California Mediation and Arbitration

Arbitration, PAGA: Employer Cannot Force Employees To Individually Arbitrate Whether They Qualified As “Aggrieved Employees” Before Pursuing Representative PAGA Claims

Takeaway:  California Law Precludes Employer From Requiring Employee To Individually Arbitrate “Aggrieved Employee” Status While Preserving Right To Judicial Forum For Other Aspects Of Claim.

    Perez v. U-Haul Co. of California, B262029 (2/7 8/16/16) (Zelon, Segal, Garnett) shows the ingenuity of an employer who tried to escape the reach of Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014) and avoid having to face employees’ representative claims brought under the Private Attorney General Act of 2004 (PAGA) – albeit, unsuccessfully.

    PAGA authorizes an “aggrieved employee” to bring a civil action personally and in a representative capacity to recover civil penalties for Labor Code violations.  As with a qui tam statute, PAGA allocates 75% of the recovery to go to a state agency, and the remaining amount to go to “aggrieved employees.”  (My 2015 article in California Litigation, entitled “Can Private Attorney General Actions Be Forced Into Litigation?” can be read by clicking here.)

     U-Haul argued that the employees, who had signed a broad arbitration clause, should first have to individually arbitrate whether they were “aggrieved employees” as a predicate for pursuing their PAGA claims – i.e., they should have to first arbitrate whether there were Labor Code violations. 

     Relying on Iskanian, the Court rejected the employer’s argument, because Iskanian underscores that the representative nature of PAGA claims cannot be destroyed by requiring individual arbitration, and that the PAGA representative claims are really brought on behalf of the state (which is not a party to the arbitration agreement).

     COMMENT:  Note that the Court limited its ruling by stating:  “For the purposes of this case, we need not determine whether PAGA claims are categorically exempted from private arbitration agreements.”  Though the Court does not explain this limitation, I understand it to mean that PAGA claims may be arbitrable, if they can be arbitrated in a representative capacity.

      However, given a choice between arbitrating or litigating in Court, an employer could have reasons to choose the court option, because the risk of error in a representative proceeding, where the stakes can be very high, weighs in favor of “multilayered review” lacking in arbitration  See footnote 3 of Perez, relying on dictum in AT & T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

Mediation/Condition Precedent: Court Refuses To Strictly Enforce Mediation Requirement As A Condition Precedent To Collecting Attorney’s Fees Because Of Unique Procedural Posture Of Case

True, Mediation Conditions Precedent To Collecting Attorney’s Fees Are Strictly Interpreted – But Not Here, Where Commonsense Dictated Otherwise.

      Check out the September 13, 2016 post in California Attorney’s Fees, the blawg my colleague Mike Hensley and I contribute to, about  Lamar Central Outdoor, LLC v. Hwang, Case No. B266070 (2d Dist., Div. 5 Sept. 9, 2016) (unpublished).  The unique procedural posture of this case leads to an unusual result:  notwithstanding a contractual requirement to mediate before initiating an action, the Court recognizes that requiring mediation as a precondition would run counter to the purpose of promoting judicial efficiency, based on the unusual procedural posture of this case. 

      In Lamar Central Outdoor, LLC, the requirement that a party mediate first before commencing legal action, if that party prevails and  is to ever collect legal fees, existed in the contract between co-defendants.  So when the plaintiff sued the co-defendants, and co-defendant Milan cross-complained against defendant Hwang, the Court recognized that the counter-claim was a permissive counterclaim, and that delaying the permissive counter-claim between the two co-defendants, while the co-defendants mediated, would only have undermined, rather than promoted, judicial efficiency.  In this unusual case, the Court did not strictly require the cross-complainant to mediate before cross-complaining as a condition precedent to obtaining attorney’s fees from its co-defendant.

Arbitration, Unconscionability, Consumers: Second District, Division 4 Holds Arbitration Agreement Between Low-Income Mobilehome Owners And Mobile Home Park Is Unconscionable

 

Defendants’ Failure To Disclose Prohibitively Expensive Arbitration Fees To Low Income Plaintiffs Weighed Against Enforcement Of The Arbitration Provision.

     When 61 “primarily low-income mobilehome owners” sued Wildwood Mobile Home Country Club (“Westmont”), naturally Westmont moved to compel arbitration.  After the trial court denied the motion, Westmont appealed.  Unsuccessfully.  Penilla v. Westmont Corporation, B262097 (2/4 9/9/16) (Manella, Epstein, Willhite).

     The Court of Appeal affirmed the order denying arbitration because the arbitration provision was procedurally unconscionable:  it failed to disclose “prohibitively expensive arbitration fees” and it was not provided in a Spanish language copy, nor explained to persons who did not understand written English.  In addition, the arbitration provision was substantively unconscionable because (i) “it imposed arbitral fees that were unaffordable or would have substantially deterred respondents from asserting their claims” and (ii) there were “unreasonably shortened limitations periods.”

