More Class: Fifth Circuit Sends Arbitrability to the Court, Not the Tribunal

By Hew Zhan Tze

The Fifth U.S. Circuit Court of Appeals recently held that class arbitrability is to be determined by the Court instead of the arbitrators in a class arbitration case.  20/20 Comms. Inc. v. Lennox Crawford, No. 18-10260 (5th Cir. July 22, 2019). The case appears to add a level of inquiry in the subject matter that may run counter to a U.S. Supreme Case earlier this year.

Several employees of 20/20 Communications, a marketing firm based in Fort Worth, Texas, filed individual arbitration claims against the employer. The arbitrator commenced a class arbitration despite an arbitration agreement contract clause prohibiting the consolidation of individual claims, “on the theory that the parties’ class arbitration bar is prohibited by federal law.”

Following the views of the Fourth, Sixth, Seventh, Eighth, Ninth and Eleventh Circuits, the Fifth Circuit held that where class arbitration is an issue, a legal presumption arises that the Court will determine the availability of class arbitration unless the arbitration agreement contained clear and unmistakable language to the contrary.

The Fifth Circuit, in a unanimous opinion written by Circuit Judge James C. Ho, reversed the decisions of two district courts. In one case, the district court held that the arbitration agreement authorized the arbitrator to determine class arbitrability instead of the court. See 20/20 Comms. Inc. v. Randall Blevins, No. 4:16-cv-00810-Y (N.D. Tex.) (Means, J.). In the other case, the district court held that the class arbitration bar was unenforceable under the National Labor Relations Act. See 20/20 Comms. Inc. v. Lennox Crawford, No. 4:17-cv-929-A (N.D. Tex.) (McBryde, J.).

The Fifth Circuit determined that class arbitrability is a gateway issue for the court. It rejected the employee’s arguments that the delegation provisions in the arbitration agreement clearly and unmistakably delegated the determination of class arbitrability to the arbitrator.

The circuit court said class arbitrability falls under the category of a gateway issue which would presumptively be determined by the courts because (i) the increased size and complexity of the dispute, (ii) the due process concerns that are raised and (iii) the privacy and confidentiality of the parties may be compromised.

While these factors point toward class arbitrability being a gateway issue, the appeals court stops short of elaborating on why arbitrators are not well-equipped to handle these concerns. An arbitrator could undertake these considerations and determine not to consolidate the individual claims.

Regardless, it means that the court could be involved despite the parties’ attempt to resolve the dispute via arbitration. Additionally, to the extent the employee can bargain, the individual may not reach an agreement with the employer to use the “clear and unmistakable” language sought by the courts to override the legal presumption that the court is to decide class arbitrability.

Having raised the legal presumption that class arbitrability is to be determined by the court, not the arbitrator, the court’s next task, according to the Fifth Circuit, would be to assess whether the arbitration agreement contained delegation provisions in clear and unmistakable language that would override the legal presumption. The circuits courts are currently split on whether traditional delegation provisions are sufficient to override this legal presumption.

The Arbitration Nation blog points out that in the Second, Tenth and Eleventh Circuits, traditional delegation provisions which submits any dispute to the arbitrator were held to be sufficient to overcome the presumption, citing Wells Fargo Advisors LLC v. Sappington, 884 F. 3d 392 (2nd Cir. 2018) and Spirit Airlines, Inc. v. Maizes, 899 F. 3d 1230 (11th Cir. 2018). See Henry Allen Blair, “The Fifth Circuit Weighs in About Who Decides Class Arbitrability,” Arbitration Nation (July 28) (available at http://bit.ly/2KqcIFu). It is noted that the Tenth Circuit held similarly in Dish Network L.L.C. v. Matthew Ray, 900 F.3d 1240 (10th Cir. 2018).

On the other hand, Blair’s Arbitration Nation post notes that the Third, Fourth, Sixth and Eighth Circuits concluded that notwithstanding traditional delegation provisions or provisions incorporating institutional rules which delegates the decision of class arbitrability to the arbitrator, the decision of class arbitrability still lies with the Court. See Opalinski v. Robert Half Intern Inc., 761 F. 3d 326 (3rd Cir. 2014); Dell Web Communities Inc. v. Carlson, 817 F.3d 867 (4th Cir. 2016); Reed Elsevier Inc. v. Crockett, 734 F. 3d 594 (6th Cir. 2013), and Catamaran Corp. v. Towncrest Pharmacy, 864 F. 3d 966 (8th Cir. 2017), among others.

In the Fifth Circuit Crawford opinion, typical delegation provisions were included in the arbitration provision. Interestingly, after a brief discussion of the delegation provisions at issue, the court stated that it ultimately need not make a conclusion on “[w]hether these provisions, standing alone, clearly and unmistakably empower the arbitrator to decide questions of class arbitrability.” Instead, the Court considered it sufficient to compare the class arbitration bar at issue with the delegation provisions to reach the conclusion that none of the provisions “state with the requisite clear and unmistakable language that arbitrators, rather than courts, shall decide questions of class arbitrability.”

