The Enforceability of Arbitration Agreements and Class Action Waivers

By Naomi Dabi Lantsberg and Jeffrey A. Kimmel

The validity and enforceability of arbitration agreements have recently been in the legal spotlight due to Douglas O'Connor, et al. v. Uber Technologies, Inc., 13-cv-3826 (EMC), a misclassification lawsuit brought in California by three drivers who claim they are Uber employees and not independent contractors. Although O'Connor has called the enforceability of arbitration agreements and class action waivers into question, causing much distress among employers and business-owners, the United States Supreme Court has diminished the significance of O'Connor by, once again, reaffirming the enforceability of such agreements and provisions in DIRECTV, Inc. v. Imburgia, No. 14-462, 577 U.S. ___, 2015 WL 8546242 (2015). While employers should be encouraged by the Supreme Court's decision in DIRECTV, they should also seek guidance in drafting and enforcing arbitration agreements, as plaintiff's attorneys and pro-employee organizations continue to push their agendas to invalidate them.

On December 9, 2015, in O'Connor, Judge Chen in the U.S. District Court for the Northern District of California, expanded the scope of the pending class-action against Uber, holding that Uber's arbitration agreement was unenforceable in its entirety because it included a requirement to arbitrate claims arising under the California Private Attorney General Act (PAGA). This decision modified a previous ruling that the arbitration agreement was, at least in part, enforceable. Therefore, even drivers who elected mandatory arbitration in their Uber contract could be included in the class action. PAGA enables private citizens to act as an attorney general, and therefore pursue claims that would usually only be available to the state of California itself. The court cited to several recent decisions of courts sitting in California holding that arbitration agreements with "non-severable" PAGA waivers were contrary to public policy. The court held the arbitration agreement was unenforceable and the class action will now include all drivers who contracted with Uber directly and in their own name since 2009, even those who did not opt out of the arbitration agreement. The next day, Uber immediately appealed Judge Chen's ruling to the Ninth Circuit appellate court.

Less than one week after Judge Chen's ruling in O'Connor, the U.S. Supreme Court affirmed the validity of arbitration agreements with class action waivers, and reversed and remanded a California Court of Appeals decision from April 2014 that found that the language of [713-1/4821999/1] DirecTV's service contracts was subject to state law prohibiting class action waivers. DIRECTV, Inc. v. Imburgia, No. 14-462-577 U.S. __, 2015 WL 8546242 (2015). The U.S. Supreme Court held that the California Court of Appeals decision ignored an earlier Supreme Court ruling in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) that the Federal Arbitration Act (FAA) preempts state bans on class action waivers. DIRECTV and Concepcion together stand for the proposition that class action waivers in arbitration agreements are generally enforceable, and state courts cannot seek to do an end-run around established federal law in order to invalidate such waivers.

It is uncertain if or how DIRECTV will directly impact the Uber cases and the state of the law in California. However, it is clear that plaintiff's attorneys and pro-employee organizations are looking for any way possible to invalidate arbitration agreements and class action waivers, despite clear guidance from the U.S. Supreme Court that federal law favors arbitration and that such agreements are generally enforceable. While the Supreme Court's repeated affirmation of the enforceability of arbitration agreements and class action waivers under the FAA provides some reassurance, it is of utmost importance that employers seek guidance when drafting and enforcing arbitration agreements. Properly drafted arbitration agreements can serve as cost efficient mechanisms to protect employers from frivolous claims and the substantial costs and exposure associated with class action litigation.

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