Same As Before – Only This Time A Third Judge Signs On To The Opinion
I blogged about this very same case in a post on August 27, 2014. So I was puzzled at first as to why another published opinion was issued following rehearing on January 20, 2015. Cruise v. Kroger Co., B248430 (2/3 Jan. 20, 2015) (Aldrich, Kitching, Klein) (published). The disposition before and after rehearing is identical: “The order denying the motion to compel arbitration and stay the action is reversed with directions to grant the motion.” The opinions are not identical, but are substantially the same.
This time around, Justice Kitching’s concurrence is added, making it a threesome. The first time around, a third judge was unavailable, and the Court relied on a provision allowing judgment upon the concurrence of two judges. Cal. Const., art. VI, § 3. Puzzle solved.
Fourth District, Division 3 Publishes To Distinguish Mansouri v. Superior Court.
California Code of Civil Procedure, section 1281.2 requires that a party seeking to compel arbitration allege, “the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy.” The question in Hyundai Amco America, Inc. v. S3H, Inc., Case No. G049204 (4/3 Dec. 17, 2014) (Fybel, O’Leary, Ikola) (published) was whether contractor S3H was required to formally demand arbitration from Hyundai Amco once Hyundai Amco filed a complaint. The answer: No. Filing the complaint “invoked the protections and procedures of the court system, and thus was an effective denial of arbitration.”
The Court published to distinguish Mansouri v. Superior Court, 181 Cal.App.4th 633 (2010). In Mansouri, the arbitration demand did not match the terms of the parties’ arbitration agreement, whereas Hyundai Amco’s lawsuit “clearly related to the parties’ performance under the agreement, thus suffic[ing] to show Hyundai Amco’s refusal to arbitrate the controversy.”
LITIGATION TIP: In run-of-the-mill cases, formally request an opponent to arbitrate before moving to compel arbitration.
Lack Of Consent Is The Problem With The Arbitration Agreement Here.
In an opinion authored by Judge Pregerson, the Ninth Circuit reverses the district court’s order dismissing a putative class action and granting Sirius XM Radio Inc.’s motion to compel arbitration. Knutson v. Sirius XM Radio Inc., No. 12-56120 (9th Cir. Nov. 10, 2014) (Pregerson, Murphy, Berzon).
The customer purchased a vehicle from Toyota, and received unwanted solicitation calls from Sirius XM. He sued Sirius XM Radio Inc., alleging the unwanted telemarketing calls were violations of the Telephone Consumer Protection Act. Sirius XM Radio Inc. successfully petitioned to compel arbitration, and plaintiff appealed.
The Ninth Circuit panel held Sirius XM failed to prove the existence of an agreement to arbitrate. A reasonable person could not be expected to understand that purchasing the vehicle would simultaneously bind him to a contract with Sirius XM, and that the contract would require arbitration. The fact that the plaintiff received some benefit by listening to the radio did not manifest consent to an agreement the plaintiff didn’t know about.
COMMENT: I have asked on other occasions whether “consent” is something of a fiction in the arbitration context, given that a procedurally unconscionable agreement involving surprise and ambush, but that is not substantively unconscionable, can nevertheless survive scrutiny. Let’s just say that being able to apply the label “lack of consent” can still effectively kill an arbitration agreement, whereas applying the label “procedurally unconscionable” is not dispositive. The line between “lack of consent” and “procedurally unconscionable” is not necessarily a bright line.
Also, note that Judge Pregerson dissented in 2013 in Kilgore v. Keybank, attaching as an Appendix to his dissent, “the dense, small print, and blurry nine-page contract that Silver State thrust on the students at career fairs and open houses.” [Kilgore is the subject of my April 12, 2013 post]. The Kilgore case rejected an argument that the arbitration clause at issue was procedurally unconscionable. However, in the Knutson case, the Court of Appeals did not address substantive unconscionability, because its analysis hinged instead on lack of consent. This time, Judge Pregerson, rather than being the dissenter, penned the opinion.
