Preserving employment class actions.

Increasingly, corporations are embedding class action bans in their employment contracts. But there are solid legal arguments against these bans, and courts are starting to recognize them.

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For many workers who have been illegally denied benefits or who have suffered discrimination on the job, a class action is the best--and sometimes the only--means of remedying the wrong. Some workers can vindicate their rights individually, in particular those who understand their legal rights and have the means to find competent lawyers willing to handle their cases. But even in cases where these crucial requisites are present, only a class action can accomplish systemic change that benefits all employees.

Large employers increasingly seek to insulate themselves from class liability by adding terms to their employment contracts that prohibit employees from bringing or participating in class actions against the company. (1) They typically embed these bans in clauses that require binding mandatory arbitration for all employment-related disputes. Thus, an individual worker suing her employer on her own behalf and on behalf of her fellow employees is likely to face a motion to compel arbitration of her claims on an individual basis.

But there are strong legal arguments for challenging these contract terms. Many corporations argue that the Federal Arbitration Act (FAA) protects the clauses from challenges brought under state law, but a better argument is that the FAA provides that courts should enforce arbitration agreements only when they do not run afoul of state contract law principles. One of those principles is that unconscionable contracts--for example, those that would exculpate the corporation from liability for wrongdoing--will not be enforced.

Some courts have applied this and other state contract law principles to invalidate class action bans in consumer cases. These principles should apply with equal force to employment cases, particularly where the plaintiffs build a strong factual record.

The FAA permits employees to challenge provisions in arbitration clauses that act as exculpatory clauses. Since 2001, it has been clear that employers have the legal right to require prospective or current employees to submit all disputes to binding arbitration as a condition of obtaining or keeping their jobs. (2)

Not all terms in all employment arbitration clauses are enforceable, though. Nearly every arbitration clause is governed by the FAA, which applies to contracts "involving commerce"--a category so broad that the U.S. Supreme Court has held that it incorporates virtually every contract? (3)

The FAA's primary provision of substantive law states that contractual agreements for arbitration are enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract." (4) This means that under the FAA, courts will not enforce a particular arbitration clause if it is invalid under principles of state law that apply to all contracts--for example, if the clause is unconscionable.

A state law (or rule of law) that applies only to arbitration clauses or that applies to all arbitration clauses of a certain type--such as a categorical rule that class action bans in consumer contracts (or employment contracts) are always unconscionable--would likely be preempted by the FAA. (5) But, by the same token, a rule invalidating exculpatory contract terms that is rooted in basic principles of law applying to all contracts would not be preempted by the FAA merely because the class action ban is embedded in an arbitration clause. (6)

The widespread practice of embedding the class action ban in an arbitration clause is thus a cynical maneuver by corporations. As the Supreme Court has noted, there is nothing inherent about arbitration that requires that it be individual, (7) and cases can be and often are handled in arbitration on a class action basis. Yet many corporations hope that courts will strike as preempted state laws that invalidate contract terms banning class actions if the terms are included in a paragraph of the contract labeled "arbitration."

Exculpatory contracts are unconscionable

Under most state laws, contract terms that are exculpatory are unconscionable. Most states divide the doctrine of unconscionability into two elements: procedural and substantive. Procedural unconscionability addresses the circumstances surrounding the formation of the contract. Substantive unconscionability addresses the fairness of the terms for instance, a class action ban.

In some states, some degree of both kinds of unconscionability must be present to invalidate an arbitration clause or other contract term. (8) Other states refuse to enforce substantively unconscionable terms, even where there is no procedural unconscionability. (9)

In most states, if a contract of adhesion (meaning a "take-it-or-leave-it" contract drafted by the more powerful party) would serve as an exculpatory clause (meaning a contract term that would deny the weaker party any effective means of vindicating its legal rights), then the contract (or at least the term that renders it exculpatory) is unconscionable. Accordingly, if an employee faces a class action ban (or other term) embedded in an arbitration clause, in most states it should be possible to challenge that term if the employee can prove that it would, if enforced, insulate the employer from liability for violations of the law.

