California Mediation and 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.

Arbitration/Class Action/FAA/Waiver: United States Supreme Court Grants Certiorari In American Express Company v. Italian Colors Restaurant

 

Can An Arbitration Class Action Waiver Be Enforced If The Plaintiff Would Not Be Able To Effectively Vindicate Federal Statutory Rights Through Arbitration?

     The United States Supreme Court will soon decide whether its holding in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), concerning the enforceability of a class action waiver through an agreement to arbitrate, can be extended, or is limited to the facts in AT&T Mobility.  American Express Company v. Italian Colors Restaurant, Case No. 12-133,  2012 WL 3096737 (U.S. Nov. 9, 2012) (“Amex”).  As reported by Debra Cassens Weiss in the ABA Journal on November 12, 2012, the Supreme Court granted cert to hear this case on November 9, 2012, with Justice Sonia Sotomayor recusing herself.

     Concepcion ruled that the Federal Arbitration Act pre-empted the rule existing in California (Discover Bank v. Superior Court, 134 Cal.App.4th 886 (2005))allowing consumers to avoid the contractual waiver of class-action rights by means of an agreement to arbitrate.  Concepcion involved contractual issues and consumers unhappy with their cell phone provider.

     Amex involves merchants unhappy with terms of allegedly burdensome credit cards issued by Amex that don’t require full payment, and that the merchants feel have been foisted upon them, in violation of the Sherman Anti-Trust Act.  The issue in Amex involves whether the class-action waiver found in the arbitration provision can be enforced when federal statutory rights are at stake and it would be prohibitively expensive to bear the costs of arbitrating anti-trust disputes in order to vindicate federal statutory rights.

     We found it interesting to see just how Amex and Italian Colors Restaurant had framed the issue for the Supreme Court.  As our law professors sometimes reminded us, “to ask the question is to answer it.”  Without comment, we quote the questions presented to the Supreme Court below.

     As framed by Amex: 

“Whether the Federal Arbitration Act permits courts,
invoking the ‘federal substantive law of arbitrability,’
to invalidate arbitration agreements on the ground
that they do not permit class arbitration of a federal law
claim.”

     As framed by respondent Italian Colors Restaurant:

“This Court has repeatedly recognized that federal
statutory claims may be appropriately resolved through
arbitration “so long as the prospective litigant effectively
may vindicate [its] statutory cause of action in the arbitral
forum.” Green Tree Fin. Corp.-Ala. v. Randolph, 531
U.S. 79, 90 (2000). The question presented—on which
there is no disagreement in the circuits—is whether an
arbitration clause should be enforced when there is no
dispute that a litigant has shown that it would be unable
effectively to vindicate its federal statutory rights in the
arbitral forum.”

     For a concise statement of what is at stake, we recommend the blog post of David Horton, Acting Professor of Law at U.C. Davis. 

     We note that Deepak Gupta, who represented Concepcion, now represents Italian Colors Restaurant.

Arbitration/Disclosures: Disclosure Requirements In Administrative Hearing Differ From Disclosure Requirements Of Arbitrator

Finding No Due Process Violation In Administrative Hearing Process, The Court Of Appeal Underscores Differences Between An Arbitrator And A Hearing Officer

 

     Plaintiff, Dr. Safari, sought a determination that the administrative peer reviewing hearing process involving Kaiser, resulting in findings that he should no longer treat patients, violated his due process rights and was not supported by substantial evidence.  In affirming a judgment denying Dr. Safari’s petition for a writ of administrative mandate directed to Kaiser,the Court of Appeal distinguished between the role of an arbitrator and a hearing officer and how that distinction bears upon disclosure requirements.  Safari v. Kaiser Foundation Health Plan, Inc., Case No. A134619 (1st Dist. Div. 2 Nov. 15, 2012) (Lambden, J.) (unpublished).

      Dr. Safari argued Kaiser unilaterally appointed the hearing officer over his objection, and that this procedure violated his due process rights.  Dr. Safari contended that the hearing officer “was actually biased against him because he had provided legal representation for Kaiser in the past and had other relationships with Kaiser.”   Bus. & Prof. Code § 809.2, pertaining to a licentiate who “timely requests a hearing concerning a final proposed action for which a report is required to be filed”, requires a hearing officer be unbiased, and also derive no direct financial benefit from the outcome.

