California Mediation and Arbitration

Arbitration/FAA/Waiver/Public Policy: 6th District Holds Federal Arbitration Act Does Not Permit Arbitration Agreements to Override Statutory Right To Bring Representative Claims Under PAGA

Same Issue Is Pending Before California Supreme Court in Iskanian

     Does the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) permit arbitration agreements to override the statutory right to bring representative claims under the Labor Code Private Attorneys General Act of 2004 (PAGA)?  That’s the issue pending before the California Supreme Court in Iskanian v. CLS Transportation of Los Angeles (2nd Dist. Div. 2), review granted Sept. 19, 2012, and in our next case, Brown v. Superior Court of Santa Clara, H037271 (6th Dist. June 4, 2013) (Premo, J., author 3:0) (for publication).  (See my June 5, 2012 post on Iskanian).

     Weighing in on this cutting-edge issue, the Sixth District holds that the Federal Arbitration Act and Concepcion do not demand enforcement of the arbitration agreement: 

“A plaintiff suing for PAGA civil penalties is suing as a proxy for the State.  A PAGA claim is necessarily a representative action intended to advance a predominantly public purpose.  When applied to the PAGA, a private agreement purporting to waive the right to take representative action is unenforceable because it wholly precludes the exercise of this unwaivable statutory right.”

 

     This result requires distinguishing Supreme Court cases, including Concepcion, and Marmet Health Care Center Inc. v. Brown, 132 S.Ct. 1201 (2012).

     Concepcion held that a court may not invalidate an arbitration agreement based upon generally applicable contract principles, if those principles are applied in a way that categorically disfavors arbitration.  In Brown, the Court acknowledges that “any statute providing a private remedy that may be effectively adjudicated in the arbitral forum must be arbitrated if that is what the parties have agreed to do.”  However, the Court of Appeal says it is unaware of any Supreme Court case that “has held the FAA requires enforcement of a private agreement that wholly prevents the exercise of a statutory right intended for a predominantly public purpose.”

     In Marmet, the Supreme Court held that a state law prohibiting the arbitration of claims against nursing homes was invalid.  The distinction:  this was a categorical prohibition of the arbitration of a routine common law claim, whereas a PAGA claim “is a statutory claim that provides a public remedy.”  The key to PAGA is that the individual plaintiff steps in as a private attorney general – a proxy for the state – and the purpose of PAGA penalties is a public purpose: deterrence.  That purpose is thwarted if one cannot make a representative claim.

     The impact of the ruling is limited, even in Brown, for the Court held that “the PAGA claim must be excluded from the order compelling arbitration and stayed pending resolution of the arbitration.”  Finally, it remains to be seen what the California Supreme Court will do in Iskanian.

Arbitration/Employment/Unconscionability: Second District, Division 1 Reverses Order Denying Motion To Compel Arbitration, Concluding That Contract Is Not Illusory, And Not Unconscionable

Employer’s Right to Change Dispute Resolution Process Is Held In Check By Implied Covenant of Good Faith and Fair Dealing

     Having just blogged on June 5, 2013, about an opinion authored by Justice Mallano, reversing an order granting a motion to compel arbitration, I now blog about an opinion authored by Justice Mallano, reversing an order denying a motion to compel arbitration.  Leos v. Darden Restaurants, Inc., B241630 (2nd Dist. Div. 1 June 4, 2013) (Mallano, J. author 3:0) (unpublished).

     Leos is a sexual harassment case filed by employees against their employer, Darden Restaurants, Inc.  Employer moved to compel arbitration, and the trial court denied the motion on the grounds that the arbitration provision was unconscionable.   Employer appealed.

     Applying the standard two-prong unconscionability analysis, the Court of Appeal found the Dispute Resolution Process (DRP) procedurally unconscionable “[b]ecause plaintiffs were required to sign the DRP acknowledgment as a condition of employment, were unable to negotiate the terms of the DRP, and had no meaningful choice in the matter . . . “  But the second prong – substantive unconscionability – was missing.

