Supreme Court upholds use of arbitration and the DirectTV case

By Brian E. Ewing. Esq.

Supreme Court Yet Again Upholds the Use of Arbitration Agreements that Waive the Right to Proceed with a Class Action.

The U.S. Supreme Court recently approved, yet again, the use of class action waivers in arbitration agreements.  In DIRECTV, Inc. v. Imburgia (US 14–462 12/14/15), the Court ruled that a California Court of Appeal improperly invalidated an arbitration agreement that included a class action waiver between a consumer and DIRECTV.  Although the legal reasoning in this case is hyper-technical, the takeaways are: (1) arbitration agreements continue to be valid because federal law trumps California’s continuing attempts to restrict the use of arbitration agreements and (2) the Court viewed the California Court of Appeal’s decision to invalidate DIRECTV’s arbitration agreement as an attempt to circumvent federal law and prior court rulings supporting arbitration.  (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 321.)  DIRECTV was a consumer class action, but the same general rules are applied by courts in the employment context.

Using arbitration agreements with employees that include properly written class action waivers is a good way for companies to prevent class action lawsuits seeking payments for unpaid overtime, denied meal and rest periods, and penalties for failure to comply with California’s strict wage statement requirements.  However, employers should carefully weigh the benefits of having an arbitration agreement against the costs and downsides.

One major downside of having your employees execute arbitration agreements is that any lawsuits filed under the Private Attorneys General Act (“PAGA”) will not be sent to arbitration and can only be resolved in court; meaning that the employer could face two “actions.”  (Iskanian v. CLS Transp. Los Angeles, LLC (2014) 59 Cal.4th 348.)  In an unpaid wages class action lawsuit, an employer with a strong arbitration agreement can successfully petition the court to send most of the claims to arbitration.  Then, once the matter is in arbitration, the arbitrator will deny the plaintiff the ability to proceed with the case as a class action if the arbitration agreement that the employee signed has a valid class action waiver.  The PAGA portion of the lawsuit, however, cannot be waived by any agreement, so that claim remains in court.  The employer in this situation ends up fighting two (or more) separate legal proceedings: one or more claims from individual employees in arbitration and a PAGA lawsuit in court seeking penalties on behalf of all employees who have similar claims to the plaintiff(s).  Also, the individual arbitrations can cost a company up to $75,000.00 each just for the arbitrator’s fees.  This does not include the costs of paying attorneys to defend both proceedings.

The number of PAGA lawsuits being filed is growing rapidly due, in part, to employers’ increased use of class action waivers in arbitration agreements.  A PAGA lawsuit seeks only penalties that would normally be collected by the State and only covers a one year period of time prior to the date the lawsuit is filed.  As such, the potential amount of money that employees can collect in a PAGA lawsuit is typically less when compared to the potential amount of money that is at stake in a class action.  PAGA lawsuits are currently taking longer to settle, however, because of the lack of statutory and appellate court guidance on key aspects of the law.

Arbitration agreements are not for every employer.  If your company is small, the costs and expenses of fighting both an arbitration and a PAGA lawsuit can be daunting.  Using a class action waiver in an arbitration agreement may not be financially worthwhile if a class action for unpaid wages is potentially resolvable at a cost that your business can absorb, since being required to defend a separate PAGA lawsuit will likely double your expenses.  On the other hand, if your workforce is large, it might be worth fighting two separate “proceedings” – the arbitration and the PAGA lawsuit – to avoid the high cost it will undoubtedly take to resolve a full class action for unpaid wages, either through settlement or through the costs of defense of a trial.  Counsel can help you determine if having your employees sign arbitration agreements containing class action waivers is the best course of action for you.