Dissent Argues That Classwide Arbitrability Is A Gateway Question The Court Should Get To Decide.
The courts have treated gateway arbitrability issues concerning the existence of an arbitration agreement and the scope of the agreement as “gateway” issues for the courts to decide, whereas so-called procedural issues are to be resolved by the arbitrator. So under which rubric should the availability of classwide arbitration be placed? Gateway or procedural issue?
The California Supreme Court ruled today in Sandquist v. Lebo Automotive, Inc., et al., No. S220812 (Cal. Sup. Ct. 7/28/16) (Werdegar, J., writing for majority), that the arbitrator gets to decide whether the arbitration agreement permits or prohibits classwide arbitration. The underlying lawsuit involves allegations by Mr. Sandquist and other non-Caucasian employees that they were subjected to racial discrimination, harassment, and retaliation by their employer.
Justice Werdegar acknowledges “[t]he question has divided the many state and federal courts to consider it.” In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), a plurality of the SCOTUS took the view that classwide arbitrability was a procedural issue, failing to definitively resolve the issue.
The majority concludes “no universal rule allocates this decision in all cases to either arbitrators or courts.” Instead, one must look to the specific agreement, subject to interpretation under state contract law, and here, the broad arbitration agreement allocated the decision to the arbitrator. Furthermore, “[u]nder federal arbitration law, no contrary presumption requires a different result, so the issue remains one for the arbitrator.” Here, the availability of classwide arbitration was not treated as a gateway issue, but rather as a procedural issue.
Authoring the dissent, Justice Kruger viewed the availability of class arbitration under the parties’ agreement as a “gateway question of arbitrability” presumptively for the court to decide.
The dissent noted that the switch from bilateral to class arbitration “is one that strikes at the heart of the bargain the parties make.” Viewed as an issue of consent, and expectations of the parties, the availability of classwide arbitration may be viewed as a gateway issue for the court to decide. Classwide arbitration also implicates the rights of third parties who did not sign an arbitration agreement – something that a court is perhaps best able to safeguard.
The immediate upshot of the Court’s decision is that the order of the Court of Appeal is affirmed, meaning that the matter is remanded by the Court of Appeal to the trial court “with directions to vacate its order dismissing class claims and to enter a new order submitting the issue of whether the parties agreed to arbitrate class claims to the arbitrator.” I previously posted on the Court of Appeal decision on July 22, 2014.
COMMENT: The positions of the parties may appear a bit unusual in this case. Usually the employee prefers to be in court, and the employer prefers to be in arbitration -- especially because individual arbitration has become useful as a tool for employers to eliminate classwide arbitration. Here, the trial court dismissed the employee’s classwide claims with prejudice. But now the employee – and the class – will get a “second bite of the apple” in front of an arbitrator. That is no guarantee, of course, that the outcome will be any different.
Panel Holds That Lengthy Amount of Time Litigating In Federal Court “Will Almost Inevitably” Cause Parties To Expend More Time, Money, And Effort Than Had They Proceeded Directly To Arbitration.
In Martin v. Yasuda, No. 15-55696 (9th Cir. 7/21/16) (Reinhardt, Wardlaw, Bennet), defendants, a cosmetology school and its principal, petitioned the 9th Circuit to hear an appeal of the district court’s order denying their motion to compel arbitration with cosmetology students who claimed they should be paid as employees. The Ninth Circuit stayed the district court action and agreed to hear the appeal, but then affirmed the district court’s order that defendants had waived their right to arbitrate by their litigation conduct.
Defendants argued unsuccessfully that (a) the issue of waiver should have been decided by the arbitrator under the broad language of an AAA delegation rule; and (b) plaintiffs were not prejudiced by the delay.
The panel disagreed, holding that waiver, like other so-called “gateway issues” involving arbitrability, must be decided by the court. The panel acknowledged that the 8th Circuit has held that the arbitrator presumptively should decide if a party has waived the right to arbitration by litigation conduct, but sought to distinguish that holding on the grounds that the litigation conduct occurred in state court. Nat’l Am. Ins. Co. v. Transamerica Occidental Life Ins. Co., 328 F.3d 462 (8th Cir. 2003).
Though no evidence was actually presented that proceeding in arbitration will be more expensive than proceeding in court going forward, it appears that the 9th Circuit will infer that a lengthy amount of time litigating in the federal court system “will almost inevitably cause the parties to expend more time, money, and effort than had they proceeded directly to arbitration.”
Finally, the panel concluded that a motion to dismiss filed by defendants had resulted in prejudice to plaintiffs, because the dismissal of the motion without prejudice constituted an “adverse ruling”. As a consequence, any party that now brings a motion to dismiss and loses must be concerned that ipso facto they have waived their right to arbitrate.