Consent To Contract Must Be Free, And An “Unsound Mind” Is Related To Concept Of Consent.
In an unpublished opinion, the Court of Appeal has affirmed the trial court’s order denying a nursing facility’s petition to arbitrate, because the plaintiff lacked mental capacity to enter into the arbitration agreement. Rodriguez v. Windsor Care Center National City, Inc., D065014 (4/1 Nov. 6, 2014) (O’Rourke, McDonald, Aaron).
The “substantial evidence” that the plaintiff lacked capacity to enter into the arbitration agreement included that she was 80 years old; that she had suffered a stroke; that she only spoke Spanish, could not read English, and had signed an arbitration agreement in English; and that a staff member at the rehabilitation center wrote that the plaintiff was “unable to make [d]ecisions.”
“Under California law,” the Court reminds us, “persons of unsound mind are not capable of contracting. (Civ. Code, section 1556.). Whether a person has an ‘unsound’ mind is related to the concept of consent because the parties’ consent to the contract must be free. (Civ. Code, section 1565.)”
QUERY: Is consent a legal fiction in the case of arbitration agreements in California? A person can be surprised and ambushed by signing a procedurally unconscionable agreement, yet the agreement (including an arbitration provision) will be enforceable, as long as it is not substantively unconscionable. In what sense has the person who signed a procedurally unconscionable contract freely consented to enter into the contract? Given its conclusion about lack of capacity in Rodriguez, the Court did not need to address the issue of unconscionability.
How To Avoid Drafting An Unconscionable Arbitration Agreement.
We usually summarize opinions, but here, the Court of Appeal does a good job itself of summing up how to draft an enforceable arbitration provision in an employment agreement. The case is Woods v. JFK Memorial Hospital, Inc., G050286 (4/3 Oct. 30, 2014) (Moore, Rylaarsdam, Thompson) (unpublished), in which the Court of Appeal reverses an order granting a motion to arbitrate, on the grounds that the arbitration agreement is both substantively and procedurally unconscionable.
Expressing the Court’s perplexity (exasperation?), Justice Moore explains how to draft an enforceable arbitration agreement:
We are, frankly, perplexed that we continue to see arbitration agreements such as this one. The years since Armendariz have produced a veritable flood of cases about arbitration between employers and employees. Employers should be well aware by now that to insulate their agreements from unconscionability claims, particularly when they are adhesive contracts, there is a simple list of do’s and don’ts. The arbitration agreement should be conspicuous (and preferably labeled as such, in a document separate from a lengthy handbook). The document should be written in plain English, attach or make readily available all referenced documents, be fundamentally fair and mutual, and in all respects abide by the guidance provided in Armendariz. Further, employers should give the employee a meaningful opportunity to review the agreement and decide whether to sign it (meaning a day or two rather than a minute or two). We do not understand why any of this is particularly difficult or challenging for employers, and yet time and time again, our courts see cases with confusing, convoluted and fundamentally unfair employer/employee arbitration schemes that are deemed unconscionable and unenforceable.
The issue in Operating Engineers Local Union No. 3 v. City of Porterville, Case No. F067635 (5th Dist. Oct. 2, 2014) (Kane, Levy, Detjen) (unpublished) is whether an agreement between a city and a union to submit an employment dispute to advisory arbitration is enforceable under the California Arbitration Act. The Court’s answer: No.
An advisory arbitration does not satisfy all three elements necessary to be considered arbitration under the CAA: “ a third party decision maker,  a final and binding decision, and  a mechanism to assure a minimum level of impartiality with respect to the rendering of that decision.” Cheng-Canindin v. Renaissance Hotel Associates, 50 Cal.App.4th 676, 687-688 (1996). An advisory opinion does not satisfy the “final and binding” requirement.
