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.
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the trend in SCOTUS to uphold arbitration agreements, including waiver of class arbitration, our next two unpublished cases show that the California courts look closely at arbitration agreements, sometimes enforcing and sometimes not enforcing arbitration agreements.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 Urchasko v. Compass Airlines, LLC, B264672 (2/7 6/27/16) (Perluss, Segal, Blumenfeld) (unpublished).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was the issue in Williams v. U.S. Bancorp Investments, Inc., A141199 (1/4 6/27/16) (Rivera, Reardon, Streeter) (unpublished): did a ruling in Burakoff et al.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.
Indiana Forum Clause Was Important Factor In Finding Of Substantive Unconscionability.
The Fourth District, Division One, concludes the trial court correctly determined the arbitration provision between an Indiana-based company soliciting business in California, and California residents, who were Licensed Vocational Nurses seeking to become Registered Nurses, was unconscionable. Magno v. The College Network, Inc., D067687 (4/1 6/14/16) (McConnell, Nares, O’Rourke) (unpublished).
The finding of procedural unconscionability was based on evidence that the Plaintiffs were young, rushed through the signing process, had no ability to negotiate, and did not see arbitration language buried on a back page in preprinted forms.
The finding of substantive unconscionability was chiefly based on the insertion of a forum selection clause providing for binding arbitration in Indiana, before an arbitrator selected by TCN.
The court found it necessary to distinguish Carnival Cruise Lines v. Shute, 499 U.S. 585 (1991), “which upheld a forum selection clause requiring Washington State residents to pursue litigation in Florida.” Whereas the plaintiffs in Carnival conceded notice of the forum selection clause, here there was substantial evidence that the plaintiffs were unaware of the arbitration provision altogether as well as the forum-selection clause. Moreover, unlike Carnival, “this dispute [is] an essentially local one inherently more suited to resolution in the State of [California] than in [Indiana].”
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.
Applying a “sliding scale” analysis, the Court of Appeal found that a “moderate level” of procedural and substantive unconscionability required affirming the trial judge’s order denying defendant employer’s motion to compel arbitration. Carbajal v. CWPSC, Inc., G050438 (4/3 Feb. 26, 2016) (Aronson, Bedsworth, Ikola).
The procedural unconscionability factors included an adhesion contract, failure to identify which of the AAA’s many different rules would apply, failure to provide the employee with a copy of the rules, and requiring the employee to sign the agreement without telling her where she could find the rules.
The one-sidedness of the arbitration provision resulting in substantive unconscionability included allowing the employer, but not the employee, to seek injunctive relief in court, waiver of the need to post a bond to obtain injunctive relief, and waiving the employee’s statutory right to recover attorney fees if she prevailed on Labor Code claims.
Because the employer failed to carry the burden of establishing that the FAA applied to the contract, the Court did not need to consider whether the result would have changed if the FAA had applied. “Carbajal’s intrastate use of a telephone to speak with some customers is at most a trivial connection to interstate commerce, especially where there is no other relationship between the Agreement and interstate commerce.”
Practice Tip: “When a trial court denies a motion to compel arbitration, a party may request the court to provide a statement of decision explaining the factual and legal basis for its decision.” Because the employer did not request a statement of decision, a) it waived any objection to the trial court’s failure to make necessary findings; b) the appellate court applies the “doctrine of implied findings and presumes the trial court made all necessary findings supported by substantial evidence.”
Relying On Common Law Principles Of Contract Formation, The Court Of Appeal Ducks Deciding Whether Failure To Comply With Statutory Provision Requiring Spanish Translation Of Contract Resulted In Unconscionability.
Ordinarily, one who signs a contract without understanding its contents will nevertheless be bound by it, just as one who fails to wear reading glasses when reviewing a contract will nevertheless be treated as one who has read the contract. What happens when the purchaser of an automobile signs a contract in English that contains an arbitration clause, and receives a Spanish translation that does not contain the arbitration clause? In the case of Ramos v. Westlake Services LLC, A141353 (1/2 Nov. 24, 2015) (Miller, Richman, Stewart), the Court of Appeal held that the Spanish speaking purchaser, who negotiated the purchase in Spanish, and who received a Spanish translation of the contract that he initialed, “reasonably relied on a Spanish translation of the English Contract . . . provided him and that did not include the arbitration agreement.” As a result, the Court of Appeal held that mutual assent to the arbitration was lacking, and the arbitration agreement was void – affirming the trial court order denying defendant’s motion to compel arbitration.
While the Court of Appeal affirmed the order of the trial court, it did not rely on the trial court’s reasoning. Unlike the Court of Appeal, the trial court had relied on Civil Code section 1632, requiring that “[a]ny person engaged in a trade or business who negotiates primarily in Spanish” in certain transactions, including auto sales, “shall deliver to the other party to the contract . . . a translation of the contract . . . in the language in which the contract . . . was negotiated, that includes a translation of every term and condition in that contract . . . “ The trial court had held that the failure to properly translate the contract into Spanish was unconscionable. The Court of Appeal held that it did not have to address “arguments regarding the scope of section 1632’s remedies or the trial court’s finding that the arbitration agreement was unenforceable due to unconscionability,” because it reached the same result with traditional contract formation concepts.
