California Mediation and Arbitration

Arbitration: On Issue Of First Impression, 9th Circuit Holds Arbitration Obligations Survived Contract Termination

Shivkov v Artex Risk Solutions Arises From Tax Shelter Gone Sideways . . .

        The numerous Plaintiffs in Shivkov, et al v. Artex Risk Solutions, Inc., et al, No. 19-16746 (9th Cir.  9/9/20) (Smith, Fisher, Hawkins), probably felt that the Artex Risk Solutions was a misnomer by the time they brought suit. Defendants allegedly set up and managed "captive" insurance companies owned by Plaintiffs, to which Plaintiffs paid insurance premiums, claiming the insurance premiums as tax-deductible business expenses without recognizing them as income. Evidently the IRS had other ideas, for as the Court of Appeals wryly observes, "Although this arrangement offered the prospect of tax benefits, that prospect proved fleeting." After having to deal with an audit, delinquency notices, and threatened penalties, Plaintiffs brought suit against Defendants, alleging that the captive insurance companies "were illegal and abusive tax shelters, about which Defendants failed to inform or  advise Plaintiffs." Risk solutions too good to be true?

        Defendants, including some non-signatories, moved to compel arbitration, the trial court granted Defendants' motion to compel, and Plaintiffs appealed.

        The most interesting part of the opinion is "an issue of first impression in our circuit concerning the survival of arbitration obligations following contract termination," as to which the Court of Appeals holds: "the Agreements do not expressly negate the presumption in favor of post-termination arbitration or clearly imply that the parties did not intend for their arbitration obligations to survive termination." So the arbitration obligations survived. If arbitration obligations did not regularly survive contract termination, a party could always avoid arbitration by terminating a contract.

        The Court also held that Arizona state law recognized no fiduciary duty to point out and fully explain an arbitration clause. The arbitration clause encompassed all Plaintiffs' claims here. The availability of class arbitration was a gateway issue to be decided by the court, because there was no "clear and unmistakable" delegation of that issue to the arbitrator. And because the agreements were silent about class arbitration, they did not permit class arbitration. Finally, non-signatories, who were sued for alleged wrongs that arose from the contracts between the parties that Plaintiffs relied upon to bring suit, could invoke the arbitration clause.

        Affirmed.

        COMMENT: The slip opinion is 36 pages long. I appreciate the Court's concise enumeration of  its resolution of the issues at the beginning of the opinion.

Arbitration, Employment, Unconscionability: Second District Div. 8 Reverses Order Denying Arbitration, Because Unconscionable Provision Was Severable

Employer Had No Duty To Call Arbitration Agreement To Attention Of Employee.

        When Michael Conyer became employed by Hula Media, the employer's handbook did not have an arbitration clause. Several months later, Conyer signed the "receipt and acknowledgment" page, which was the final page of a revised employee handbook that did include an arbitration clause. Conyer sued the employer for sexual harassment, and claimed he would never have signed an arbitration agreement if he knew it existed. The trial court denied a motion by the employer to compel arbitration, and defendant Hula Media appealed. Michael Conyer v. Hula Media Services, LLC, et al., B296738 (2/8  8/26/20) (Grimes, Bigelow, Wiley). Reversed.

        The Court of Appeal held "the employee demonstrated his assent to the arbitration clause by signing the acknowledgment, and the employer had no duty to call the arbitration agreement to the employee's attention." 

        However, under an unconscionability analysis, the Court of Appeal found that the provisions in the arbitration clause concerning arbitrator's fees and costs and attorneys fees, were unenforceable. Why? A clause providing the arbitrator shall award attorney fees to the prevailing party conflicts with FEHA, since "the defendant in a  FEHA case may only recover attorney fees when the plaintiff's action was frivolous, unreasonable or groundless." But that was not enough to make the arbitration clause unenforceable, because the unenforceable provision could be severed.

Arbitration, FAA: Why Does The Federal Arbitration Act Exempt Transportation Workers From Arbitration?

Rules Of Statutory Interpretation Rather Than History Of The Statute Offer The Best Explanation.

        When I posted on August 31, 2020 about Rittmann v. Amazon, the case holding that AmFlex workers who carry out the "last mile" of Amazon deliveries, are exempt from arbitration under the statutory exemption found in 9 U.S.C. section 1, I wondered how that statutory interpretation came to be, and why it is interpreted to exempt transportation workers from arbitration. After all, the key language in the statute makes no mention of transportation workers: " . . . but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Read that again: there is no reference to transportation workers.

