California Mediation and Arbitration

Employment, Uncionscionability, Delegation: Fourth Dist. Div. 3 Agrees With Trial Court That Arbitration Agreement Is Unconscionable

Ambiguous And Unconscionable.

        The threshold question in Bernell Gregory Beco v. Fast Auto Loans, Inc., G059382 (4/3  12/14/22) (Moore, Bedsworth, Sanchez) was whether the court or the arbitrator should determine the issue of arbitrability. The arbitration agreement included a delegation provision stating that covered: "any dispute concerning the arbitrability of any such controversy or claims." The Court of Appeal held that the provision was ambiguous at best, because "arbitrability" here could refer to deciding to the arbitrability of a substantive claim, rather than to who should decide the issue of arbitrability. Therefore, the delegation of the question "who should decide" was not "clear and unmistakable," the standard for finding a valid delegation of decision-making authority to the arbitrator. Nor did incorporation by reference of AAA rules concerning arbitrability help here, because the the court concluded that Mr. Beco, an employee of a payday lender¹ who earned $13.50 per hours, was not a legally sophisticated person who should be charged with knowledge of the incorporated rules.

        The court's analysis that the arbitration provisions were procedurally and substantively "unconscionable" is unremarkable. Well, perhaps the following is worth remarking: the court found that a three-month period allotted to the employee to provide notice of a claim was "particularly onerous."

¹A US government website defines "payday loan" as follows: "While there is no set definition of a payday loan, it is usually a short-term, high cost loan, generally for $500 or less, that is typically due on your next payday. Depending on your state law, payday loans may be available through storefront payday lenders or online."

Arbitration, Construction Of Scope Of Agreement: Second Dist.Div. 7 Reverses Arbitration Award Because Narrow Scope Of Arbitration Agreement Did Not Cover The Dispute

The Court Of Appeal Construes The Arbitration Provision As "Narrow" Rather Than "Broad."

        The Court of Appeal reverses confirmation of an arbitration award in Thomas Ahern et al. v. Asset Management Consultants, Inc., et al., B309935 (2/7  2/1/22) (Perluss, Segal, Feuer).

        The underlying dispute was between a co-tenant, Ahern, who purchased a co-tenant interest in an office building from Asset Management Consultants, who acquired the building from iStar. Asset Management Consultants compelled arbitration against Ahern based on an arbitration provision in the co-tenancy agreement. This was reversed on appeal, because Ahern's dispute with Asset Management Consultants did not "arise under" the co-tenancy agreement. The dispute related to representations made during the acquisition of the building, not to the management and operation of the building under the co-tenancy agreement.

       Arbitration clauses requiring a dispute to "arise under" an agreement are interpreted to be narrower in scope than clauses providing for arbitration of "any dispute" or clauses providing for disputes "arising from or related to" an agreement. The clause at issue here was construed to be a narrow one.

        COMMENT: It seems that  Ahern will get another bite out of the apple. But we don't know whether a judge will rule differently on the merits of the underlying dispute, or  whether the reversal of fortune will lead to a settlement.

Arbitration, FAA, Construction: Second Dist. Div. 1 Holds FAA Preempts Applying Contra Proferentum Rule In Case Of Contractual Ambiguity

Trial Court Must Now Enter Order Compelling Binding Arbitration Between Western Bagel Company And Employee.

Moose figure outside the Bagels Plus store in North Conway, New Hampshire. Photographer: Carol M. Highsmith. 2017. Library of Congress.

        When Jose Calderon, a  Spanish speaking employee of Western Bagel Company, Inc. brought a  putative class action lawsuit against his employer, the employer moved to compel binding arbitration -- unsuccessfully in the trial court, but successfully in the Court of Appeal. Western Bagel Company, Inc. v. The Superior Court of Los Angeles, No. B305625 (2/1  7/16/21) (Bendix, Rothschild, Chaney).

        The issue facing the trial court was whether Calderon had agreed to binding arbitration, which is what the employer wanted, or to non-binding arbitration. The employer had two versions of its employment agreement, one in English not given to Calderon, and one in Spanish given to Calderon. The English and Spanish versions had several references to binding arbitration, but the severability clause in the Spanish version created ambiguity, because it referred to non-binding arbitration. Applying the principle of contra proferentum, which requires that ambiguity must be construed against the drafter, the trial court ordered the dispute to non-binding arbitration.

