Senate to Determine Whether to “Waive” Goodbye to Class Action Waivers and Mandatory Arbitration Agreements

Last month, the United States House of Representatives passed the Forced Arbitration Injustice Repeal Act, or the “FAIR Act.” The FAIR Act, should it be passed by the Senate and signed into law, would prohibit class action waivers and mandatory pre-dispute arbitration agreements in a wide range of disputes:

  • Employment disputes that arise out of or relate to the work relationship or prospective work relationship, including disputes regarding discipline and/or termination of employment and terms of payment for advertising, recruiting, referrals and arrangements.
  • Consumer disputes that arise between a consumer and a seller, including claims by a third party involved in the transaction.
  • Antitrust disputes that arise from alleged violations of federal or state antitrust laws.
  • Civil rights disputes that arise from an alleged violation of a state or federal law prohibiting discrimination on the basis of a legally protected status, such as race, sex, age, gender identity, sexual orientation, disability, or religion.

While class action waivers are often a part of mandatory arbitration agreements in contracts, the FAIR Act covers class action waivers regardless of whether they are a part of a mandatory arbitration agreement.

Class action waivers and mandatory arbitration agreements have been used and upheld for decades, but there has been a recent push to reduce the number of situations in which they are enforceable. State efforts thus far have been mostly unsuccessful, as the Federal Arbitration Act (“FAA”) largely preempts state law and provides that most arbitration agreements are enforceable according to their terms. The Supreme Court also confirmed that class action waivers are enforceable under the FAA in 2018 in Epic Systems Corporation v. Lewis. Thus, any significant changes to the enforceability of class action waivers or mandatory arbitration agreements will have to come by federal statute.

Congress has appeared increasingly interested in making changes in this area over the last several years. For example, in April 2019 the Senate Judiciary Committee held a hearing entitled “Arbitration in America,” where the Committee heard testimony in support of and against mandatory arbitration. This hearing was in response to a prior version of the FAIR Act that was introduced in the House earlier that year, though it ultimately stalled when it reached the Senate. Most recently, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act was signed into law on March 3rd. This law amended the FAA to prohibit enforcement of class action waivers and mandatory arbitration agreements in sexual harassment and sexual assault disputes.

The FAIR Act essentially seeks to have the same effect, but with a broader category of claims. If enacted, it would dramatically change the landscape of the four types of disputes it covers. Employment law, in particular, would face significant changes. Many employers use class action waivers and mandatory arbitration agreements in their employment agreements as a way to reduce their litigation cost and risk, especially considering the potential for class actions in Fair Labor Standards Act claims and other areas. Should such provisions become unenforceable, litigation costs and liability exposure for employers will increase dramatically. One exception of note is that the FAIR Act expressly exempts agreements between labor unions and employers from its coverage.

Fortunately for employers, the FAIR Act only has a prospective effect, meaning it would apply to claims that arise or accrue after the date of enactment. Further, the FAIR Act does not entirely ban arbitration of the relevant disputes. Rather, it affects only the enforceability of mandatory arbitration agreements. However, any dispute over whether the FAIR Act applies—for example, over whether a particular agreement to arbitrate was mandatory—is to be decided in federal court, rather than in arbitration.

What will happen next with the FAIR Act is unclear, as there have been mixed comments from the Senate in response to its passage through the House. Additionally, while the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act passed through the House easily by a vote of 335-97, the FAIR Act’s margin in the House was only 222-209 on almost entirely partisan lines. It remains to be seen whether the evenly divided Senate will approach the Fair Act along the same partisan lines, or whether the current anti-arbitration momentum will continue. The Biden Administration has publicly expressed support for the Fair Act and said the President will sign the bill if it passes the Senate.

Should the FAIR Act start to pick up support in the Senate, employers and customer-facing entities should consider whether to revise their employment and customer contracts. Arbitration and single-plaintiff actions under the current legal structure typically pose less risk to employers, as the procedural rules are more streamlined, the damages are confined to the plaintiff rather than a class, and arbitration decisions are non-appealable. For companies that have sought to insulate themselves from traditional litigation with class action waivers and mandatory arbitration agreements, their legal strategies and budgets may require an overhaul in response to a riskier legal landscape.