While strictly speaking, the Court of Appeal did not rely on section 1632 to affirm the trial court’s order, it did note that “it would be anomalous” to hold that the seller was required to provide Ramos a translation, and that the buyer “was not entitled to rely on the accuracy of that translation.”
Party Seeking Arbitration Only Has Initial Burden Of Establishing Prima Facie Case Of Existence Of Arbitration Agreement.
In a dispute concerning student debt, plaintiff student argued defendant loan servicer failed to establish the dispute was encompassed by the arbitration agreement. Reversed: “In denying defendant’s petition to compel arbitration, the trial court improperly required defendant to prove that plaintiff’s lawsuit is encompassed by the arbitration clauses.” Rodriguez v. Navient Solutions, Inc., B258981 (2/2 Aug. 24, 2015) (Boren, Ashmann-Gerst, Hoffstadt) (unpublished). The burden of the party petitioning for arbitration is only to offer prima facie evidence of the written agreement, after which the burden shifts to opposing party to prove a defense to enforcement or that the agreement can’t be interpreted to cover the claims. Rosenthal v. Great Western Financial Securities Corp., 14 Cal.4th 394, 413 (1996).
The Court of Appeal also addressed the issue of unconscionability. Perhaps the most important factor supporting the conclusion that the arbitration provision was not unconscionable was that plaintiff had 60 days to decline arbitration after the date of the first loan disbursement.
COMMENT: On May 27, 2013, I posted about unpublished cases addressing the burden of proof of a party seeking to compel arbitration. While it seems clear that the party seeking arbitration only has the burden of making a prima facie showing of the existence of the existence of an arbitration agreement, more abstruse issues may arise, such as whether that places the burden of authenticating the arbitration agreement on the moving party.
Regarding the Court’s conclusion plaintiff student “had ample time to review the arbitration clause over the course of 60 days, and confer with a lawyer about whether he should reject it or agree to it,” one can only wonder if a real live student has ever been known to do that. Still, the message is clear: an opt-out provision is a powerful tool for strengthening an arbitration provision.
State Law Unconscionability Principles Are Not Preempted By The Federal Arbitration Act – So Long As They Do Not Uniquely Target Arbitration Agreements.
Carlson v. Home Team Pest Defense, Inc., A142219 (1/4 Aug. 17, 2015) (Ruvolo, Reardon, Streeter) (certified for publication) affirms an order denying an employer’s motion to compel arbitration, on grounds that the arbitration provisions are procedurally and substantively unconscionable. Finding the agreement permeated with unconscionability, the Court agrees that it would be improper to rewrite the agreement and sever unconscionable provisions. The analysis seems conventional and thorough, aided by a “substantial evidence” standard of review, because “[i]n this case the trial court made factual findings based on at least some material disputed evidence.”
NOTE: The California Supreme Court recently addressed the test for unconscionability in Sanchez v. Valencia Holding Co., LLC (See my August 4, 2015 post.) The Sanchez Court did not find the automobile sales arbitration provision to be unconscionable in Sanchez. However, the Court in Carlson does find the employment agreement provision to be unconscionable, while relying on the Sanchez test “which stated that all of these formulations essentially embrace a central idea requiring a degree of unfairness, beyond ‘a simple old-fashioned bad bargain.’”
Though the same legal test is applied, there is, perhaps, one high-level factual difference between Sanchez and Carlson. Sanchez was the purchaser of a two-year old pre-owned Mercedes Benz, with a sales price of $53,498.60. Perhaps that influenced the way the Supreme Court viewed unconscionability, because it did not view the transaction as an ordinary consumer purchase, in which, for example, affordability of arbitration could be a significant factor in the unconscionability analysis. By way of contrast, Carlson was an employee, not the purchaser of a high-end automobile. Among other things, the Carlson Court noted that requiring the employee to pay a $120 filing fee within 90 days after making an initial Request for Dispute Resolution, after which all fees and expenses incurred in connection with the arbitration are to be split between the parties, puts arbitration and litigation on an unequal footing, and becomes a factor in the unconscionability analysis.
At last, the California Supreme Court has decided Sanchez v. Valencia Holding Company, LLC, S199119 (Cal. Sup. Ct. Aug. 3, 2015) (Liu, J., author). The case has been pending since Defendant and Appellant Valencia filed its petition for review on January 4, 2012. The majority opinion, authored by Justice Liu, holds: “Concepcion requires enforcement of the class waiver but does not limit the unconscionability rules applicable to other provision of the arbitration agreement. Applying those rules, we agree with Valencia that the Court of Appeal erred as a matter of state law in finding the agreement unconscionable.”
Sanchez’ lawsuit alleged Valencia violated the Consumer Legal Remedies Act by making false representations about the condition of the automobile he purchased.
