Class and collective action waivers in arbitration agreements are a common strategy for employers seeking to resolve workplace disputes efficiently and economically. However, the plaintiffs’ bar, eager to litigate disputes on a class basis, has sought to undermine the efficiencies of arbitration by adopting a strategy of filing hundreds or even thousands of individual arbitration demands against an employer alleging almost identical claims. The strategy, often deployed after a court has compelled arbitration of a putative class or collective action pursuant to an enforceable arbitration agreement, is meant to pressure the employer into waiving the arbitration agreement and relenting to a judicial forum or into high-dollar settlement negotiations.

Employers typically bear the expense of arbitration filing fees and costs. Given that filing fees alone can cost several thousands of dollars per case, many employers simply cannot afford an onslaught of arbitration demands and the cost of defending hundreds or thousands of arbitrations. The plaintiffs’ bar has used the costs of arbitration to its advantage.

Notice of collective action

It is not uncommon for employers to have arbitration agreements in place for some employees but not others (who perhaps began employment before the employer adopted an arbitration agreement). In recent years, disputes have arisen as to whether employees with enforceable arbitration agreements should be entitled to receive notice of a collective action against the employer. From the defense perspective, there would seem to be no reason why an employee who cannot join a collective should receive notice of a litigation. However, plaintiffs’ counsel have used notice as a tool to recruit potential arbitration claimants. That is, rather than seek to add these individuals to the collective, plaintiffs’ counsel files individual arbitration demands on behalf of each claimant with an arbitration agreement.

Once plaintiffs’ counsel has unearthed as many claimants as possible, arbitration is extremely cumbersome for the employer. If the employer does not waive arbitration, it is faced with defending claims both in court and in arbitration. If plaintiffs’ counsel won’t agree to have the same arbitrator consider all the related claims, the employer will face numerous arbitrators who are likely to issue different evidentiary rulings. Further, if one arbitrator makes the employer produce certain documents in discovery, opposing counsel has those documents in all pending arbitrations.

The judicial response to this circumstance has been mixed. The Fifth Circuit was the first federal appeals court to address the issue. In a 2019 decision, it struck down a district court ruling that required an employer to turn over to plaintiffs the personal contact information for 35,000 individuals (from a possible 42,000-member collective) who had entered into predispute arbitration agreements that included class waivers. The appeals court reasoned that a trial court may not send notice to employees with arbitration agreements “unless the record shows that nothing in the agreement would prohibit that employee from participating in the collective action.”

The U.S. Court of Appeals for the Seventh Circuit, addressing the issue in 2020, placed a higher burden on the employer seeking to avoid sending notice of a certified collective action to employees with binding arbitration agreements. It held that a district court “may” authorize notice of a collective action to individuals who have signed arbitration agreements waiving the right to join such actions,

unless (1) no plaintiff contests the existence or validity of the alleged arbitration agreements, or (2) after the court allows discovery on the alleged agreements’ existence and validity, (3) the defendant establishes by a preponderance of the evidence the existence of a valid arbitration agreement for each employee it seeks to exclude from receiving notice.

Federal district courts in those circuits yet to have addressed the question are split.

California law aggravates fees dilemma

Under California’s Forced Arbitration Accountability Act (SB 707), which took effect in 2020, if an employer fails to pay fees required for the commencement or continuation of an arbitration within 30 days of the payment’s due date, the employer’s conduct is deemed a material breach of the arbitration agreement. This deems the party in default of the arbitration to have waived its right to compel arbitration. In such a case, the employee may compel arbitration (and receive attorneys’ fees and costs for doing so) or withdraw the arbitration claim and proceed in court. In addition, the law requires the court or arbitrator to issue appropriate sanctions against the employer, which may include monetary sanctions, issue sanctions, evidence sanctions, or terminating sanctions.

