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Arbitrator improperly imposed class arbitration
May 20, 2012 by Ross Runkel at LawMemo

The 5th Circuit has held that an arbitrator improperly imposed class arbitration where the agreement was silent on that point. The dispute must be arbitrated, but on an individual basis rather than as a class action.

Reed v. Florida Metro University (5th Cir 05/18/2012)

Jeffrey Reed spent over $50,000 getting an online bachelor's degree in paralegal studies. Apparently he though this would qualify him to attend law school, but it didn't.

Reed brought a putative class action under a Florida statute to recover his expenses in getting his online bachelor's degree in paralegal studies, claiming that law schools and employers would not recognize it and claiming the school misled him.

The trial court granted the university's motion to compel arbitration and found that it was for the arbitrator to decide whether the parties' arbitration agreement provided for class arbitration.

The arbitrator determined that the parties implicitly agreed to class arbitration and entered an award to that effect.

The trial court confirmed the award, but the 5th Circuit reversed.

(1) The court first concluded that the trial court properly referred the class arbitration issue to the arbitrator. The parties agreed to use AAA Rules, and those say this is an issue for the arbitrator to decide.

(2) The court then vacated the arbitrator's decision, finding that the arbitrator exceeded his powers because "the arbitrator forced the parties into class arbitration without a contractual basis for doing so." The text of the arbitration agreement was silent on the subject of class actions. The court rejected the arbitrator's reasoning that there was a contractual basis for class arbitration; specifically

(a) that the parties agreed to arbitrate "any dispute,"

(b) that the parties agreed that "any remedy" available from a court is available in arbitration, and

(c) that the agreement's silence as to class arbitration was persuasive because the university could have drafted the agreement to preclude class arbitration.

[The court specifically rejected a contrary holding by the 2nd Circuit.]

My view: Basically, the court did not like the arbitrator's reasoning or the result he reached. Maybe the arbitrator's reasoning makes you scratch your head, but that really is not a legitimate ground for overturning an arbitration award. The parties bargained for the arbitrator's analysis - not the court's analysis. So, in the name of defending arbitration, the court fails to follow one of the basic rules. The end result is totally logical, but the means (taking the decision away from the arbitrator) was wrong.

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NLRB arbitration deferral to change?
January 22, 2012 by Ross Runkel at LawMemo

Here is the NLRB's January 20 press release, announcing the General Counsel's intent to try to get the Board to change its arbitration deferral policy:

Citing concerns about delays in processing grievances through parties’ contractual grievance-arbitration procedures, NLRB Acting General Counsel Lafe Solomon has proposed that the Board consider revising the existing policy of deferring charges to arbitration in certain circumstances.

When it is anticipated that charges alleging violations of Section 8(a)(1) and (3) – which include discharges or other discrimination based on union activities -- will not be resolved or arbitrated within a year, Acting General Counsel Solomon would urge that the Board not defer the case, but rather decide the case on the merits. He would also apply the new policy to cases that have already been deferred for more than one year. Mr. Solomon specifically targeted cases involving issues of unlawful discrimination and interference with workers’ protected rights because they are significant and uniquely within the Board’s expertise.

In a memo issued today, Acting General Counsel Solomon directed Regional staff to investigate whether there are significant backlogs or other probable delays in the grievance-arbitration process before making a determination to defer a case alleging Section 8(a)(1) and (3) violations. If the arbitration of this claim is likely to be delayed by more than a year, the Region should not defer the matter to the grievance-arbitration process. Instead, it should fully investigate the charge and, if meritorious, send the case to the Division of Advice at NLRB headquarters for further action. Regional offices should also regularly monitor deferred cases, and, if the case has not been arbitrated or resolved within a year, the Region should consider the parties’ positions and submit the case to the Division of Advice if it determines that the case is meritorious or that continued deferral is appropriate based upon the circumstances of that particular case.

This directive applies only to union workplaces where grievance-arbitration procedures are spelled out in a collective-bargaining agreement. It applies to all pending cases, including those that have already been deferred for more than a year. The directive will not apply to typical Section 8(a)(5) cases, which often involve allegations of contractual violations, that are normally better left to resolution through arbitration.