        Because Western Bagel engages in interstate commerce, the Federal Arbitration Act applied. The Court of Appeal held that the FAA preempts applying the contra proferentum rule, and the FAA requires the court to construe any ambiguity in favor of binding arbitration. And so the court directed the trial court to vacate its order compelling nonbinding arbitration and enter a new order compelling binding arbitration.

Arbitration, Contract Interpretation, FAA: 9th Circuit Holds California's "Absurd Results" Rule Of Contract Interpretation Is Not Preempted By FAA

Provisions Requiring Arbitration With AT&T's Affiliates Did Not Apply To A Future Affiliate.

        Plaintiff contracted with AT&T for service, and sued an affiliate DIRECTV acquired later by AT&T. The Court of Appeal had to "decide whether a satellite television company, which became an affiliate years after the agreement was signed, may use the wireless services agreement to compel arbitration in a suit brought against it under the Telephone Consumer Protection Act." Jeremy Revitch v. DIRECTV, LLC, No. 18-16823 (9th Cir.  9/30/20) ( O’Scannlain, McKeown; conc. O'Scannlain; dsst, Bennett).

        The service agreement required arbitration with AT&T and its affiliates. However, both the  district court and the 9th Circuit held that "affiliates" did not include DIRECTV, LLC, an affiliate acquired by AT&T after the service agreement was signed. The interesting part of the opinion is the analysis of California's "absurd results" rule of contract interpretation, providing, "The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.” (Cal. Civ. Code section 1639). The majority opinion explained that if "affiliates" was interpreted to include after-acquired affiliates, then Revitch could be required to arbitrate with a party who had not contracted with him, and who was acquired later, regardless of the affiliate's connection to the dispute.

        Judge Bennett dissenting disagreeing that such an interpretation of the contract resulted in an absurd result. Judge Bennett argued that the word "affiliates" was clear and included DIRECTV, that if there was any ambiguity, it had to be interpreted to favor arbitration, and that agreeing to a broadly worded arbitration agreement was not an absurd result. 

        COMMENT: California's "absurd results" rule of contract interpretation is not preempted by the FAA, because the rule would apply to contracts in general, and thus would not unduly burden arbitration  agreements.

Arbitration, Class, Waiver, Construction: Third District Holds Plaintiff Only Waived Right To Bring Class Action Lawsuit, Not Class Arbitration

Court Of Appeal Reverses Order Denying Motion To Compel Arbitration Of Class Claim.

        In an employment dispute, the trial court denied plaintiff' Garner's ability to  pursue class action claims in arbitration, relying on "language in the arbitration agreement stating that Garner waived his right to participate in class action lawsuits." Chris Garner v. Inter-State Oil Company, C088374 (3rd Dist.  7/23/20) (Mauro, Robie, Duarte). Garner appealed.

        One clause in the arbitration expressly provided for arbitration of  class actions, i.e., "any and all claims arising out of or related to your employment that could be filed ina a court of law, including . . . class action . . . shall be submitted to final and binding arbitration . . ."

        Therefore, respondent Inter-State Oil Company argued a second clause -- the one relied on by the trial court -- resulted in a waiver of the right to arbitrate a class action, because it provided that the employee "waived his right to 'participation in a civil class action lawsuit . .  .'" 

        The Court of Appeal harmonized the two provisions in favor of the employee, pointing out the obvious:  "Lawsuits generally refer to court actions." Therefore, the parties had agreed that the employee could arbitrate class actions, and also agreed that the  employee could not litigate class action lawsuits in court. 

        The Court of Appeal concluded that both the employee's individual and class claims required arbitration. 

 

Arbitration, Construction Of Agreement, Reference: Trial Court Properly Denied Motion To Compel Arbitration Or For A Reference

An Order Denying A Judicial Reference Is Not Appealable, Even When Coupled With An Order Denying Arbitration, Which Is Appealable.

    A frequent source of confusion with motions to arbitrate is an arbitration provision that refers to both the Federal Arbitration Act (FAA) and California law. Indeed, that was the source of confusion (somewhat amplified, as the Court of Appeal ultimately determined there was no ambiguity) in J.H. Boyd Enterprises, Inc. v. Kenneth Robert Boyd, F078292 (5th Dist.  9/10/19) (DeSantos, Smith, Meehan). 

