Class Action Arbitration for Employers and Employees - Quo Vadit?

03.01.2011
Nossaman eAlert

This term, the United States Supreme Court will render an opinion that may have substantial consequences for the arbitration of disputes between employers and employees, as well as other litigants.  In AT&T Mobility LLC v. Concepcion, the court will consider whether California case law, which rejects class action waiver provisions in arbitration agreements, is preempted by the Federal Arbitration Act (FAA).  If so, employers in California will be able to substantially limit the ability of employees to bring class action claims, such as claims for alleged unpaid overtime, by including class action waivers in arbitration agreements.

In 2005, the California Supreme Court ruled in Discover Bank v. Superior Court that class action waivers (whether for litigation or arbitration) contained in consumer contracts of adhesion are unconscionable. The court also held that the Federal Arbitration Act (FAA) did not foreclose or preempt its holding against the enforceability of class action waivers in arbitration agreements.

In 2007, in Gentry v. Superior Court, the California Supreme Court applied Discover Bank in the employment context to the claim that an employer systematically denied proper overtime pay to a class of employees.  According to the Supreme Court, a the trial court should not enforce the waiver if it concludes that "a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws . . . ." 

In AT&T Mobility LLC v. Concepcion, the United States Supreme Court will address the issue of whether the FAA precludes state courts from conditioning the enforceability of an arbitration agreements on the availability of class-wide arbitration. Simply put, what is at issue in AT&T is the enforceability of class action waivers in arbitration agreements in states like California that have previously that held such waivers not to be valid.

AT&T involved a consumer dispute over AT&T's charge of state taxes in connection with the retail price of cell phones provided at no or discounted cost.  The plaintiff consumers filed a class action in federal court.  AT&T moved to compel arbitration.  The plaintiffs opposed arbitration contending that the arbitration agreement was unconscionable under Discover Bank because it did not permit arbitration by way of class-wide relief.  The federal district court denied AT&T's effort to compel arbitration and rejected its argument that the FAA "preempts any holding that [AT&T's] arbitration provision is unenforceable under California law."  The federal Ninth Circuit Court of Appeals agreed.  The United States Supreme Court granted review of the Ninth Circuit's decision.

AT&T argues in the Supreme Court that the FAA does in fact preempt the holding of Discover Bank.  Pointing to the FAA, AT&T argues that it preempts any state-law limitation on the enforceability of arbitration agreements contained in written contracts.

The respondents (named plaintiffs in the underlying action) respond to AT&T's arguments asserting that the FAA does not preempt California law which invalidates class action waivers in arbitrations.

What This Means for Employers

The United States Supreme Court heard argument on AT&T v. Concepcion in November 2010.  The court will render its decision at any time between now and the end of its current term in June.  Should the court effectively reject the rule of Discover Bank, it would severely limit the availability of class arbitration of employment claims such as claims for unpaid overtime compensation.  Should the court accept the rule of Discover Bank, then employers will need to consider, with the advice of employment counsel, whether they are better off litigating class action claims in arbitration or in court.


Steve Wiman is a Partner in Nossaman's Los Angeles office and former Chair of Nossaman's Litigation Department.  His complex litigation practice focuses on breaches of contract, state and federal antitrust, state and federal securities, unfair business practices, judicial review of administrative decisions, land use, and real property.  He can be reached at 213.612.7818 or swiman@nossaman.com.

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