The National Labor Relations Board has a long-standing policy to defer charges made by employees to the parties’ grievance-arbitration procedures contained in a collective bargaining agreement, as long as certain conditions are met. Deferral of cases has been done in order to promote collective bargaining and the private resolution of disputes, presumably more quickly than through the NLRB’s administrative process. The Board later reviews the resulting arbitration decision to ensure that it meets certain standards.

The Acting General Counsel’s goal, as described in the memo, is to ensure a prompt resolution of disputes in those cases in which backlogs hold up the process for many years. Acting General Counsel Solomon wrote, “Excessive delays can render enforcement of a Board order ‘pointless and obsolete.’ The circumstances may have changed so much at the job site that by the time a Board order issues it would be impossible to effect meaningful compliance, and the Charging Party would be left without a remedy. This lack of a remedy can erode public respect and confidence in the law.”

The central review of cases in Headquarters’ Division of Advice will allow the Acting General Counsel to identify trends and bring the issue to the Board.

Today’s memo builds upon an earlier General Counsel directive regarding Board deferral to grievance-arbitration procedures. That memo suggested new ways for the Board to analyze arbitration awards to ensure that workers’ rights under the law have been addressed and protected.

And here is the full memo.

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Credit card holders must arbitrate claims
January 10, 2012 by Ross Runkel at LawMemo

The US Supreme Court held today that the Credit Repair Organizations Act (CROA) does not trump the Federal Arbitration Act (FAA) requirement that an arbitration agreement must be enforced according to its terms.

CompuCredit Corp v. Greenwood (US SUpreme Court 01/10/2012).

The Court's syllabus:

Although respondents’ credit card agreement required their claims to be resolved by binding arbitration, they filed a lawsuit against petitioner CompuCredit Corporation and a division of petitioner bank, alleging, inter alia, violations of the Credit Repair Organizations Act (CROA). The Federal District Court denied the defendants’ motion to compel arbitration, concluding that Congress intended CROA claims to be nonarbitrable. The Ninth Circuit affirmed.

Held: Because the CROA is silent on whether claims under the Act can proceed in an arbitrable forum, the Federal Arbitration Act (FAA) requires the arbitration agreement to be enforced according to its terms. Pp. 2–10.

(a) Section 2 of the FAA establishes “a liberal federal policy favor- ing arbitration.” Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1, 24. It requires that courts enforce arbitration agreements according to their terms. See Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213, 221. That is the case even when federal statutory claims are at issue, unless the FAA’s mandate has been “over-ridden by a contrary congressional command.” Shearson/American Express Inc. v. McMahon, 482 U. S. 220, 226.

(b) The CROA provides no such command. Respondents contend that the CROA’s disclosure provision—which requires credit repair organizations to provide consumers with a statement that includes the sentence “ ‘You have a right to sue a credit repair organization that violates the [Act],’ ” 15 U. S. C. §1679c(a)—gives consumers the right to bring an action in a court of law; and that, because the CROA prohibits the waiver of “any right of the consumer under this sub- chapter,” §1679f(a), the arbitration agreement’s waiver of the “right” to bring a court action cannot be enforced. Respondents’ premise is flawed. The disclosure provision creates only a right for consumers to receive a specific statement describing the consumer protections that the law elsewhere provides, one of which is the right to enforce a credit repair organization’s “liab[ility]” for “fail[ure] to comply with [the Act].” §1679g(a). That provision does not override the FAA’s mandate. Its mere contemplation of judicial enforcement does not demonstrate that the Act provides consumers with a “right” to initial judicial enforcement.

(c) At the time of the CROA’s enactment in 1996, arbitration clauses such as the one at issue were no rarity in consumer contracts generally, or in financial services contracts in particular. Had Congress meant to prohibit these very common provisions in the CROA, it would have done so in a manner less obtuse than what respondents suggest. Pp. 8–9.

