Hunton Employment & Labor Perspectives

The Ninth Circuit’s recent opinion in Avery v. TEKsystems, Inc. addressed whether an arbitration agreement introduced to putative class members during pending class litigation could be enforced where the district court found the surrounding communications misleading and inconsistent with the fairness of the Rule 23 process. The court held that, under the circumstances presented, the district court acted within its authority under Rule 23(d) in refusing to enforce the agreement.

The case involved a class action under California wage-and-hour law alleging that the defendant staffing agency misclassified its recruiters as exempt employees. In October 2023, plaintiffs moved for class certification. In December 2023—just days after briefing on class certification closed—the defendant introduced a new mandatory arbitration agreement covering the claims at issue. The agreement was rolled out through an email stating, among other things, that employees would be deemed to accept it if they continued working for the company. A separate email was sent to recruiters who were members of the putative class explaining that they could opt out of the agreement for the limited purpose of remaining in the pending lawsuit. Only 41 of 164 employees opted out. The district court later certified the class in February 2024, and the defendant did not raise arbitration at the certification hearing. In June 2024, the defendant moved to compel arbitration. The district court denied the motion under Federal Rule of Civil Procedure 23(d), concluding that the communications surrounding the arbitration rollout threatened the fairness of the litigation because the court found they were misleading and omitted important information. The Ninth Circuit affirmed.

The Ninth Circuit held that Rule 23(d)—which allows judges to police communications and conduct that might interfere with a fair class action process—gave the district court authority to refuse enforcement of the arbitration agreement notwithstanding the Federal Arbitration Act. It further agreed that denial of enforcement was proper because the defendant’s communications were misleading. The court focused on the repeated disparagement of class actions in the rollout emails. It also found the communications confusing in their treatment of acceptance and opt-out procedures: employees were told they would be deemed to accept the agreement if they continued working, yet opting out required an affirmative signed form. The court further found the communications misleading as to employees’ ability to contact class counsel. Finally, the timing of the rollout—which began on December 19 and was set to take effect on January 1—contributed to the confusion and unfairness. In the Ninth Circuit’s view, the defendant’s conduct effectively transformed Rule 23’s normal opt-out framework into an opt-in process.  

Avery underscores that Rule 23(d) may provide class action plaintiffs with a basis upon which to challenge enforcement of an arbitration agreement introduced during pending litigation. The decision is a good reminder that enforcement may turn not only on the agreement itself, but also on the surrounding circumstances, including the content of the communications, the procedures imposed on employees, and the timing of the rollout.  While courts have enforced arbitration agreements rolled out during pending litigation, employers should keep Avery in mind when arbitration agreements are rolled out during the pendency of a class action.