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Businesses large and small are asking customers and employees to sign contracts featuring arbitration clauses, seeking to limit exposure to big damages from the inevitable lawsuits. Here are examples of five different arbitration agreements and the important arbitration decisions.
Business arbitration contract clauses
In Sanchez v. Valencia Holding Company, LLC (California Supreme Court, 8/3/15), the buyer signed an agreement including an arbitration clause directing the parties to seek arbitration to resolve disputes, prohibiting class action lawsuits. It did not prohibit the use of so-called “self-help” remedies. The purchaser could still file an action in small claims court, or the dealer could attempt to repossess the car for non-payment. The California courts had routinely found such clauses to be unconscionable; holding that, as this court did in Sanchez, that the right sue in a class action was “unwavable.”
The California Supreme Court relied on a recent US Supreme Court (SCOTUS) decision to overturn the lower court’s decision. The practical result was to force Sanchez into accepting arbitration to resolve his case. The actions of Valencia were so egregious that Mr. Sanchez is likely to collect something in arbitration, still nothing like he might have received in court in front of a jury.
Consumer service contract arbitration clauses
The SCOTUS case that turned the California Supreme Court in Sanchez is AT&T Mobility v. Concepcion, 563 U.S. 333 (2011). The Conceptions sued the phone company over alleged false advertising. Other parties enjoined the suit and it became a class action. AT&T moved to enforce the arbitration clause that prohibited consumers from seeing remedy in a class action suit. Among other provisions, the AT&T arbitration agreement appeared to be generous to consumers, offering to pay for the arbitration and attorney’s fees. The Ninth Circuit Court in California found the clause unfair because of the prohibition against class action suits. It is a “poison pill” test; if any part of the clause is unconscionable, the entire clause is unenforceable.
The majority of the Roberts’ Court disagreed with the lower court. The Federal Arbitration Act (FAA) allows for clauses that prohibit class actions, and the FAA is controlling concerning the validity of arbitration agreements in arbitration cases. Some observers believe that AT&T’s clause survived in part because it clearly favored both parties regardless of the class action issue, and drafters of these clauses should mimic AT&T’s stance.
Employment arbitration contract clauses
Like other arbitration agreements, the employment arbitration clauses seek to prevent class action cases against employers.
Sheila Hobson, an employee of Murphy Oil, an Alabama company, sued her employer, alleging various violations of the Federal Labor Standards Act (FLSA). The employer tried to compel arbitration as per the employment contract. Hobson filed a complaint with the National Labor Relations Board (NLRB) over the arbitration agreement. The NLRB sided with Hobson and ordered Murphy Oil to cease forcing employees to sign such agreements and to retroactively ban the others. The employer appealed to the Fifth Circuit and won. However, the Board held fast to its position and refused to adhere to the Court’s ruling in other arbitration clause matters. The NLRB views arbitration clauses that prohibit class actions as the employer acting to prevent collective action by employees, a violation of the FLSA.
Banking arbitration contract clauses
Arbitration clauses exist in banking environments as well, where checking and savings account agreements – legal contracts – prohibit class action relief. With more commerce and communication occurring online, there are likely thousands of people entered into an arbitration agreement without knowing it. In Martin Vs Wells Fargo Bank, the bank altered a years-old consumer agreement and added an arbitration clause. When the customer, Ms. Martin, tried to sue the bank over customer service issues, the bank tried to force arbitration. Ms. Martin argued she was never notified of the arbitration requirement. The bank sent her snail mail and provided a pop-up when she logged in – as did all customers – on one occasion. The District Court in California found insufficient notice, noting especially that the bank could not prove they gave sufficient notice.
Non-binding arbitration clauses
Businesses sometimes use nonbinding clauses to offer parties to a contract the option to enter into arbitration to resolve a dispute. The nonbinding agreement means that the parties can enter into arbitration as a kind of “test run” before a lawsuit. The parties may agree to the terms of the arbitration or may opt out and go to trial.
In banking and in employment cases, the executive branch of the government is hostile towards arbitration agreements that forbid class actions. Consumer Finance Protection Bureau (CFPB) is studying ways of essentially reversing this so-called “free pass” for arbitration clauses that waive class action rights. The CFPB and the SEC can, under Dodd-Frank, ban arbitration clauses where banking is involved. This, coupled with the NLRB’s hostility towards arbitration clauses, suggests that businesses be wary of using arbitration clauses in contracts in the future.
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