     The most interesting argument was the employee’s argument that the employer’s right to modify the DRP at will made the contract unconscionable and illusory.  However, in California, the employer’s unilateral right to modify an arbitration provision is subject to the limitations imposed by the covenant of good faith and fair dealing.  24 Hour Fitness, Inc. v. Superior Court, 66 Cal.App.4th 1199 (1998).  The exception is that the arbitration agreement is indeed illusory and unenforceable if the employer’s unilateral modifications apply where an employee’s claims have already accrued or are known to the employer.  Peleg v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012).

    Here, the employer was saved by drafting language that gave it the right to modify “as required by law.”  “We fail to understand,” wrote Justice Mallano, “how a clause permitting modification as required by law can itself be unlawful.”  That’s a drafting tip for employers!

     The trial court’s order denying arbitration was reversed.

    

 

Arbitration/Employment/Enforcement/ Construction: Signed Acknowledgment of Employee Guidebook Failed to Establish Employee Was Bound By Arbitration Provision in Guidebook

 

Guidebook Disclaimers Were Self-Destructing

     In the next case, the Court of Appeal would not let the employer “have its cake and eat it too.”  On the one hand, the employee Guidebook provided for arbitration.   On the other hand, the employee Guidebook contained disclaimers that relieved the employer of contractual obligations.  The employer could not have it both ways.

      In an employment lawsuit between Plaintiff Tamayo and her employer, a golf club, the golf club moved to compel arbitration, based on the employee’s signed acknowledgment that she received the employer Guidebook with an arbitration provision.  The trial court denied the employer’s motion to compel arbitration, and the employer appealed.  Tamayo v. Cordevalle Golf Club, LLC, H037983 (6th Dist. April 26, 2013) (Bamattre-Manoukian, J., author 3:0) (unpublished). 

     One key disclaimer in the Guidebook provided that it “does not constitute a contract of employment.”  The Court of Appeal concluded, “the parties did not enter into a binding agreement to arbitrate because no document contained in the record can be reasonably construed to manifest the mutual assent of the parties to an agreement to arbitrate.”

     Query whether the result would have been different if, instead of the self-destructing language that there was no contract of employment, the Guidebook had only said that the employer could unilaterally modify, revoke, suspend, terminate, or change the policies and procedures in the Guidebook.  Under those circumstances, might the Court of Appeal have reached into its toolkit, and pulled out the implied covenant of good faith and fair dealing to conclude that the contract was not unilateral and illusory, because it had to be interpreted reasonably so as not to frustrate its purpose?  See my April 28, 2013 post on Serpa v. California Surety Investigations, Inc., Case No. B237363 (2nd Dist. Div. 7 April 19, 2013; mod’d April 26, without changing judgment) (Perluss, J., author 3:0) (published) (applying covenant of good faith and fair dealing to save arbitration clause from “illusory” interpretation).

Arbitration/Employment/Unconscionability: Second District, Div. 7, Reverses Trial Court, and Finds Employment Agreement Arbitration Requirement Is Not Unconscionable

Court Uses Full Bag Of Tools To Save Arbitration Provision

     Life boat drill.  Between ca. 1910 and ca. 1915.  Library of Congress.

     The Courts of Appeal have many tools for interpreting arbitration provisions, including sliding scales for weighing unconscionability, incorporation by reference, application of the implied covenant of good faith and fair dealing, severability, and “reasonable” interpretation of an undefined term.  All those tools were applied to save an arbitration provision from unenforceability in the following employment case, Serpa v. California Surety Investigations, Inc., Case No. B237363 (2nd Dist. Div. 7 April 19, 2013; mod’d April 26, without changing judgment) (Perluss, J., author 3:0) (published).

     Plaintiff Serpa sued her employer CSI alleging FEHA claims for sexual harassment, gender discrimination, retaliation, and other employment related claims.  The trial court denied the employer’s motion to compel arbitration on the ground that the arbitration provision was unconscionable and therefore unenforceable.  The employer appealed.

     First, applying the sliding scale of unconscionability, the Court of Appeal found that the contract was indeed one of adhesion, and therefore at least somewhat procedurally unconscionable.  However, with a low degree of procedural unconscionability, the degree of substantive unconscionability would have to be high to make the arbitration provision unconscionable. 