Although its application to class action bans is evolving, the principle that arbitration clauses are invalid when they insulate one party from liability is not new. The U.S. Supreme Court has made clear that arbitration must allow a party to "effectively ... vindicate" its rights. (10) Courts have struck down terms in arbitration clauses not only when they explicitly strip employees or consumers of rights, (11) but also when they create a barrier that would effectively prevent the consumer--or an employee--from holding the corporation accountable for violations of law. Such terms have included, for example, shortened limitations periods, (12) confidentiality provisions, (13) and cost-shifting provisions. (14)

Using consumer precedent

A wave of decisions striking down class action bans in consumer cases provides important precedents for employment cases. (15)

In perhaps the most widely cited case of its kind, the California Supreme Court in Discover Bank v. Superior Court (Boehr) analyzed a class action ban embedded in an arbitration clause that was imposed by a bank on its customers. (16) The plaintiffs had alleged that the creditor was secretly assessing late fees for payments received after 1 p.m. on the due date.

The court started with the assumption that "class action and arbitration waivers are not, in the abstract, exculpatory clauses." (17) But the court also found that the particular class action ban at issue was exculpatory and, therefore, substantively unconscionable under California law.

First, the court noted, each class member's damages were too small to pursue individually. Therefore, the corporation could potentially "reap a handsome profit" by "wrongfully extract[ing] a dollar from each of millions of customers." (18) Second, the court observed, the party that had drafted the contract had superior bargaining power and had simply imposed the class action ban on its customers.

Finally, the class action ban, while nominally mutual, was effectively one-sided, as banks never sue their customers on a class-wide basis. This combination of factors, the court held, made clear that in this type of case, a class action would be "the only effective way to halt and redress" the bank's alleged wrongdoing. (19)

The general rule articulated by the Discover Bank court is that a term in a contract of adhesion that would exempt the stronger party from responsibility for its own wrongdoing is unconscionable. (20) This reasoning has been embraced in cases involving small consumer claims in courts throughout the country. (21)

Eager to avoid the logical implications of the principles embodied in these decisions, many corporations (and pro-corporate commentators) have argued that they should be read as holding that class action bans are unconscionable only in the context of consumer cases involving small individual claims. Unfortunately, this argument has succeeded with at least some courts. (22)

This narrow reading is problematic for at least two reasons. First, it is simply inaccurate: Although the law is certainly much better developed in the consumer arena, courts have begun to strike down class action bans outside the context of small consumer claims. (23) Second, to infer from the holdings of the Discover Bank line of cases that a class action ban cannot be exculpatory and unconscionable unless it arises in a consumer case with individually small damages is to misread the central principle articulated by these courts.

Properly read, these cases set forth the principle that a class action ban is unconscionable if, on the facts of the particular case, it would serve as an exculpatory clause. While class action bans are certainly exculpatory in the context of many small-value individual claims, this is not the only scenario in which a class action ban may be found exculpatory.

First, one of the reasons courts have found that class action bans are exculpatory in consumer settings--that the consumers' claims are so small that the plaintiffs would not find lawyers willing to handle them on an individual basis--applies to many employment cases. Wage-and-hour claims, and in particular the claims of low-wage workers, frequently involve small recoveries that may not justify the time and expense required to bring an individual case. In addition, even if a worker were motivated to seek individual justice, he or she might be unable to find and afford qualified counsel.

Many other factors may render a class action ban exculpatory in an employment case. Many workers may be too fearful of retaliation or unwilling to risk their job to assert their rights. Low-wage or immigrant workers may be particularly vulnerable to the threat of retaliation or job loss. Also, many workers may not even be aware that their legal rights have been violated until they learn that a class action has been filed.