     COMMENT:  There are now a number of California cases in which language confusion has become a factor in finding procedural unconscionability.  You can find my discussion of several of those cases by using the left-hand sidebar of this website and searching for “Spanish” in the “Search This Blog” rectangle. 

     The California courts have been sorting through the problem of figuring out when to take into consideration the ability of a person to pay for arbitration.  California Code of Civil Procedure section 1284.3(b)(1) entitles “indigent consumers” to qualify for a fee waiver.  The amount of income earned by the plaintiffs – average gross annual income of $35,600, and median annual income of approximately $32,000 in Penilla – placed them within the meaning of “indigent” under the statute. 

      Interestingly, the statute does not actually define “consumer.”  However, the courts seem to be assimilating persons with low income who enter into adhesive contracts into the developing jurisprudence concerned with the high costs of arbitration for consumers.  One of the primary arguments in support of mandatory consumer arbitration is “that it is less costly than civil litigation.”  Sanchez v. Valencia Holding Co., LLC, 61 Cal.4th 899, 919 (2015).  Here, however, the evidence was that JAMS arbitrator rates (which were not disclosed) ranged from $500 to $800 per hour, or $5,000 to $10,000 per day, plus a mandatory $400 arbitration filing fee.  The low cost of arbitration can be an aspiration rather than a reality, especially when claims are small, and there is a class action waiver.

Arbitration, Delegation, PAGA: In Two Lawsuits Brought By Uber Drivers, Ninth Circuit Holds Issue Of Arbitrability Was Delegated To The Arbitrator, But PAGA Claims Go To District Court In One Of The Lawsuits

How Will This Ultimately Play Out?

     In Mohamed v. Uber Technologies and Gillette v. Uber Technologies, Nos. 15-16178 and 16181 (9th Cir. 9/7/16), cases in which district court judge Edward M. Chen found arbitration clauses between Uber and its drivers to be unenforceable, the 9th Circuit panel has affirmed in part and reversed in part.

     Uber drivers Mohamed and Gillette alleged that use of consumer credit reporting information violated the Fair Credit Reporting Act and other credit reporting statutes, and Gillette alleged Uber misclassified him and other employees as independent contractors.

     The 9th Circuit, in an opinion penned by Judge Clifton, holds that the issue of arbitrability was effectively delegated to the arbitrator by “clear and unmistakable” language.  Similarly, the issue of arbitrability of the PAGA claims was clearly and unmistakably delegated to the arbitrator in Mohamed’s case, but Gillette’s PAGA claim could proceed in court on a representative basis under the holding of Iskanian v. CLS Transp. L.A., LLC, 327 P.3d 129 (Cal. 2014).

      Furthermore, the delegation provisions were not unconscionable.  Here, an opportunity to opt-out of arbitration altogether appeared to be decisive.

      Finally, arbitration against another defendant, Hirease, LLC, was held unenforceable.  Hirease had allegedly violated credit reporting statutes by providing credit information about Uber drivers that Uber used to terminate Uber drivers.  However, Hirease was not a signatory to the contracts with the arbitration provisions, nor was it an agent of Uber.

      I note that the press has scored this as a big win for Uber.  See for example Joel Rosenblatt and Linda Hurtado’s September 7 article in Bloomberg, entitled “Uber Gains Leverage Against Drivers With Arbitration Ruling.”

      For one thing, this will not make settlement easier in another case involving Uber, because, as I posted on August 18, 2016, Judge Chen rejected a class settlement of Uber and Uber drivers precisely at a time when the enforceability of the arbitration clause was pending before the 9th Circuit.

      However, there are still some likely twists in the road ahead.

      First, the Uber drivers still have the ability to pursue PAGA claims in court in the Gillette lawsuit.  The arbitrator must still make some decisions about the arbitrability of the PAGA claims in the Mohamed lawsuit.   The existing PAGA claims are likely to be a source of some leverage for the Uber drivers.

      Second, the fact that the arbitrator now gets to rule on the enforceability of the arbitration clauses does not necessarily mean that the Uber drivers have lost the right to proceed as a class.  The Ninth Circuit ruled on August 22, 2016 in Morris v. Ernst & Young (see my August 23, 2016 post), that an employee class action waiver violates the National Labor Relations Act, because such a waiver prohibits employees from exercising their right to “concerted activity.”  So Uber gets a “second bite of the apple”, but if the arbitrator follows Morris, the arbitrator could hold the class action waiver unenforceable. 

       Morris v. Ernst & Young included a strong dissent by Judge Ikuta who thought the majority opinion deviated from precedent.   

