California Mediation and Arbitration

Arbitration/FAA: Supremes Says FAA Doesn’t Allow Court to Invalidate Class Arbitration Just Because Arbitration Leaves Plaintiff Without Affordable Means To Vindicate Claim

 Dissent’s Nutshell of Opinion:  “Too Darn Bad”  

     The United States Supreme Court, in a 5-3 opinion, has now held that the Federal Arbitration Act does not permit courts to invalidate a contractual waiver of class arbitration just because the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.  American Express Co. et al. v. Italian Colors Restaurant et al., No. 12-133 (June 20, 2013).

     Evidently class arbitration is a highly charged topic capable of  dividing the Supreme Court along a neat political line.  Big business favors arbitration, but not class arbitration.  Justice Scalia delivered the opinion of the Court, in which Chief Justice Roberts, and Justices Kennedy, Thomas, and Alito joined, with Justice Thomas filing a concurring opinion.  Justice Kagan filed a dissenting opinion, in which Justices Ginsburg and Breyer joined.  Justice Sotomayor did not participate in the decision.

     Italian Colors Restaurant claimed that Amex had violated the Sherman Act, Section 1, by using its monopoly power to force merchants to accept credit cards charging very high fees – an illegal tying agreement.  Here’s the rub:  an economist estimated the cost of an expert analysis to prove antitrust claims would be several hundred thousand dollars and might exceed $1 million, whereas individual payouts would be --- when trebled – $38,549.  Hence, if class arbitration was unavailable, plaintiffs would be left without a way to affordably vindicate rights under the Sherman Act.

     Wrote Justice Kagan, dissenting:  “And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged:  Too darn bad.”

     The dissent paints a stark picture:  “So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability-even if it has in fact violated the law.  The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of legal recourse.”

Arbitration/Collective Bargaining/Construction of Agreement: In 4-3 Decision, California Supreme Court Rules That City of Los Angeles Must Arbitrate City’s Furlough Decisions

Dissenters Worries About Practical Consequences of Arbitrating Furlough Dispute In Budgetary Crisis

     With this post, I inaugurate a new sidebar category:  Collective Bargaining.

     Facing a fiscal emergency, the City of Los Angeles adopted a mandatory furlough program for its civilian employees.  Represented by a union, the employees filed grievances, arguing the furloughs violated memorandums of understanding (MOUs) governing the employees’ terms and conditions of employment.  After the grievances were denied, the union petitioned to compel the City to arbitrate the furlough dispute.  The superior court granted the union’s petition, but the Court of Appeal reversed, finding arbitration would constitute an unlawful delegation to the arbitrator of discretionary policymaking powers that the city charter vests in its city council. 

Los Angeles City Hall.  1931.  Wikimedia Commons.    

     Now the California Supreme Court has ruled, in a 4 to 3 decision, that the City is contractually obligated under the MOUs to arbitrate the employee furlough dispute. City of Los Angeles, Petitioner, v. Superior Court of Los Angeles County, Respondent, Engineers & Architects Association, Real Party in Interest (Sup. Ct. June 6, 2013).  Justice Kennard wrote for the majority, with Chief Justice Cantil-Sakauye, Justice Werdegar, and Justice Liu, concurring.

     The City argued that allowing arbitration would constitute an unlawful delegation to the arbitrator of discretionary policy making powers – salary setting and budget making – that the City’s charter vests in the city council.  [Note:  Los Angeles is a charter city, meaning its governing system is defined by its charter, rather than by state laws.]   But the Supreme Court disagreed with the City, holding “the arbitrator’s role would be limited to interpreting the MOUs for the purpose of determining whether the furlough program violates the terms of those MOUs.”  In short, the role of the arbitrator would be adjudicative, not legislative.

     Justice Corrigan dissented, with Justices Baxter and Chin concurring.  Whereas the majority believed that the contract was ambiguous, and did not want to get down into the weeds interpreting it, the dissenters believed that the arbitration provision could not reasonably be interpreted to exclude furlough disputes from arbitration.  What really perturbs the dissenters is that “[a]n important question of public policy and a matter of considerable budgetary significance is committed to the discretion of an unelected arbitrator, whose decision is unreviewable.” 

    

 

Arbitration/FAA/Class Actions: Supreme Court Holds Arbitrator Does Not Exceed Powers By Deciding That Class Action Was Available

Impact of the Case Likely to Be Limited Because of Parties’ Agreement

      In Oxford Health Plans LLC v. Sutter  (Sup. Ct. June 10, 2013) (Kagan, J., author, with Thomas, J., joining in concurrence by Alito, J.), the Supreme Court held that an arbitrator does not “exceed his powers” under section 10(a)(4) of the Federal Arbitration Act where the parties agreed that the arbitrator should decide whether their contract authorized class arbitration, and he determined that it did.  Because the arbitrator construed the contract, he did not “exceed his powers”, and it does not matter whether the arbitrator construed the parties’ contract correctly.

     The impact of the case is likely to be limited, because the holding turns on the fact that the parties agreed the arbitrator could decide the issue. Justice Kagan observed:  “We would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called ‘question of arbitrability.’”  Certain such “gateway matters” are “presumptively for courts to decide.” Footnote 2.   But here the question of arbitrability was not one for the court to decide, because the parties in the case had agreed that the arbitrator would decide it.  “In sum, Oxford chose arbitration, and it must now live with that choice.”

     In their concurrence, Justices Alito and Thomas were eager to limit the scope of the opinion to the narrow facts.  They opined that absent class members, who had not explicitly agreed to arbitration, might not be bound by the arbitrator’s resolution of the dispute.  “In the absence of concessions like Oxford’s,” they admonished, “this possibility should give courts pause before concluding that the availability of class arbitration is a question the arbitrator should decide.”