Further, if each wronged employee is forced to litigate or arbitrate his or her claim individually, without the potential for the large-scale injunctive relief afforded by a class action, the employer could simply resolve cases piecemeal while continuing to break the law with impunity. In addition, many of the agencies charged with enforcement of labor laws may not have the resources to investigate complaints and prosecute violations, making them unable to ensure that employers who violate the law will be held accountable.

Making the facts count

If you are asked to represent workers challenging a class action ban, you must prove facts that will support the challenge. (24) Devote serious effort to building a factual record to show why the workers in your case would be unable or unlikely to pursue relief individually. (25)

Emphasize the effect of the class action ban not only on the named plaintiff, but also on other members of the class. Even assuming class representatives could seek redress individually, doing so would require them to abandon their obligation to putative class members and courts have been quick to disapprove of tactics such as attempting to moot class actions by offering the maximum damages to one individual class representative. (26)

In consumer cases that have successfully challenged class action bans, the plaintiffs created a factual record demonstrating that, if enforced, the ban would function as an exculpatory clause. For example, in the landmark case Ting v. AT&T, the plaintiffs did not merely assert that AT&T's class action ban would prevent them from vindicating small-value consumer claims. (27) They proved this assertion as a factual matter by building an evidentiary record that included

* a study demonstrating that the arbitrators who were chosen by the defendant charged an average of nearly $2,000 per day

* witness testimony showing that fee waivers were rare

* declarations by consumer lawyers explaining the impossibility of bringing cases like the plaintiffs' on an individual basis

* a review of reports by the Federal Communications Commission showing virtually no cases in which the agency obtained relief for aggrieved consumers in 10 years. (28)

Based largely on this evidence, the district court concluded that "the prohibition on class actions will prevent class members from effectively vindicating their rights in certain categories of claims." (29)

To invalidate a class action ban in an employment case, you should take a similar approach. The following types of evidence could go a long way toward demonstrating that a class action ban would exculpate the corporation:

* statistics showing that very few employees have filed individual actions against the corporation within a relevant time period, either in court Or in arbitration

* affidavits from officials at state and federal agencies charged with investigating claims of wage-and-hour violations or discrimination, about the percentage of complaints they resolve

* testimony from employment lawyers and experts that the vast majority of plaintiffs would not be able to retain counsel to bring their claims on an individual basis

* affidavits from employment lawyers who not only have brought similar class actions against employers and achieved good outcomes for employees, but who can also testify that it would not have been feasible for them to bring those cases on an individual basis

* evidence demonstrating that many employees in the plaintiffs' situation would not be aware that their legal fights had been violated or would not know how to pursue them on a pro se basis

* factual support for the argument that individual damages of many class members would be small

* evidence about the likely costs of individual arbitration.

Class action bans should not be enforced when they would exculpate the corporate drafter from liability for wrongdoing. This principle is rooted in generally applicable contract law and is not limited to consumer cases alleging small-value damages claims.

In the context of an employment wage-and-hour or discrimination case, a class action may provide the only recourse for many workers whose rights have been violated. In such cases, it is essential to build a factual record to demonstrate why the class action ban is exculpatory within the particular facts of the case.

Given such evidence, a court should strike down exculpatory class action bans that would prevent workers from vindicating their rights.

RELATED ARTICLE: For section members, obtaining justice is all in a day's work.

Workers who seek compensation for job-related injuries or illnesses or their employers' unlawful conduct can expect bureaucratic delays, low-ball settlement offers, and even outright denials of their claims. State law often governs disputes arising from work-related claims, but the settlement and litigation strategies that ultimately bring justice to injured or wronged workers transcend state boundaries.

The AAJ Workers' Compensation and Workplace Injury Section offers opportunities for members in all jurisdictions to join together to brainstorm the best techniques for representing workers. Those who practice in the area of workers' comp, for example, can learn from the experiences of members who hail from other states.

