In his August 28, 2016 post, Prof. Kenneth Jost suggests, as I did in my August 23, 2016 post about Morris v. Ernst & Young, that the split among the circuits concerning the enforceability of employment contract clauses requiring disputes to be resolved through individual arbitration is likely to be headed to the Supreme Court for resolution --especially after the Ninth Circuit panel neatly framed the split with majority and dissenting opinions in Morris.
But Jost goes one step further, drawing a parallel between the contemporary arbitration clause intended to stop concerted activity by employees and the notorious “yellow-dog contracts” of yesteryear, prohibiting employees from joining unions.
Judge Ikuta Dissents: “This decision is breathtaking in its scope and in its error . . . “
The issue decided in Morris v. Ernst & Young, No. 13-16599 (9th Cir. 8/22/16) is clearly framed by the majority and dissenting opinions, and almost certainly headed for Supreme Court review. In a majority opinion authored by Chief Judge Thomas, the panel holds an employer violates sections 7 and 8 of the NLRA by requiring employees to sign an agreement precluding them from bringing, in any forum, a concerted legal claim regarding wages, hours, and terms of conditions of employment.
Judge Thomas identifies “a core right to concerted activity” established by the NLRA. “Irrespective of the forum in which disputes are resolved, employees must be able to act in the forum together. The structure of the Ernst & Young contract prevents that.”
The majority opinion relies on Chevron deference to the NLRB’s interpretation of the NLRA, on the statutory reference in section 7 of the NLRA to the right of employees “to engage in other concerted activities”, on the savings clause in the FAA that permits agreements to arbitrate to be invalidated by generally applicable contract defenses (but not by defenses that apply only to arbitration), and on a distinction between substantive rights and procedural rights. This last distinction is particularly important, because the majority describes the right to concerted action as a substantive right that cannot be eliminated in arbitration agreements or in other agreements.
The majority nimbly distinguishes the Italian Colors case. Readers of my blog will recall that Justice Kagan, dissenting in Italian Colors, lamented that the majority opinion, authored by Justice Scalia, gave the plaintiffs a right to sue without an effective remedy, because they could not sue as a class. “Too darn bad” was her nutshell of the case. [See June 25, 2013 post.] In Morris, Judge Thomas distinguishes Italian Colors as a case in which a procedural, not a substantive right, was waived, because the antitrust statutory scheme at issue in Italian Colors did not create a right to concerted activity, only a right to sue for antitrust violations. By way of contrast, Judge Thomas views the extinction of employees’ right to concerted activity as the loss of a substantive right created by federal statute.
Judge Thomas explains that the panel’s holding does not uniquely burden arbitration:
“The contract here would face the same NLRA troubles if Ernst & Young required its employees to use only courts, or only rolls of the dice or tarot cards, to resolve workplace disputes – so long as the exclusive forum provision is coupled with a restriction on concerted activity in that forum. At its heart, this is a labor case, not an arbitration case.”
Judge Ikuta vigorously dissents, arguing that the FAA preempts federal court here from not enforcing the arbitration agreement, and that the panel’s holding is counter to recent Supreme Court case law, as well as case law of the Second, Fifth, and Eighth Circuits, concluding that “the NLRA does not invalidate collective action waivers in arbitration agreements.”
Political Footnote. Judge Ikuta, who clerked for Judge Kozinski and Justice O’Connor, was nominated for the Ninth Circuit by President George W. Bush. Judge Thomas was nominated by President Bill Clinton for a seat on the Ninth Circuit. Judge Hurwitz was nominated by President Barack Obama.
Enforceability Of Arbitration Provisions Is Uncertain, Threatening To Upset The Settlement Applecart.
Joel Rosenblatt, reporting for Bloomberg on August 18, 2016, explains why San Francisco District Court Judge Edward Chen’s rejection of a class-settlement between Uber and its drivers may now give Uber the upper hand: the Ninth Circuit is poised to rule on the enforceability of arbitration clauses in Uber driver contracts in another case, and if it enforces the arbitration clauses, Uber could force drivers to individually arbitrate their claims, eviscerating the class action.
Judge Chen, who rejected the $100M settlement as being not generous enough to the Uber drivers, had previously ruled that Uber’s arbitration clauses could not be enforced. However, the Ninth Circuit could overturn his ruling that the arbitration clauses are invalid in another pending case involving Uber drivers. It would be an odd twist of fate if the Judge’s ruling results in a worse outcome for the drivers.
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.
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.
Court Looks At Evolution Of Class Action Waiver Law In California For Help Construing Meaning Of The Contractual Language.
In 2011, AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) held the Discover Bank rule, invalidating a class arbitration waiver, had been preempted by the Federal Arbitration Act. After Concepcion, employers frequently insert class arbitration waivers in their employment agreements and dispute resolution policies.