     Second, there was a question as to whether the arbitration provision was written broadly enough so as to result in a mutual obligation to arbitrate.  Here, incorporation by reference helped the employer, because the arbitration provision incorporated an employee handbook that evidenced an intent to arbitrate “any dispute” arising out of the employment.

     Third, the arbitration provision, which allowed the employer to alter the terms of any policy contained in the handbook at its sole discretion and without notice appeared to be illusory.  Not so, said the Court of Appeal, relying on the covenant of good faith and fair dealing implied in every contract.  The party with the authority to alter the contract may not change it in such a manner as to frustrate its purpose.

     Fourth, the contract explicitly provided that each party would bear its own attorney’s fees.  That, said the Court of Appeal, was unconscionable, because it deprived Serpa of an unwaivable statutory remedy to recover fees if she prevailed on her FEHA claims in arbitration.  Not to worry – the unconscionable provision could be severed. 

     Fifth, the Court applied a reasonable interpretation to a seemingly vague provision in the agreement.  The agreement required the employee to submit her dispute informally to the company before seeking arbitration.  Serpa argued that this unfairly gave her employer a “a free peek” at her case.  But the Court interpreted “informal internal efforts”, which were not defined, to mean nothing more “than some informal notice of a grievance before proceeding to arbitration.” 

    Thus, the Court of Appeal rescued the arbitration provision, finding that it was not unconscionable, and reversing the trial court’s denial of the employer’s motion to arbitrate.

Arbitration/Employment/Choice of Law/Preemption: Massachusetts Choice of Law Enables Court of Appeal to Uphold Denial of Petition to Arbitrate Employment Discrimination Claims

Waiver of Right to Trial of Employment Claims Was Not Clear and Unequivocal

     One of the hottest areas of contention concerning arbitration is the waiver of statutory rights through arbitration, and whether such a waiver is preempted under AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011).  In Harris v. Bingham McCutchen, B240522 (2nd Dist. Div. 5 March 29, 2013) (O’Neill, J., author 3:0) (published), the Court held that Massachusetts choice of law, required by the employment contract, provided that waiver of the right to try an employment discrimination claim needed to be “clear and unequivocal.”  That’s the law in Massachusetts, and the contractual language did not meet that heightened standard.

     So why wasn’t this resulted preempted by the Federal Arbitration Act and Concepcion? After all, Concepcion invalidated a class action waiver that peculiarly burdened an arbitration provision in California.

     The answer is that the heightened waiver standard under Massachusetts law does not discriminate against arbitration, because it applies as well to any contractual provision that limits statutory rights in an employment discrimination case. “[The] rule states only that as a matter of the Commonwealth’s general law of contract, a private agreement that purports to waive or limit—whether in an arbitration clause or in some other contract provision—the employee’s otherwise available right to seek redress for employment discrimination through the remedial paths set out in [Massachusetts General Law chapter] 151B, must reflect that intent in unambiguous terms.” Warfield v. Beth Israel Deaconess Medical Center, Inc., 454 Mass. 390, 399-400 (Mass. 2009) (italics added by me for emphasis).

     TIP for California legislators:  A statute that provides a heightened standard for waiver of statutory rights might survive Concepcion if it applies to all contracts, not just to arbitration provisions.

    

    

Arbitration/Employment/Unconscionability: Second District, Division 8 Tanks Employment Arbitration Provision On Basis of Unconscionability

Main Problem is One-Sidedness of Arbitration Provision

     Compton v. Superior Court, Case No. BC448343 (2nd Dist. Div. 8 March 19, 2013) (published) starkly presents the conflicting views of judges confronted with deciding whether an employment arbitration provision is unconscionable.

      Leasa Compton appealed the order granting her former employer, American Management Services’s (AMS’s) petition compelling her to arbitrate her class action complaint for violations of Labor Code provisions governing payment of wages.  Appellant Compton raised two issues:  (1) the employer had waived arbitration by litigating extensively; (2) the arbitration provision was unconscionable. 

