El Segundo satellite TV provider DirecTV is defending itself before the U.S. Supreme Court as it seeks to protect its use of arbitration agreements, which have become an increasingly popular tool that employers use to resolve disputes quickly, privately – and cheaply.

Businesses are waiting anxiously to see whether the court will maintain the status quo or strike down arbitration agreements and open employers up to untold millions in class-action legal costs. A ruling in the case, which began oral arguments this month, is due in the summer.

“Companies that have arbitration programs, they can use them to better manage their legal risks in a way that’s more cost-effective,” said Emily Burkhardt Vicente, a partner in the downtown L.A. law office of Hunton & Williams. “It can also make the proceedings a little more confidential. So what’s really at stake for companies is how they manage the risk of their litigation portfolio.”

Indeed, it has become standard in recent years for many employers to require both employees and customers to arbitrate disputes as a way to head off potentially long and costly courtroom battles, Burkhardt Vicente said.

The legality of that practice, however, has been put in jeopardy as lawmakers and regulators have sought to limit employers’ ability to mandate arbitration, citing claims that arbitration provides an unfair advantage to employers.

One state bill in particular, AB 465, would have prohibited California employers from requiring employees to arbitrate disputes as a condition of employment.

Gov. Jerry Brown vetoed the bill this month. Brown, in a veto message published Oct. 11, said he wanted to wait until the Supreme Court rules on the issue of arbitration – which it’s poised to do in the DirecTV case and one other – before he signs off on any new regulations.

“California courts have addressed the issue of unfairness by insisting that employment arbitration agreements must include numerous protections to be enforceable, including neutrality of the arbitrator, adequate discovery, no limitation on damages or remedies, a written decision that permits some judicial review, and limitations on the cost of arbitration,” Brown wrote in his message. “If abuses remain, they should be specified and solved by targeted legislation, not a blanket prohibition.”

Even though AB 465 did not become law, said Roland Juarez, another partner at Hunton & Williams, businesses are likely to see more efforts to rein in arbitration clauses in the near future.

“The fight, in my mind, is going to be more legislative,” Juarez said. “This is not going to be the last you’ve heard of it.”

High stakes

For now, businesses and employment attorneys remain fixated on DirecTV’s case pending before the Supreme Court.

The original case, filed in Los Angeles Superior Court in 2008, centers on a former DirecTV customer’s allegations that the company violated several California laws when it charged her cancellation fees.

The Supreme Court won’t rule on the merits of the dispute but will decide more narrowly on where the complaint will be resolved – either in private arbitration or as part of a class-action lawsuit.

DirecTV is pushing for one-on-one arbitration with the main plaintiff, Amy Imburgia, who wants her complaint to be a part of a class action involving other disgruntled customers.

At the time the case was filed, the California Supreme Court had implemented a rule that invalidated almost all consumer arbitration agreements that included class-action waivers. But the U.S. Supreme Court in 2011 ruled in a separate case that the Federal Arbitration Act, or FAA, trumps state laws that seek to deem arbitration agreements unenforceable.

After the high court’s ruling, DirecTV, which recently agreed to merge into AT&T Inc. in a $48.5 billion deal, asked the L.A. Superior Court to move the pending case to arbitration. That request was denied. The decision was upheld on appeal, which is what led the case to the Supreme Court.

Sanjay Bansal, a partner in the Brentwood law offices of Kaufman Dolowich & Voluck, said arbitration agreements are an important tool for businesses to have at their disposal because they oftentimes prevent individuals from joining a class-action lawsuit, which can take much longer to defend and can come with significantly higher financial burdens.

“It answers the question: Am I on the hook for $1,000 or am I on the hook for $5 million here?” Bansal said. “These are big numbers here and the ramifications can be huge.”

Waiting game

Despite the uncertainty hanging over the future of arbitration clauses, Jennifer Barrera, a California Chamber of Commerce policy advocate for labor and employment issues, said it’s quite possible that more lawmakers will propose arbitration regulations.

“Legislation has been introduced almost on an annual basis,” she said. “It’s not uncommon to see legislation address the arbitration issue. Some proposed regulations are trying to outright ban arbitration agreements in the employment context, and I would not be surprised to see another arbitration bill come up next year.”

Indeed, the Consumer Financial Protection Bureau announced plans this month to consider new rules that would ban consumer financial companies from using arbitration agreements that block customers from joining a class-action lawsuit.

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” Richard Cordray, the bureau’s director, said in an Oct. 7 press release. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

Businesses, however, would still be allowed to require individual disputes to be resolved in arbitration under the bureau’s recently proposed regulations.

“Everyone is watching these cases and the developments quite closely,” said Steven Katz, partner in the downtown L.A. law offices of Reed Smith. “It could certainly change the way businesses write their agreements with their customers and employees.”

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