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Ruling could help employers avoid class actions

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WASHINGTON—The U.S. Supreme Court's decision last week to uphold class action waivers in arbitration agreements could become a major tool that helps employers avoid class action employment suits, legal experts say.

While the court's 5-4 decision in AT&T Mobility L.L.C. vs. Vincent and Liza Concepcion involved a consumer case, it is widely expected to be applicable in the employment context as well.

According to the decision, the Concepcions entered into a contract in 2002 with AT&T that allowed arbitration of disputes but disallowed class actions. The couple purchased AT&T services, which were advertised as including free phones but included $30.22 in sales tax based on the phones' retail value.

They sued, challenging the sales tax, and sought class action status.

AT&T moved to compel arbitration under terms of its contract with the Concepcions. A federal judge denied AT&T's motion to compel arbitration, a ruling the 9th U.S. Circuit Court of Appeals upheld in 2009. The appeals court ruled that the provision forbidding class actions was “unconscionable” under California law and pre-empted by the 1925 Federal Arbitration Act.

Last week, the Supreme Court ruled in AT&T's favor. “Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA,” Justice Antonin Scalia wrote for the majority.

“The switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly and more likely to generate procedural morass than final judgment,” he wrote.

Class arbitration “requires procedural formality” and “greatly increases risks to defendants,” said the opinion. “Faced with even a small chance of a devastating loss, defendants will be pressured into settling questionable claims.”

Observers estimate that more than 20 states have legislation similar to California that permits class actions in arbitration disputes. But “the Supreme Court ruled essentially that the federal statute, the FAA, trumps those laws,” said Ron Chapman Jr., a shareholder with law firm Ogletree, Deakins Nash, Smoak & Stewart P.C. in Dallas.

Although the case involves consumers, it is expected to be applied to employment disputes.

“There's a distinct possibility this ruling is to be extended to apply to the employment context as well, and allow employers to require that any claims be resolved in arbitration on an individual basis, rather than allowing employees to represent a class of employees within the arbitration,” said Enzo Der Boghossian, a partner with law firm Proskauer Rose L.L.P. in Los Angeles.

“This one is a game changer,” said Mr. Chapman. “The Supreme Court has provided companies with a road map on how to avoid class or collective actions...the No. 1 risk that businesses face,” he said.

Jack E. Pace III, a partner with White & Case L.L.P. in New York, said the decision “really preserves arbitration as a way to resolve disputes with employees, and with consumers and customers generally.”

Had the Supreme Court ruled otherwise, “then there really would have been a very big risk for any company with an arbitration provision that prohibited class actions,” Mr. Pace said. If the provision were invalidated, a company could be at risk of a class action “when you thought you were just agreeing to a small-scale arbitration,” he said.

Attorneys said employers now are expected to consider introducing arbitration agreements that prohibit class actions in employment disputes.

“I think every company in America needs to examine whether they want to have an arbitration agreement with a class action waiver in light of the Supreme Court's ruling,” said Mr. Chapman. “Even if the company had that internal debate previously, they need to re-examine the issue because the rules have changed.”

“Companies will be looking at this very closely and you will probably see resurgence in these types of agreements,” Mr. Pace said.

John Doran, a shareholder with law firm Greenberg Traurig L.L.P. in Phoenix, said companies that already have arbitration agreements in place “will probably rush to make it clear that those arbitration agreements preclude the arbitration of class-related claims.”

“I think there will be an uptick in adopting arbitration agreements” among firms, but “I don't think you'll see a groundswell,” he said. Arbitration “has its own costs and its own downsides,” including in some cases generating more claims, Mr. Doran said.