The Fifth Circuit’s conclusion raises an important question: What language used in the arbitration agreement would be clear and unmistakable enough to overcome the legal presumption that it is the courts that will decide class arbitrability instead of the arbitrators when there is a contractual clause barring class arbitration?

“[T]here is tension in this decision,” notes Philip J. Loree Jr., of New York’s Loree & Loree, who closely watches class arbitration cases, “and I think the culprit is the Court’s ruling that the clarity of the class arbitration waiver should be considered as evidence that the parties did not clearly and unmistakably  intend arbitrators to decide arbitrability.”

Loree notes in an email, “Whether or not the class arbitration waiver is clear and unmistakable says nothing about who is supposed to interpret and apply the waiver. This, he notes, gives the impression that the Fifth Circuit is —perhaps unintentionally— making an end around this year’s U.S. Supreme Court rejection of the “wholly groundless” exception to the clear and unmistakable rule set out in Henry Schein, Inc. v. Archer And White Sales, Inc., 139 S.Ct. 524 (2019) (available at http://bit.ly/2YLDkWQ) (see Mark Kantor, “Implications of Henry Schein and New Prime US Supreme Court Decisions,” CPR Speaks (Jan. 22) (available at http://bit.ly/33d5nSo).

Loree notes that where an arbitrator ignores the parties’ clear and unmistakable class arbitration waiver, the award would presumably be vacated under Federal Arbitration Act Section 10(a)(4), following the Supreme Court’s decisions in Stolt-Nielsen S.A v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010) and Oxford Health Plans LLC v. John Ivan Sutter, 133 S.Ct. 2064 (2013).

“But rather than allow that scenario to play itself out,” he continues, “the Fifth Circuit has effectively conflated the clarity of the contract on the merits issue (class arbitration consent) with the clarity of the contract on the issue of who gets to decide class arbitration consent.”

This, according to Loree, runs counter to the Supreme Court’s Schein decision.

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The author is a CPR Institute summer intern.

 

More on Mass Individual Arbitration As an Alternative to Class Arbitration

By Echo K.X. Wang

A plaintiffs-side law firm is embracing a recently developed path to pursuing employment disputes against companies that mandate class-action waivers.

Last month in California’s Northern District federal court, Uber and Lyft were separately faced with individual JAMS Inc./American Arbitration Association claims and petitions to compel arbitration from thousands of Uber and Lyft drivers working for each company.

The Uber lawsuit, Abadilla v. Uber Technologies Inc., is scheduled for a hearing on a motion to compel arbitration on March 28 with U.S. District Court Judge Edward M. Chen. (The Abadilla case page is available at http://bit.ly/2By5Zpf.)

The Lyft lawsuit, Abarca v. Lyft Inc., is scheduled for an initial case management conference on Mar. 14, 2019 with U.S. District Court Judge William Haskell Alsup. (The Abarca case page can be found at http://bit.ly/2Svtny8.)

The drivers claimed that the ride-share companies have misclassified them as independent contractors and violated the Fair Labor Standards Act.

The basis for these arbitration claims arose in light of last year’s California Supreme Court case, Dynamex v. Superior Court of Los Angeles County, 4 Cal. 5th 903 (Cal. April 30, 2018) (available at http://bit.ly/2ByKGnH), where the state’s top Court limited companies’ ability to label their workers as independent contractors. Unlike workers classified as employees, independent contractors, including Lyft and Uber drivers, are not entitled to minimum wage and other benefits promised under state and federal law.

The U.S. Supreme Court last year ruled in favor of employers in limiting employee’s ability to bring class suits, backing waivers in favor of mandatory individual arbitration, in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) (available at https://bit.ly/2rWzAE8); see also Noah Hanft, “What’s Next for Employers, Post Epic Systems?” Corporate Counsel (July 24, 2018) (available on the CPR Institute’s website at http://bit.ly/2E6ZUlB).

Another earlier Supreme Court case, Stolt-Nielsen v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) (available at http://bit.ly/2SP4ugk), held that a party may not be compelled to submit to class arbitration under the Federal Arbitration Act unless otherwise provided for within the contract.

These decisions impose restrictions on employees’ ability to resolve workplace disputes, requiring them to arbitrate claims individually.

Yet 2019 has started off with a shift toward a more expansive view of workers’ rights which will affect—in ways yet to be determined—resolving conflicts with their employers. Last month, the Supreme Court in New Prime v. Oliveira, No. 17–340 (2019) (available at https://bit.ly/2CyEpbd) resolved a circuit split about whether the FAA Section 1 exemption applies to independent contractor agreements.