"Workers' compensation is a state issue, so many practitioners become very knowledgeable in their state statutes and case law," said Robert DeRose of Columbus, Ohio, the section's immediate past chair. "Members of our section gain great insights into what is happening in other jurisdictions and nationally."

The section's newsletter keeps members up to date on developments across the country. Recent articles discussed the constitutional challenge to the Missouri workers' compensation law and provided an update on workers' comp reform in California.

Section members also must keep abreast of federal law that may affect injured workers, and the section's education programs help them do so. For example, a program at a recent AAJ convention examined common jurisdictional questions that arise in claims brought under the Longshore and Harbor Workers' Compensation Act. Another program explored the basics of representing civilian employees of the federal government under the Federal Employees' Compensation Act.

For help with the practical, daily aspects of their work, members turn to their section's robust document library, where they can review depositions, pleadings, and other materials from prior cases--free of charge.

The members' interests are vigorously represented in the policymaking arena. The section's leaders recently teamed up with AAJ Public Affairs to address a federal bill relating to a hot issue in workplace injury law: Medicare set-asides.

Said DeRose: "AAJ has been a big help on the legislative front."

The section's annual dues are $45. To join or for more information, contact AAJ Sections at [phone], ext. 381, or visit the Workers' Compensation and Workplace Injury Section home page at www.justice.org/ sections/workerscomp.

Notes

(1.) As one commentator recently explained, "While arbitration of employment disputes is nothing new (and some scholars have staunchly defended the use of arbitration in the employment context), the potential for collective action waivers to curtail most, if not all, employment class actions seeking broad-scale changes in the U.S. workplace is a more recent phenomenon." Myriam Gilles, Opting Out of Liability: The Forth-coming, Near-Total Demise of the Modern Class Action, 104 Mich. L. Rev. 373, 419 (2005).

(2.) See Cir. City Stores, Inc. v. Adams, 532 U.S. 105 (2001).

(3.) Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56-57 (2003).

(4.) 9 U.S.C. [section] 2 (2000); see also EEOC v. Waffle House, Inc., 534 U.S. 279, 289 (2002) (FAA places arbitration clauses "upon the same footing as other contracts").

(5.) See e.g. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996); Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995).

(6.) In the wake of Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), some defendants may argue that the validity of a class action ban outside an arbitration clause would be a question not for the court, but for the arbitrator. However, courts have rightly rejected this argument as superficial, particularly where the class action ban clearly applies to all arbitrated claims. See e.g. Muhammad v. Co. Bank of Rehoboth Beach, Del., 912 A.2d 88, 95-96 (N.J. 2006), cert. denied, 127 S. Ct. 2032 (2007).

(7.) Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003) (suggesting that arbitrations may be conducted on a class action basis); see also Kinkel v. Cingular Wireless LLC, 857 N.E.2d 250, 262 (III. 2006) (rejecting defendant's argument that "any outcome that discourages arbitration of individual claims is in conflict with the FAA and is, therefore, impliedly preempted. Cingular cites many sources demonstrating that encouraging arbitration is, indeed, a strong federal objective, but offers no authority for the claim that individual arbitration, rather than class arbitration, is favored.").

(8.) See e.g. Muhammad, 912 A.2d at 97 (discussing weighing of procedural and substantive unconscionability); Coady v. Cross Co. Bank, 729 N.W.2d 732, 741 (Wis. App. 2007) ("determination of unconscionability requires a mixture of both procedural and substantive unconscionability").

(9.) See e.g. Kinkel, 857 N.E.2d at 263 ("A finding of unconscionability may be based on either procedural or substantive unconscionability, or a combination of both."); Vasquez-Lopez v. Beneficial Or., Inc., 152 P.3d 940, 948 (Or. App. 2007) ("only substantive unconscionability is absolutely necessary"); Adler v. Fred Lind Manor, 103 P.3d 773, 782 (Wash. 2004) (en banc) ("substantive unconscionability alone can support a finding of unconscionability").

(10.) Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985).