DISCLOSURE: I participated in drafting the appellant’s petition to the 9th Circuit to stay the district court action while an appeal was pending, and my colleague Mike Hensley argued the appeal for appellants.
CNN Legal Analyst Danny Cevallos reported on July 18, 2016 about the strategic maneuvers of Mr. Ailes’ attorneys to move Gretchen Carlson’s sexual harassment suit from the the court to arbitration – and presumably to enforce confidentiality, so that dirty linen need not be washed in public.
Ms. Carlson’s lawsuit was filed in New Jersey State Court on July 6, 2016. Under diversity jurisdiction, the case was removed by Mr. Ailes to federal court in New Jersey. Mr. Ailes’ attorneys are seeking to change venue to New York federal court, and to compel arbitration.
“Overall, the defendants have a good chance of sending this back to arbitration,” concludes Mr. Cevallos.
Third-Party Non-Signatory Owed Duties Under Labor Code To Plaintiff, Independent Of Plaintiff’s Contract.
Zepeda v. Paramount Citrus Packing Company LLC, F071593 (5th Dist. 7/14/16) (Pena, Levy, Smith) (unpublished) distinguishes two situations: (1) a plaintiff whose relationship with a third-party non-signatory merely presumes the existence of a contract; and (2) a plaintiff whose rights against a third-party non-signatory rely on the existence of a contract. In the first situation – which is the situation in Zepeda – the non-signatory might not be able to use the arbitration provision in the contract to compel arbitration. In the second situation, which is not the situation in Zepeda, the plaintiff relies on the contract to sue the third party, and the third party can take advantage of the arbitration provision to compel arbitration.
Ranstad, in the business of providing temporary workers to its client companies, provided workers, including Zepeda, to Paramount, a grower and processor of citrus crops. Ranstad had an arbitration clause with Zepeda, and Paramount unsuccessfully invoked the arbitration clause after Zepeda sued alleging class-wide labor violations resulting from uncompensated time for donning and doffing, and interrupted meal and rest break periods. Paramount argued that Zepeda was equitably estopped to deny the right to arbitrate, and alternatively, that Paramount was the third-party beneficiary of the arbitration agreement.
Paramount relied on a federal district court case, Lucas v. Hertz Corp., 875 F.Supp.2d 991 (N.D. Cal. 2012), for the proposition that, because the relationship with Paramount presumed the existence of the contract with Zepeda, Paramount could rely on the arbitration clause in the Rantstad/Zepeda contract. However, the Court of Appeal found the district court case to be non-persuasive and non-binding authority.
Instead, the Court of Appeal found Kramer v. Toyota Motor Corp., 705 F.3d 1122 (9th Cir. 2013) to be better reasoned. Kramer held that equitable estoppel was inapplicable where the plaintiff’s claims against the third party non-signatory are not founded on any provision in the plaintiff’s contract, but instead arise from independent duties owed by the third party to the plaintiff. In Zepeda, the independent duties owed by the third party Paramount were owed under the Labor Code, not under the contract with Ranstad.
The Court of Appeal also concluded that a third-party beneficiary argument was not supported by the contractual language.
COMMENT: Too bad the case is unpublished. Cases involving non-signatory third parties seeking to compel arbitration arise with some frequency, and it would be helpful to have more guidance in this area.
The Subjects Are Appellate Mediation And Mediating Employment Disputes With Small Business Owners.
The July 2016 edition of Orange County Lawyer includes two worthwhile articles about mediation.
Rethinking the Impossible: Appellate Mediation.
By the time a case is on appeal, many attorneys and their clients view a case as far beyond the point of settlement. However, Kerry W. Franich, an attorney in Severson & Werson’s appellate practice group, emphasizes the benefits of appellate mediation. A judgment may provide an opportunity for revisiting settlement negotiations.
The opportunities presented by appellate mediation often flow from the passage of time: decision makers may have changed, parties may have changed, litigation objectives may have changed, and the law may have changed. In short, the door to settlement may not be shut.
COMMENT: Nevertheless, appellate mediation does not have as high a settlement rate as does mediation at the trial court level. Do any of my readers have statistics on settlement rates for appellate mediation?
We would add that a significant motivator for engaging in appellate mediation ought to be the rate of reversal on appeal in California. “With an overall statewide reversal rate of 36% in civil cases, an appeal does not necessarily end the litigation process – it may be only another step in a seemingly endless and costly road to resolution.” Hon. Jeff Kaplan (Ret.), “Practical Considerations for Post-Trial and Appellate Mediations,” Advocate (Fall 2013).