        The best answer is to be found in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), a case in which Justice Kennedy delivered the opinion of the majority. The issue in Circuit City was whether 9 USC section 1 narrowly exempted contracts of employment of transportation workers, or whether it broadly exempted other employment contracts involving commerce, from the FAA's coverage. Justice Kennedy opted for the former, more restrictive interpretation of the statute: it exempts from arbitration transportation workers engaged in interstate commerce.

      Commenting "that the legislative record on the § 1 exemption is quite sparse," Justice Kennedy arrived at this interpretation through statutory interpretation. He applied the rule of ejusdem generis to the specific reference to seamen and railroad employees, and concluded that the more general reference to "workers engaged in interstate commerce" must refer to the preceding like kind of persons, i.e., examples of transportation workers. He also explained that his reading of section 1 was consistent with case law concerning section 2, which provides for the validity, irrevocability, and enforceability of a "contract evidencing a transaction involving commerce to settle by arbitration a controversy . . ." Section 2, though it does not  specifically mention employment contracts, had been interpreted expansively to include employment contracts, and the section 1 exemption for certain workers would be unnecessary and superfluous if section 2 had been interpreted narrowly to exclude employment contracts, and to only apply to commercial contracts. 

        So the court in Circuit City arrived at a narrow interpretation of the exemption in section 1, where transportation workers are not mentioned, so as to apply the exemption only to seamen, railroad employees, and transportation workers, and a broad interpretation of arbitration coverage in section 2, where employment is not mentioned, to include employment contracts. This is consistent with the trend in SCOTUS and other courts to support the validity and enforceability of arbitration agreements.

        Justice Stevens filed a three part dissent, joined by Justices Ginsburg and Breyer, and in 2 of 3 parts, by Justice Souter. Justice Souter also filed a separate dissent. One must look to the discussion by the dissenting justices for a more extensive discussion of the legislative history of Section 1. The dissenters suggest that opposition to the drafting of the FAA came from organized labor groups concerned that an ability to compel arbitration would result in unfair bargaining situations between businesses and employees. For example, the International Seamen's Union of America raised objections. To meet the objections, the drafters carved out exceptions in an area in which the federal government had already passed a considerable amount of legislation and exercised its commerce powers. Secretary of Commerce Herbert Hoover, who supported the bill, "suggested that '[i]f objection appears to the inclusion of workers' contracts in the law's scheme, it might be well amended by stating "but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in interstate or foreign commerce."'. . . The legislation was reintroduced in the next session of Congress with Secretary Hoover's exclusionary language added to § 1, and the amendment eliminated organized labor's opposition to the proposed law."

        Given that the purpose of the drafting changes may have been to meet objections of organized labor that workers engaged in interstate commerce would be compelled to arbitrate, it was perhaps not a foregone conclusion that 75 years later, Section 1 would be interpreted so as only to exempt transportation workers. However, legislative history is often discounted when judges believe they have a simpler path to a satisfactory conclusion via statutory construction. In any case, the Circuit City majority opinion and dissents shed light on how the arbitration exemption for seamen, railroad employees, and workers engaged in interstate came into being -- and furthermore, how the  catchall phrase came to be limited to "transportation workers."

 

Arbitration, FAA: Ninth Circuit Agrees That Delivery Workers In Amazon's App-Based Delivery Program Amazon Flex Are Exempt From Arbitration

The FAA Exempts Transportation Workers Engaged In Interstate Commerce From Arbitration -- What About The Amazon Delivery Person Who Brings The Package To Your Door?

     Many of us trying to avoid shopping during the pandemic have become familiar with the delivery of an Amazon package to our door. The delivery workers often drive their own vans or bicycles, go to the Amazon warehouse, pick up items, and complete the "last mile" of delivery. The items that we purchase from Amazon often come from out of  state. However, the delivery workers usually make their deliveries locally, working in our state. So: are those delivery workers exempt from the Federal Arbitration Act's "9 U.S.C. section 1, et seq., enforcement provisions because they are transportation workers engaged in interstate commerce." That's the primary issue in Rittmann v. Amazon, No. 19-35381 (9th Cir.  8/19/20). The majority, in an opinion authored by Judge Milan D. Smith, Jr., says yes, the exemption applies. Judge Daniel A. Bress dissenting, says no. 