NOTE: Federal law appears to be unclear as to whether a different result would follow under the Federal Arbitration Act. Cf. Wolsey Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1209 (9th Cir. 1998) (arbitration need not be binding in order to fall within scope of the FAA) and Advanced Bodycare Solutions v. Thione Intern., 514 F.Supp.2d 1326, 1333 (S.D. Fla. 2007) (arbitration agreement that does not require parties to arbitrate to final decision “does not mesh with the concept of ‘arbitration’ within the contemplation of the FAA”). Of course, the California Court of Appeal was not required to follow Wolsey, and instead it followed Cheng-Canindin.
Appellants’ Argument That There Was An “Implied Oral Understanding” Didn’t Cut It With The Court Of Appeal
The arbitration clause in our next case began: “NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION’ PROVISION DECIDED BY NEUTRAL ARBITRATION . . . “ No party initialed this provision. Now that’s a problem. Trial court denied defendants’ motion to compel arbitration, and scrappy defendants appealed. Lake Balboa Investments, LLC v. J&J Mayfair, LLC, Case No. B254449 (2/7 Sept. 17, 2014) (Zelon, Woods, Segal) (unpublished).
Appellants appeared to argue “that the parties to the agreement waived the initialing condition of the arbitration provision ‘by implied oral understanding.’” However, the trial court and the Court of Appeal didn’t buy this argument, because the declaration upon which it was based was conclusory, i.e., “devoid of any specific facts demonstrating how this conclusion was reached.” A beefed-up declaration filed as part of defendants’ reply in the trial court “suffer[ed] from the same infirmities” as the original declaration, “with the additional deficiency that it was submitted in conjunction with the reply brief, precluding the responding party from addressing it.”
Marc sends his greetings to appellants’ attorney, Michael B. Montgomery. Michael, Marc, and Barbara Lichman were attorneys in a jury trial in Victorville some years ago, and it was a memorable experience.
Court of Appeal Was Unable To Find Precedent On Whether CCP 1284.3, Pertaining To Consumer Arbitrations, Applies To Employer-Employee Arbitrations, And Reaches Its Own Conclusion
On March 12, 2014, I posted about an earlier Court of Appeal decision involving the same parties and the same arbitration agreement as here, in which the Court held that, with the exception of a claim for unpaid wages, other claims in the case could be arbitrated. Unfortunately, the decision in that case apparently came down too late to offer guidance to the trial judge in this case, who denied plaintiff’s motion to compel the former employee to arbitrate, only to be reversed on appeal. Francis Capital Management LLC v. Martin Keith Lane, Jr., B253559 (2/1 Sept. 9, 2014) (Manella, Epstein, Willhite) (unpublished).
The most interesting issue presented by the case is the application of Cal. Code of Civ. Proc., section 1284.3. (I posted about 1284.3 earlier on May 1, 2014). Subpart (a) of this provision states:
“No neutral arbitrator or private arbitration company shall administer a consumer arbitration under any agreement or rule requiring that a consumer who is a party to the arbitration pay the fees and costs incurred by an opposing party, if the consumer does not prevail in the arbitration, including, but not limited to, the fees and costs of the arbitrator, provider, organization, attorney, or witnesses.”
The parties had designated the AAA as the arbitration organization. The issue presented by section 1284.3 was whether a prevailing party fee shifting provision in the arbitration agreement prohibited the AAA from arbitrating the dispute. The trial court concluded that the answer was “yes”, but the Court of Appeal concluded here, on the facts, that the answer was “no.”
A threshold question is whether employee-employer arbitrations even qualify as “consumer arbitrations.” Finding an absence of case law, and looking to guidance in California Rules of Court, Ethics Standard for Neutral Arbitrators, promulgated pursuant to section 1281.85, the Court of Appeal answered the threshold question in the affirmative.
Several factors here saved the fee shifting provision from the clutches of section 1284.3.
First, the fee shifting was not “mandatory,” but rather “discretionary.” The clause provided that the arbitrator “may” award reasonable fees.
