The Ninth Circuit in O’Dell v. AYA Healthcare Services, Inc. (9th Cir. No. 25-1528) unanimously held that the Federal Arbitration Act (“FAA”) does not allow the use of collateral estoppel to preclude enforcement of arbitration agreements and reversed the lower court’s ruling barring enforcement of employee arbitration agreements.
In O’Dell, four former employees of a travel-nursing agency brought a putative class and collective action against their employer for wage-related violations under state law and the Fair Labor Standards Act (“FLSA”). The agency’s employees had executed identical arbitration agreements which precluded arbitration on a class basis and gave the arbitrator authority to determine the agreement’s validity. Consistent with the agreements’ terms, the district court sent the four employees’ claims to separate arbitrations. Two arbitrators held that the agreements were unenforceable (reasoning that the fee and venue provisions were unduly one-sided), and the other two arbitrators ruled that the agreements were enforceable (one severed terms it found unconscionable, and the other held a savings clause rescued unconscionable terms in the agreement).
After the district court confirmed all but one of the arbitrators’ rulings as to enforceability,[1] the defendant moved to compel arbitration of the claims by the 255 additional plaintiffs who had opted into the putative FLSA collective action. Thereafter, the district court, on its own accord, questioned whether the doctrine of collateral estoppel precluded arbitration of the additional plaintiffs’ claims because two arbitrators had found the agreements unenforceable. After briefing, the district court denied the defendant’s motion, holding that arbitrators’ decisions that the agreements were unenforceable precluded the defendant from enforcing the arbitration agreements against the 255 other plaintiffs.
The Ninth Circuit reversed. The court held that “[a] hallmark of the FAA is the enforcement of arbitration agreements and the resolution of disputes in individualized, one-on-one proceedings” and that “[d]oing away with such bilateral proceedings between mutually consenting parties, because other arbitrators in other proceedings involving other parties have already decided the issue, is anathema to the FAA.” (Emphasis in original).
The court held that the FAA recognizes only “generally applicable contract defenses such as fraud, duress, or unconscionability” as grounds for revoking an arbitration agreement and the doctrine of collateral estoppel was not a contract defense. The court reasoned that applying collateral estoppel to revoke an arbitration agreement would “contravene critical features of the FAA” and “render the parties’ consent [to arbitration] meaningless.” The court further reasoned that invalidating hundreds of separate arbitration agreements based on rulings from different arbitrators in different proceedings effectively imposed an unconsented class action procedure in violation of Supreme Court precedent. The appellate court remanded the matter to the district court for further proceedings.
For assistance on ensuring your arbitration agreements are compliant, please contact Michael A. Wahlander at mwahlander@vedder.com, Charlie Y. Wang at cwang@vedder.com, or any other Vedder attorney with whom you have worked.
[1] The district court refused to confirm one arbitration award upholding the agreement because the defendant did not pay the arbitration fees.