Reaching for Understanding: Mediating Employment Disputes With Small Business Owners.
David Ezra,an attorney with a practice focusing on ADR, insurance and employment law,considers the attributes of small business owners that “can make the mediation process especially challenging.” Mr. Ezra points out that small business owners are accustomed to making decisions with “no opportunity for consensus building or a second opinion.” Additionally, relationships in a small business can be highly personal and emotionally charged. “The mediator,” Mr. Ezra counsels, “needs to resist passing judgment.”
Mr. Ezra offers useful suggestions for dealing with the small business owner in mediation – and perhaps he will follow up someday with suggestions for helping the employee through the mediation process.
Case Held That Arbitration Agreement Between Indiana Based Distance-Learning Partnership And California Licensed Vocational Nurses Was Unconscionable.
We can report that on July 8, 2016, Magno v. The College Network, Inc., D067687 (4/1 6/14/16) (McConnell, Nares, O’Rourke), a case we posted about on June 22, 2016, was ordered for publication. Perhaps the most notable part of the case is the weight that the Court gave to an Indiana forum selection clause for binding arbitration in determining that substantive unconscionability existed. Also, there was an absence of evidence that the plaintiffs, young nursing students, knew about the forum selection clause.
Interview In Orange County Lawyer Is Summarized Today In California Attorney’s Fees Blawg.
My colleague Mike Hensley and I publish a blawg about California Attorney’s Fees. A post today (July 10, 2016) in that blawg summarizes highlights of an interview appearing in the July 2016 edition of the Orange County Lawyer, in which the co-chairs of the Orange County Bar Association’s Mandatory Fee Arbitration Committee offer tips on what arbitrators look for in mandatory attorney fee arbitration.
On May 4, 2016, I posted about the Committee on Mandatory Fee Arbitration of the State Bar of California’s two new Advisories on Mandatory Fee Arbitration (MFA) brought under the Business & Professions Code. Advisory 2016-01, replacing Advisory 2011-02, is about the application of the Statute of Limitations for MFAs. Advisory No. 2016-02, replacing Advisory 2003-01, is an analysis of bill padding and other billing issues.
Notwithstanding the trend in SCOTUS to uphold arbitration agreements, including waiver of class arbitration, our next two unpublished cases show that the California courts look closely at arbitration agreements, sometimes enforcing and sometimes not enforcing arbitration agreements. On the same day, one California Court of Appeal reversed an order denying an employer’s effort to compel arbitration, while another California Court of Appeal affirmed an order denying a motion to compel.
Second District, Division 7, Reverses Judgment Denying Arbitration.
Finding the existence of an arbitration agreement and the lack of any substantive unconscionability, the Court of Appeal reversed the trial court’s denial of a petition to arbitrate. Urchasko v. Compass Airlines, LLC, B264672 (2/7 6/27/16) (Perluss, Segal, Blumenfeld) (unpublished).
The Court concluded the trial courted erred in ruling that the employee failed to agree to arbitrate. The trial court had based its ruling on lack of evidence that the employee checked a box on his electronic application; however, the Court of Appeal pointed out that there was no dispute the employee signed the printed application.
While there was some procedural unconscionability in a take-it-or-leave it contract, the Court concluded that the absence of any substantive unconscionability meant the arbitration agreement was enforceable.
First District, Division 4, Affirms Order Denying Employer’s Petition To Compel.
Collateral estoppel was the issue in Williams v. U.S. Bancorp Investments, Inc., A141199 (1/4 6/27/16) (Rivera, Reardon, Streeter) (unpublished): did a ruling in Burakoff et al. v. U.S. Bancrop, (L.A. Super. Ct., 2008), collaterally estop plaintiff/respondent Williams from bringing claims as a class action and bind him to an agreement to arbitrate individual disputes?
Williams, a financial consultant, filed a class action complaint against USBI in 2010 in the present case. The defendant argued that Williams belonged to a class that was certified, then decertified, in Burakoff, that because he was bound by collateral estoppel as a member of the decertified class, he could not file a class action, and that under a rule of the Financial Industry Regulatory Authority’s Code of Arbitration Procedure for Industry Disputes (FINRA rules), he would have to arbitrate.
No one disputed that Williams was a party to an arbitration provision, or that the FINRA rules provided that the arbitration provision could not be enforced against a class member. Therefore, under the FINRA rules, if Williams could not sue as a member of a class, because he was estopped by the class decertification in Burakoff, then Williams could not avoid having to arbitrate his individual claims.
California law provides that denial of class certification cannot establish collateral estoppel against unnamed putative class members on any issue because unnamed putative class members are not parties to the prior proceeding or represented in it. Bridgeford v. Pacific Health Corp., 202 Cal.App.4th 1034, 1044 (2012). Here, the situation was not so clear, because in the prior proceeding, the putative class members had first been certified, and thus arguably the interests of the absent class members were, at least for a time, represented.
