The Good, The Bad, and The Ugly of Recent Arbitration Decisions: The Bad – Balasanyan, et al. v. Nordstrom, Inc.

This continues our series regarding the good, the bad, and the ugly of recent arbitration decisions.  One of the more disappointing recent arbitration cases – Balasanyan, et al. v. Nordstrom, Inc., No. 3:11-cv-02609 (S.D. Cal. March 8, 2012) – adds a new wrinkle to the arbitration issue that could constrain employers wishing to take advantage of the post-Concepcion landscape.

In Balasanyan, the U.S. District Court for the Southern District of California invalidated a mandatory arbitration agreement containing a class action waiver on the ground that it constituted an impermissible communication with putative class members.  In doing so, the Court did not distinguish or even address Concepcion, and instead relied on its own authority to control the proceedings in class action litigation – including by monitoring communications with putative class members.  Balasanyan is thus notable for the unique basis on which it invalidated the arbitration agreement, which in turn presents a new issue for employers to consider when implementing or updating their arbitration agreements.

Balasanyan, a putative class and collective action seeking unpaid wages (among other relief), involved a “Dispute Resolution Agreement” that Nordstrom implemented several months after plaintiff filed the action.  The Dispute Resolution Agreement modified and superseded a prior agreement that had been in place since 2004.  Notably, the new agreement applied to “the resolution of past, present, and future disputes that otherwise would be resolved in a court of law” and required that all such disputes be resolved through individual (not class) arbitration.  The agreement was presented as a condition of employment, and employees therefore were unable to opt out of the agreement.  The agreement also did not notify any employees of their status as putative class members in the pending litigation.  Ultimately, Nordstrom moved to compel the arbitration of plaintiff’s claims under the agreement.

In addressing Nordstrom’s motion to compel arbitration, the Court did not assess the arbitration agreement’s validity in light of the Supreme Court’s Concepcion decision, nor did it otherwise assess the validity of class action waivers in employment arbitration agreements.  The Court instead focused on a line of cases emphasizing the inherent authority of district courts to exercise control over class action litigation and “enter appropriate orders governing the conduct of counsel and the parties,” including with regard to communications with class members.  The Court focused, in particular, on In re Currency Conversion Fee Antitrust Litigation, 361 F.Supp.2d 237 (S.D.N.Y. 2005), in which the Southern District of New York invalidated an attempt by several credit card companies to add arbitration clauses to their customers’ cardholder agreements after litigation had begun through the mailing of various letters.  The Court in In re Currency Conversion noted, among other things, that courts must protect against misleading communications to putative class members and, if necessary, disallow such communications “if they attempt to…encourage class members not to join the suit.”

Relying on In Re Currency Conversion, the Court denied Nordstrom’s motion to compel arbitration.  The Court held that Nordstrom’s imposition of the arbitration agreement after the litigation had begun, combined with its failure to disclose the existence of the litigation, constituted an improper communication designed to “alter the pre-existing arbitration agreement with putative class members during litigation.”  The Court emphasized that “[m]any, and perhaps most of the putative class members were likely unaware of the litigation, and therefore may…not have fully appreciated the rights they were purportedly forfeiting by ‘accepting’ the agreement through continuing their employment at Nordstrom.”  The Court added that the confusing manner in which Nordstrom communicated the new arbitration agreement to its employees rendered the arbitration agreement especially flawed.

Balasanyan thus illustrates a relatively new strain of arbitration decisions that could spell trouble for employers – at least those who decide to implement arbitration agreements while putative class actions are pending and fail to provide adequate notice of the pending class actions.  While this is an unfortunate development, the holding of Balasanyan is very specific to its facts, and the court made no sweeping pronouncements regarding the manner in which arbitration agreements should be communicated to putative class members.   In any event, Balasanyan provides another example of the premium that courts are placing on transparency and disclosure in arbitration agreements.