California Mediation and Arbitration

Arbitration, FAA Preemption: Ninth Circuit Holds Federal Arbitration Act Does Not Preempt AB 51, Which Forbids Employers From Requiring Arbitration As Condition Of Employment

Judge Sandra S. Ikuta Dissents.

        Section 432.6 of the California Labor Code, which was added by AB 51, forbids employers from requiring an arbitration agreement as a condition of employment, or threatening to retaliate against an employee for refusing to sign an arbitration agreement. A Ninth Circuit panel, by a two person majority, holds that the Federal Arbitration Act does not preempt §432.6, except for civil and criminal penalties that were an impediment to arbitration, and which therefore were preempted. Chamber of Commerce v. Bonta, No. 20-15291 (9th Cir. 9/15/21) (Lucero, Fletcher; Ikuta, dsst.)

        Judge Lucero explains that the sine qua non for arbitration agreements is that they must be voluntary and consensual. Therefore, he sees no conflict between the goal of the FAA and the California legislation, which seeks to  prevent employers from foisting unwanted arbitration agreements on employees. Additionally, he draws a line between a law that  would invalidate an arbitration agreement, which §432.6 does not  do, and a law aimed at conduct before the arbitration agreement is entered into. He uses this two-stage analysis to attempt to distinguish Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421 (2017), reversing a Kentucky court that had ruled that arbitration agreements executed by individuals holding powers of attorney for relatives were unenforceable. Section 432.6 does not actually invalidate arbitration agreements, targeting instead pre-agreement conduct. However, because civil and criminal penalties do serve as an obstacle to arbitration, they are preempted by the FAA.

        Judge Ikuta finds the effort to distinguish Kindred Nursing Centers strained, because the SCOTUS case does refer to formation of arbitration agreements. She also  points out that in California, the doctrine of unconscionability has been used to invalidate arbitration agreements, and that this doctrine does not hinge simply on whether the contract was one of  adhesion: instead, it must be both a take-it or leave-it agreement, and it must be substantively unfair before it will be invalidated. One who signs a contract is presumed to have consented voluntarily, even if it is a contract of adhesion, and there is unequal bargaining power. Finally, she points out that the "tortuous" ruling results in a "bizarre" enforcement scheme: "the majority upholds Section 432.6 and its associated sanctions so long as they are not applied to conduct leading to executed arbitration agreements. This holding means that an employer’s attempt to enter into an arbitration agreement with employees is unlawful, but a completed attempt is lawful." 

        COMMENT: When Charles Bernheimer, the "Father of Commercial Arbitration", campaigned for the New York Arbitration Act and the FAA early in the 20th century, his goal was to create a quick and efficient means of resolving disputes between merchants. It is doubtful that the authors of the FAA imagined a landscape in which arbitration would swallow up employment and consumer disputes involving parties with very unequal bargaining power. Ever after, courts have had to apply the legal fiction that  an arbitration agreement must be "voluntary and consensual." However, those words are now  terms of art, for the person who fails to read a contract or to wear their reading glasses,  has nevertheless consented by signing. And the person who must sign a "take-it or leave-it" arbitration agreement to obtain a minimum wage job has consented. Jeremy Bentham, a critic of legal fictions, said that "fictions are to law what fraud is to trade."

        The Ninth Circuit has probably set up a conflict between federal circuits in Chamber of Commerce v. Bonta, and with Judge Ikuta's dissent, there is a reasonable probability that the majority opinion will not be the last word on the subject.

        From time to time I will note that in controversial arbitration cases, differences of opinion parallel political philosophies and parties  of the judges. So I note here that Judges Lucero and Fletcher were Clinton appointees, and Judge Ikuta, a member of the Federalist Society, is a  George W. Bush appointment.

        BEST LINE: "Like a classic clown bop bag, no matter how many times California is smacked down for violating the Federal Arbitration Act (FAA), the state bounces back with even more creative methods to sidestep the FAA." A go-to cliche favored by jurists is a reference to the arcade game "whack-a-mole." So Judge Ikuta gets points for elegant variation. A Hat Tip:

Danny Kollaja, better known as Lanky the Clown, acting up at the Wyoming  State Fair in Douglas. Carol M. Highsmith, photographer. 2015. Library of Congress.

Arbitration, FAA, Waiver: Ninth Circuit Holds In-State Trucker Delivering Goods That Once Crossed State Lines Is Exempt From Federal Arbitration Act

Delivery Truck Driver  Had To Arbitrate Anyway.

        Section 1 of the FAA exempts from the Act’s coverage all “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” In Romero v. Watkins and Shepard Trucking,  No. 20-55768 (9th Cir.  8/19/21) (Fisher, Watford, Bumatay),  the court holds that Romero, an in-state delivery truck driver who delivered goods that had crossed state lines, was exempt from the coverage of the  FAA, and this exemption from coverage cannot be waived in a private contract. In a concurrent unpublished memorandum opinion, the court concludes that Romero was required to arbitrate under state law anyway.