    While Amazon has shipped products using FedEx and UPS, "[r]ecently it has supplemented those delivery services by contracting with local delivery providers through its AmFlex program, which is available in certain metropolitan areas in the United States." The AmFlex program is run by Amazon Logistics, Inc., an Amazon subsidiary. "AmFlex drivers' transportation of goods wholly within a state are still a part of a continuous interstate transportation," explains Judge Milan Smith, Jr., "and those drivers are engaged in interstate commerce for section 1's purposes."

    Judge Bress disagrees, arguing that the driver who works completely in state is not engaged in interstate commerce. The majority counters that it does not write on a "blank slate", and that drivers who are part of "continuous interstate transportation" are involved in interstate commerce, even when travelling intrastate. Judge Bress also argues that the majority rule will be difficult to apply in other cases and lead to odd results: the driver who has a Doordash sticker on the car and delivers food, and is also part of the AmFlex program, will be classified differently depending on whether the driver is delivering food for Doordash or making deliveries for Amazon. It seems like that would be an expected result if the driver works for Doordash, and Doordash delivers intrastate, and the AmFlex worker works for the subsidiary of a  national company, and participates in the flow of continuous interstate transportation. More work for judges and attorneys, perhaps, as evidence will need to be  presented and judges will need to decide early on in a lawsuit if transportation workers are participating in continuous interstate transportation and therefore exempt from arbitration. C'est la vie -- for a  federal judge, at least?

    COMMENT: For Amazon and the AmFlex workers, the stakes are high. The workers' underlying lawsuit contends that AmFlex misclassifies the workers as independent contractors rather than as employees. Presumably the plaintiffs' attorneys believe that a court will provide a convenient and viable forum for a class action (rather than divide-and-conquer one-on-one dispute resolution in arbitration) and a more sympathetic setting if the case goes to a jury.

    Legal commentators have noted efforts, which they ascribe to conservatives, to limit access to the federal courthouse by the use of standing doctrine, and enforcement of arbitration agreements. See, e.g., Erwin Chemerinsky, Closing the Courthouse Door: How Your Constitutional Rights Became Unenforceable (2017). In the Rittmann case, however, all three judges were Republicans appointed by a Republican President -- Judge Milan D. Smith, Jr., and Judge N. Randy Smith, appointed by George W. Bush, and Judge Daniel A. Bress appointed by Donald Trump. Though statutory rights may be slightly less of a battle ground than constitutional rights, worker rights in the courts are fought over in many pitched battles. Given the dissent by Judge Bress, one may wonder: what would SCOTUS do? We won't speculate.

     UPDATE: For an explanation of why the 9 USC section 1 arbitration exemption exists for transportation employees, see my September 2, 2020 post.

Arbitration, FAA, Vacatur: Sixth District Holds FAA Preempts Argument That Arbitration Is Incompatible With Following Commercial Code Sections Governing Wire Transfers

Plaintiff/Appellant Unsuccessfully Argued Following California Commercial Code Required Legal Proceeding, Not Arbitration.

    Plaintiff/Appellant Prima Donna Development Corporation appealed from a judgment confirming an arbitration award in favor of Wells Fargo Bank, N.A., and challenged an order compelling arbitration and denying its motion to vacate the award. Prima Donna Development Corporation v. Wells Fargo Bank, N.A., H045379 (6th Dist.  11/13/19) (Danner, Greenwood, Grover). The underlying facts provide a painful example of how transacting business over the internet can go horribly wrong. A third party hacked the email account of Prima Donna's President, and used the information obtained to fraudulently induce a "Company Administrator" -- an employee of Prima Donna -- to initiate a wire transfer of Prima Donna's funds to an overseas account. Prima Donna lost $638,400 wired from its Wells Fargo accounts. Of course, Prima Donna wanted Wells Fargo to bear the loss, and the dispute was subject to arbitration.

    The arbitrator found in favor of Wells Fargo, concluding that Wells Fargo had followed commercially reasonable security procedures, and that under the California Commercial Code, "security procedure" did "not include a procedure for establishing that the customer is not being defrauded by a third party into making the transfer." 

