Can Arbitration Agreements Preclude Class Actions?

By Joe Mulherin, Dick Schnadig, Nina Stillman and Mike Cleveland

Many employers have considered requiring, or now require, their nonunion employees to execute agreements promising to submit employment disputes, such as claims of employment discrimination, to arbitration rather than pursuing their claims in court. While there are downsides to such agreements, these employers view arbitration as a quicker, cheaper alternative to trial in court, where large jury verdicts and large legal bills can result. Such arbitration agreements are generally enforceable, but some employers have gone further and included provisions that may jeopardize the enforcement of the agreements, such as provisions foreclosing in arbitration remedies that might be available in court, like punitive damages. Still others have included provisions that courts have concluded make the agreements too one-sided to be enforceable, for example, language that makes the outcome binding on the employee, but not the employer.

A recent U.S. Supreme Court decision raises the possibility that arbitration agreements may possibly be used as an effective "class-action shield" that prevents employees from bringing class actions against their employer in court or in arbitration. This would result from requiring employees to sign arbitration agreements that compel them not only to arbitrate their employment claims, but to do so only on an individual basis.

A number of courts had held that the Federal Arbitration Act does not permit class arbitration unless the parties' agreement expressly allows for it. Many commentators predicted that the United States Supreme Court would decide this issue in Green Tree Financial v. Bazzle, 123 S. Ct. 2402 (June 23, 2003). The Court instead ruled that the issue of whether an arbitration agreement permits class arbitration should be decided by the arbitrator. Although Green Tree was not an employment case, the decision will have a significant effect on how employers draft arbitration agreements with their nonunion employees.

In Green Tree, four consumers sued under South Carolina law, claiming that defendant Green Tree Financial, a commercial lending company, had failed to make legally required disclosures when it entered into loan contracts with them. Each contract contained an arbitration provision requiring arbitration of "all" contractrelated disputes, but none mentioned class arbitration. The consumers brought two separate actions in state court...