        COMMENT: The §1 exemption is well-travelled legal ground for truckers. We've posted earlier about New Prime Inc. v. Oliveira, 139 S. Ct. 532 (2019), holding that the exemption for transportation workers engaged in interstate commerce applies to both employees and independent contractors. We also posted about Rittmann v. Amazon.com, Inc., 971 F.3d 904, 915 (9th Cir. 2020), cert. denied, 141 S. Ct. 1374 (2021), holding in-state delivery drivers engaged in the movement of goods interstate are covered by the §1 exemption.

Arbitration, Employment, Choice Of Law, FAA: Second Dist., Div. 7 Holds Choice Of California Law Incorporates Substantive Law But Not Procedural Limitations On Arbitration In Contract Governed By FAA

Parties Could Have Specifically Incorporated Arbitration Limitations In California Labor Code Instead Of Generally Choosing California Law -- In Theory.

        California Labor Code §229 provides, in part, that actions to collect due and unpaid wages may be maintained without regard to the existence of any private agreement to arbitrate. And parties to an employment contract could, if they wished, incorporate that limitation on arbitration directly into their contract. But that's not what happened in Nixon v. AmeriHome Mortgage Co., LLC, B302754  (2/7  8/16/21) (Perluss, Feuer, Ibarra), a case in which a loan review analyst sued for unpaid overtime and unfair business practices.

        Instead, in Nixon, the contract had a California choice-of-law provision, but did not specifically incorporate the limitations on arbitration found in §229. Because the employer's business involved interstate commerce, the arbitration provision was governed by the Federal Arbitration Act, requiring the court to enforce the arbitration provision according to its terms. And the arbitration provision did not specifically incorporate the §229 arbitration limitation, so the parties must arbitrate.

        COMMENT. Justice Perluss notes that, notwithstanding the general principle of preemption, "the parties could provide in their arbitration agreement that a dispute regarding unpaid wages—the subject of section 229—is not arbitrable." True 'nuff, but why would an employer who has drafted an employment agreement with an arbitration provision be motivated to do that? Which brings up our next point: employees with individually negotiated contracts and legal representation at the time they enter into their employment contract tend to do better in arbitration than employees with "take it or leave it" contracts they did not negotiate. Parties with bargaining power need to pay attention to choice-of-law and incorporation by reference issues in employment negotiations.

Arbitration, FAA, Employment: Ninth Circuit Agrees Uber Workers Are Subject To Mandatory Arbitration

Uber Workers Are Not  Engaged In Interstate Commerce Says The Court.

        Can Uber compel mandatory arbitration of disputes with its drivers? To answer this question, the Ninth Circuit in Capriole v. Uber Technologies, No. 20-16030 (9th Cir.  8/2/21) (Wardlaw, Nguyen, Eaton) had to confront whether Uber drivers are exempt from Federal Arbitration Act requirements by virtue of the so-called residual clause or transportation worker exemption in the Federal Arbitration Act. Section 1 of the FAA provides that it does not apply "to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." The emphasized part of the statutory text has been interpreted to apply to transportation workers "engaged in" interstate commerce, truckers being a good example. But Uber drivers are not the same as long-haul truckers.

        The Ninth Circuit panel agreed with the district court that Uber workers primarily drive intrastate, not interstate, and therefore do not fall under the exemption to coverage by the FAA. Therefore, pursuant to their arbitration agreement with Uber, the drivers could be compelled to arbitrate pursuant to the FAA requirement that arbitration agreements be enforced.

        The panel also agreed, "Plaintiffs' requested injunctive relief -- reclassification as employees -- does not constitute 'public injunctive relief.'" And so the emergency equitable relief requested, which was not public injunctive relief, could not be shoehorned into a California exception to mandatory arbitration.

        Thus, the putative class of Uber drivers who sued in Massachusetts to obtain a preliminary injunction prohibiting Uber from classifying drivers in Massachusetts as independent contractors found their lawsuit transferred to the USDC, Northern District of California, pursuant to a forum selection clause. In sum, the Ninth Circuit has affirmed that the drivers do not fall under the  FAA exemption, that the preliminary injunction was properly denied, and that arbitration is required.

        COMMENT: Judge Wardlaw wrote that the new gig economy  has "led to a Dickensian tale of two workforces." On the one side, there are the persons with technical skills able to design and operate the internet platform and who are deemed to be employees with concomitant benefits. "On the other side is a much larger bloc consisting of those who frequently directly transport goods or passengers, the so-called 'gig-economy workers,' most if not all of whom are classified as 'independent contractors,' a status conferring flexibility but little security."