But that’s not what happened in Licon v. Wish-I-Ah Skilled Nursing & Wellness Centre LLC, F070304 (Fifth Dist. 6/15/16) (Hill, Kane, Franson) (unpublished), where the Employment Dispute Resolution (EDR) Program was written before Concepcion was decided. Instead, the EDR Program provided that it “covers only claims by individuals and does not cover class or collective actions.” (italics in the Court’s opinion). Construing the plain meaning of the words, the Court of Appeal agreed with the trial judge that the arbitration agreement excluded class and collective actions from its scope, so plaintiffs were not required to arbitrate class or private attorney general claims.
Of course, the employer argued “other language in the EDR program booklet demonstrates an intent to arbitrate all claims on an individual, nonclass basis . . . “
The Court found it helpful to consider the extrinsic evidence of how the employer’s EDR policy had evolved from before to after Concepcion, for after Concepcion, the employer changed the wording of its EDR policy to take advantage of Concepcion’s evisceration of the Discover Bank rule. The Court concluded that the pre-Concepcion ERP, which governed the situation, meant what it said, because it had been drafted at a time when the employer “had to be concerned with the possibility a court would invalidate a class action or class arbitration waiver.”
His Opinion Analysis Is Titled, “Justices rebuke California courts (again) for refusal to enforce arbitration agreement” -- And That About Says It All.
On December 14, 2015, the United States Supreme Court decided DirecTV v. Imburgia, The SCOTUS syllabus states the holding: “Because the California Court of Appeal’s interpretation is pre-empted by the Federal Arbitration Act, that court must enforce the arbitration agreement.” Professor Ronald Mann of Columbia previewed the case earlier on SCOTUSBlog, and I recommend his post-opinion analysis for its brevity and clarity.
The arbitration agreement between DirecTV, a satellite television provider, and two of its customers, provided for binding arbitration and waiver of class arbitration, unless the “law of your state” made waiver of class arbitration unenforceable. In case the waiver of class arbitration was unenforceable, then the entire arbitration provision became unenforceable.
When the plaintiff entered into the arbitration agreement, existing California law (Discover Bank), made class action waivers unenforceable, in those situations where it would have been simply infeasible for a single aggrieved party to pursue rights in arbitration. Since then, however, SCOTUS has made it clear in Concepcion and other cases that state laws placing arbitration agreements on an unequal footing with other contracts will be preempted by the Federal Arbitration Act (assuming interstate commerce is involved). And the FAA requires that arbitration agreements be enforced according to their terms – even though pragmatically, this can be harsh, leaving would-be plaintiffs with rights, but without an effective remedy. Who will bother to arbitrate over a very small monetary dispute, unless it can be aggregated with similar disputes in a class arbitration or lawsuit?
The majority opinion makes it clear that the reference to state law means “valid state law” – not state law that has been preempted by SCOTUS.
Justice Breyer was assigned to write the opinion – an interesting choice, given that he was one of the dissenters in Concepcion, the case that spearheaded the current FAA preemption juggernaut.
Justices Ginsburg and Sotomayor dissented, on the ground that the reference to state law was at best ambiguous, and that an ambiguous agreement should be interpreted against the drafter, DirecTV. Ever feisty, Justice Ginsburg wrote: “Demeaning that [state] court’s judgment through harsh construction, this Court has again expanded the scope of the FAA, further degrading the rights of consumers and further insulating already powerful economic entities from liability for unlawful acts.”
In a three-sentence dissent, Justice Thomas propounded his view that the FAA does not apply to state court proceedings.
Fees And Costs Provision In Consumer Arbitration Was Unconscionable Here.
This case involves a common scenario in which a business sells a good or service that is financed, the business is unable to fully perform, and the lender seeks to enforce an arbitration provision when it gets sued. Here, the Court of Appeal held that the arbitration clause was enforceable, with one exception: the provision that shifted fees and costs to the prevailing party in a consumer arbitration was held to be substantively unconscionable. Why? Because a prevailing plaintiff consumer would have been entitled to fees under the Consumer Protection Act, the “loser pays” provision only benefits a prevailing defendant. Brinkley v. Monterey Financial Services, Inc., D066059 (4/1 Nov. 11, 2015) (Aaron, McIntyre, O’Rourke). However, the Court also determined that because the agreement was not permeated with unconscionability, the one unconscionable provision could be severed, saving the rest of the arbitration provision.
