Taking Advantage of Arbitration as a Class Action Safe Harbor

On May 21, 2018, the United States Supreme Court issued a decision upholding the validity of clauses in agreements between an employer and its employees that require disputes to be resolved by private arbitration proceedings and precluding employees bound by such proceedings from bringing or participating in class action litigation. The Court reaffirmed longstanding deference to agreements to arbitrate, which are enforceable under the Federal Arbitration Act. The Court rejected a relatively recent interpretation of the National Labor Relations Act that asserted such agreements violate the rights of employees to engage in concerted activity.

As announced last week, the Court’s decision in Epic Systems Corp. v. Lewis reaffirmed, by a close 5 to 4 majority, related decisions that had previously upheld arbitration agreements precluding class action participation in the context of retail customer agreements and business-to-business arrangements.

The reaffirmance of the primacy and validity of arbitration agreements creates important opportunities for businesses to shape their dispute resolution mechanisms in a wide range of agreements, including by using arbitration agreements to insulate them from class action litigation risk.  The Epic Systems decision may have profound implications not only for agreements entered into with employees, but also with customers, suppliers, distributors, independent contractors and other service providers, and a range of other commercial counterparties.

Fundamentally, when a business relationship is governed by a formal written agreement or other written terms and conditions, such as employee handbooks or internet “click through” agreements, a business has an opportunity to shape dispute resolution mechanisms, and manage litigation risk, but it must do so from the outset of the arrangement or obtain consent to the terms if added later.

Arbitration has distinct characteristics, and for some businesses it may provide real opportunities to manage and control the procedures and, ultimately, the risk inherent in disputes. Arbitration involves a private forum to resolve disputes, supervised by privately designated neutrals, under rules that are or can be different in important ways from those that govern court disputes. Parties have broad discretion to specify and tailor for their own needs the rules and procedures that govern arbitration.

Not all businesses and not all relationships will be best served by designating arbitration, as opposed to court proceedings, to resolve disputes. For example,  a single class action can potentially bind all the members of the class disposing of an issue on a uniform and final basis, while arbitrations may lead to a company defending a large number of individual arbitrations, possibly before multiple arbitrators, and create the risk of inconsistent outcomes. However, for clients specifically concerned with avoiding the risk of class action proceedings on behalf of employees, customers or other commercial counterparties, arbitration provides a clear and now confirmed safe harbor.

Arbitration provisions generally, and class action waivers specifically, should be considered and crafted to meet the specific circumstances, needs and goals of individual businesses. The Epic Systems decision is a cogent reminder that effective advanced planning is critical; tools exist to manage and control litigation risk in a variety of ways. The key is to consider the specific circumstances, concerns and objectives of particular businesses in assessing and managing risks of disputes. Determining that arbitration is a preferred mechanism for a particular business is only the first step in a process. Among other issues to be addressed are: which rules will govern an arbitration, where it will take place, who will pay for it, what consideration is provided for the agreement to arbitrate, whether employees or business counterparties must specifically sign agreements to arbitrate, whether a new arbitration agreement will apply to pre-existing relationships and transactions, and whether there are other restrictions appropriate beyond class action waivers.

Advance planning and careful assessment and implementation are critical. Our transactional employment and benefits lawyers collaborate regularly and effectively with their litigation counterparts to perform thorough and comprehensive assessment of dispute resolution risks, and to craft tailored solutions that meet the particularized needs of our clients.

Please contact any of us, or your regular Hogan Lovells lawyer, to discuss these issues with respect to your business, and to consider whether arbitration or other customized dispute resolution procedures are appropriate and useful in dealing with your employees, customers and other commercial counterparties.

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