Employers considering rolling out mandatory arbitration agreements during pending class action litigation received a cautionary message from the Ninth Circuit this week. The court’s decision makes clear that district courts possess broad authority to decline enforcement of such agreements if they threaten the fundamental fairness of class proceedings.

District Court Authority to Invalidate Mid-Litigation Arbitration Agreements; the Scope of Delegation Provisions

In Avery v. TEKsystems, Inc., 2026 U.S. App. LEXIS 2091 (9th Cir. January 28, 2026)(Rawlinson and Koh, CJs, and Fitzwater, DJ, sitting by designation), the Ninth Circuit on Wednesday affirmed a district court’s denial of a motion to compel arbitration where the employer implemented a mandatory arbitration agreement over 22 months into class action litigation.  The panel and the court below found that the defendant’s communications were misleading and effectively converted the federal litigation from an opt-out class action into an opt-in proceeding.

Plaintiffs filed a putative class action against TEKsystems in January 2022, alleging the staffing agency misclassified its recruiters as exempt from California overtime laws. After discovery and class certification briefing closed, TEK rolled out a mandatory arbitration agreement on December 19, 2023 – during the holiday season and over twenty-two months into litigation.

TEK’s communications came in two emails on the same day. The first announced that the arbitration agreement would take effect January 1, 2024, with continued employment constituting acceptance. The email disparaged class actions as “wasteful,” “inefficient,” involving “exorbitant fees,” tending “to enrich only attorneys,” and requiring TEK to “ignore individual employee issues.” The second email informed putative class members they could opt out by January 9, 2024, but contained contradictory deadlines stating “January 9, 2023” in one place. Of 164 class members, 123 (77%) did not opt out. TEK moved to compel arbitration on June 10, 2024 – five days before the class notice period closed.

Writing for the panel, Judge Koh held that Rule 23(d) of the Federal Rules of Civil Procedure authorizes district courts to refuse enforcement of arbitration agreements threatening class action fairness. Following Gulf Oil Co. v. Bernard, 452 U.S. 89 (1981), the court explained that district courts have “the duty and the broad authority to exercise control over a class action” because of potential abuse. Rule 23(d) empowers courts to regulate notice and opt-out processes when party conduct threatens litigation fairness.

This judicial power, Judge Hoh opined, extends beyond merely prohibiting communications, observing that FRCP 23(d)’s power would be meaningless if it stopped when misleading communications resulted in agreements. The panel referenced the reasoning of the  Fourth, Sixth, and Eleventh Circuits. In Degidio v. Crazy Horse Saloon & Restaurant Inc., 880 F.3d 135 (4th Cir. 2018), the Fourth Circuit affirmed the District Court’s refusal to enforce arbitration agreements obtained through misleading communications more than a year after the case’s pendency. In Fox v. Saginaw County, Michigan, 35 F.4th 1042 (6th Cir. 2022), the Sixth Circuit held that FRCP 23(d) gives district courts broad authority to protect against coercive communications. In Billingsley v. Citi Trends, Inc., 560 F. App’x 914 (11th Cir. 2014), the Eleventh Circuit affirmed denial of a motion to compel where the rollout was “replete with deceit and designed to be intimidating and coercive.” The panel also cited its own decision in Dominguez v. Better Mortgage Corp., 88 F.4th 782 (9th Cir. 2023), where it affirmed orders nullifying employment and release agreements obtained through misleading communications.

TEK fundamentally subverted FRCP 23’s opt-out structure, Judge Koh opined. Under Rule 23, class members automatically remain in a certified class unless they affirmatively request exclusion. TEK’s agreement inverted this scheme; class members who did nothing automatically opted out of the litigation class and into an arbitration process.  To remain in the class, the court wrote, employees had to either quit or affirmatively opt out of arbitration, effectively converting the judicial proceeding from opt-out to opt-in status.

In addition to holding that the arbitration process subverts the process laid out in Rule 23, the panel agreed with the lower court that TEK’s communications were misleading in several respects.  The emails contained disparaging language apparently designed to dissuade participation in the class litigation. TEK implied class members would need to hire attorneys at “exorbitant fees,” without disclosing that consultation with plaintiffs’ counsel could be free. The communications gave contradictory instructions and inconsistent deadlines. The December 19 rollout with a thirteen-day response period limited employees’ ability to seek counsel because of the intervening holidays. TEK did not inform class members that certification had been briefed or provide the certification pleadings.

TEK argued that the FAA’s provision that arbitration agreements are valid and enforceable “save upon such grounds as exist at law or in equity for the revocation of a contract,” 9 U.S.C. § 2, trumps the application of FRCP 23(d) to deny arbitration.  The crux of  TEK’s contention was that Rule 23 is merely procedural and that the “grounds” for denying an arbitration must rest in state or federal substantive law.  The panel rejected this argument, citing Morgan v. Sundance, Inc., 596 U.S. 411 (2022), which held that courts cannot create arbitration-specific variants of procedural rules. Following Morgan, the panel ruled, FRCP 23(d) serves as an ordinary procedural rule which treats arbitration contracts like other contracts. “The federal policy is about treating arbitration contracts like all others, not about fostering arbitration,” Quoting Morgan, at 418.

TEK’s alternative argument – that a corrective notice would suffice – was also rejected as inadequate because class members had already entered the agreement based on misleading communications. Invalidating the agreement, the panel ruled, is necessary to restore the opt-out process as the default.

Although the agreement incorporated the JAMS rules, including a delegation provision, Judge Koh held that the district court properly ruled on enforceability, rather than sending it to the arbitrator. Citing Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), the court reiterated the rubric that, when a party challenges the validity of the precise agreement to arbitrate itself, rather than the effect or scope thereof, the court, not the arbitrator, must consider the challenge. Because plaintiffs’ FRCP 23(d) challenge applied equally to both the delegation provision and underlying agreement, the panel agreed that the district court properly addressed the issue.  Query, though.  Does the court give enough weight to the general Matryoshka doll theory that an attack general attack on a contract does not constitute an adequate challenge to any particular provision thereof? Rather, the attack needs to be directed very specifically at the embedded provision which the party wishes to challenge.  Or is the court essentially saying that the Plaintiffs’ challenge here goes to the formation, rather than the effect, of the parties’ contract – an issue that always rests with the court?

The Ninth Circuit’s decision, along with the similar holdings from three other circuits, creates substantial precedent authorizing district courts to police arbitration agreements that interfere with the class action process.  Taken together, the decisions provide counsel who want to short-circuit class actions by adopting an arbitration provision with practical guidance as to how to pursue that goal.

First, arbitration agreements implemented while class litigation is pending cannot subvert Rule 23’s opt-out structure. Agreements that automatically bind class members to arbitration unless they take affirmative action, thus removing them from the litigating class, will face heightened scrutiny.

Second, communications must be accurate, complete, and not misleading. Key considerations include avoiding disparaging characterizations of class actions, clearly disclosing that class members can consult class counsel without cost, ensuring consistency in communications and deadlines, providing adequate time to consider whether to agree to arbitrate, and disclosing certification status.

Third, the FAA’s policy favoring arbitration does not override ordinary procedural rules. Courts may apply FRCP 23(d) to arbitration agreements as they would to any other contract threatening class action fairness.

Have a good weekend and stay warm.

David A. Reif, FCIArb
Reif ADR
Dreif@reifadr.com