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CarMax v. Fowler and the Federal Arbitration Act

JURIST Guest Columnist Rae Vann of Norris, Tysse, Lampley & Lakis discusses CarMax v. Fowler and the Federal Arbitration Act...

It is now well settled that the use of mandatory arbitration in the employment context is legally permissible. In fact, many would say that the Federal Arbitration Act (FAA)—which requires that agreements to arbitrate be enforced to the same extent and subject to the same defenses as any other contract—expresses a federal public policy favoring mandatory arbitration as a means of resolving employment disputes.

On February 24, 2014, the Supreme Court granted a petition for certiorari in CarMax v. Fowler (PDF), an important case testing the scope of the court's recent jurisprudence regarding the validity of class action waiver clauses contained in mandatory arbitration agreements. In CarMax, the California Court of Appeals held that a group of plaintiffs claiming state wage and hour violations were not required to submit to individual arbitration—despite language contained in arbitration agreements they signed as a condition of employment—because class-based procedures potentially could be significantly more effective in vindicating the employee's rights. The question in CarMax was whether the state court's decision can be reconciled with the FAA, as construed by the court in AT&T Mobility, LLC v. Concepcion (PDF) and American Express Co. v. Italian Colors Restaurant (PDF). The granting of certiorari vacated the ruling of the California Court of Appeals and remanded the case for proceedings consistent with Italian Colors.

In Concepcion, the court considered whether the special rule set out by the California Supreme Court in Discover Bank v. Superior Court, governing enforcement of consumer arbitration agreements containing class waiver provisions was consistent with the FAA. It found that inasmuch as Discover Bank conditions the enforceability of consumer arbitration agreements on the availability of class arbitration procedures, it "creates a scheme inconsistent with the FAA" because it "interferes with fundamental attributes of arbitration" and undermines the FAA's expectation that agreements to arbitrate be enforced in accordance with their terms.

Consistent with that principle, the court ruled last term in Italian Colors that the FAA requires the enforcement of a class waiver contained in a commercial arbitration agreement, even if doing so makes it less desirable financially for an individual plaintiff to pursue his or her claims. The CarMax case raises similar questions, but in the employment arbitration context.

Some lower courts continue to resist the idea that employees can effectively vindicate their legal claims using bilateral, as opposed to class, arbitration. In Gentry v. Superior Court, for instance, the California Supreme Court held that an employment arbitration agreement containing a class waiver is unenforceable "under some circumstances in which such a provision would lead to a de facto waiver and would impermissibly interfere with employees' ability to vindicate unwaivable rights and to enforce overtime laws." Because Gentry predates Italian Colors—which addressed and rejected the same "effective vindication" argument, but in the commercial arbitration context—and has not been overruled by the California Supreme Court, some lower state courts continue to rely on its rationale to invalidate employment class waiver clauses.

Indeed, the California Court of Appeal in CarMax relied on Gentry to invalidate an employment arbitration agreement solely on the ground that it contained a class waiver provision. It distinguished Gentry from the Discover Bank rule at issue in Concepcion, principally on the ground that the Gentry rule requires "a different analysis than Discover Bank's rule of substantive unconscionability for consumer contracts of adhesion."

The Court of Appeals observed that the Discover Bank test is a "legal determination subject to de novo review, while Gentry is based on whether a class action is a significantly more effective practical means of vindicating unwaivable statutory rights, which is a discretionary determination subject to abuse of discretion review." Furthermore, in the court's view, because Concepcion was not an employment case in which "an employee's unwaivable statutory rights were involved," it "does not preclude our application of a Gentry analysis." Both parties unsuccessfully petitioned the California Supreme Court for review, and CarMax filed its cert. petition on October 8, 2013.

The issues presented in CarMax are extremely important to the business community in general, but in particular to the many companies that have adopted company-wide Alternative Dispute Resolution (ADR) programs containing a mandatory arbitration component. A number of employers have adopted mandatory arbitration as a means of resolving employment disputes quickly, without resort to time-consuming and costly litigation—including class actions.

To avoid the burdens and complexities associated with class litigation, some employers include express class action waiver clauses in their mandatory arbitration agreements. Those efforts have been bolstered by the Supreme Court, which has made clear that a rule purporting to invalidate an arbitration agreement simply because it contains a class waiver provision cannot be reconciled with the FAA's mandate that arbitration agreements be enforced as written.

Limiting Concepcion and Italian Colors to the consumer and commercial arbitration contexts would create a strange anomaly in federal arbitration policy. To the extent that the CarMax ruling appeared to create special enforceability rules that apply specifically (if not exclusively) to employment arbitration agreements containing class waiver clauses, it threatened to undermine all of the practical benefits to employers, as well as employees, in agreeing to arbitrate workplace disputes in the first place. In particular, class arbitration of employment disputes can be very costly and procedurally complex, thus eliminating a key advantage of bilateral arbitration that benefits employers and employees alike. Moreover, as a practical matter, any time a case is styled as a class action, the pressure on a defendant to settle is enormous, even in arbitration, regardless of the merits of the case.

Now that the Supreme Court has summarily granted the petition and vacated the decision below in CarMax, the California Court of Appeals will now have an opportunity to consider and properly apply the Supreme Court's pro-arbitration jurisprudence—including Concepcion and Italian Colors—to the employment context, and in doing so reaffirm the well-established principle that where the parties to an arbitration agreement have expressly waived the availability of certain procedures, such as class-wide arbitration, the agreement must be enforced according to its terms.

Rae T. Vann is a partner with the firm, which she first joined in 2000 as an associate. Since 2007, she also has served as General Counsel to the Equal Employment Advisory Council (EEAC), a nationwide employer association dedicated to promoting sound approaches to the elimination of workplace discrimination. 

Ms. Vann received her B.S. in Policy and Management from Carnegie Mellon and her law degree from the University of Connecticut School of Law. She is admitted to practice law in the District of Columbia and the State of Connecticut, as well as before the U.S. Supreme Court and other federal appellate courts.

Suggested citation: Rae Vann, CarMax v. Fowler and the Federal Arbitration Act, JURIST - Sidebar, Mar. 24, 2014, http://jurist.org/sidebar/2014/03/rae-vann-federal-arbitration-act.php.

This article was prepared for publication by Jason Kellam, an assistant editor with JURIST's professional commentary service. Please direct any questions or comments to him at professionalcommentary@jurist.org

Opinions expressed in JURIST Commentary are the sole responsibility of the author and do not necessarily reflect the views of JURIST's editors, staff, donors or the University of Pittsburgh.

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