      Justice Rubin, with Justice Flier concurring, authored the opinion reversing the trial court’s order.  The first issue – waiver of the right to arbitrate through delay – was not addressed, perhaps because the employer sought arbitration, after extensive litigation, but immediately after Concepcion was decided by the United States Supreme Court, opening up the argument for employer that it would have been futile for it to seek arbitration before Concepcion was decided, holding class action waivers in arbitration are not per se unenforceable.  In any case, the issue of delay and waiver did not need to be addressed, because Justice Rubin disposed of the enforceability of the arbitration provision issue on the grounds of procedural and substantive unconscionability.

      The trial court’s decision was reviewed on a de novo standard, as there appeared to be no facts in dispute.  The provision was procedurally unconscionable, presented on a “take it or leave it” basis, as a condition for unemployment, unaccompanied by the applicable arbitration rules.  Substantive unconscionability resulted because the provision required employees to arbitrate claims they were most likely to bring, while allowing the employer to go the judicial route for certain claims it was more likely to bring; statutory rights to attorney’s fees might not be applied in arbitration; and the statute of limitations provisions seemed to favor the employer.

      Justice Bigelow, dissenting, believes that Concepcion has changed the landscape, and that the Majority failed to pay it proper homage.    She concludes that the arbitration provision is not "so ‘tainted with illegality’ as to render it wholly unenforceable”, that an injunctive relief carve-out for litigating trade secret and unfair competition cases “could be easily severed”, and that she is not “offended by the procedural path to litigation here.”

      Plenty to chew on here for advocates on both sides.

Arbitration/Employment/Waiver/FAA: First District, Div. 1, Affirms Judgment Compelling Employee To Arbitrate, Alone, With Macy’s Department Stores, Inc.

Court of Appeal Is Skeptical About Gentry, But Avoids Addressing Gentry Factors, Because Record Was Lacking

 

    

Macy’s Department Store’s Flagship location in Manhattan, New York.  Carol M. Highsmith Collection.  Library of Congress.

     The issue of the enforceability of class action waivers and compulsory arbitration in employment disputes is before the California Supreme Court by virtue of its grant of review in Iskanian v. CLS Transportation Los Angeles, LLC, 206 Cal.App.4th 949 (2012) (review granted Sept. 6, 2012, S204032).  See my June 5, 2012 post on Iskanian.  Meanwhile, the Courts of Appeal must still deal with cases that present those issues, sometimes skirting the issues.  Our next case, Outland v. Macy’s Department Stores, Inc., A133589 (1st Dist. Div. 1 January 16, 2013) (Margulies, J., author) (unpublished), concerns a class action brought on behalf of California residents employed as group sales managers for Macy’s, alleging they were not compensated for overtime and for missed meal and rest periods, because they were improperly classified as exempt.

     The trial court granted Macy’s motion to enforce an arbitration agreement with a class action waiver.  Plaintiff appealed, contending that AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011) was distinguishable, and that dismissal of her class claims could be avoid by relying upon Gentry v. Superior Court, 42 Cal.4th 443 (2007), and D.R. Horton, Inc., a decision of the National Labor Relations Board (NLRB).

     Courts that take the position that Gentry is still good law point out Gentry did not establish “a categorical rule that invalidates class action waivers – the type of rule that Concepcion condemned.”  Franco v. Arakelian Enterprises, Inc., 211 Cal.App.4th 314, 368 (2012).  See my November 27, 2012 post on Franco.  Unfortunately for plaintiff here, however, “plaintiff did not submit any evidence to the trial court concerning the Gentry factors.”  Thus, there was no basis on the record for finding the class action waiver unconscionable.

     The Court also says, somewhat cryptically, that notwithstanding another decision, Truly Nolen of America v. Superior Court, 208 Cal.App.4th 487 (2012), recognizing that Concepcion was inconsistent with Gentry, “we conclude we must follow Concepcion.”   See my August 13, 2012 post on Truly Nolen.  It is unclear how following Gentry is necessarily inconsistent with Concepcion, because Concepcion does not abolish unconscionability as a defense to arbitration.  In Outland, the Court explains that there is no basis in the record “for finding the class action waiver unconscionable.”  But if application of the Gentry factors, based on evidence, had led to a finding that the class action waiver was unconscionable, how would that be inconsistent with Concepcion?

