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.
Language In The Employee Handbook Undercut The Existence Of An Agreement To Arbitrate.
When January Esparza sued her employer for sexual harassment and related causes of action, the employer petitioned to compel arbitration, based on the fact that Esparza had acknowledged receipt of an employee handbook, and the handbook mentioned that the employer’s policies, practices and procedures included arbitration. The trial court denied the motion, finding no agreement to arbitrate. Esparza v. Sand & Sea, B268420 (2/4 8/22/16) (Collins, Epstein, Willhite).
The handbook included a welcome letter stating, “[T]his handbook is not intended to be a contract (express or implied), nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees.” The acknowledgment signed by the employee did not state she agreed to the arbitration provision, and recognized she had not read the handbook when she signed the form. Under those circumstances, the Court of Appeal found that there was no enforceable agreement to arbitrate, and affirmed.
COMMENT: The problem with the handbook here could have been avoided by giving the employee a conspicuous arbitration agreement to sign or acknowledge in writing at the time she entered into the employment relationship. Esparza relies heavily on Mitri v. Arnel Management Co., 157 Cal.App.4th 1164 (2007) – another good case to look at when considering whether the employee handbook creates a mutual agreement to arbitrate.
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.
The next three cases show that, notwithstanding the trend to uphold agreements to arbitrate, there are still plenty of situations in which our California Courts of Appeal will agree that arbitration should be denied or stayed, and allow litigation to go forward.
In Tran, the trial court denied defendants’ motion to compel arbitration on the grounds that the arbitration provision was superseded by a different, later arbitration provision, and the later provision was unconscionable. The operative arbitration provision was “take it or leave it” and unconscionable because it required Tran, a California employee, to arbitrate her claims in New Jersey, and because the arbitration provision had various provisions reflecting the unilateral nature of the arbitration requirement. Justice Thompson authored the decision. Affirmed.
Scheiber v. Shoe Palace Corporation, No. H041495 (Sixth Dist. 8/16/16) (unpublished): Appeal Of Order Staying Arbitration Of Plaintiff’s Individual Claims And Allow PAGA Claim To Proceed In Court Declared Moot.
Defendant’s appeal was limited to challenging the trial court’s decision to stay the arbitration of plaintiff’s individual claims, and did not challenge order that representative claims could be litigated in court. However, because the plaintiff sought dismissal of his individual claims in the trial court, and represented in the Court of Appeal that he would dismiss those claims before they were ever arbitrated, the appeal was dismissed as moot. Justice Bamattre-Manoukian authored the decision.
The trial court denied defendant’s motion to compel arbitration, because plaintiff’s claims pertained only to defendants’ conduct in the years after the contract was terminated. Affirmed.
One interesting question here is why the court, rather than the arbitrator, decided the issue. After all, the Commercial Arbitration rules of the AAA entitled the arbitrator to decide disputes over the scope of the arbitration agreement. The Court of Appeal, however, viewed the issue as turning “on the continued validity of the arbitration clause, not the clause’s scope.” So essentially the Court viewed the validity issue as a gateway issue that the Court should decide. Justice Margulies authored the decision.
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.
Nor Was The Agreement Illusory Just Because The Agreement Provided The Employer Could Change It At Any Time.
In Harris v. Tap Worldwide, LLC, B262504 (2/5 6/22/16) (Turner, Kriegler, Kumar) (certified for partial publication, except part III(C) covering unconscionability), the Court determined that, notwithstanding that the arbitration agreement was unsigned, there was a validate agreement to arbitrate, the agreement to arbitrate was not illusory notwithstanding the employer’s ability to unilaterally change the Employee Handbook, and in an unpublished part of the opinion, the agreement was not unconscionable. Therefore, the trial court’s order denying defendants’ motion to compel arbitration was reversed.
Plaintiff asserted that under Sparks v. Vista Del Mar Child and Family Services, 207 Cal.App.4th 1511 (2012), merely acknowledging receipt of an Employee Handbook was insufficient to demonstrate a valid arbitration agreement existed. Addressing that argument, the Court distinguished Sparks: First, the acknowledgment form plaintiff signed “included acknowledging both the Employee Handbook and the attached arbitration agreement.” Second, the agreement to arbitrate could also be implied-in-fact, as it was here, where the employee continued to work and accept consideration.
The Court also made short shrift of the additional argument that the agreement was illusory, because the employer could change the terms at any time. Actually, that provision only applied to the Employment Handbook, not to the arbitration provision, which could only be modified by a writing, signed by both parties. And even as to the Employment Handbook, the employer’s ability to make unilateral changes to the terms is reigned in by the covenant of good faith and fair dealing.
The Exception To Arbitration Simply Restates Existing Law.