     Dr. Safari argued there was a violation of due process because, “there are no disclosure requirements in an administrative hearing and thus he could not disqualify [the hearing officer] based on connection to Kaiser revealed during voir dire [of the hearing officer].”  One can inquire into bias at the administrative hearing, but the statute does not include a disclosure standard/bias disqualification process.  Dr. Safari pointed out that arbitration requires disclosure requirements.  Moreover, an arbitrator’s failure to disclose the nature of his legal practice has been held to violate the California Arbitration Act.  Benjamin, Weill & Mazer v. Kors, 195 Cal.App.4th 40 (2011) (Kors).

      But here, the Court of Appeal explained:  “Kors has minimal applicability to the present case.”  Why?   “[T]he requirements underlying arbitrations and administrative hearings are very different.” 

    First, there is a statutory difference:  disclosure requirements for an arbitrator are governed by the California Arbitration Act.  See Cal. Civ. Proc. Code § 1281.9.  Second, the hearing officer’s rulings are subject to appellate review and reversal if actual bias of the hearing officer is demonstrated.  Third, the hearing officer, unlike an arbitrator, is not a trier of fact.  Bus. & Prof. Code section 809.2(b) (hearing officer presiding over panel “shall not act as a prosecuting officer or advocate, and shall not be entitled to vote”).

     In addition to recognizing the legal distinctions between an arbitrator and a hearing officer, the Court of Appeal distinguished the facts from cases in which “[h]earing officers have had a significant entwinement with the hospital . . . “   Here, the facts did not evince a “long-standing and continuous” relationship between Kaiser and the hearing officer.

     Judgment affirmed.

The square tower has the remains of a sign, Kaiser Foundation Hospital.  Richmond Field Hospital, 1330 Cutting Boulevard, Richmond, Contra Costa County, CA.  Library of Congress.

Arbitration/Employment/Waiver/CCP 1286.2: Second District, Division 3 Reverses Judgment Confirming Arbitration Award Because Clear Legal Error Abridged Employee’s Statutory Rights

 

Unwaivable Rights Under California Family Rights Act Were Compromised, And The Parties Had Agreed That The Arbitrator Was To Resolve The Dispute “Based Solely Upon The Law”

     Plaintiff Richey sued his employer for, among other things, violating the Moore-Brown-Roberti Family Rights Act (CFRA).  The employer had terminated Richey, believing he had misused medical leave by working part time in a restaurant he owned.  Richey’s claims were submitted to arbitration under an arbitration agreement providing, “[r]esolution of the dispute shall be based solely upon the law governing the claims and defenses set forth in the pleadings.”  The arbitrator denied Richey’s CFRA claim based on the employer’s “honest belief or honest suspicion defense” that Richey misused his medical leave.  After the trial court denied Richey’s motion to vacate, and the trial court confirmed the arbitrator’s award, Richey appealed.  Richey v. Autonation, Inc., et al., Case No. B234711 (2nd Dist. Div. 7 Nov. 13, 2012) (Perluss, P.J.) (published).

     Ordinarily an arbitrator’s award cannot be vacated under CCP 1286.2 just because the arbitrator has made a legal or factual mistake.  However, the Court of Appeal did not buy the “honest belief” defense under California law, believing further that the arbitrator’s “clear legal error” resulted in a waiver of statutory rights under CFRA.   Furthermore, the arbitrator’s application of the “honest belief” defense resulted in a misallocation of the burden of proof, because the employer bears the burden of proving the employee was not eligible for reinstatement. 

