Potential Challenges to Contractual Arbitration Grow
Wednesday, December 21, 2022
by: David Worley, Miller Nash LLP

Section: Fall 2022

Potential Challenges to Contractual Arbitration Grow                  
Defense attorneys may be pleased to see an arbitration clause in their client’s contract terms at the beginning of litigation. Be it a lease agreement, terms of service, user agreement, etc., the existence of an arbitration clause can drastically affect the overall value of claims, particularly when attorney’s fees are recoverable.  Moreover, arbitration clauses frequently include language waiving a claimant’s right to class-wide relief. When relevant, the availability of a class-wide claim is typically the threshold question determining exposure.
However, defense attorneys in Washington should be aware that two recent decisions, one from the U.S. Supreme Court and one from the Court of Appeals, that puts arbitration clauses at risk.  Both cases present different risks and considerations when arbitration is at issue, either in the formulation of the contract language or how and when arbitration is pursued during litigation.
Waiver of Arbitration Easier than Ever
Until recently, the risk of losing a valid contractual right to arbitration through waiver was relatively small and avoidable.  A party could typically wait some time to compel arbitration even when aware that the contract provided for arbitration.  What may occur is a plaintiff will file a claim in court, either ignorant of the contractual arbitration clause or simply in disregard of it, and the defendant will be forced to move to compel arbitration. However, a party may not always move to compel arbitration at the outset, for many reasons strategic or otherwise.  Perhaps the arbitration clause is overlooked, perhaps the motion to compel is put on the back burner, or perhaps the parties are enthusiastically spending their time arguing about the intricacies of document discovery. Whatever the reason may be, a recent decision by the U.S. Supreme Court makes that delay – for whatever reason – far riskier if arbitration is desired.
In Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022), the U.S. Supreme Court resolved a circuit court split on the elements necessary to demonstrate waiver of a contractual right to arbitrate. Prior to Morgan, all but the First and D.C. Circuits had a three-part test to evaluate waiver: Knowledge of the right to arbitrate; actions inconsistent with that right, and prejudice to the other side. The other two Circuits only considered the first two factors – prejudice was irrelevant. 
In a short decision, the Court clarified that the “federal policy favoring arbitration” does not actually favor arbitration, at least in the typical definition of “favor.” Instead, this policy merely places arbitration on the same legal footing as any other contract. A standard contractual waiver analysis does not require a showing of prejudice, and therefore waiver of a right to arbitrate should be judged by the same standard. This viewpoint adjustment clarified that by “favoring” arbitration, what the Court actually meant was it does not disfavor arbitration. This is a meaningful distinction given that the quote “federal policy favoring arbitration” has been used over 9,700 times in State and Federal courts according to Westlaw, and many if not most practitioners and courts may have presumed that “favoring” arbitration meant just that.
Therefore, parties and their counsel who engage in litigation with knowledge of a right to arbitrate face significant risk of waiving that right. Further, many courts have found that a party’s knowledge of a right to arbitration can be actual or constructive – the party either knew of the right in fact, or it had the information available to it.[1] Failing to re-discover a contractual basis to arbitrate until months or years after the filing of a lawsuit would typically not disprove the party’s constructive knowledge, particularly if the information was available to it at an earlier date. As parties are presumed not only to have read what they signed but also understand it, the mere existence of an arbitration clause when drafted by the party seeking to enforce arbitration arguably proves knowledge. 
Defense attorneys with a right or potential right to arbitrate the claims should determine at the earliest opportunity whether to invoke that right. A defendant that sits idly by and engages in litigation, even to a somewhat limited extent, has an increased risk of waiver of that right. While there may be strategic reasons to wait to compel arbitration, litigation efforts taking in the interim may result in the option to arbitrate being eliminated.
Unconscionability Defense to Class Action Waiver
On the other side of the arbitration coin, practitioners should take note when drafting contracts or when seeking to enforce arbitration provisions, as the unconscionability defense to enforcement recently expanded in notable, questionable. While this analysis would not apply when federal law (i.e.: the Federal Arbitration Act) governs arbitration, contracts either exempt from the FAA and/or for which Washington law applies could be affected.
In Oakley v. Domino’s Pizza, LLC, plaintiff Oakley brought class-wide claims under the Washington Minimum Wage Act (WMWA) and wage rebate act. Oakley was a delivery driver for Domino’s supply chain (not a pizza delivery driver), where Oakley delivered raw materials to franchise locations, and some routes required he cross state lines. When he began working for Domino’s, he signed an agreement to arbitrate any claims arising from his employment under the Federal Arbitration Act (FAA) and also waived his right to participate in class actions.[2] Despite this, he filed a class action lawsuit asserting wage and hour claims on his own behalf and on behalf of a class of drivers.