Plaintiff Oliveira brought a class action wage-and-hours claims against New Prime, an interstate trucking company. When New Prime sought to enforce its mandatory arbitration agreement under the FAA, Oliveira contended that he qualifies for the FAA Section 1 exemption, and the FAA shouldn’t apply to his case, thereby striking the mandatory arbitration clause in his independent contractor agreement.

The exemption clause states that “nothing herein” the FAA “shall apply to contracts of employment of . . . any [] class of workers engaged in foreign or interstate commerce.” While both parties agreed that Oliveira is considered a class of worker “engaged in interstate commerce,” the parties disagreed on whether the FAA’s “contracts of employment” included independent contractor agreements, or only to employer-employee agreements.

In the unanimous 8-0 decision by Justice Neil M. Gorsuch—new Justice Brett Kavanaugh wasn’t seated when the case was argued and didn’t participate—the Court held that “contract of employment” includes a broad reading of employee-employer relationships, including independent contractor agreements. Therefore, under FAA Sec.1, transportation workers like Oliveira may not be compelled to arbitrate.

Looking to the historical usage of the word “employment,” Gorsuch explained that when the FAA was enacted in 1925, “employment” was understood broadly to be “more or less as a synonym for ‘work.’” He also noted that both federal and state courts in the early 20th century have used the term “contract of employment” to describe work agreements involving independent contractors.

In summary, he wrote, “a contract of employment did not necessarily imply the existence of an employer-employee . . . . relationship.” (Emphasis is in the opinion.)

* * *

The New Prime decision could have a significant impact on the interstate transportation industry, including the outcomes of the pending Uber and Lyft disputes. Chicago-based law firm Keller Lenkner  initially filed and is orchestrating both the 12,501 arbitrations claims against Uber (Abadilla v. Uber Technologies Inc.)and the 3,420 Lyft drivers arbitration claims against Lyft (Abarca v. Lyft Inc.).

When the two companies failed to fully pay the initial arbitration filing fees as promised within the companies’ arbitration agreements, Keller Lenkner enlisted Los Angeles firm Larson O’Brien LLP to help with the Uber Abadilla cases, and filed a motion to compel arbitration against both companies in the N. D. California District Court.

It is not a surprise that Uber and Lyft are delaying the fee payments. As it turns out, the large numbers of individual arbitrations are expensive and time consuming for companies. In the Uber arbitrations under JAMS, the initial filing fees for arbitration is $1,500 per dispute.

Similarly, Lyft’s American Arbitration Association arbitrations are $1,900 per dispute. A detailed list of AAA’s employment dispute arbitration fees is available at https://bit.ly/2X4VD9Q.

At the same time, Uber counters in the joint case management statement filed by both parties on Feb. 7 that the plaintiffs haven’t paid their arbitration fees either. The joint statement is available at http://bit.ly/2X10Tew.

Uber even proposed to resolve the arbitrations through four representative arbitrations. Alison Frankel, “Forced into arbitration, 12,500 drivers claim Uber won’t pay fees to launch case,” Reuters (Dec. 6, 2018) (available at https://reut.rs/2tha1xS). While Keller Lenkner rejected this offer on behalf of its clients, it is interesting and unusual that Uber proposed the equivalent of class arbitration, after fighting so hard—and successfully—against class action arbitrations at the Ninth U.S. Circuit Court of Appeals. O’Connor, et al.  v. Uber Technologies Inc., No. 14-16078 (Sept. 25, 2018) (available at http://bit.ly/2Gnhggl).

In combatting these individual arbitration claims, the ride-share companies adopted several tactics including: 1) delay the arbitrations by not paying the arbitration initial filing fees, 2) challenging their opposing counsels’ qualifications, and 3) offering incentives for employees to drop their arbitration claims.

The tactic to delay arbitration fee payments, as both Uber and Lyft seem to be doing, is not new. See Howard E. Levin, Stiffing the Arbitrators and the Respondents, ABA GPSolo eReport (Aug. 22, 2017) (available at http://bit.ly/2WZQD6c). Neither is the plaintiffs’ push for mass individual arbitrations. See Jessica Goodheart, “Why 24 Hour Fitness Is Going to the Mat against Its Own Employees,” Fast Company (March 13) (available at http://bit.ly/2pkDPIm) (A class of health club employees decertified by a California federal court filed hundreds of individual arbitrations, which the employer settled as a group); Ben Penn, “Buffalo Wild Wings Case Tests Future of Class Action Waivers,” Bloomberg Law (July 12, 2018), https://bit.ly/2Sx9qXY (Workers at Buffalo Wild Wings filed nearly 400 individual arbitrations for wage-and-hour disputes, which also resolved in a group settlement).