    The California Commercial Code governs the law of wire transfers, and the key California case, Zengen v. Comerica Bank, 41 Cal.4th 239 (2007), makes it clear that the UCC provisions displace common law provisions and provide the law under which claims are analyzed. Prima Donna argued that this meant that the matter could not be arbitrated, since arbitration is an equitable proceeding,  and the arbitrator might not follow the statute. The trial court, when considering the initial motion to compel arbitration, concluded that there was no reason that the arbitrator could not adjudicate a UCC claim, and evidently, the Court of Appeal agreed. In fact, the Court of Appeal pointed out that the arbitration agreement provided that the governing law of the state whose laws governed Prima Donna's accounts was to be applied, thus California law applied, and the arbitrator's award applied California's Commercial Code to the dispute.

    Prima Donna further argued that the arbitration agreement was substantively unconscionable because it denied Prima Donna's right to trial by jury, and because it limited judicial review, but those arguments were preempted by the Federal Arbitration Act, which governed the agreement.

    Finally, Prima Donna argued that the arbitrator had failed to address whether Wells Fargo had acted in "good faith", because there was evidence that a high "risk score" had been triggered by the transaction at Wells Fargo. But the Court of Appeal explained that Prima Donna was allowed to bring its claims against Wells Fargo and was not prevented "from receiving a review on the merits," so the failure to address "good faith" amounted only to a contention that the arbitrator made a legal error. And that is not a question subject to judicial review.

    COMMENT: Under Cal. Code of Civ. Proc., section 1286.2, vacatur may be based on arbitrators exceeding "their powers by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy." But legal error per se doesn't meet the "exceeding their powers" test. Rather, the error must be "so egregious as to constitute misconduct or so profound as to render the process unfair." This becomes a matter of degree subject to specific facts and circumstances.

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.

Arbitration, FAA: Ninth Circuit Holds Federal Arbitration Act Does Not Preempt California's McGill Rule

McGill v. Citibank Held Agreement To Waive Right To Seek Public Injunctive Relief Is Unenforceable.

        In McGill v. Citibank, N.A. (2017), the California Supreme Court held that a contract purporting to waive a party's right to seek public injunctive relief in any forum is unenforceable under California law. The key issue in Blair v. Rent-A-Car, No. 17-17221 (9th Cir.  6/28/19) (Fletcher, McKeown, Murguia), is whether the Federal Arbitration Act preempts California's McGill  rule. The Ninth Circuit holds that the FAA does not preempt the McGill rule.

        Blair brought a putative class action against the Rent-A-Center defendants, alleging they overcharged for rent-to-own plans for household items. Such plans provide for installment payments, and if all payments are timely made, the consumer owns the item. Blair's agreement contained an arbitration clause providing that it was "intended to be interpreted as broadly as the FAA allows." The agreement also provided that arbitration was to be on an individual basis and relief could not affect other account holders. There could be no class, collective, mass, private attorney general, or representative action. If the provision was held to be unenforceable, then the claims for relief had to be severed and brought in a judicial forum.

        The district court concluded that this agreement violated the McGill rule because it waived Blair's right to seek public injunctive relief in any forum (1) because all claims had to be heard in arbitration; and (2) because claims for public injunctive relief could not exist in arbitration consistent with the parties' agreement. The Court of Appeals agreed, and severed the claims providing for public injunctive relief, which will now be heard in court.

        The court analyzes federal preemption in two steps. First, it explains the McGill rule is a "generally applicable contract defense." In other words, it applies equally to arbitration and non-arbitration agreements. In contrast, a rule that uniquely burdens arbitration would be preempted by the FAA. Second, even a generally applicable contract defense may not prevent preemption, if the rule interferes with the accomplishment of the FAA's objectives. However, the McGill rule does not deprive the parties of the benefits of arbitration, because according to the Blair court, a public injunctive relief claim could be sought in arbitration or in court. And seeking a public injunction in arbitration does not require all the procedural formality that a class action would require.

        Here, however, the parties' agreement precluded the pursuit of a public injunction in arbitration, and triggered severance of public injunctive relief claims -- so such claims will go to the district court.

        COMMENT: In Blair, the claims for public injunctive relief are severed and go to court only because the agreement does not allow such claims to be heard in arbitration. But an agreement could be drafted that would allow for a hearing of such claims in arbitration. How much protection would that give to the public?

