California Mediation and Arbitration

Arbitration, Automobiles, FAA, Public Policy: A "Satellite Service Facility" Agreement With Subaru Was Not Subject To Statutory Exception To Arbitration That Would Apply To Manufacturer-Dealer Franchise Agreements

Automobile Dealerships Are Subject To A Narrow Exception To Arbitration -- But The Exception Did Not Apply Here.

1958 Subaru 360. Licensed under the Creative Commons Attribution-Share Alike 3.0 Unported, 2.5 Generic, 2.0 Generic and 1.0 Generic license. Author: Mytho88.

        Who knew? Automobile dealer franchises are subject to a narrow statutory exception to arbitration under the Motor Vehicle Franchise Arbitration Fairness Act, 15 USC section 1226. The key issue in Subaru of America, Inc. v. Putnam Automotive, Inc., No. A159686 (1/2  2/10/21) (Kline, Stewart, Miller) was whether Putnam's "Satellite Service Facility" agreement to service Subarus was part of Putnam's franchise agreement as an automobile dealer with Subaru. Because the arbitrator construed the two agreements to be separate, rather than a single integrated agreement, Putnam did not fall under a statutory exception that would have allowed it to escape arbitration.

        Putnam also argued that forcing it to arbitrate was contrary to the public policy protecting dealers from mandatory arbitration. However, since the arbitrator and  the court concluded the service agreement was not a  dealer franchise  agreement, this argument did not prevail.

        COMMENT: The statutory exemption that allows dealers to avoid having to arbitrate with distributors or manufacturers of motor vehicles is a  narrow exception. Apparently it  exists to level the playing field between the dealers and  economically more powerful manufacturers and distributors. We surmise that, though they may have less economic clout than manufacturers and distributors, dealers nevertheless had enough influence in the legislative process to obtain the narrow carve-out from arbitration. While the same "level the playing field" logic might apply to consumers and borrowers seeking an escape hatch from mandatory arbitration, evidently they have been less successful obtaining legislative carve-outs from arbitration.

Arbitration, Public Policy: An Arbitration Provision Purporting To Waive Consumer's Right To Seek Public Injunctive Relief Is Invalid And Unenforceable

McGill Is Still Good Law.

        The action in Joe Maldonado v. Fast Auto Loans, Inc., G058645 (4/3  2/8/21) (O'Leary, Aronson, Thompson) centered on whether McGill v. Citibank, N.A., 2 Cal.5th 945  (2017) is still good California law and whether it has been preempted by the Federal Arbitration Act. McGill, which we posted about on April 6, 2017, held that an arbitration provision was invalid and unenforceable because it required consumers to waive their right to pursue public injunctive relief. See also the September 29, 2020 post on Mejia v. DACM Inc., 54 Cal.App.5th 691 (2020).

        Maldonado and others brought a putative class action alleging Fast Auto Loans, Inc. charged unconscionable interest rates on loans in violation of the  Financial Code. Fast Auto Loans moved to compel arbitration, based on a broad arbitration provision that  would have resulted in a waiver of class actions and the plaintiffs' ability to bring an action for public injunctive relief. The trial court held that the McGill rule made the arbitration provisions unenforceable, and the Court of Appeal affirmed the order denying the motion to compel arbitration.

        The Court of Appeal concluded that  McGill is good law. Fast Auto Loans' argument that FAA preemption applied foundered, because SCOTUS recently denied review of Ninth Circuit cases applying McGill, leaving the Court of Appeal to apply McGill, a case decided by the California Supreme Court.

        COMMENT: What is the reasoning that explains why McGill is not preempted by the  FAA?  "The contract defense at issue here—'a law established for a public reason cannot be contravened by a private agreement' (Civ. Code, § 3513)—is a generally applicable contract defense, i.e., it is a ground under California law for revoking any contract. . . . It is not a defense that applies only to arbitration or that derives its meaning from the fact that an agreement to arbitrate is at issue." McGill v. Citibank, N.A., 2 Cal. 5th 945, 962 (2017). In short, the defense does not unduly burden an arbitration agreement, because it would also apply to another contract.

 

Arbitration, FAA, Unconsionability: First Distriction, Div. 2 Holds FAA Does Not Apply To Transportation Workers And Agreement Is Unconsionable

Court Distinguishes Baltazar.

        Plaintiff Sabid Ali sued Daylight Transport, LLC, claiming he had been misclassified as an independent contractor, and alleging various California labor violations. Daylight move to compel arbitration, failed, and appealed. Sabid Ali v. Daylight Transport, LLC, No. A157104 (1/2  12/31/20) (Kline, Richman, Miller) (partial pub.).

        In the trial court, Daylight had claimed Federal Arbitration Act preemption. Under the FAA, parties engaged in interstate commerce are subject to the FAA, unless they are interstate transport workers. Daylight argued in the trial court that Sabid Ali was a trucker engaged in intrastate commerce within California, delivering goods after other truckers had move the goods in interstate commerce. This argument had no traction after cases holding that a truck driver who drove the intrastate portion of interstate trips for a transportation company was engaged in interstate commerce and therefore exempt from FAA preemption. Daylight abandoned the preemption argument on appeal, because its fallback argument was that the arbitration clause was binding under state or federal law.

