The Ninth Circuit Court of Appeals recently held that non-mutual offensive collateral estoppel—a doctrine under which a party different from the party in the original action seeks to preclude the opposing party from relitigating an issue decided against it—cannot be used to invalidate hundreds of arbitration agreements under the Federal Arbitration Act (FAA).
Quick Hits
- The Ninth Circuit ruled that non-mutual offensive collateral estoppel could not serve as a tool to invalidate a swath of arbitration agreements.
- Of the four named plaintiffs who proceeded to arbitration, two arbitrators found the agreement enforceable, while the other two found it unenforceable—but the district court gave preclusive effect only to the rulings that declined to enforce the agreement, invalidating 255 additional arbitration agreements.
- The Ninth Circuit reversed the district court’s ruling, emphasizing that the lower court’s decision clashed with the FAA and its progeny, which require arbitration agreements to be enforced as written and treat arbitration as an individualized proceeding rooted in the mutual consent of the parties.
The decision in O’Dell v. Aya Healthcare Services, Inc., is helpful to employers faced with mass arbitrations and that rely on arbitration programs. The decision underscores arbitration agreements must be individually enforced and courts may not use equitable doctrines like non-mutual offensive collateral estoppel to circumvent this requirement. However, employers may want to proactively review their arbitration agreements to ensure fee-splitting arrangements, venue provisions, and other terms are not so one-sided as to be vulnerable to unconscionability challenges.
Background
Aya Healthcare Services, Inc., is a health care service company that employs travel nurses and supporting clinicians. As a condition of employment, employees were required to execute arbitration agreements that any employment-related disputes be resolved through arbitration. The agreements included a delegation clause that an arbitrator, not the court, would determine whether the agreement was valid. Four former employees brought a putative class action against the employer. The employer moved to compel arbitration and the district court granted the motion, leading to separate arbitrations with each individual plaintiff. However, when the plaintiffs challenged the enforceability of the agreement, the outcomes split—two arbitrators found the agreement enforceable, while the other two found the agreements unconscionable and therefore unenforceable. In the interim, 255 plaintiffs opted into the case through the Fair Labor Standards Act’s (FLSA) collective-action provision. The employer moved to compel each of those opt-in plaintiffs to arbitrate.
The district court then raised the question of whether collateral estoppel prevented the employer from enforcing the arbitration agreement against the newly opted in employees. The district court gave collateral-estoppel effect to the arbitration awards declining to enforce the arbitration agreement, because the court found those arbitrators’ opinions to be better reasoned. Thus, the 255 arbitration agreements of the newly opted-in employees were instantly found unenforceable and the employer was precluded from enforcing the arbitration agreements with its 255 opt-in employees. The Ninth Circuit disagreed with this outcome.
The FAA requires the enforcement of arbitration agreements as written
The Ninth Circuit reversed the trial court’s decision, highlighting that the district court’s approach exhibited the kind of “‘judicial hostility to arbitration’ that the [FAA] was enacted to prevent.” The Ninth Circuit also emphasized how application of non-mutual offensive collateral estoppel to preclude the enforcement of arbitration agreements is incompatible with the FAA. The court observed arbitration agreements are contracts that must be enforced according to their terms, even though the FAA lists valid contractual grounds for revocation may exist (including, for example, fraud, duress, or unconscionability). Offensive non-mutual issue preclusion, however, does not fit into the “generally applicable contract defense” mold the FAA provides, and was improperly applied in this context. This was because the doctrine of issue preclusion does not pertain to a deficiency in the formation or validity of contracts; rather, it is a procedural doctrine that gives preclusive effect to certain prior judgments to avoid relitigation of the same issues.
Consent as a key tenet of the FAA
Next, the court returned to the key theme of the FAA—arbitration being a matter of consent rather than coercion, noting the individualized nature of arbitrations. Arbitrators only derive their jurisdiction through the employer and employee consenting to private dispute resolutions. In this case’s context, hundreds of plaintiffs were estopped from arbitrating their cases, running against a core tenet of the FAA—the parties’ consent.
The court also held the district court’s ruling effectively transformed individualized arbitral proceedings into something resembling a bellwether class action to which the parties never agreed. Essentially, on the basis of just two arbitral awards, the district court foreclosed hundreds of separate arbitration proceedings thereby invalidating hundreds of separate arbitration agreements. The Ninth Circuit observed this approach was troubling because it lacked procedural safeguards inherent in class actions, for example that the named plaintiff’s adequacy.
Key Takeaways for Employers
The decision in O’Dell v. Aya Healthcare Services, Inc., is helpful to employers facing mass arbitrations. The Ninth Circuit’s decision reinforces that arbitration agreements must be enforced as written, on an individual basis. The Ninth Circuit recognized a potentially detrimental application of an equitable legal doctrine as improper—which had the potential to invalidate more than two hundred arbitration agreements. Employers can take some comfort that courts may not use equitable doctrines like non-mutual offensive collateral estoppel to circumvent this requirement under the FAA.
Moreover, even where an arbitrator finds an arbitration agreement unconscionable, that finding does not automatically apply to materially identical agreements with different employees. Each employee’s agreement must be evaluated on its own merits in a separate proceeding.
The court’s opinion also underscores that delegation clauses—provisions requiring an arbitrator, rather than a court, to decide questions about the validity of the arbitration agreement—are enforceable and must be honored.
While this decision is helpful to employers in these circumstances, it does not come without some warnings of potential pitfalls. Two out of four arbitrators found the agreements unconscionable due to one-sided fee and venue provisions. As such, the case still highlights the importance of proactively reviewing arbitration agreements, including provisions regarding fee-splitting arrangements and venue provisions.