Legal challenges to the law have been unsuccessful to date. In a case that ended up at the Ninth Circuit, a federal judge in California refused to enjoin arbitration demands of 5,057 of the employer’s 10,356 couriers, finding the employer was unlikely to succeed on the merits of its argument that the mass arbitration demands constituted a de facto class arbitration. Denying the employer’s motion for judgment on the pleadings, the district court also held that SB 707 is enforceable, finding no conflict with the FAA and that the statute is neither preempted nor unconstitutional.

Another closely watched case asserting that the FAA preempted SB 707 involved a manufacturer that was facing 40,000 individual arbitration demands by disgruntled customers, each costing the company at least $3,200 in arbitration fees. The company filed a lawsuit in state court and moved for a preliminary injunction to halt the arbitrations and instead require each individual to have their claim heard in small claims court. However, the customers added federal antitrust claims to their arbitration demands and filed a lawsuit in federal court seeking to compel arbitration. The federal court declined to intervene, and the state court thereafter denied the manufacturer’s motion for a preliminary injunction.

Among other things, the court found the manufacturer was unlikely to prevail on its claim that the FAA preempted SB 707 since its primary argument was that the statutory penalties for late payment discouraged arbitration, and that argument was not ripe because the company “has not yet blown any of its fee deadlines.” Alternatively, if the court were to rule that the FAA preempted SB 707, the “proper remedy” would be to “enjoin the sanctions” mandated by the statute, not “halt the arbitration[s].”

A ‘bellwether’ alternative

Some arbitration providers have responded to the extraordinary expense employers face when plaintiffs initiate mass arbitration. The International Institute for Conflict Prevention & Resolution (CPR) has introduced an “Employment-Related Mass-Claims Protocol,” which is triggered when there are more than “30 individual employment-related arbitration claims of a nearly identical nature” filed with CPR “in close proximity one to another.” Under this procedure, such arbitration claims are randomly assigned numbers, and the claims numbered 1-10 will proceed to arbitration as “test cases,” to be resolved within 120 days. The results of the test cases go to a mediator, who will then attempt to resolve the remaining claims. After a 90-day mediation period, the parties can elect to opt out of arbitration and proceed with the remaining claims in court.

This approach has not been well-received by the plaintiffs’ bar and is being challenged in litigation. In a case brought against a nationwide food and delivery service, plaintiffs objected to the employer’s inclusion of the CPR’s Mass-Claims Protocol in its most recent version of its independent contractor agreement. They argued that CPR’s 10-at-a-time arbitrations would force the vast majority of claimants to wait in the arbitration “queue,” potentially for years. The plaintiffs also contended that the employer had switched from the rules of the American Arbitration Association to CPR to deprive the drivers of “a fair and impartial forum.” They cited evidence that defense counsel had reached out to CPR to explore creating the Mass-Claims Protocol, which the employer now wanted to impose on the drivers. In their view, this relationship would give rise to systemic bias in favor of the defendant.

However, the district court granted the employer’s motion to compel arbitration under the CPR protocol (with the exception of those plaintiffs who had successfully opted out of arbitration). The court observed that it was not a “a one-off protocol tailored to [the employer] but is openly available to other companies,” and also “is not so biased that it negates the agreement to arbitrate.” The court declined to opine, though, on whether the plaintiffs might have a valid claim, post-arbitration, that the arbitration decision should be vacated based on a lack of impartiality on the arbitrator’s part. The parties are currently in mediation.

Takeaway

Given the evolving legal and political landscape, employers considering mandatory predispute arbitration agreements should consult with counsel to weigh their advantages and disadvantages and to pursue the best course of action for the organization. Employers with arbitration agreements in place should work with counsel to review those agreements to ensure they are enforceable to the fullest extent allowed by law and drafted in a manner that will optimize their utility as a means of controlling the costs and disruption of litigation, particularly class litigation.

Scott Jang, Samia Kirmani, Linda O'Brien, and Marjorie Johnson also contributed to this article.