         It would seem that the interests of the public would be better served by hearing public injunctive relief claims in court, because mistakes of law and fact made by an arbitrator would be no basis for vacating the award. While that is exactly what private parties should expect, in the case of public injunctive relief, broader interests are at stake. If one could write on a blank slate, the public's interests would be better protected by a court hearing than by arbitration. But one does not write here on a blank slate.

 

    

 

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, Gateway Issues, Delegation, Severability, FAA: Court Had Authority To Adjudicate Enforceability Of Arbitration Agreement, Where Party Specifically Challenged The Arbitration Agreement

Opinion Explains How Contract And Arbitration Agreement Are Treated As Separate Agreements.

    Jackpot Harvesting, Inc. v. Applied Underwriters, H044953 (6th Dist.  3/28/19) (Danner, Greenwood, Grover), provides a detailed discussion of whether the court or the arbitrator has authority to enforce an arbitration agreement, and how the concept of "severability" helps the analysis.

    Applied Underwriters offered workers' compensation insurance to Jackpot Harvesting, Inc. and related companies through a number of agreements, one of which was entitled "Request to Bind" and which contained an arbitration agreement. Jackpot sued Applied,  believing Applied mishandled claims and failed to disclose how premiums were calculated. Applied moved to compel arbitration, the trial court denied the motion, and Applied appealed. The important threshold question was whether the trial judge had the authority to decide the gateway issue of arbitrability, or whether that issue was one for the arbitrator to resolve.

    The parties agreed that the Federal Arbitration Act supplied the governing law, and the FAA carries with it a strong policy in favor of enforcing arbitration provisions. Of course, the parties could have included a "delegation clause" specifying who had authority to decide gateway issues. But the arbitration provision did not include a delegation clause.

    In such a situation, SCOTUS applies "the severability principle." The challenge to the validity of an arbitration agreement or delegation clause is treated separately from a challenge to the validity of the entire contract.  In effect, the contract between the parties, and the arbitration provision, are analyzed as two separate contracts. "Unless a party specifically challenges the validity of the agreement to arbitrate, both sides may be required to take all their disputes -- including disputes about the validity of their broader contract -- to arbitration." New Prime Inc. v. Oliveira, 139 S.Ct. 532, 539 (2019). 

    Applied argued that the New Prime approach required an "analytically distinct" attack on the arbitration provision -- in other words, an attack distinct from the attack on the contract as a whole. While conceding that there is "some support" for that position, the Court of Appeal says that it hasn't been shown a SCOTUS case requiring that the "substance of the challenge to the arbitration agreement must differ in all respects from the challenge to the underlying agreement." But this is dictum, because the Court of Appeal then found a distinct challenge to the arbitration provision in the Request to Bind: the Request to Bind was "a collateral agreement" triggering statutory filing and regulatory approval requirements under the Insurance Code and regulations, and "a contract made in violation of a regulatory statute is void."

    So the arbitration provision is specifically challenged. Found to be made in violation of a regulatory statute, the arbitration provision crashes and burns, leaving the trial judge with the authority to adjudicate the enforceability of the arbitration agreement. The denial of the motion to compel arbitration is AFFIRMED.

    

Federal Arbitration Act: Fifth District Holds That Truck Driver Engaged In Interstate Commerce Is Exempt From FAA Arbitration Requirement

Driver Did Not Need To Cross State Lines To Engage In Interstate Commerce.

    The Federal Arbitration Act contains a statutory exemption for "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." 9 U.S.C. section 1 (italics added). Thus, a truck driver engaged in interstate commerce is exempted from arbitration under the FAA. 

    The issue in Nieto v. Fresno Beverage Company, Inc., F074704 (5th Dist.  3/22/19) (Detjen, Franson, Desantos) was whether a truck driver who did not cross state lines "engaged in interstate commerce." Here, the facts were that the driver traveled in California, while delivering beverages that arrived from out-of-state. Under those facts, the flow of the goods was in interstate commerce, and plaintiff Nieto's deliveries "although intrastate, were essentially the last phase of a continuous journey of the interstate commerce . . ." Hence, the trial court concluded that Nieto was engaged in interstate commerce, was not required to arbitrate under the  FAA, and could proceed in court with wage and hour claims brought under California law. The Court of Appeal affirmed.