Second, the arbitrator was given authority to award costs and fees “authorized by law.” That meant that if 1284.3 didn’t allow for fee shifting, then the arbitrator lacked the authority to shift fees. DRAFTING TIP: the phrase “authorized by law” can be useful to save a questionable provision.
Third, there was a severability provision.
Fourth, plaintiff had agreed to waive fees.
In short, the Court of Appeal concluded “no legal bar prohibits the AAA from accepting the arbitration.” The Court remanded the matter to the trial court “to enter an order granting FCM’s motion to compel Lane to submit to arbitration of FCM’s claims.”
If published, this case would provide useful guidance about section 1284.3 to parties drafting fee clauses in consumer arbitration agreements, and to arbitrators having to confront the impact of such clauses on their ability to accept the arbitration.
Employer Kroger Co., parent of Ralphs, which had loaded an arbitration policy with one-sided provisions favoring the employer, moved to compel arbitration of an employment discrimination action. Unpersuaded that the arbitration policy really existed when the employee read and signed the employment application, the trial court denied Kroger’s motion.
In what could only be described as an ironic twist, the Court of Appeal accepted the trial judge’s finding that the stand-alone four-page arbitration policy may not have been part of the employment agreement, and concluded that here, that helped the employer -- and possibly saved Kroger from having to defend an unconscionable arbitration policy.
Here, the employment application itself contained a broad agreement to arbitrate employment-related disputes, separate and apart from the arbitration policy document. The failure to incorporate the additional arbitration policy simply meant that the relationship between the parties would be governed by the California Arbitration Act, requiring an arbitrator to be chosen pursuant to the provisions of the CAA.
Also, the employer’s failure to incorporate the arbitration policy document very possibly stopped the Court of Appeal from torpedoing that policy, because the arbitration policy presented serious lopsidedness issues. Under the terms of the arbitration policy, arbitrators from the AAA and JAMS were not permitted to administer the arbitration – making it more likely, in the view of the trial judge, that Kroger would be able to hand-pick an individual arbitrator dependent on Kroger’s patronage. The trial judge also found that a fee provision requiring plaintiff to pay 50% up front for the arbitration was unconscionable under Armendariz. Also, the arbitrator was only empowered to resolve a fee dispute if there was on-point US Supreme Court authority .
Fortunately (at least for the employer), because Kroger was unable to establish the contents of the arbitration policy were effective, the arbitration was controlled by California statutory and case law. Therefore, plaintiff’s arguments “that Kroger’s Arbitration Policy is procedurally and substantively unconscionable are meritless.”
Carter sued her former employer, Fannie Mae, for whistleblower retaliation. Fannie Mae moved, unsuccessfully, to compel arbitration, and appealed. The Court of Appeal explains that Carter did have an implied-in-fact agreement to arbitrate, but that the agreement is one-sided, and therefore substantively unconscionable. Specifically, “the contract cannot be enforced because it exempts the kinds of claims that Fannie Mae is likely to bring against employees, such as trade secret claims.”
The Court of Appeal refused to sever the unconscionably one-sided provisions: “We would have to rewrite the arbitration clause – which we cannot do – or somehow choose ‘what to leave in, what to leave out’ [quoting ‘Against the Wind,’ Bob Seger, 1980] which is also beyond our mandate.”
Comment: Note that Cruise v. Kroger, supra, didn’t address the need to sever, presumably because Kroger failed to establish that the provisions in its four-page arbitration policy, lopsided or otherwise, were ever part of the arbitration agreement.
A Progression: From Shrink Wrap To Browsewrap To Clickwrap Contracts
Above: Shrink wrapped helicopters to be shipped to Iraq. US Navy photo, Bart Jackson. Wikimedia Commons.
The Court does not exactly chuck browsewrap agreements out the window, because it explains that “the validity of the browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract.”
The Court holds, “in keeping with courts’ traditional reluctance to enforce browsewrap agreements against individual consumers”, that:
NOTE: This case should help e-commerce merchants see the benefits of clickwrap over browsewrap agreements.