    Defendants/Appellants, the Boyd Trust, moved to compel arbitration after their tender of payment of a promissory note to J.H. Boyd Enterprises, Inc., was rejected.  It was clear that an agreement between the Boyd Trust and J.H. Boyd Enterprises, Inc. included a broad arbitration clause that governed the dispute over the refusal to accept the tender. However, there was an exception: If California law governed a dispute that involved a promissory note secured by property, as happened to be the case here, then arbitration could not be compelled, unless J.H. Boyd Enterprises, Inc. elected to arbitrate, which it assuredly did not do. And as many arbitration agreements do, this one provided that any arbitration proceeding shall be governed by the FAA. 

    So was the dispute governed by California law or the FAA? Basically, the Court of Appeal concludes that even if the FAA applies to an arbitration proceeding, the parties agreed to arbitrate this particular dispute, alleged in the complaint to involve a defaulted promissory note, by applying ordinary state law principles. The term "Dispute" was defined to encompass "any dispute, claim or controversy", which encompassed a promissory note default, and forum was not included in the definition of Dispute.

    Defendants/Appellants alternatively sought a reference, and that too had been denied by the trial judge. We see plenty of cases involving orders denying motions to compel arbitration, but orders denying a motion to deny a reference? Not so much. The short answer here is that orders denying a motion to compel a reference are not appealable.

    However, Appellants made a rather ingenious argument. Orders denying a motion to arbitrate are appealable, and Code of Civ. Proc. section 1294.2 creates ancillary appellate jurisdiction over orders affecting appealable arbitration orders. For example, if the Court denies an order to compel arbitration and to deny a stay, ancillary jurisdiction exists to consider the denial of the stay. No go here. The ancillary jurisdiction that allows an appeal of the order denying a stay is necessary to effectuate an appellate ruling on an arbitration order. An appellate ruling allowing arbitration becomes pointless if the litigation is not stayed. But that's not the case here, where review of the order denying the reference is not necessary to effectuate the order denying arbitration. It's apples and oranges.

Construction And Enforceability Of Arbitration Agrement: Broad Arbitration Agreement May Be Applied Retroactively

Employee's Claims Arose Before He Signed Arbitration Agreement.

        Is an arbitration agreement enforceable when the employee's claim arises before he signs the arbitration agreement? Yes, says the Court of Appeal in Franco v. Greystone Ridge Condominium, et al., G056559 (4/3  8/27/19) (Fybel, Aronson, Thompson). In this case, "[t]he parties' arbitration agreement is clear, explicit, and unequivocal with regard to the claims subject to it and contains no qualifying language limiting its applicability to claims that had yet to accrue."

        The employees of Greystone, including plaintiff, had been presented with an arbitration agreement to sign. Instead of signing, plaintiff consulted with an attorney, and about ten days after receiving the agreement, filed claims for employment discrimination and wage and hour claims. Two days later, he signed the arbitration agreement. The trial court, finding that the agreement could not be applied retroactively, held that the the employee could not be compelled to arbitrate. The Court of Appeal reversed, interpreting the clear and broad language of the agreement not to be limited to prospective claims.

        COMMENT: Under California law, the result would be different if the employer had unilaterally made the changes, and the employee had continued to work, without expressly agreeing to the changes. Under those circumstances, the implied covenant of good faith and fair dealing would require an interpretation that the unilateral change was intended to be prospective only. In Franco, however, unilateral modification of the arbitration agreement was not involved, because it was not disputed that the plaintiff agreed to the arbitration provision.

Arbitration, Class Actions, Waiver, Construction of Agreement: SCOTUS Rules That Class Arbitration Is Not Allowed When Agreement Is Ambiguous

Majority Rejects State Law Rule That Ambiguous Contracts Are Interpreted Against The Drafter Because . . . 

    Frank Varela, an employee of Petitioner Lamps Plus, Inc., sued Lamps Plus because a hacker tricked Varela's employer into disclosing tax information about 1,300 employees. Mr. Varela was understandably miffed after a fraudulent income tax return was filed in his name. Lamps Plus sought to compel arbitration on an individual basis, relying on an arbitration provision. The District Court rejected the request for individual arbitration, but authorized class arbitration, and the Ninth Circuit affirmed. So Lamps Plus petitioned to the Supreme Court. Lamps Plus, Inc., et al. v. Varela, No. 17-988 (S.Ct.  4/24/19).