The California Supreme Court has ruled that an employment agreement providing for arbitration of disputes, but authorizing the parties to seek preliminary injunctive relief in the superior court, does not make the agreement one-sided and substantively unconscionable, even if employers are more likely to seek injunctive relief than employees. Baltazar v. Forever 21, Inc., S208345 (Sup. Ct. March 28, 2016) (Kruger, J.). Here, the contract simply restates existing law, which has a carve-out for preliminary injunctive relief. Code Civ. Proc., section 1281.8(b).
We posted earlier about the judgment of the Court of Appeal on December 21, 2012. The Supreme Court affirms the judgment of the Court of Appeal.
COMMENT: Note that here, the clause excepted preliminary injunctive relief from arbitration, and this restates existing law. A provision that excepted injunctive relief from arbitration would not restate existing law. Compare Carbajal v. CWPSC, Inc., G050438 (4/3 Feb. 26, 2016) (Aronson, Bedsworth, Ikola) (arbitration provision resulting in substantive unconscionability included allowing the employer, but not the employee, to seek injunctive relief in court) about which we posted on February 28, 2016.
Arbitral Award Was Properly Corrected To Take Into Account That Labor Code Section 1194 Is A One-Way Fee Shifting Award.
California Attorney’s Fees posts today on Ling v. P.F. Chang’s China Bistro, Inc., Case No. H039367 (6th Dist. Mar. 25, 2016) (published), an employment law case in which the Court of Appeal agreed (in part) with the trial judge that Labor Code section 1194 works as a one-way fee shifting provision in favor of the employee, such that a substantial arbitral award fee award in favor of the employer required correction. This is an example of the “public policy” exception to arbitral finality applied in the employment law context.
Ninth Circuit Panel Blames Employer For Not Making Good Faith Effort To Address Merits Of Dispute.
SEIU United Health Care Workers-West v. Los Robles Regional Medical Center, No. 13-55672 (9th Cir. Dec. 3, 2015) (Pregerson, Parker, Nguyen) holds “that it is a breach of the duty of good faith performance under Section 301 [of the Labor Management Relations Act, 29 U.S.C. section 189] for an employer to fail to respond within a reasonable time to a union’s communication which seeks to abide by a grievance process set forth in a collective bargaining agreement.’
In this case, the union followed a three-step grievance process, the last step of which can lead to arbitration. Responding to the first and second steps, the employer took the position that the matter was not arbitrable. However, a demand for arbitration did not have to be made until the third step of the grievance process, and when the union made the arbitration demand, the employer waited nearly five months to reject the demand. When the union petitioned to compel arbitration, the employer took the position that the six-month statute of limitations under section 301 had run earlier, when the employer had staked the position that the matter could not be arbitrated.
That was good enough for the district court judge, Manuel Real, to deny the union’s request for arbitration. However, the Ninth Circuit disagreed, explaining:
“Only an ‘unequivocal, express rejection of the union’s request for arbitration’ will start the six-month limitations period under Section 301. There is no such thing as constructive notice of an employer’s refusal to arbitrate; if an employer offers varying responses to a request to arbitrate, its responses do not constitute an unequivocal, express rejection.”
The Ninth Circuit panel panel reversed the district court’s summary judgment and vacated its order dismissing a petition to compel arbitration under Section 301
We have posted before about the “Berman hearing”, named after Congressman Howard Berman, and providing workers with a procedure intended to provide “a speedy, informal, and affordable method of resolving wage claims” with the California Labor Commissioner. Under California law, it cannot be waived. However, if there is an arbitration clause governed by the Federal Arbitration Act, which preempts state law, then employers may use the arbitration clause to preempt the state Berman hearing. That is what ultimately happened in Performance Team Freight Systems, Inc. v. Garcia, B259146 (2/2 Nov. 2, 2015) (Boren, Ashmann-Gerst, Chavez) (published), where a trucking company, prior to commencement of Berman hearings, petitioned to compel arbitration with truck drivers filing wage claims.
The trial court had denied the petition, ruling that the agreements fell under an FAA exemption for transportation workers engaged in interstate commerce. Section 1 of the FAA exempts from FAA coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” – and it has been held that transportation workers are included in this exemption. Without determining whether the truckers, who may have been involved mostly in intrastate short-hauls were truly involved in interstate commerce, the Court of Appeal concluded that they had not met their burden of establishing that the the subject agreements were “contracts of employment.”
And that leads us to the burden of proof. The party opposing arbitration bears the burden of demonstrating the exemption to FAA coverage applies. The agreements under which the truckers worked were labeled “Independent Contractor Agreements”. The Court of Appeal stuck with the label “independent contractor” because “only minimal evidence was presented to the trial court relevant to the issue of whether the subject agreements were contracts of employment.”
The Court also had little trouble finding that the clause was broad enough to cover the dispute. Reversed.
COMMENT: The law respects form less than substance. However, labels, light as they may be, are not weightless. When minimal evidence is presented on whether a worker is a contractor or an employee, the label may tip the balance, as it did here.