        However, Sabid Ali argued the arbitration provision was unconscionable, a defense he could  have asserted whether or not the FAA applied, since under the FAA, state law defenses to the enforcement of a contract still exist. 

        The Court of  Appeal, performing an unconscionability analysis under California law, explained that both procedural and substantive unconscionability existed. Therefore, the arbitration clause was not enforceable.

        The most consequential part of the opinion explains why it mattered in this case that the contract did not include the AAA rules that it had incorporated by reference, distinguishing the case from Baltazar v. Forever 21, Inc., 62 Cal.4th 1237 (2016). In Baltazar, the party challenging the arbitration provision on the grounds that it did not include a copy of the AAA rules was not actually objecting to any specific element in the AAA rules. Here, however, Sabid Ali did object to the fact that the AAA rules provided for a sharing of expenses, as set forth in AAA Rule 54, and that this was "artfully hidden" by the incorporation of the  rules. Thus, the court found this case to be distinguishable from Baltazar. That the AAA rule being challenged as unfair was "artfully hidden" weighed in the unconscionability analysis.

 

 

Arbitration: First District, Div. 1 Rules State Regulatory Law Did Not Allow Plaintiff To Avoid Arbitration

In Which We Create A New Side Bar Category-- Arbitration: State Regulatory Law

        Nearly every new post on this blog links to one of our many sidebar categories. This post, however, addresses an arbitration issue that required the creation of a new sidebar category: "Arbitration: State Regulatory Law." The issue presented was whether an optometrist who entered into a "Network Doctor Agreement" with his vision care insurer in California, VSP, could rely on state regulatory law to avoid having to arbitrate a dispute with VSP after VSP concluded that Epstein had purchased lenses from an unapproved supplier and terminated his provider agreement. Gordon Epstein v. Vision Service Plan, A155219 (1/1  10/22/20) (Banke, Margulies, Sanchez).

        Epstein's provider agreement described a two-step dispute resolution process: (1) a "Fair Hearing" with an internal review  process; (2) if  the first step did not resolve the dispute, then "Binding Arbitration" requiring arbitration pursuant to the FAA. Seeking to avoid going to the second step, Epstein instead filed an administrative mandamus proceeding. As Justice Banke explained, "he maintained the second step of the dispute resolution process was contrary to state regulatory law requiring certain network provider contracts to include a procedure for prompt resolution of disputes and expressly stating arbitration 'shall not be deemed' such 'a provider dispute resolution mechanism.'"

        Well might you ask, why wouldn't such a regulatory law unfairly burden an agreement to arbitrate, and thus be preempted by the  Federal Arbitration Act? Here, Epstein argued that the state law was not preempted by virtue of the McCarran-Ferguson Act, "which generally exempts from federal law, state laws enacted to regulate the business of insurance."

        While that may sound like a pretty good argument, the Court of Appeal concluded that the state regulatory law did not make the second step of the dispute resolution process requiring arbitration unenforceable, because the state regulatory law only applied to the initial step, which did not require binding arbitration.

        Because Epstein had failed to exhaust administrative remedies requiring him to ask for  arbitration, the trial court's judgment rejecting his writ petition was AFFIRMED.

 

 

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, Policy, Choice of Law, FAA, Severance: McGill v Citibank Lives: Arbitration Provision Eliminating Any Forum For Public Injunctive Relief Is Unenforceable

Case Offers Primer On McGill v. Citibank, N.A.

        Defendant and appellant DACM, Inc. (Del Amo) sold a motorcycle to Joseph Mejia, who paid some cash and financed the remainder of the purchase with a credit card. And, the credit card included an arbitration provision covering Del Amo. So when Mejia sued Del Amo for violation of consumer protection statutes, Del Amo sought to compel arbitration. When Del Amo's motion was denied, it appealed. Joseph Mejia v. DACM, Inc., G058112 (4/3  9/15/20) (Aronson, Moore, Ikola).

        Del Amo lost the  appeal, because the arbitration provision would have prevented Mejia from obtaining public injunctive relief and such a prohibition is unenforceable under McGill v. Citibank, N.A., 2 Cal.5th 945 (2017). We posted about McGill on April 6, 2017.

        The arbitration provision provided for the application of Utah law. So why did California's McGill case apply? California public policy  outweighs the Utah choice-of-law provision, and it is California  policy, as encapsulated in McGill, that courts may invalidate arbitration clauses that waive public injunctive relief in any forum -- something Utah law does not permit.

        So why couldn't the unenforceable waiver provision be severed? The arbitration provision had been drafted to contain a "poison pill" restricting the right of the court to sever, once the prohibition on public injunctive relief was found to be unenforceable.

        So why didn't the Federal Arbitration Act preempt McGill? McGill itself answers that question: "The contract defense at issue here—'a law established for a public reason cannot be contravened by a private agreement' (Civ. Code, § 3513)—is a generally applicable contract defense, i.e., it is a ground under California law for revoking any contract. . . . It is not a defense that applies only to arbitration or that derives its meaning from the fact that an agreement to arbitrate is at issue." McGill v. Citibank, N.A., 2 Cal. 5th 945, 962 (2017). In short, the defense does not unduly burden an arbitration agreement, because it would also apply to another contract.

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.