The Court punted, and did not decide whether absent class members are bound by an earlier proceeding in which a class is first certified, then decertified. Instead, the Court simply ruled that the record was insufficient to compel a conclusion that the class to which Williams belonged was the same as the decertified class in Burakoff. Therefore, collateral estoppel did not apply.
This is probably not the end of the matter, because “the classes here and in Burakoff might ultimately be found to be indistinguishable.” Just not yet.
The order appealed from, denying a motion to compel arbitration and to dismiss the class complaint, was affirmed.
“When practicing appellate law, there are at least three immutable rules: first, take great care to prepare a complete record; second, if it is not in the record, it did not happen; and third, when in doubt, refer back to rules one and two.” Protect Our Water v. County of Merced, 110 Cal.App.4th 362, 364 (2003).
The Third District instructed on these rules of appellate practice in Spanos v. Dreyer, Babich, Buccola & Callaham, LLP, C077235 (3rd Dist. 6/27/16) (Duarte, Robie, Renner) (unpublished), in which the plaintiff/appellant alleged malpractice in connection with a mediation session settling an underlying tort case and a related workers’ compensation claim. The outcome of the case would have turned on the application of the mediation privilege (Evid. Code, section 1119) – if there had been an adequate record.
Alas, the appellant failed to provide the operative complaint, and failed to augment the record. On an appeal from an order sustaining a demurrer, the Court must review the operative complaint to determine whether a cause of action is stated. Also, counsel for appellant failed to appear at oral argument.
The Fifth Circuit, Division Two, holds that because a law firm’s cause of action to compel arbitration with its client “admitted the existence of a binding agreement to arbitrate the fee dispute, the trial court’s jurisdiction over the merits of plaintiff’s claims was initially limited to a determination of the gateway issue of arbitrability.” Cox, Castle & Nicholson, LP v. Wan et al., B262017 (2/5 6/23/16) ((Kumar[judge of the superior court], author, Baker, concurring); Turner (dissenting)) (unpublished). Alternatively, plaintiff was judicially estopped from seeking default judgments because it “admitted in its complaint that the fee dispute was subject to binding arbitration and defendants relied to their detriment on that admission.” As a result, plaintiff was not allowed to pursue defaults, and an order denying defendants’ motion to vacate and the default judgments were reversed.
This case has a somewhat unusual procedural history. It was originally argued on October 8, 2015, when Justice Richard Mosk was a member of the panel. Because Justice Mosk was unable to further participate, the Court vacated the submission, and appointed Judge Kumar to the panel. Letter briefs were submitted on the issue of judicial estoppel on March 22 and 25, 2016. Justice Mosk died on April 17, 2016. On March 30, 2016, the case was re-argued, and on June 23, 2016, the unpublished opinion was filed.
The majority conclusion that the cause of action to compel arbitration constituted “a binding agreement to arbitrate,” and stripped the Court of jurisdiction, may not be intuitively obvious, given that the cause of action, unlike a free-standing petition to arbitrate, was not verified, did not include evidence, and was denied in an answer, which, however, was only lodged and not filed, because a default had occurred. Furthermore, in other cases, the existence of an arbitration agreement has not resulted in a loss of jurisdiction. At least, the majority conclusion was not obvious to Justice Turner, who penned a pithy dissent.
Presiding Justice Turner’s dissent made several points: first, that existence of an arbitration agreement does not preclude a party from pursuing claims (citing Brock v. Kaiser Foundation Hospitals, 10 Cal.App.4th 1790, 1795 (1992) and cases in accord); second, that the cause of action did not accrue, because plaintiff failed to allege that defendants refused to arbitrate – a necessary element; third, that the record was inadequate, because there was no transcript; fourth, that the defendants were not artless rubes, as one was a certified public accountant, and the other a licensed realtor; and finally, that there were questions of credibility, leading to Justice Turner’s belief that the trial court did not abuse its discretion in denying the motion to set aside the default.
Though the case is unpublished, today’s post in California Attorney’s Fees rightly observes: “This decision, if correct, counsels that plaintiffs carefully think about whether they should include an arbitration claim in a complaint; otherwise, the trial court may not be able to proceed on the merits.” So be aware of another trap for the unwary.
Given that there is a majority opinion and a dissent, we wonder whether the case will be appealed. As far as the parties themselves are concerned, this may be a tempest in a teacup, for if the lawsuit does not proceed further in the trial court, the parties could end up in arbitration. And there is always the option to settle . . .