     Finally, like a number of other courts (including the Iskanian court) that have considered the issue, the Court of Appeal was not persuaded by the ruling in D.R. Horton., a case that held that the NLRA barred mandatory waivers of class arbitration over wages, hours, and working conditions.  A ruling by the NLRB was not binding on the California courts.  Nor did the Court of Appeal believe that the NLRB has any special expertise in the area of arbitration and class action waivers.

     Judgment affirmed.

Arbitration/Employment: Second District, Division 5 Reverses Trial Court’s Refusal To Enforce Arbitration Agreement In Employment Handbook

Law Of The Case Allows Court To Duck More Interesting Issues Concerning Arbitrability Of PAGA And UCL Claims

     Lewis v. 24 Hour Fitness USA, Inc., Case No. B239912 (2nd Dist. Div. 5 January 15, 2013) (Turner, P.J., author) (unpublished), involved the second appeal from the trial court’s refusal to enforce an arbitration agreement between employee plaintiffs and employer 24 Hour Fitness USA, Inc.  The first time around, the Court of Appeal reversed the trial court’s order denying the employer’s motion to compel arbitration.

     On remand from the first appeal, the trial court severed Private Attorneys General Act (PAGA) and Unfair Competition Law (UCL) claims from the arbitration, and once again, the employer appealed, leading to the present decision.

     The second time around, plaintiffs/employees found themselves impaled by the law of the case doctrine:  “’[t]he decision of an appellate court, stating a rule of law necessary to the decision of the case, conclusively establishes that rule and makes it determinative of the rights of the same parties in a subsequent retrial or appeal in the same case.’”  Morohoshi v. Pacific Home, 34 Cal.4th 482, 491 (2004).  And the first time around, the Court of Appeal’s opinion adjudicated the arbitrability of plaintiffs claims under the PAGA and UCL Law.  Plaintiffs never raised the issue of the arbitrability of “any individual cause of action” and thus forfeited that issue on the first appeal.  The ruling in the first appeal became the law of the case, leading to reversal of the trial court’s later order seeking to sever the PAGA and UCL claims from arbitration.  Thus, the Court of Appeal avoided the substantive issues concerning arbitrability of PAGA and UCL claims.

Arbitration/Employment/Enforceability/FAA/CCP 1281.8: Second District, Div. 1 Reverses Order Denying Motion To Compel Arbitration – Mutuality Of Employer/Employee Provisions Is Key

“In particular, we do not find unconscionable a provision in the arbitration agreement allowing either party to seek provisional remedies . . . “

     For the practitioner, Baltazar v. Forever 21, Inc., Case No. B237173 (2nd Dist. Div. 1 Dec. 20, 2012) (Mallano, J.) (published), is worth reading because it provides employers and employees with an example of a “final and binding” arbitration provision that survives various challenges and passes muster with the Court of Appeal.

     Maribel Baltazar sued her former employer, Forever 21, Inc., for racial and sexual harassment and other employment-related wrongs.  Employer and two employees filed a motion to compel arbitration, which motion the employee opposed, arguing the arbitration agreement was unconscionable.  The trial court denied defendants’ motion, and defendants appealed.

     Agreeing that the “take it or leave it” employment contract was one of adhesion, the Court of Appeal nevertheless held that it was not substantively unconscionable. 

     Preliminarily, the Court of Appeal concluded that the agreement was governed by the California Arbitration Act, not the Federal Arbitration Act, because no evidence was offered that the employment or any pertinent transaction involved interstate commerce.  This preliminary conclusion supported the Court’s analysis that carving out provisional equitable relief from the arbitration agreement was entirely permissible.

     Because California Arbitration Act applied, Cal. Code of Civ. Proc. section 1281.8 necessarily applied to the agreement.  And section 1281.8 allows either party to the arbitration provision to apply to the court for a provisional remedy in connection with an arbitrable controversy.  (We note in passing that sometimes other contractual arbitration provisions include carve-outs for provisional relief.  Seeking provisional relief from an arbitrator may be unwieldy, because it must be enforced quickly and through a court.  For example, the standard California Association of Realtors contracts for the purchase and sale of real estate typically have ADR provisions requiring mediation and arbitration with a carve-out for provisional remedies, allowing recourse to the court).