(11.) See e.g. Cir. City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002); Graham Oil Co. v. ARCO Prods. Co., 43 F.3d 1244, 1247 (9th Cir. 1994); Armendariz v. Found. Health Psychare Servs., Inc., 6 P.3d 669, 681 (Cal. 2000); Holt v. O'Brien Imports of Ft. Myers, Inc., 862 So. 2d 87 (Fla. Dist. App. 2003).

(12.) See e.g. Adler, 103 P.3d at 787-88.

(13.) See e.g. Zuver v. Airtouch Comms., Inc., 103 P.3d 753,765 (Wash. 2004) (en banc).

(14.) See e.g. Delta Funding Corp. v. Harris, 912 A.2d 104, 112-13 (N.J. 2006).

(15.) See e.g. Rollins, Inc. v. Garrett, 176 Fed. Appx. 968, 968-69 (11th Cir. 2006) (per curiam); Ting v. AT&T, 319 F.3d 1126, 1150 (9th Cir. 2003); Lowden v. T-Mobile U.S.A, Inc., 2006 WL 1009279 at *6 (W.D. Wash. Apr. 13, 2006); Kinkel, 857 N.E.2d 250; Muhammad, 912 A.2d 88; Coady, 729 N.W.2d at 746.

(16.) 113 P.3d 1100 (Cal. 2005).

(17.) Id. at 1108. I

(18.) Id.

(19.) Id. at 1108-09.

(20.) Id.

(21.) See cases cited at n. 15.

(22.) See e.g. Gentry v. Super. Ct. (Cir. City Stores), 37 Cal. Rptr. 3d 790 (Cal. App. 2006), superseded by 135 P.3d 1 (Cal. 2006). The amicus brief filed in Gentry in the California Supreme Court by Public Justice is available at www.publicjustice.net/ briefs/GentryBrief_121406.pdf. See also Ornelas v. Sonic-Denver T, Inc., 2007 WL 274738 at **6-7 (D. Colo. Jan. 29, 2007) (enforcing class action ban in case brought by non-English speakers against car dealer on grounds that their claims were not sufficiently complex or low-value).

(23.) See e.g. Kristian v. Comcast Corp., 446 F.3d 25, 59 (1st Cir. 2006); Skirchak v. Dynamics Res. Corp., 432 E Supp. 2d 175,180-81 (D. Mass. 2006); Independent Assn. of Mailbox Ctr. Owners, Inc. v. Super. Ct., 34 Cal. Rptr. 3d 659, 669-71 (Cal. App. 2005).

(24.) For example, the Supreme Court refused to invalidate an arbitration clause on grounds that the costs would be prohibitively high where the plaintiff had failed to offer evidence that she would, in fact, incur those costs. Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 91-92 (2000).

(25.) In states that require both kinds of unconscionability, it is also essential to build a record of procedural unconscionability. For more information about factors and evidence courts consider in evaluating procedural unconscionability, see generally Consumer Arbitration Agreements: Enforceability and Other Issues (Natl. Consumer Law Ctr. & Public Justice Found., 4th ed., 2004 & 2006 Supp.).

(26.) See e.g. Weiss v. Regal Collections, 385 F.3d 337, 345 (3d Cir. 2004) (recognizing that if defendants could avoid class actions by picking off class representatives, "meritorious FDCPA [Fair Debt Collection Practices Act] claims might go unredressed because the awards in an individual case might be too small to prosecute an individual action[,] ... frustrating[] the goals and enforcement mechanism of the FDCPA").

(27.) 182 F. Supp. 2d 902 (N.D. Cal. 2002), aff'd with respect to unconscionability, 319 F.3d 1126 (9th Cir. 2003).

(28.) Id. at 916-21.

(29.) Id. at 931.

LESLIE A. BAILEY is the Brayton-Baron Fellow at Public Justice, a national public-interest law firm headquartered in Washington, D. C. She can be reached at [e-mail].