615 F. 3d 1204, reversed and remanded.

SCALIA, J., delivered the opinion of the Court, in which ROBERTS, C. J., and KENNEDY, THOMAS, BREYER, and ALITO, JJ., joined. SOTOMAYOR, J., filed an opinion concurring in the judgment, in which KAGAN, J., joined. GINSBURG, J., filed a dissenting opinion

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NLRB seeks briefs on class action arbitration issue
June 21, 2011 by Ross Runkel at LawMemo

The NLRB is inviting briefs [link to Invitation] on the following issue:

Did the respondent violate Section 8(a)(1) of the [National Labor Relations Act] by maintaining and enforcing its Mutual Arbitration Agreement, under which employees are required, as a condition of employment, to agree to submit all employment disputes to individual arbitration, waiving all rights to a judicial forum, where the arbitration agreement further provides that arbitrators will have no authority to consolidate claims or to fashion a proceeding as a class or collective action?

Briefs are due July 20.

My view:

This is a case of extraordinary importance because -

(1) The US Supreme Court has held that an arbitration agreement containing a class action waiver is enforceable under the Federal Arbitration Act even if such a provision would be considered unconscionable under the laws of a particular state. AT&T Mobility LLC v. Concepcion (US Supreme Court 04/27/2011).

(2) If the NLRB holds that such an agreement violates the National Labor Relations Act, then employers who maintain such agreements will be subject to unfair labor practice charges. So, employers would not be able to implement such an agreement in spite of the Supreme Court decision.

(3) Any decision by the NLRB in this case will apply to both unionized and non-union employers in the private sector.

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SCOTUS case on arbitration waiver is settled
June 07, 2011 by Ross Runkel at LawMemo

Stok & Associates v. Citibank was pending in the US Supreme Court, but the parties have settled, and the Court dismissed the case. [Order]

Stok and Citibank had a contract governing their banking relationship, and the contract contained an agreement to arbitrate all disputes. After a dispute arose regarding Citibank's handling of a check, Stok sued in state court alleging a number of state law claims. Citibank filed an answer which made no reference to arbitration. Over the following two weeks, Stok made four filings relevant to its case (offer of judgment, request for production, reply, notice of readiness for trial) and the court set a trial date. Two weeks later Citibank filed a motion to compel arbitration in state court. Another month later Citibank filed a petition to compel arbitration in federal court, which was denied. The 11th Circuit reversed.

The 11th Circuit reasoned that Citibank's participation in litigation did not result in prejudice to Stok. Citibank delayed for only one month before invoking its right to arbitrate, and Stok could not point to any portion of the record that reveals either the amount of money it spent or the number of hours it dedicated to conducting litigation-specific discovery and preparing litigation-specific documents.

The US Supreme Court granted certiorari to review the 11th Circuit judgment. The Supreme Court dismissed the case on June 2, 2011 because the parties settled.

The terms of the settlement have not been disclosed.

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Federal Arbitration Act preempts state law that made class action waiver unconscionable (5-4)
April 27, 2011 by Ross Runkel at LawMemo

Today's decision in AT&T Mobility v. Concepcion (US Supreme Ct 04/27/2011):

In Discover Bank v. Superior Court, 36 Cal4th 148, 113 P3d 1100 (2005), the California Supreme Court held that class action waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud.

The US Supreme Court (5-4) held that California's Discover Bank rule is preempted by the Federal Arbitration Act (FAA) because it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."

The cell phone contract between the Concepcions and AT&T provided for arbitration of all disputes, but required that claims be brought in the parties' "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." The Concepcions sued AT&T for charging $30.22 in sales tax for a "free" phone. The trial court denied AT&T's motion to compel arbitration. Relying on Discover Bank, it found the arbitration provision unconscionable because it disallowed classwide proceedings. The 9th Circuit agreed, and held that the FAA, which makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," did not preempt its ruling. The US Supreme Court (5-4) reversed.

The FAA's overarching purpose is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate informal, streamlined proceedings. Parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom they will arbitrate.

Class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, interferes with fundamental attributes of arbitration. The switch from bilateral to class arbitration sacrifices arbitration's informality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. And class arbitration greatly increases risks to defendants. The absence of multilayered review makes it more likely that errors will go uncorrected. That risk of error may become unacceptable when damages allegedly owed to thousands of claimants are aggregated and decided at once. Arbitration is poorly suited to these higher stakes. In litigation, a defendant may appeal a certification decision and a final judgment, but 9 USC. §10 limits the grounds on which courts can vacate arbitral awards.