      The Court also rejected the employee’s argument that the carve-out for provisional remedies did not result in a lack of mutuality.  Here, the carve-out did not exempt claims more likely to be brought only by the employer.  For example, of the employee’s nine claims, virtually all could be a source of injunctive relief.  Thus, while ‘[a]n arbitration agreement is substantively unconscionable if employees are required to submit their disputes to arbitration while the employer remains free to pursue its claims in any forum,” such was not the case here.

     The employee also argued that a provision allowing for all necessary steps to be taken to protect trade secrets and proprietary and confidential information from public disclosure was unduly harsh and one-sided.  One-sided, perhaps, but not unreasonable.  After all, the provision was limited to protecting trade secret or similar provision, “consistent with the duties imposed by the Uniform Trade Secrets Act (Civ. Code, sections 3426-3426.11)”.  Besides, “courts have upheld confidentiality and nondisclosure agreements of general application,” allowing the Court to invoke the maxim that “the greater contains the less.”

     Concluding that the agreement to arbitrate was not unconscionable, the Court of appeal reversed the order denying arbitration, ordering the trial court on remand to enter a new order granting the motion to compel arbitration.

Arbitration/Employment/FAA/Class Action/Waiver: Second District, Division 1 Holds That Gentry Is Not Overruled By Concepcion or Stolt-Nielsen

Gentry Rides Again!

      Franco v. Arakelian Enterprises, Inc., Case No. B232583 (2nd Dist. Div. 1 Nov. 11, 2012) (Mallano, J.) (published) is a long, scholarly opinion, containing a probing analysis of what may now be the hottest arbitration issue: how to resolve the collision between a class action waiver in arbitration and vindication of unwaivable statutory rights.  Franco involves wage and hour, meal and rest period claims brought by an employee as a putative class action. 

      Gentry v. Superior Court, 42 Cal.4th 443 (2007) resolved the class action waiver issue with a multi-factor test, which when satisfied, results in the unenforceability under some circumstances of an arbitration agreement class action waiver, because the waiver would interfere with the employees’ ability to vindicate statutory rights.  (We note, as does Justice Mallano, that vindication of unwaivable statutory rights and unconscionability have resulted in the application of two lines of cases in California that may lead to unenforceability of a class action waiver).

     In Franco, the Court concludes, “that Gentry remains good law because, as required by Concepcion, it does not establish a categorical rule against class action waivers but, instead, sets forth several factors to be applied on a case-by-case basis to determine whether a class action waiver precludes employees from vindicating their statutory rights. And, as required by Stolt-Nielsen, when a class action waiver is unenforceable under Gentry, the plaintiff’s claims must be adjudicated in court, where the plaintiff may file a putative class action.” 

     Because Gentry applies here to invalidate the class action waiver, it is obvious that here, “the parties have not agreed in any fashion to allow class arbitration.”  And because Stolt-Nielsen held that class arbitration is not permitted unless the parties expressly or implicitly agree to it, that is why Stolt-Nielsen requires hearing the case in court.

      The key to Franco is an individualized application of the multi-factor Gentry test, leading to the conclusion that under the circumstances of this case, employees could not vindicate their statutory rights.  This approach is to be distinguished from a categorical prohibition of class action waivers.

      Two tips, one for the class action plaintiff, the other for defendants.  The plaintiff needs to be prepared to present evidence through competent declarations that the multi-factor Gentry test for invalidating a class action waiver has been satisfied  – something the plaintiff did present here.  The tip for employers is that to survive the Gentry tests, the arbitration provisions would have to be fairly drafted in such a way that the employee could fully vindicate statutory rights in the arbitral forum – easier said than done.

     For other recent posts that relate to unwaivable statutory rights, see our November 13, 2012 post on Richey v. Autonation, Inc. and our November 20, 2012 post on American Express Company v. Italian Colors Restaurant.