 motions granted in 102 cases).

By almost any measure, the arbitration defense had a tumultuous year in 2022. In the courts, chinks in the armor of the defense began to grow. While the U.S. Supreme Court shut down state efforts to evade arbitration of wage and hour claims, as discussed above, it limited application of the FAA to workers who participate in interstate transportation. Perhaps more significantly, on the legislative front, Congress significantly limited the availability of arbitration for cases alleging sexual harassment or sexual assault when it passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. President Biden signed the Act into law on March 3, 2022.

The Act amends the FAA and provides a plaintiff the discretion to enforce pre-dispute arbitration provisions and class and collective action waivers in cases where he or she alleges “conduct constituting a sexual harassment dispute or a sexual assault dispute” or is “the named representative of a class or in a collective action alleging such conduct.” In other words, whereas the Act does not render such agreements invalid, it allows the party bringing sexual assault or sexual harassment claims to elect to enforce them or avoid them. The Act does not impact agreements entered into after a dispute arises.

The plaintiffs’ bar often alleges other claims along with claims for sexual assault or sexual harassment. Whereas the Act refers to a “case,” it remains to be seen whether courts will attempt to limit a plaintiff’s option to avoid pre-dispute arbitration to sexual assault or sexual harassment claims or will extend such option to all claims at issue in a case. The Act provides that “no pre-dispute arbitration agreement or pre-dispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.” To date, courts have not issued significant decisions interpreting such language.

Given the impact of the arbitration defense, in 2023, companies may face additional hurdles, on the judicial or the legislative front, as the plaintiffs’ bar continues to look for workarounds. In particular, we expect to see litigation over whether the Act’s use of the word “case” renders the statute applicable to all claims in the case, including claims other than sexual harassment and sexual assault and whether the statute, therefore, will allow for a broader shield to the arbitration defense.