    It is established law that classwide arbitration may not be compelled when an agreement is silent about its availability. Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010). However, the Ninth Circuit believed that Stolt-Nielsen was not controlling, because in that case, the parties stipulated the agreement was silent, but here, the agreement was ambiguous. Therefore, the rule of interpreting an agreement against the drafter (contra proferentem) allowed the court to interpret the ambiguity against the draftsman/employer, and in favor of the employee.

    AT&T v. Concepcion, 559 U.S. 333 (2011) allowed for the application of defenses to arbitration when the defenses were neutral and did not uniquely burden arbitration. And it would seem that the contra preferentem rule of contractual interpretation, applied here by the employee to defend against individual arbitration, and to use in favor of class arbitration, would qualify as a neutral rule, since the rule applies to arbitration clauses as well as to other contractual clauses. 

    However, the SCOTUS majority, which is very much in favor of arbitration and specifically, individual arbitration, concluded that under the Federal Arbitration Act, an ambiguous agreement cannot provide a basis for class arbitration.

    Here's the scorecard with a brief summary of the opinions:

    1. Chief Justice Roberts delivered the Court's opinion, in which Thomas, Alito, Gorsuch, and Kavanaugh joined. The majority held that it had jurisdiction to hear the appeal, because even though the District Court compelled arbitration, the fact that it allowed for class arbitration instead of individual arbitration, meant a "fundamental" change, and resulted in a denial of the relief Lamps Plus was requesting. The FAA, rather than the state rule of contract interpretation, provided the default rule for resolving ambiguities in arbitration agreements, and here the majority concluded that ambiguity meant a lack of consent to class arbitration.

    2. Justice Thomas filed a concurring opinion. Thomas remains "skeptical of this Court's implied pre-emption precedents." But he remained comfortable with the majority opinion, because he believed that the contract was silent about class action, and thus Stolt-Nielsen applied, and he believed that California law would also reach the conclusion that the arbitration  provision did not provide a basis for class arbitration.

    3.  Justice Ginsburg, with whom Justices Breyer and Sotomayor joined, dissented, and joined Justice Kagan's dissent in full. The thrust of Ginsburg's dissent is that the FAA was intended "to enable merchants of roughly equal bargaining power to enter into binding agreements to arbitrate commercial disputes" (quoting from her own dissent in Epic Systems Corp.), and current jurisprudence has taken a turn to thwart "effective access to justice" for those who lack power and encounter violations of their rights (to quote another Ginsburg dissent in DIRECTV).

    4. Justice Breyer dissented, believing that there was no jurisdiction, based on Lamps Plus' appeal from an order allowing arbitration. Typically, there is no appeal from an order allowing arbitration, because such an order is interlocutory, rather than final, unlike a district court order refusing to compel arbitration. And because the order granting Lamps Plus' motion to compel was interlocutory, the District Court's dismissal of the case in the very same order was improper, according to Breyer. Lastly, Breyer disagreed with the majority's conclusion that class arbitration is so "fundamental[l]y" different from individual arbitration, that the District Court did not really grant a motion to arbitrate (which would be interlocutory), but rather denied the relief Lamps Plus really wanted. While class arbitration may be different than individual arbitration, Breyer argued that class arbitration was still arbitration, and that an order allowing class arbitration was still interlocutory.

    5. Justice Sotomayor dissented, joining Justice Ginsburg's dissent in full and Part II of Justice Kagan's dissent. She believed "[t]his Court went wrong years ago in concluding that a 'shift from bilateral arbitration to class-action arbitration' imposes such 'fundamental changes,' . . . that class-action arbitration 'is not arbitration as envisioned by the' Federal Arbitration Act. . . " She also disagreed that the FAA could be read "to pre-empt the neutral principle of state contract law on which the court below relied." 

