LawFlash

Recent Legal Developments Could Significantly Impact Employer Arbitration Agreements

March 25, 2022

Despite the passage of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act on March 3, arbitration remains a viable option for disputes outside the act’s purview. Several recent and pending legal developments could impact the scope of significant types of claims and workers subject to arbitration agreements and programs, which may further increase “mass arbitration” tactics by plaintiffs’ lawyers when class and collective actions are precluded by enforceable arbitration provisions.

Employers that use or are considering the use of arbitration agreements and programs may wish to consult with their legal counsel, including for review of any existing arbitration agreement or program templates and materials, to determine whether changes may be warranted nationwide or in specific states as these issues continue to evolve.

Supreme Court Will Hear Case on Whether Arbitration Agreements Can Preclude California PAGA Representative Claims

In Viking River Cruises, Inc. v. Moriana, the US Supreme Court will determine whether the Federal Arbitration Act (FAA) preempts a 2014 California Supreme Court ruling in Iskanian v. CLS Transportation Los Angeles, LLC, holding that employers cannot enforce arbitration agreements that prevent employees from bringing representative claims on behalf of other employees under the Private Attorneys General Act (PAGA).

The PAGA authorizes “aggrieved employees” to file lawsuits on a representative basis—as is done in a class action lawsuit but without application of Rule 23-like procedures or requirements. PAGA lawsuits can recover civil penalties on behalf of alleged aggrieved employees and the State of California for Labor Code violations.

Under the ruling by the California Supreme Court in Iskanian, employers may not compel employees who file PAGA claims into individual arbitration, and PAGA claims cannot be prevented by representative action waivers. Iskanian held that PAGA claims are brought on behalf of the state itself and therefore do not involve private employee claims that are subject to the FAA.

In Viking River Cruises, the US Supreme Court is expected to decide whether Iskanian is correct or whether arbitration agreements providing that an employee cannot raise representative claims, including under PAGA, must be enforced under the FAA. If the Court finds that representative PAGA claims can be precluded by agreement under the FAA, such a ruling likely would have a dramatic impact on currently widespread PAGA-related litigation in California.

Employers may wish to review their existing arbitration agreements and programs with legal counsel, including to assess whether those documents address representative claims, including PAGA claims, and whether any changes may be warranted in anticipation of or following the Court’s ruling (expected by late June) in Viking River Cruises. For any pending PAGA litigation, employers may wish to consult with their legal counsel regarding whether the pendency of Viking River Cruises creates an opportunity to seek a stay of the case.

Supreme Court Will Hear Case on Scope of Transportation Workers Exempt From the FAA

In Southwest Airlines Co. v. Saxon, the Supreme Court will decide whether workers who load or unload goods from airplanes that travel in interstate commerce, but who do not physically transport such goods themselves, are interstate “transportation workers” exempt from the FAA. Section 1 of the FAA exempts from the FAA’s scope “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

In Circuit City Stores, Inc. v. Adams, the Supreme Court held that this exemption applies only to interstate “transportation workers,” but it has not defined the scope of that term. Lower federal courts have adopted conflicting interpretations of who counts as an interstate “transportation worker.”

The plaintiff in Southwest Airlines is a ramp agent supervisor who supervises employees who load and unload baggage from airplanes and assists with such duties but does not physically transport people or goods across state lines. The Court’s ruling on whether the plaintiff is an interstate transportation worker will likely address the scope of transportation workers who are exempt from the FAA, potentially providing guidance as to other classes of debated workers beyond the airline ramp agent supervisors at issue in Southwest Airlines.

Employers that have not used or enforced arbitration agreements or programs with certain types of workers involved in the transportation industry may wish to reconsider those issues depending on how the transportation worker exemption is interpreted in Southwest Airlines.

Mass Individual Arbitrations

Favorable decisions for employers in either or both of Viking River Cruises and Southwest Airlines also likely would impact the growing trend of “mass arbitration” tactics being used by the plaintiffs’ bar—filing numerous costly individual arbitration claims where enforceable waivers preclude class and collective actions. Arbitrator and arbitration service fees alone can be substantial in the mass arbitration context, in addition to the potential costs and burdens of arbitrating individual claimant cases.

If the Supreme Court holds that the FAA encompasses PAGA claims and/or construes the FAA’s “transportation worker” exclusion narrowly, employers can be expected to have greater latitude to subject a broader scope of claims and/or employees to mandatory individual arbitration.

However, they also may experience many individual arbitration filings with respect to such arbitrable disputes. Employers may wish to consult with legal counsel to consider potential revisions to their arbitration agreements and programs that could help employers and employees alike appropriately navigate mass arbitration situations while effectuating the efficiency and cost-control principles that are fundamental to arbitration.

California’s SB 762

SB 762, which went into effect in California on January 1, 2022, requires an arbitration provider to issue an invoice for any fees and costs to all parties and specify the final due date of the initiation fees as soon as a worker or consumer completes their filing requirements. In addition, it requires consent from all parties before the adjustment of deadlines for the payment of fees and costs due to the arbitrator during the pendency of the arbitration.

In the past, arbitration providers would not always disclose when a company’s fees were due and would sometimes negotiate the due dates. Under this new law, however, invoices are presumed “due upon receipt” unless the arbitration agreement says otherwise.

The arbitration agreement may create a later due date as long as the due date is reasonable. If an employer does not pay arbitration fees and costs that it is obligated to pay within 30 days of the due date, then the employer risks being “in material breach of the arbitration agreement, is in default of arbitration, and waives its right to compel arbitration.” Other sanctions can also apply.

Employers should review the wording of their arbitration agreements as to fee due dates as well as their protocol for handling new arbitrations to ensure that they are properly addressing deadlines to pay arbitration fees under this new law.

FAIR Act

On March 17, the House passed the Forced Arbitration Injustice Repeal (FAIR) Act of 2022, a sweeping bill that, among other things, would void any pre-dispute arbitration agreement or joint action waiver in claims involving employment laws, as well as consumer laws, antitrust laws, and other civil rights laws.

While Morgan Lewis will continue to monitor developments as to this bill, passage by the Senate appears presently unlikely for various reasons, including the fact that only one Republican House member voted for it.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Chicago
Sari M. Alamuddin
Jonathan D. Lotsoff
Stephanie L. Sweitzer

Los Angeles
John S. Battenfeld
Kathy H. Gao
Jennifer B. Zargarof

New York
Christopher A. Parlo
Samuel S. Shaulson
Kenneth J. Turnbull 

Orange County
Carrie A. Gonell
Daryl S. Landy
Barbara J. Miller

Philadelphia
Michael J. Puma

Princeton
Thomas A. Linthorst
Richard G. Rosenblatt

San Francisco
Eric Meckley
Michael D. Schlemmer

Silicon Valley
Melinda S. Riechert