In recent years courts have debated the enforceability of class action waivers in arbitration agreements. A class action waiver is a provision in an arbitration agreement that expressly prohibits arbitration on a class-wide basis. Companies have tried to defeat class action lawsuits by compelling arbitration pursuant to arbitration agreements with class action waivers. The viability of this strategy has been tested in California with mixed results. For the last several years, California courts have found various class action waivers unenforceable. More recently, however, other California courts have upheld class action waivers, including a case decided just last month. The issue is now pending before the California Supreme Court.
One of the first cases in this area was decided in 1998 in Blue Cross of California v. Superior Court, 67 Cal. App. 4th 42 (1998), where a California appellate court held that, in the absence of an express agreement not to proceed to class arbitration, courts could compel arbitration on a class-wide basis. Thus, an arbitration agreement would not necessarily avoid class litigation, particularly if the agreement was silent on the issue of class-wide arbitration.
In response to this uncertainty, companies drafted arbitration agreements with express class action waivers. But, in 2002, another California appellate court held, in Szeleta v. Discover Bank, 97 Cal. App. 4th 1094 (2002), that an arbitration agreement with a class action waiver was substantively unconscionable because it violated public policy and was, thus, unenforceable.
The trend to disfavor class action waivers shifted in 2003 in Discover Bank v. Superior Court, 105 Cal. App. 4th 326 (2003) review granted, where a California appellate court, within the same district that issued the Blue Cross decision, stated that Szeleta was wrongly decided. The court held that the Federal Arbitration Act (“FAA”) pre-empts California public policy regarding class action waivers contained in valid arbitration agreements governed by the FAA. Thus, the court held that an arbitration agreement with a class action waiver, and which is otherwise valid, is enforceable. The California Supreme Court granted review of Discover Bank, and in particular, will decide whether class action waivers are enforceable in California. The Court is expected to issue its opinion this summer. Thus, the holding in Discover Bank cannot yet be relied upon.
Just a few weeks ago, another California court declined to follow Szeleta in Parrish v. Cingular Wireless, LLC, (filed May 18, 2005). While acknowledging that the issue is pending before the California Supreme Court, the Parrish court found that the class action waiver in the case before it was not unconscionable. In reaching its conclusion, the court stated that, “there is no statutory right to class arbitration”, and further stated just because class-wide arbitrations are permitted in California does not create a right to class-wide arbitration. Parrish is not an employment case and the court was mindful of the various reasons an employment arbitration agreement will be deemed unenforceable (e.g. if it lacks mutuality, if it forces the claimant to forfeit statutory rights, or if it precludes recovery that would otherwise be available in court). Nevertheless, the Parrish case gives new hope for the viability of class action waivers.
We will continue to keep you updated about the status of the enforceability of class action waivers and we will release another update following the California Supreme Court’s decision on the issue. Until then, we recommend employers seek legal advice before relying on employment arbitration agreements with class action waivers and remain cautiously optimistic about the future of such provisions.