    6. Justice Kagan, dissenting, is joined by Justices Ginsburg and Breyer, and as to Part II, by Justice Sotomayor. Part I of Kagan's dissent explains why she believes the arbitration provision authorizes class arbitration, and Part II explains why, even if the provision is ambiguous, California law provides a clear answer by construing ambiguities against the drafter. Justice Kagan explains that the FAA does not federalize basic contract law, except when state contract law discriminates against arbitration agreements. She happens to interpret the arbitration clause as allowing for class arbitration, and even if it doesn't unambiguously do so, then "a plain-vanilla rule of contract interpretation" applied in California and all other states, requires interpretation against the drafter. In effect, the majority has made a policy decision that class arbitration "undermine[s] the central benefits of arbitration itself" -- a policy decision with which Kagan disagrees, and that in she believes does not justify displacing applicable state law regarding the interpretation of ambiguous contracts.

    COMMENT. Back in December 2016, I wrote an article entitled "The Politics of Arbitration," describing how arbitration had become one more "hot button" issue for the Supreme Court, dividing the Justices along political lines. Notwithstanding the six different opinions described above in Lamps Plus, the fault line is along predictable political lines: Justices Roberts, Thomas, Alito, Gorsuch and Kavanaugh, all appointed by Republican presidents, formed the majority, while the dissenters, Justices Ginsburg, Breyer, Sotomayor, and Kagan, were all appointed by Democratic presidents.

    The majority's opinion brought to mind the title of David Lodge's satirical novel, How Far Can You Go? (1980). If the majority's policy decision that class arbitration is (fundamentally) not arbitration means it will not countenance a state rule of contract interpretation leading to a different result, just how far will it go to discard other background principles of contract law in arbitration cases?

 

    

Arbitration, Employment, Choice Of Law: California Choice Of Law Provision Does Not Mean Employee Gets To Avoid Arbitration

Choice-Of-Law Provision Is Interpreted To Exclude Special Rules Limiting The Authority Of Arbitrators Where The Federal Arbitration Act Governed The Agreement.

    California Labor Code section 229 provides that wage disputes "may be maintained without regard to the existence of any private agreement to arbitrate." In Bravo v. RADC Enterprises, Inc., B289506 (2/8  3/29/19) (Wiley, Grimes, Adams), the trial court had interpreted a California choice-of-law provision to mean that a store manager could avoid arbitrating his wage dispute with his employer.  On appeal, the Court reversed the part of the order denying arbitration of claims (except for a PAGA claim that did not need to be arbitrated).

    As the Court of Appeal noted, the "first textual clue" that the parties intended to arbitrate was in the title of the parties' agreement: "'ARBITRATION AGREEMENT.' This agreement is for arbitration and not against it."

    So how was California law to be applied? The Court interpreted the California choice-of-law provision to mean that California substantive law principles were to be applied, but that "special rules limiting the authority of arbitrators" were to be excluded.

Arbitration, Construction Of Agreement, Employment, Enforceability: Court of Appeal Remands Case To Determine If Plaintiff Was Represented By Counsel When She Signed Arbitration Agreement

Language Of Arbitration Agreement Was Sufficient To Require Arbitration, But . . . .

    In Salgado v. Carrows Restaurants, Inc., B285756 (2/6  2/26/19) (Gilbert, Yegan, Tangeman), the trial court denied employer's motion to compel arbitration, on the grounds that "Defendants have failed to demonstrate that the arbitration agreement applies to a suit that was filed prior to its signature." However, the Court of Appeal reversed, concluding the language of the arbitration agreement, which covered claims "related in any way to my application for employment and/or employment" was broad enough to cover the prior dispute.

    However, the Court also remanded, to determine if the employer knew when the employee signed the arbitration agreement, that she was represented by counsel. Plaintiff's attorney stated his client was "forced to sign" at a time the lawsuit had already been filed, the employer's restaurant manager had been served with the lawsuit, and the attorney was representing his client in the lawsuit. 

    COMMENT. We will be interested to learn if, on remand, the facts provide a basis for making the arbitration agreement unenforceable. Unconscionability? Duress? And if Defendant's counsel knew of the lawsuit, we could see a problem if an end-run was done around Plaintiff's counsel, though ordinarily the parties can deal directly. 

    In the first paragraph, the opinion states, "[W]e remand to determine a factual issue where time is not relative, but relevant." That, plus knowing the opinion issued from the Ventura County Court of Appeal, was all the information I needed to know that the opinion was penned by Justice Gilbert, who knows how to turn a phrase.