     Because of Oxford’s concession, the impact of the case is also likely to be limited in the future by the drafting of the arbitration provision. The party with superior bargaining power, who is the master of the contract, can draft around the problem by not delegating arbitrability of class action decisions to the arbitrator. 

Mediation/Confidentiality/Settlement Agreement: Second District, Division 2 Says Postsettlement Statement Subject To Confidentiality Agreement “May Prove To Be Costly Rather Than ‘Free’ Speech”

Litigation Privilege Does Not Bar Breach of Contract Claim Arising From Violations Of Confidentiality Provisions Contained in a Settlement Agreement

     Carrie Prejean.  Miss California 2009.  Miss USA 2009.  Donald Trump.  Perez Hilton.  Same-sex marriage.  Compromising video.  Does any of this ring a bell?

     Back in 2009, Carrie Prejean, a former Miss California USA, expressed her sentiments about traditional marriage in response to a question posed by Perez Hilton during the Miss USA Pageant.  Several pageant judges said afterward that she did not win because of her answer.  The owner of the Miss Universe Organization, Donald Trump, admitted her views probably cost her the crown.  After later being terminated as Miss California, Ms. Prejean filed a lawsuit for defamation, religious discrimination, and related claims.

     Above:  Venice Bathing Beauty Pageant, 1926. M.F. Wheeler. Library of Congress.

     JAMS mediation and a settlement followed, after the law firm for one of the defendants showed Ms. Prejean, her attorney, and the mediator “a compromising video and photographs.”  The settlement was confidential, providing the parties could only say they had dropped their claims against each other and “wish each other the best in their future endeavors.”  Alas, that was not to be, as embarrassing details about the confidential settlement were revealed to the media.  Questioned about the compromising video, Ms. Prejean described it as a “youthful indiscretion that she sent to a boyfriend when she was 17 and ‘the biggest mistake of my life.’”

     The alleged breach of the confidentiality provision resulted in satellite litigation, SLAPP motions by defendants, and four appeals involving Ms.Prejean’s attorney LiMandri, attorneys for the defense, and executive directors of the Miss California USA pageant, but not Ms. Prejean.  The trial court granted an anti-SLAPP motion only as to LiMandri’s cause of action for fraudulent inducement of the settlement, but denied the motion with respect to LiMandri’s contract claims.  Appeals and a cross-appeal followed. LiMandri v. Wildman, Harrold, Allen & Dixon, LLP/Li Mandri v. Moakler, Case Nos. B234460 & B237158 (2nd Dist. Div. 2 June 6, 2013) (Boren, P.J. author: 3:0) (unpublished).

     The Court of Appeal ruled the defense attorney Nguyen made statements about a matter of public interest, but that LiMandri demonstrated a probability of prevailing on his claims.  As a party to the settlement agreement, the defense law firm waived its right to speak publicly.  Therefore, post-settlement breaches of the confidentiality agreement were not protected speech.  However, promises made during the settlement discussions are protected.  Because LiMandri had not shown probability of prevailing on his fraud claim, there was no basis for piercing the settlement privilege and disclosing statements made during settlement, and thus not way to prove fraudulent inducement.  All the judgments were affirmed on appeal.

     The opinion includes some tart comments.  The defense law firm mentioned the trial court had ruled that LiMandri lacked standing, but failed to mention that the standing ruling was vacated on reconsideration.    “Misrepresenting the trial court’s rulings and record on appeal,” admonished the Court, “is a poor and discrediting practice.”  As to any postsettlement statement about Ms. Prejean’s case beyond the good wishes, the Court added, “[t]hough it touched a matter of public interest, it may prove to be costly rather than ‘free’ speech, if it is found to be a breach of the two confidentiality agreements.”

     I do wonder what damages LiMandri, the attorney, will prove for breach of the confidentiality agreement.  Does the settlement agreement contain a liquidated damages clause?  We’ll only find out if the case goes to trial.    

    

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/Automobiles/Unconscionability: Second District, Div. 1 Revisits Ruling In Sanchez v. Valencia Holding Company, And Again Concludes That Arbitration Provision In Automobile Sales Contract Is Unconscionable

Split In Appellate Opinion

     I have a separate sidebar category on “automobiles” because the auto industry spawns many decisions about the enforceability of arbitration clauses in sales contracts.  As I have previously posted on August 26, 2012, and January 7, 2013, Sanchez v. Valencia Holding Co. LLC, 201 Cal.App.4th 74 (2012) is pending before the California Supreme Court, and presents as an issue whether unconconscionability defenses to arbitrating auto sales disputes are preempted by AT&T Mobility v. Concepcion, 563 U.S. __ , 131 S.Ct. 1740 (2011).

     In Vargas v. Sai Monrovia B, Inc., B237257 (June 4, 2013) (Mallano, J., author; Rothschild, J. writing separate concurrence) (for publication), the Second District, Division 1 has revisited its ruling in Sanchez.  Unsurprisingly, it concludes that unconscionability defenses are not preempted.  As in Sanchez, the Court again concludes “that the identical sale contract does not require the arbitration of disputes between a purchaser and a dealer because it is permeated by unconscionability.”

     The split in appellate opinion is expressly noted in footnote 4:  “In Goodridge and Natalni, the Courts of Appeal concluded the Sale Contract was unconscionable.  In Flores and Vasquez, the Courts of Appeal reached the opposite conclusion.”

 

Above: 1965 Monte Carlo Rally winner: 1964 Morris Mini Cooper S.  Source:  Wikimedia Commons/License.  Author:  “DeFacto.”  (Note:  The subject of Vargas v. Sai Monrovia B, Inc. was a Mini Cooper S.)