     While the Court of Appeal cited to the language of the Supreme Court “’that an arbitration agreement cannot be made to serve as a vehicle for the waiver of statutory rights created by the FEHA [Fair Employment and Housing Act]’ . . . because the enforcement of such rights was for the public benefit and was not waivable”, Pearson Dental Supplies, Inc. v. Superior Court, 48 Cal.4th 665, 667 (2010), the Court in hedged its ruling here.   In Richey, the Court of Appeal said that “[w]e . . . need not decide whether it is proper to vacate an arbitration award based on any legal error in connection with mandatory arbitration of an employee’s unwaivable statutory rights.” (italics in the original).  Ducking determination of that issue, the Court instead relied upon the language that the parties agreed the arbitrator would resolve any claim “solely upon the law”, adding that where “the purported legal error goes to both express, unwaivable statutory rights (the guarantee of reinstatement) and the proper allocation of the burden of proof, judicial review is essential to ensure the arbitrator has complied with the requirements of CFRA.”   Thus, our takeaway is that in the employment context, where there are (i) unwaivable statutory rights involved; (ii) serious errors of law; and (iii) an agreement to rule “solely upon the law”, the Court will provide judicial review to ensure compliance with CFRA.

     This leaves unresolved whether there are so-called “unwaivable statutory rights” of employees that may nevertheless be waived by an arbitration agreement,  and what errors of law concerning unwaivable statutory rights will result in setting aside an arbitration award. 

     Note:  The California Supreme Court has relied on statutory rights to invalidate a class action waiver in the context of employee rights. Gentry v. Superior Court, 42 Cal.4th 443 (2007).  But the continuing viability of Gentry is an issue.  See our October 16, 2012 post relating to Gentry and Iskanian v. CLS Transp. Los Angeles, 208 Cal.App.4th 949 (2012) (case concluding that Concepcion invalidated Gentry).

     The judgment confirming the arbitration award was reversed and the matter remanded. 

Mediation: Ninth Circuit Rules That Indian Tribe Does Not Waive Tribe’s Sovereign Immunity By Agreeing To Mediate Cigarette Tax Contract Dispute

Agreement Providing To Mediate Did Not Satisfy Burden of Showing Clear Intent of Tribe to Waive Immunity

     Our next case, involving tribal sovereign immunity, does not fit into one of our convenient sidebar categories.  Miller v. Wright, Case No. 11-35850 (9th Cir. Nov. 13, 2012) (Rawlinson, J.) (published).  In Miller, a panel of the Ninth Circuit held that the Puyallup Tribe did not implicitly waive its sovereign immunity by agreeing to dispute resolution procedures or by ceding its authority to Washington State when entering into a cigarette tax contract (CTC).  The opinion describes the case as “the latest iteration of cigarette vendors’ challenge to taxes imposed by virtue of the authority vested in the tribe.”

       A waiver of tribal immunity must be clear.  C&L Enters., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 411, 418-419 (2001).  In C&L, waiver of tribal immunity was clear, where a clause stated that contractual disputes should be resolved according to AAA Rules, the arbitrator’s award was to be enforced in accordance with applicable law in any court having jurisdiction, and the contract provided for Oklahoma choice of law.  In contrast to C&L, no waiver occurred in Demontiney v. U.S. ex rel. Dep’t of Interior, Bureau of Indian Affairs, 255 F.3d 801 (9th Cir. 2001).   In Demontiney, the dispute resolution clause “did not ‘reference or incorporate procedures that provide for non-tribal jurisdiction for enforcement . . . ‘”.

     The panel in Miller concluded that the facts were “more akin to those in Demontiney than to the facts in C&L.”  Critically, the dispute resolution provision in Miller called for “mediation”, not “arbitration”, and mediation “generally is not binding and does not reflect an intent to submit to adjudication by a non-tribal entity.” 

     Affirmed.

     BLAWG BONUS:  Objections to a tobacco tax are nothing new.  See the print below, dating from 1790, and the explanatory note.

“A British satire on efforts by William Pitt, George Rose, and some members of Parliament to impose new "Excise" duties on tobacco (cf. Tobacco Excise Bill). The additional tax burden on British citizens is implied by the image of a bull, muzzled and blindfolded, with legs chained to a stump, being harassed by dogs (depicted with heads of members of Parliament). Edward Thurlow, also shown as a dog, registers his opposition to these "New Excise Fetters for John Bull" by urinating on tobacco leaves. Among the members of Parliament depicted are: William Wyndam Grenville, Henry Dundas, Charles Lennox Richmond, Charles Jenkinson, Richard Pepper Arden, Sir Charles Pratt Camden, and possibly Francis Osborne Carmarthen.”  James Gillray.  1790.  Library of Congress.