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Court will not order consolidation of union's multi-unit grievance
March 08, 2011 by Ross Runkel at LawMemo

UFCW v. MultiCare Health Sys (W.D. Wash 03/03/2011) is an interesting case.

The union filed a grievance in response to the employer's change in its policy on paying employees who are furloughed due to infectious conditions.

The union represents employees in eight bargaining units, and sought a court order to conduct a single arbitration for all units.

The US District Court held that (1) the court (not an arbitrator) should decide this issue, and (2) consolidation will not be ordered.

The court found that the parties did not intend consolidated arbitration.

The eight collective bargaining agreements differ as to arbitrator selection; two use a pre-selected list of arbitrators, and six provide for selection using an FMCS list. If one arbitrator decided the case, then he or she would act in excess of authority by deciding an issue under contracts that did not provide for his or her appointment.

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SOX ban on pre-dispute arbitration agreements is retroactive
March 01, 2011 by Ross Runkel at LawMemo

Pezza v. Investors Capital (D Mass 03/01/2011):

Pezza sued claiming retaliation in violation of the whistleblower provisions of the Sarbanes-Oxley Act. While the employer's motion to compel arbitration was under advisement, Congress enacted the Dodd-Frank Act which enacted a bar to pre-dispute arbitration agreements for whistleblower claims brought under the Sarbanes-Oxley Act.

The US District Court for Massachusetts held that the Dodd-Frank ban on pre-dispute arbitration agreements is retroactive, and denied the employer's motion to compel arbitration.

Although the Act says nothing about retroactive application, leaving the question "far from clear," the court reasoned that the ban was in the nature of a procedural provision rather than one dealing with substantive rights.

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Arbitration agreement cannot waive right to administrative wage hearing
February 24, 2011 by Ross Runkel at LawMemo

The California Supreme Court held today [Sonic-Calabasas A Inc v. Moreno (California 02/24/2011) (4-3)] that an arbitration agreement cannot waive an employee's right to have an administrative hearing to resolve a claim for unpaid wages.

Under California's unpaid wages statute, an employee can seek an administrative hearing which results in a nonbinding decision, followed by an appeal de novo to a trial court. Moreno, who had signed an agreement to arbitrate all claims, filed an administrative wage claim with the state Labor Commissioner. The employer petitioned the trial court to compel arbitration and dismiss the administrative proceeding, but this was denied as premature. The California Supreme Court agreed that the petition to compel arbitration was premature and must be denied, holding that:

(1) A waiver of the administrative hearing violates public policy. The right to this administrative proceeding is an unwaivable right that an employee cannot relinquish as a condition of employment. The administrative proceeding provides many benefits to employees (e.g., the Labor Commissioner's representation in the superior court of employees unable to afford counsel, the requirement that the employer post an undertaking in the amount of the award, and a one-way attorney fee provision that requires an employer that is unsuccessful in the appeal to pay the employee's attorney fees) as a means of furthering the public purpose of ensuring the payment of wages owed.

(2) A waiver of the administrative hearing is unconscionable because the arbitration agreement was an adhesion agreement and the waiver is "markedly one-sided."

(3) The Federal Arbitration Act does not preempt a decision that waiver of the administrative proceeding violates public policy and is unconscionable. [Ed. Note: A decision on a closely related issue is pending in the US Supreme Court in AT&T Mobility v. Concepcion.]

(4) Courts may enforce the arbitration agreement as it relates to the court proceedings that may follow after the administrative hearing is held.

The DISSENT argued that (1) when parties have agreed to arbitrate, the Federal Arbitration Act supersedes state laws that lodge primary jurisdiction in administrative agencies, and (2) enforcing the arbitration provision does not violate California public policy and is not unconscionable.

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SCOTUS will decide arbitration waiver issue
February 22, 2011 by Ross Runkel at LawMemo

Today the US Supreme Court granted certiorari in Stok & Associates v. Citibank.

The issue, as presented in the petition for certiorari:

Despite the prevalence of arbitration provisions, parties very frequently elect to waive their contractual right to arbitrate and instead seek to resolve their disputes in a court of law. Because this Court has yet to rule upon when such a waiver becomes binding, a broad and profound conflict has arisen in the Circuit courts as to whether a showing of prejudice is required to render such a waiver irrevocable. Therefore, it is necessary for this Court to answer the following inquiry:

Under the Federal Arbitration Act (“FAA”), should a party be required to demonstrate prejudice after the opposing party waived its contractual right to arbitrate by participating in litigation, in order for such waiver to be binding and irrevocable?

