Ninth Circuit Voids Employer’s New Arbitration Agreement for Class Members

A district court had the authority to invalidate an employer’s arbitration agreement where the communications about the agreement were misleading and confusing, the Ninth U.S. Circuit Court of Appeals has ruled.

A group of former and current employees of a staffing agency filed a putative class action alleging their employer misclassified recruiters as exempt from overtime laws and failed to provide meal and rest breaks.

A federal district court denied the agency’s motion to dismiss, and the parties engaged in discovery for over a year. The plaintiffs filed a motion for class certification, which the agency opposed.

The agency then sent an email to all internal employees instituting a new arbitration agreement, writing that “[i]n our experience, litigation in court – particularly class and collective actions – are wasteful, inefficient means for resolving disputes, and tend to enrich only attorneys rather than the individuals who may have legitimate claims.”

All new and current employees were subject to the agreement, which was mandatory for continued employment.

The agency sent a second email to all recruiters who were members of the putative class, explaining that they could opt out of the arbitration agreement for the limited purpose of remaining in the class.

After the district court granted the plaintiffs’ motion for class certification, the agency filed a motion to compel arbitration.

The district court denied the motion, relying on Federal Rule of Civil Procedure 23(d) for the authority to regulate the notice and opt-out process, and expressing concern about the agency’s communications.  

Although the agency appealed, the Ninth Circuit affirmed denial of the motion to compel arbitration.

FRCP 23(d) authorizes district courts to refuse to enforce arbitration agreements, the court said, relying on U.S. Supreme Court precedent, and the district court correctly applied the Rule in denying the agency’s motion to compel arbitration.

“Specifically, ‘[FRCP] 23 gives district courts the power to regulate the notice and opt-out processes and to impose limitations when a party engages in behavior that threatens the fairness of the litigation,” the court wrote. “[The agency’s] actions fall within the scope of this broad authority because [the agency] subverted FRCP 23 by turning this typical Rule 23 opt-out class proceeding into an opt-in proceeding.”

A contrary holding would be at odds with the “duty and the broad authority” of district courts to control the class action process under FRCP 23(d), the court added. Had the district court been aware of the agency’s arbitration plans before the roll out, it could have enjoined the communications for being misleading and attempting to disrupt the opt-out process.

Relying on precedent from the Fourth, Sixth, Ninth and Eleventh Circuits, the court rejected the agency’s argument that the district court lacked the authority to invalidate the arbitration agreement. Arbitration agreements can be invalidated based on federal procedural rules, and there was no inherent conflict between FRCP 23 and the Federal Arbitration Act in the case, the court noted.

Applying Rule 23(d), the court agreed with the district court that the agency’s communications were misleading and had a harmful impact on potential class members.

“[The agency] repeatedly disparaged the efficacy of class actions and misleadingly claimed that class actions are ‘wasteful, inefficient means for resolving disputes’ that ‘tend to enrich only attorneys rather than the individuals who may have legitimate claims,’” the court wrote. “Further, [the agency] inaccurately stated that a class action ‘requires [the agency] to ignore individual employee issues and concerns.’ [The agency’s] disparaging and inaccurate framing of class actions was particularly significant because [the agency’s] communications ‘were the first communication many putative class members received about the case.’ [The agency’s] attempt to couch this repeated language as its own opinion does not cure its obvious impact, or that these disparaging comments ‘appear designed to prevent putative class members from opting into the lawsuit and opting out of the [Agreement].’”

Adding to the problem: the roll out was internally inconsistent and confusing, exacerbated by the staggered nature of the deadlines in the two emails and their timing, with the emails coming near the holidays, as well as misleading comments about legal advice and attorney contact information.

Nor was the court persuaded by the agency’s assertion that the district court erred by ordering the broadest relief available in lieu of issuing a corrective notice.

“A corrective notice alone would not provide adequate relief to class members because they entered into the Agreement based on misleading communications,” the court said. “Although we must consider ‘the narrowest possible relief which would protect the respective parties,’ that relief must still be ‘consistent with the policies of [FRCP] 23.’ Invalidating the Agreement is necessary to be consistent with FRCP 23 as it restores the opt-out process as the default.”

To read the opinion Avery v. TEKsystems, Inc., click .

Why it matters: The Ninth Circuit was clear that district courts have the power to regulate the notice and opt-out processes pursuant to Rule 23, along with the ability to impose limitations when a party engages in behavior that threatens the fairness of the litigation. In the case before the court, those limitations included the authority to invalidate the employer’s arbitration agreement.