News: Cost Effectiveness of Mediation and Arbitration Mulled Over In California Attorney’s Fees

    A November 7, 2012 post in California Attorney’s Fees discusses:  “Arbitration/Mediation: The Debate Goes On ... Are They Cost Effective?”  Summarizing a recent article authored by Victoria Paal, Randall Block, and Steven Roland in the most recent 2012 edition of the California Real Property Journal, the post suggests that mediation is widely perceived to be a more cost-effective approach than arbitration.  Hat Tip to Mike Hensley, my co-contributor to our blawg, California Attorney’s Fees.

Arbitration/Standard of Review/CCP 1281.2/Nonsignatories: Nonsignatories Created Possibility of Conflicting Rulings And Also There Was Evidence That Aged Plaintiff Never Agreed To Arbitrate

Standard of Review Was Crucial To Affirmance of Trial Court’s Order Denying Motion to Compel Arbitration

     What a difference the standard of review can make. 

     Plaintiff Thiel, an investor, sued MKA Real Estate Qualified Fund I, LLC for investment mismanagement.  Several investment advisors, as well as real estate developers, were named as co-defendants.  MKA moved to compel arbitration with it, and the trial court denied the motion on grounds that Thiel had not agreed to arbitrate, and that third party signatories, who could not be compelled to arbitrate, created the possibility of conflicting rulings.  MKA appealed. Thiel v. MKA Real Estate Qualified Fund I, LLC, Case No.A131683 (1st Dist. Div. 4 November 9, 2012) (Ruvolo, P.J.) (unpublished).

     Evidence cut both ways as to whether there was an agreement to arbitrate.  However, the Plaintiff stated he was not shown a copy of an arbitration agreement, and he never agreed to arbitrate, and his wife backed him up.  If the court’s order to deny a motion to compel arbitration is based on a decision of fact, then a substantial evidence standard governs.  And here, though the evidence was disputed, Thiel’s denials amounted to substantial evidence. 

     Cal. Code of Civ. Proc. section 1281.2(c) authorizes the court to deny a request to arbitrate when arbitration may result in conflicting rulings on a common issue of law or fact.  Applying a de novo standard of review, the Court of Appeal concluded that Plaintiffs’ allegations of agency and conspiracy “would necessarily require presenting evidence and determining the culpability of the codefendants as well as that of MKA,” as a result of which, “there exists a possibility of conflicting rulings on common issues of law and fact . . . warranting the denial of MKA’s motion to compel arbitration.”

     The Court of Appeal’s path to affirmance was made easier by its subsidiary rulings that MKA had forfeited various arguments along the way.

      Affirmed.

News/FINRA: Morgan Stanley and Facebook Investor Are Not Friends

Lead Underwriter in Facebook IPO Seeks to Avoid FINRA Arbitration With Facebook Investor

     On November 6, 2012, Suzanne Barlyn reported for Reuters that Morgan Stanley, a lead underwriter for the Facebook IPO, has filed a complaint in federal court in Manhattan seeking an order to stop FINRA arbitration initiated by a Facebook investor who alleges she took a financial drubbing in the recent Facebook IPO.  Morgan Stanley asserts that the investor, who ordered shares through Vanguard Financial Group Inc., was not Morgan Stanley’s customer. 

     The investor, a widow and retired schoolteacher (but of course!), alleges that Morgan Stanley “informed their own privileged clients” it was downgrading its outlook for the stock, while issuing more shares at the same time.

Arbitration/Employment/Unconscionability: Implied Restriction On Employer’s Express Right To Unilaterally Change Arbitration Agreement Saves Arbitration Agreement From Unconscionability Attack

Arbitration Requirement In Employment Contract of Casino Security Director Survives Unconscionability Attack

    Plaintiff Gatewood sued his former employee Hustler Casino and its owner El Dorado Enterprises, Inc., for various employment-related claims.  The employer moved successfully to compel arbitration.  Apparently unsatisfied with the arbitration award, Mr. Gatewood appealed the award and the order compelling arbitration on grounds of substantive and procedural unconscionability.  Gatewood v. El Dorado Enterprises, Inc., et al., B237435 (2nd Dist. Div. 4 November 6, 2012) (Manella, J.) (unpublished).