The automobile sales contract at issue contained four arbitration provisions that some Courts of Appeal have found to be unfairly one-sided: (1) an award could be appealed to a panel of three arbitrators if the award was $0 or over $100,000; (2) an award of injunctive relief could be appealed; (3) the appealing party had to pay in advance the filing fee and other arbitration, through the arbitrators could later apportion costs; (4) repossession is exempted from arbitration. Because the California Supreme Court finds that none of those provisions is unconscionable, and because those provisions are common in automobile sales contracts, automobile dealers will breathe a collective sigh of relief.
Justice Chin, concurring and dissenting in part, agrees that the class arbitration waiver is enforceable and that Sanchez fails to carry his burden of establishing that the contract is unconscionable. However, Justice Chin disagrees with some of the majority’s analysis. He questions whether an adhesive contract is necessarily procedurally unconscionable, and states that the majority does not need to reach the issue of procedural unconscionability, because it holds that the arbitration provisions are not substantively unconscionable. He also argues in favor of a single substantive unconscionablility “shocks the conscience” test, rather than a smorgasbord of legal formulations.
COMMENT: The opinion also contains an interesting discussion of Cal. Code Civ. Proc. section 1284.3, concerning responsibility for fees in consumer arbitrations. While the Court agrees that a requirement that a consumer front appellate filing fees or other arbitration costs “has the potential to deter the consumer from using the appeal process”, the Court applies a case-by-case “affordability of arbitration” analysis to determine whether fees and costs would make arbitration unaffordable. Here, the dispute involved “a high-end luxury item” – a “preowned” Mercedes-Benz S500V. Sanchez simply failed to claim or show that appellate arbitration filing fees were unaffordable to him.
Unconscionability and the “affordability of arbitration” will have to be left for another day.
“Exotic” Choice Of Law Clause Is The Key To This Case.
Stained glass in Neiman Marcus store, San Francisco. Carol M. Highsmith, photographer. 2012. Library of Congress.
Neiman Marcus drafted an ingenious choice of law clause that the First District, Division Four, describes as “exotic” – perhaps a euphemism for “too clever by half”, because it ultimately led the Court of Appeal to find the arbitration agreement unconscionable in an employee-employer putative class action/wage-hour dispute. Pinela v. Neiman Marcus Group, Inc., A137520 (1/4 June 29, 2015) (Streeter, Reardon, Rivera).
The choice of law clause provided Texas law applied, “except that for claims or defenses arising under federal law, the arbitrator shall follow the substantive law as set forth by the United States Supreme Court and the United States Court of Appeals for the Fifth Circuit. The arbitrator does not have the authority to enlarge, add to, subtract from, disregard, or . . . otherwise alter the parties’ rights under such laws, except to the extent set forth herein.” The agreement also included a broad delegation provision allowing the arbitrator to decide pretty much any disputed issue.
Ordinarily an agreement can specify choice of law and delegate decisions to the arbitrator. Indeed, typically such provisions are enforced, but such was not their fate here. The Court performed an unconscionability analysis, and found the arbitration provisions both procedurally and substantively unconscionable.
The Court did not like the fact that the agreement disabled the arbitrator from applying California law to a labor dispute involving California workers, and therefore it refused to enforce the Texas choice of law provision, explaining that California has an important interest “in ensuring that its statutory protections for California-based workers are not selectively disabled by out-of-state companies wishing to do business in this state . . .” (My ball, my rules.) The Texas choice of law disadvantaged California workers both as to substantive claims that they might have in California, but not in Texas, and as to defenses to the enforceability of an arbitration agreement, e.g., California law concerning unconscionability.
“[B]ecause the ability of the arbitrator to call upon California law in deciding the enforceability questions entrusted to him is a ‘consideration  inextricably bound up in the question of the validity of the choice of law provision, ‘”, once the choice of law provision was jettisoned, the delegation of the enforceability decision to the arbitrator was too.
Having concluded that the delegation clause was uneforceable, the Court then analyzed the arbitration agreement as a whole and found several instances of substantive unconscionability.
The Court’s bottom line: “We conclude that the delegation clause and the agreement are both unconscionable and therefore unenforceable under California law.”
COMMENT: The Court notes, “In Peleg [v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012)], Division One of the Second District Court of Appeal held an arbitration agreement identical in form to the agreement at issue in this case was illusory under Texas law (which the appellate court applied pursuant to a choice of law provision) and therefore unenforceable).” I have previously posted about Peleg on November 7, 2012:
The “unilateral modification arbitration agreement” was invalid, because Texas law requires an express carve-out of claims from the employer’s ability to unilaterally modify, whereas, “[u]nder California law, a court may imply such a restriction if an arbitration agreement is silent on the issue.” Peleg at p. 1466. This is an instance in which Texas law is “more demanding than California law.” Id. at pp. 1466-1467.
See also my post of April 18, 2012. Note that Peleg and Pinela reach the same result – invalidation of the arbitration agreement – but by different routes. Peleg finds the arbitration agreement illusory under Texas law. Pinela refuses to apply Texas or Fifth Circuit law, and finds the agreement unconscionable under California law.