        On May 26, 2021, the Guardian newspaper reported, "Uber is to recognise the GMB trade union in the UK for its private hire drivers, marking the first deal between a union and a gig economy ride-hailing service." But this is in the United Kingdom, not the United States. And according to the Wikipedia article on the GMB trade union, "On 28 October 2016, in a landmark ruling if not overturned on appeal, the Central London Employment Tribunal ruled that Uber drivers are 'workers' entitled to the minimum wage, paid holiday, sick leave and other normal worker entitlements, rather than self-employed." In 2021, the ruling that Uber workers are employees was upheld on appeal.

        In the United States the courts are deciding whether Uber workers must  arbitrate their claims to achieve employment  status in the gig economy. And in California, where legal precedent has created an expansive definition of employment, voters approved Proposition 22 to exempt companies such as  Uber from having to classify their drivers as employees.

 

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, Appealability, Jurisdiction, Existence of Agreement: District Court Should Have Summarily Ruled On Existence Of Agreement Before Denying Motion To Arbitrate

There Is A Method To This . . . 

        Before I get to the case, I should mention that I'm playing "catch up." I've fallen somewhat behind on posting, between a busy mediation calendar and some travel to visit a newly born child in the family. But it's the weekend, so let's see how much we can get done.

        Bill Hansen v. LMB Mortgage Services, Inc., et al., No. 20-15272 (9th Cir.  6/11/21) (Ikuta, Nguyen, Eaton) presented a jurisdictional question. Plaintiff Hansen opposed LMB Mortgage Services, Inc and CPL Assets, LLC's (collectively LMB) motion to compel arbitration. The district court issued a nonfinal order denying the motion and decided to schedule a  trial to determine whether there was a binding agreement to arbitrate. LMB appealed.

        LMB's appeal presented a threshold jurisdictional issue. Ordinarily interim orders are not appealable. However, as Judge Ikuta explains, under 9 USC §16, an order denying a petition to compel arbitration under §4 of the FAA is appealable, whether it is an interim or final order. So the  Ninth Circuit could consider the appeal of the interim order.

        What should the district court have done? It should have summarily tried the issue of whether an agreement to arbitrate existed, before deciding the motion to arbitrate. So the Ninth Circuit vacated the district court's denial of the motion to compel and  remanded for the district  court to  "proceed summarily to the trial" on the  question of  whether plaintiff is required to arbitrate. 

Arbitration, Employment, FAA: 9th Circuit Holds Private Arb Agreement Does Not Bind Labor Sec In Enforcement Action Against Parties To Their Own Arbitration Agreement

Liberal Arbitration Policy Of The FAA Doesn't Mean Nonparties Can Be Compelled To Arbitrate.

        The question in Walsh v. Arizona Logistics, Inc. and Larry Browne, No. 20-15765 (9th Cir.  18/21/2021) (Hunsaker, Fletcher, Miller) is "whether a private arbitration agreement binds the Secretary of Labor when bringing a Fair Labor Standards Act (FLSA) enforcement action that  seeks relief on behalf of one  party to the arbitration agreement against the  other party to the agreement." The district court answered nope, and the Court of Appeals affirmed.

        Walsh is Martin J. Walsh, suing in his capacity as Secretary of Labor, to enforce labor laws against Larry Browne and his companies Arizona Logistics and Parts Authority Arizona, an underlying issue being whether  the employees were improperly classified as independent contractors. The workers (that is a neutral term) had arbitration agreements with Browne's companies. Defendants argued that, because the Labor Secretary's enforcement action was brought on behalf of the  workers to obtain a monetary benefit for the  workers, it was actually covered by the arbitration agreements between the employer and the  workers.

        The district court and the Ninth Circuit both relied on EEOC v. Waffle House,  Inc., 534 U.S. 279 (2002) to conclude that the government entity that brought the enforcement action and controlled the action was not bound by the private parties' arbitration agreements. Though the enforcement action under the FLSA  results in financial benefits to individual plaintiffs, it is also for a public purpose, and does not only benefit the private parties.

        COMMENT: Note the similarity in reasoning between this case and California's PAGA cases, which hold that a Private Attorney General Act of 2004 action brought by employees to enforce California's labor laws is not  subject to arbitration. The reasoning in PAGA cases is that the claim really belongs to the  State of California, which is not a party to the arbitration agreement, just as the US Department of Labor is not a party to the arbitration agreement. Yet the US Department of Labor enforcement action is also different than the PAGA claim. The difference is that the FLSA enforcement action is brought by the Department of Labor, whereas the PAGA claim is brought by employees for the benefit of the people of California, as well as  the benefit of the employees. Evidently California legislators concluded that it would be more cost efficient, or at least politically prudent, to make use of private attorneys general, rather than appropriate more money to enforce the law.

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.