       Because a mistake of law is generally no reason for vacating the award of an arbitrator, an arbitrator could follow the reasoning of the panel opinion in Morris v. Ernst & Young, and blow out any class action waivers, or follow the dissenting opinion – and in either case, it would not provide a basis for vacating an arbitrator’s award.

       So the road ahead for Uber and its drivers could be bumpy, winding, uncertain – and long.

Arbitration/Vacatur: Second District, Division Four Affirms Vacation Of Arbitration Award, Observing: “Simply Put, The Hearing Was Not Fair”

Arbitrators Allowed One Party To Speak And Did Not Allow Other Side Even A Limited Chance To Do The Same Or To Cross-Examine.

     One of the raps against arbitration is that arbitration proceedings lack due process.  In Royal Alliance Associates, Inc. v. Liebhaber, No. B264619 (2/4 8/30/16) (Collins, Epstein, Manella), the Court of Appeal applies some basic due process concepts to affirm the vacation of an award because “the hearing was not fair.”

     Royal Alliance Associates is an insurance broker, and Liebhaber was a client of Tarr, a financial advisor.  Liebhaber arbitrated with Royal Alliance under Financial Industry Regulatory Authority, Inc. (FINRA) rules, alleging Tarr sold her “illiquid, high-risk investments” that were “inappropriate and unsuitable” for her circumstances.  The case settled, Liebhaber’s allegations against Tarr were documented in FINRA’s Central Registration Depository (CRD), and Royal Alliance then sought to expunge the allegations from the CRD record.  After the arbitration panel granted an award, Royal Alliance petitioned the trial court to confirm the award. FINRA and Liebhaber, however, opposed the petition, and sought to vacate the award.

     The problem with the award was the flawed process:  the arbitrators had allowed Tarr to “testify” unsworn, while denying an opportunity to Liebhaber’s counsel to cross-examine, and to Liebhaber to even speak.  The trial court refused to confirm and vacated the award, and the Court of Appeal affirmed.

     COMMENT:  The California Arbitration Act does not mention a right to due process in arbitration.  But a number of the Court’s comments bear on the concept of due process.  For example, the opinion states:  “The arbitrators denied Liebhaber a full and fair opportunity to introduce and challenge evidence material to the expungement proceedings to which she was a party.”  The Court also quotes Moncharsh v. Heily & Blase:  “Precisely because arbitrators wield such mighty and largely unchecked power, the Legislature has taken an increasingly more active role in protecting the fairness of the process.”  3 Cal. 4th at pp. 12-13.  Finally, the Court describes California Code of Civil Procedure, section 1286.2, the vacatur provision, as a “safety valve . . .  that permits the court to intercede when an arbitrator has prevented a party from fairly presenting its case”.

Choice Of Law/Confidentiality: Ninth Circuit Holds Federal Law Of Privilege Applies To Mediation When Federal Law Law Issues Are Involved At The Time Of The Mediation But Not Afterwards

 

Panel Majority Ties Mediation Privilege To Parties’ Expectations At The Time Of The Mediation, Not To Later Time When Federal Claims Were Dismissed.

     Timing can be everything.

     Where there are federal question claims and pendent state law claims present, the federal law of privilege applies.  Agster v. Maricopa County, 422 F.3d 836, 839 (9th Cir. 2005).  See also Fed. R. Evid. 501.  So does the law of federal or state privilege apply when a mediation occurs while federal and state law issues are pending, the federal claims are then dismissed, and only after the federal claims are dismissed, does a party seeks to introduce evidence from the mediation to prove that a settlement occurred?  That’s the issue presented by In Re:  TFT-LCD (Flat Panel) Antitrust Litig., No. 14-15916 (9th Cir. 9/1/16).

     Sony and HannStar agreed to a settlement proposed by the mediator in an email exchange.  HannStar refused to comply.  Under California law, evidence of the agreement would be inadmissible, unless the parties had memorialized that the agreement was binding and admissible in evidence, and apparently they did not.  At the time of the settlement, mixed questions of federal and state law were pending and under Agster, that meant that the federal law of privileges, rather than California mediation confidentiality rules would apply.  By the time that Sony wanted to introduce evidence of the settlement, however, the federal claims had been dismissed, leaving only California claims.  Because only California claims remained, the district court denied Sony’s motion for summary judgment, holding California Evidence Code’s mediation privilege bars introduction of settlement demands.

     Reversed and remanded.  Why?  Expectations may be the key.  “At the time of mediation, both parties would have expected to litigate both federal and state law issues.”  So federal law of privileges applied.

    Chief District Judge Lynn dissented, on the grounds that “only state law claims remained at the time Sony sought to admit evidence of the email exchange.”

    But doesn’t it make sense to protect the parties’ expectations regarding confidentiality at the time of the mediation?