     The Court of Appeal first analyzed enforceability of the arbitration agreement under the four “minimum requirements for the arbitration of nonwaivable statutory claims” set forth in Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal.4th 83 (2000).  Three of the four requirements were “indisputably” satisfied:  no limit on statutorily imposed remedies such as punitive damages and attorney’s fees; a written arbitration decision allowing for review; the employer bears any type of expense the employee would not be required to bear in a court action.  While there was a disagreement about a fourth factor, adequate discovery, the Court believed this issue had been forfeited, or else satisfied by a provision stating “[e]ach party shall have the right to conduct reasonable discovery, as determined by the arbitrator as provided in [the] California Code of Civil Procedure.”

     The Court found “minimum elements of procedural unconscionability” to be present, because signing the agreement was required to obtain the job.  But the agreement was not so one-sided as to create the substantive unconscionability also necessary to find an agreement unconscionable. 

     The most interesting one-sidedness issue arose because the language permitted Hustler Casino to “change in [its] sole discretion” all the policies, procedures and conditions of employment.  But the employer’s discretionary power to modify the terms of the employment agreement “indisputably carries with it the duty to exercise that right fairly and in good faith.”  24 Hour Fitness, Inc. v. Superior Court, 66 Cal.App.4th 1199, 1214 (1998).

     The Court distinguished another “unilateral modification” case that we have posted about on April 18, 2012:  Peleg v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012).  In Peleg, Texas law governed.  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.

     The judgment was affirmed.

Arbitration/Unconscionability/Severability/Standard of Review: Law Firm Partnership Agreement That Is Functionally An Employment Agreement Is Subject To Armendariz Unconscionability Analysis

 

Court of Appeal Rejects Employer’s Contention that AT&T Mobility v. Concepcion Overruled Armendariz Unconscionability Analysis

     Plaintiff Erika Brenner, an attorney, sued her “employer” Glenn Johnson Law, LLP and its principal, attorney Glenn Johnson, for wrongful discharge and other employment-related claims.  Defendants moved to compel arbitration under a contractual arbitration provision.  Brenner opposed, arguing that the arbitration provision was unconscionable under the analysis set forth in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000).  Defendants argued Armendariz had no application, because Brenner was a partner, not an employee.  Agreeing with Brenner that the agreement was unconscionable, the trial court denied Defendants’ motion to compel arbitration.  Defendants appealed.  Brenner v. Glenn Johnson Law, LLP et al., Case No. G046532 (4th Dist. Div. 3 November 5, 2012) (Rylaarsdam, Acting P.J.) (unpublished).

     The Court of Appeal agreed that the trial court’s finding that the partnership agreement was “the functional equivalent of an employment agreement” was supported by substantial evidence; thus, there was no reason to disturb the trial court’s finding.   Brenner had a 5% interest, and Johnson had a 95% interest, Johnson dictated the terms, and the agreement set forth the terms of the employment relationship. 

     “Unconscionability” analysis requires an examination of two prongs:  substantive and procedural unconscionability.  The source of substantive unconscionability here was that the agreement, which purported to cover FEHA claims, did not require the employer to bear costs unique to arbitration, nor did it contain a limitation that the employee, if she her suit, could not be burdened with fees and costs unless the employee’s suit was brought frivolously or in bad faith.  While Plaintiff and Defendants disagreed as to whether the agreement was “take it or leave it”, there was substantial evidence that Brenner did not have a meaningful opportunity to negotiate the terms – enough to support a finding of procedural unconscionability, the second prong.

     Finally, there was an issue as to whether the provision for shifting of costs and fees to the prevailing party, if unconscionable, could be severed in order to save the arbitration provision.  Because there were two problems with the unlawful fees provision, the Court concluded it was not required to reform an agreement that was “permeated” by unconscionability.  Besides, Defendants failed to ask the superior court to exercise its discretion to sever.

     Affirmed.