Uber and Lyft did not respond to a request for comment.

Since arbitrations can only proceed after the initial filing fees are paid, there is perverse incentive for companies to delay or even refuse to pay the arbitration fees, in hopes that employees would either pay for the filing fees themselves, or simply give up and abandon the claims altogether.

As noted, the companies advanced arguments to attack the qualifications of their opposing firms and attorneys. In a separate but similar wage-and-hour arbitration dispute at the California Northern District federal court, Uber succeeded in its motion to disqualify Keller Lenkner and its partner Warren Postman from representing Diva Limousine against Uber in Diva Limousine Ltd. v. Uber Technologies Inc. (case page available at http://bit.ly/2Ia1wz2).

In Diva, Uber argued that in his previous job at the U.S. Chamber of Commerce, Postman frequently “exchanged confidential and privileged communications [with Uber] on the driver classification issue,” and should therefore be disqualified for conflicts of interest. (A detailed account of Uber’s argument can be found at Alison Frankel, “Law firm for Uber drivers in mass arbitration is bounced from federal court case,” Reuters (Jan. 10) (available at https://reut.rs/2GntPYS).

On Jan. 11, Judge Edward M. Chen from the California Northern District federal court in San Francisco granted Uber’s motion to disqualify Postman & Keller Lenkner. On Feb. 11, 2019, the plaintiff appealed this decision to the Ninth Circuit, filing a writ of mandamus.

Uber is now trying to use the Diva opinion as the basis to disqualify Keller Lenkner and Larson O’Brien in the Abadilla case. In Uber’s opposition to the plaintiffs’ motion to compel arbitration (see motion available at http://bit.ly/2TNcnjx), the company argued that while the counsel of record for the 12,501 drivers is the Larson O’Brien firm, the arbitration demands were initially submitted to JAMS by Keller Lenkner.

Uber expressed doubts on Larson O’Brien’s involvement in the case, alleging that Keller Lenkner, with Larson O’Brien by association, should not be able to represent the drivers given the Diva disqualification judgment.

Keller Lenkner might face the same conflict problem against Lyft as well.  In November, soon after Keller Lenkner requested arbitration, Lyft filed a tort lawsuit against Postman, seeking both money damages and an injunction against Postman from representing the Lyft drivers in arbitrations. (Lyft Inc. v. Postman, case court docket available at https://bit.ly/2SRO4DY). There, Lyft alleged that Postman worked closely with Lyft when he was at the Chamber of Commerce, and like Uber, alleged that he was exposed to confidential information about Lyft’s driver classification issues (see motion available at https://bit.ly/2tiNMYu).

On Jan. 16, the Court grant an extension for Postman to respond to the complaint, but Postman has yet to respond as of Feb. 14. It is unclear if the Diva opinion, now on appeal, would affect Keller Lenkner’s eligibility to represent the drivers in the Lyft arbitrations.

* * *

In addition to stalling the arbitration and imposing other defenses against the arbitrations, Uber and Lyft might also consider other ways to settle these claims. Uber already did this in the past, in offering to pay 11 cents per mile in exchange for drivers to opt out of another arbitration. After all, Uber and Lyft are both hoping to go public in the next few months, and it would be to their advantage to resolve these matters before then.

It is unknown if mass individual arbitrations—the plaintiffs’ “death by a thousand cuts” strategy—will turn out to be a key path for gig-economy workers. While mass individual arbitrations may impose pressure for companies to change their policies or to settle, would it be possible to arbitrate so many disputes?

Although it appears that Uber is stalling for time by attacking Postman’s qualifications, it is questionable whether Keller Lenkner, a 10-attorney firm, is equipped to handle more than 16,000 individual arbitrations–though, according to Keller Lenkner, they have been referring affected clients to other firms as a way to address this problem.

The plaintiffs’ mass arbitration strategy also has been questioned by experts, who wonder whether it risks corrupting the processes.  They charge that attorneys employing this strategy may be trying to gain negotiation leverage, rather than intending to arbitrate each claim, which, they say, is detrimental to ADR. See Andrew Wallender, “Corporate Arbitration Tactic Backfires as Claims Flood In,” Bloomberg Law (Feb. 11) (available at https://bit.ly/2BwruqF).

Moreover, in light of New Prime, significant changes loom in how transportation workers bring their claims. For drivers in the ride-share industry who “engage[] in … interstate commerce,” New Prime stands for the proposition that they have a choice to bring future wage and hour claims directly to the state and federal courts, rather than through arbitrations.

Another question is whether Uber and Lyft drivers will fit under the FAA Sec. 1 umbrella of transportation workers “engaged in … interstate commerce.” Even if they are, how will the New Prime sit with individual state laws and regulations?

 

The author is a Spring 2019 CPR Institute intern, and a student at Brooklyn Law School.