Three issues were discussed by Division 1 of the Court of Appeals: (1) Whether the agreement was governed by State law or the FAA; (2) if not the FAA, whether the language directing that the FAA would apply was severable[3], and (3) if State law applied, whether the class action waiver was unconscionable. The first two issues are beyond the scope of this article, but the written decision is certainly worth a close and critical read. Ultimately, the court found (1) the FAA could not apply due to the FAA §1 exemption for transportation workers, (2) the FAA language was severable, and (3) Washington law applied.  Then, the Court considered whether the arbitration provision was enforceable under Washington common law. [4]
With regard to enforceability, the Court disapproved the class action waiver contained within the contract, finding for the first time that such waivers are unconscionable under Washington law, and therefore unenforceable. Because the contract required it, the whole arbitration agreement was therefore stricken.
To find a public policy necessary to establish unconscionability of the class action waiver, the Court looked to laws protecting concerted activities and collective bargaining. Interestingly, interpreting the National Labor Relations Act, the original source of “protected concerted activity” does not protect the right to participate in a class action.[5]  Nevertheless, the Court effectively equated class action litigation to collective bargaining, finding “class action suits uphold the same public policy.” No provision of Washington’s labor regulation, Title 49 RCW, prohibits class action waivers, however. 
One surprising factor in the Court’s analysis was that class actions are more profitable for plaintiffs’ attorneys. Oakley’s attorney claimed, and the Court found important, that the attorney would have been less inclined to take this case on an individual basis because it was a small claim and not lucrative enough. No mention was made of the fact that claims under the WMWA and wage rebate act include recovery of reasonable attorney’s fees. The inclusion of attorney’s fees in those statutes is expressly intended to make the claims viable, regardless of the amount of damages. Nevertheless, recovery of attorney’s fees provides insufficient profit motive for plaintiff’s attorneys, the Court seemingly found. The Court also questionably concluded that Oakley could not afford to hire an attorney, ignoring that such claims nearly always are litigated on a contingent basis.  Defense attorneys should hope the “I won’t make as much money” argument do not become a trend.
Practitioner takeaways:
First, until the U.S. Supreme Court further clarifies what a “narrow” view of the “interstate commerce” exemption to the FAA actually means, any worker whose employment includes transportation of anything that has been out of state (for example, an Amazon “last mile” driver) could fall outside coverage of the FAA. The Federal Circuit courts are currently split on what level of interstate transportation is necessary to trigger the exemption. Counsel in employment actions should anticipate FAA exemption arguments in a broad scope of employment cases if transportation is part of the job description and arbitration is at issue.[6]
Second, attorneys involved with class action claims within the state should carefully look at the choice of law provisions within any contract providing a desired basis for arbitration. If the choice of law provision unqualifiedly applies Washington law, or if there is no choice of law provision and Washington has the most significant relationship with the dispute, any class action waiver is at risk.  Clients relying on such contracts should be advised as such.
Finally, attorneys drafting or reviewing contracts for employers in Washington who desire arbitration on an individual basis should ensure the contracts contain appropriate language that will allow the class action waiver to survive Washington’s courts. Specifically, to ensure such terms survive, Washington law should not be applied at least with regard to the arbitration agreement. For example, the language used in the contract at issue in Rittmann was as follows:
These Terms are governed by the law of the state of Washington without regard to its conflict of laws principles, except for [the Arbitration agreement], which is governed by the Federal Arbitration Act and applicable federal law.
While the court in Rittmann ultimately found the FAA did not apply due to the exemption in §1 of the FAA, had the court found otherwise, this language would have been sufficient to enforce single-claimant arbitration. However, for practitioners dealing with contracts that uniformly apply Washington law, any class waiver in those contracts is at risk.
The Washington State Supreme Court has not weighed in on the issue, nor is there any statutory basis to declare class action waivers unconscionable, despite the fact that such issues have been litigated and legislated for decades. Whether this decision is repeated or rejected has yet to be seen, but defense attorneys can be sure that the plaintiff’s bar will be filing many amicus briefs if the issue is presented to the State Supreme Court.
[1] See, e.g., Bowman v. Webster, 44 Wn.2d 667, 669, 269 P.2d 960, 961 (1954)(“The one against whom waiver is claimed must have actual or constructive knowledge of the existence of the right.”)
[2] Notably, the contract, which allowed him to opt out, provided that except that if the prohibition on class-wide actions was deemed invalid, then the entire arbitration agreement “shall be null and void.”
[3] The ultimate result made this determination unnecessary after the fact, as the contract itself required the arbitration clause to be severed. Finding severability did allow the Court to declare class action waivers unconscionable, however.
[4] The Washington Arbitration Act excludes employment agreements, and therefore could not apply to this dispute.
[5] Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 200 L.Ed.2d 889 (2018).
[6] Interestingly, the same typical class of workers exempt from the FAA, truck drivers for example, are frequently found exempt from State regulations including wage and hour laws, due to Federal Aviation Administration Authorization Act preemption.