This case will be scheduled for oral argument some time in the Fall of 2011.

Opinion of the 11th Circuit

Petition for writ of certiorari

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NLRB deferral to arbitration: Changes coming
January 25, 2011 by Ross Runkel at LawMemo

The NLRB's Acting General Counsel has announced that he will urge the National Labor Relations Board to change its framework for post-arbitral deferral.

Memorandum GC 11-05, January 20, 2011

For a very long time the NLRB has had a policy of declining to take jurisdiction over an unfair labor practice charge when an arbitrator has already issued an award. This policy of deferring to an arbitrator's award has been applied when the contract and statutory issues were “factually parallel” and the arbitrator was “presented generally with the facts relevant to resolving the unfair labor practice”

In the GC's view, this policy needs revision when it comes to Section 8(a)(1) and (3) cases. Why? Because these cases involve questions of individual employees' statutory rights as contrasted with employees' collective rights or rights of a union.

The proposed change? To ensure that the NLRB defers to an arbitration award only if the arbitrator has actually considered the statutory rights. And to shift the burden of proof to the party that is urging deferral.

The GC summarizes his lengthy memorandum as follows:

To summarize, we will urge the Board to modify its approach in Section 8(a)(1) and (3) post-arbitral deferral cases as follows:

1. The party urging deferral should have the burden of demonstrating that: (1) the contract had the statutory right incorporated in it or the parties presented the statutory issue to the arbitrator; and (2) the arbitrator correctly enunciated the applicable statutory principles and applied them in deciding the issue.

2. If the party urging deferral makes that showing, the Board should defer unless the award is clearly repugnant. The award should be considered clearly repugnant if it reached a result that is “palpably wrong,” i.e., the arbitrator’s award is not susceptible to an interpretation consistent with the Act.

3. The Board should not defer to a pre-arbitral-award grievance settlement unless the parties themselves intended the settlement to also resolve the unfair labor practice issues. Where the evidence demonstrates that the parties intended to settle the unfair labor practice charge, the Board should continue to apply current non-Board settlement practices and procedures, including review under the standards of Independent Stave.

My view:

Makes sense to defer to an arbitrator who has actually considered the statutory issue as opposed to an arbitrator who has decided a contract issue that is "factually parallel."

The Democrat-dominated Board will adopt this new policy.

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SCOTUS: Arbitrator, not court, decides whether arbitration agreement is unconscionable (5-4)
June 21, 2010 by Ross Runkel at LawMemo

The US Supreme Court decided Rent-A-Center West v. Jackson (US Supreme Ct 06/21/2010) this morning.

When he was hired, Jackson signed an agreement to arbitrate all future disputes. That agreement provided: "The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable."

Jackson sued under 42 USC Section 1981, claiming race discrimination and retaliation. The trial court granted the employer's motion to dismiss and to compel arbitration. The 9th Circuit (2-1) reversed.

Jackson argued that the arbitration agreement was unconscionable, and that the issue of unconscionability must be decided by a court rather than an arbitrator.

The US Supreme Court held (5-4) that under the Federal Arbitration Act, where an agreement to arbitrate includes an agreement that the arbitrator will determine the enforceability of the agreement, if a party challenges specifically the enforceability of that particular agreement, the district court considers the challenge, but if a party challenges the enforceability of the agreement as a whole, the challenge is for the arbitrator.

The agreement contained two arbitration provisions, one to arbitrate employment disputes, and a second to give the arbitrator exclusive authority to resolve the "gateway" question of whether the agreement is enforceable. The employer sought enforcement of the second provision, which is severable from the rest of the contract. Jackson did not challenge this second provision specifically, so the Court treated his challenge as a challenge to the whole contract. It is well settled that a challenge to the whole contract is an issue to be resolved by the arbitrator rather than the court.

The DISSENT argued that the majority improperly applied the rule of severability. Jackson did challenge the validity of the arbitration agreement and should not have to object to "the particular line in the agreement" that purports to assign the validity issue to the arbitrator.

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