This is also a case in which incorporation by reference of AAA arbitration rules resulted in incorporation by reference of the AAA Supplementary Class Arbitration Rules. And that in turn meant here that the decision to determine whether a class-wide arbitration will be allowed is a decision delegated to the arbitrator under the AAA rules. The same delegation of the decision to decide whether to allow class-wide arbitration, with the same result, has been addressed in a case we blogged about earlier on August 20, 2015, Universal Protection Services, LP v. Superior Court of Yolo County (Michael Parnow, et al., Real Parties in Interest), C078557 (3d Dist. August 18, 2015)(published).
ScotusBlog Analyzes Oral Argument Under Caption, “Justices have scorching criticism for California court’s refusal to enforce arbitration agreement, but debate their authority to correct it.”
Columbia Law Professor Ronald Mann has authored both an October 2, 2015 preview of arguments in DIRECTV v. Imburgia and an October 7, 2015 analysis of the oral arguments.
In his preview, Professor Mann leads: “If I start by telling you that DIRECTV includes an arbitration clause in agreements with its customers and that the California Court of Appeal in this case declined to order arbitration, it would be understandable if you immediately stopped reading and clicked back to look for another post: how far do you have to read to expect that my post is going to tell you that the Court is likely to reverse the California court and hold the agreement enforceable?”
In DIRECTV, the arbitration provisions contain a poison pill: “if the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration provision] is unenforceable.” What does “law of your state” mean?
The parties entered into the agreement when the Discover Bank rule applied in California, invalidating class action waivers, and before that rule had been overturned by AT&T v. Concepcion.
The question, as presented by DIRECTV’s petition for writ of certiorari to the Supreme Court is: “Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.”
Thus, DIRECTV’s position is simply that the California courts flaunt federal law and preemption.
In contrast, Imburgia argues that this is a simple matter of contract interpretation: whether the reference to “the law of your state” refers to the rule in Discover Bank, or to the state of the law in California after Concepcion. Imburgia argues that contract interpretation should be left to state judges, and if the contract drafted by DIRECTV is ambiguous, then the well-known rule that ambiguous contracts are interpreted against the drafter must apply.
Prof. Mann concludes, “[I]t seems unlikely that five of the Justices will vote to affirm the California decision. But do we know exactly how they’ll explain their decision? For that I suppose we’ll have to wait a few months yet.”
Court Distinguishes Imburgia v. DIRECTV, Inc., Case Pending Before SCOTUS.
Automobile purchases and leases have generated quite a few disputes about the enforcement of arbitration clauses. Exhibit 1: The Sanchez case decided by the California Supreme Court on August 3, about which I posted on August 4, 2015. We have a sidebar category for Arbitration: Automobiles.
Now we have yet another automobile case – coincidentally as with Sanchez, involving a Mercedes Benz. Plaintiff Kaghazchi sued Mercedes-Benz Financial Services USA LLC in connection with his lease of a Mercedez-Benz. The key issue in the appeal is whether “the FAA preempts application of the CLRA’s [California Legal Remedies Act] rule prohibiting a waiver of class actions.” In Kaghazchi v. Mercedes-Benz Financial Services USA LLC, G049981 (4/3 Aug. 10, 2015) (Thompson, O’Leary, Rylaarsdam) (unpublished), the Court of Appeal answers: Yes. Perhaps not without qualms, for the Court “acknowledge[s] the CLRA’s antiwaiver section serves an important purpose of protecting California’s consumers.” But the Court concludes, relying on Concepcion, that “[s]tates cannot require a procedure that is consistent with the FAA, even if it is desirable for unrelated reasons.”
NOTE: The Court is at pains to distinguish Imburgia v. DIRECTV, Inc., 225 Cal.App.4th 338 (2014), certiorari granted sub nom. DIRECTV, Inc. v. Imburgia (Mar. 23, 2015) ___ U.S. __ [135 S.Ct. 1547] (Imburgia). As posted on SCOTUSblog, the issue in Imburgia is: “Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.”
The contract in Imburgia contained a reference to the “law of your state,” interpreted by the California Court of Appeal to operate as “a specific exception to the arbitration agreement’s general adoption of the FAA.” Therefore, in Imburgia, the FAA did not trump the application of California law. However, in Kaghazchi, the Court of Appeal explains that while the automobile lease stated it was “subject to” California law, arbitration under the lease was to be governed by the FAA. Thus, unlike Imburgia, there was no “specific exception” to FAA governance of arbitration. In other words, the parties in Imburgia and in Kaghazchi struck different deals as to choice of law for purposes of arbitration. Far from impairing the deal parties strike, according to Concepcion, the FAA ensures private arbitration agreements are enforced according to their terms.
Regardless of what SCOTUS does in Imburgia, we predict that automobile dealers, lessors, and financing parties will draft documents that follow the Kaghazchi model – i.e., they will preemptively make it clear that whatever substantive law applies to the contract, the FAA applies to arbitration procedure. To steal a line from one of our local judges, “that’s the way the cow chews its cud.”