California Mediation and Arbitration

Arbitration, Waiver: US Supreme Court Holds Prejudice Is Not Required To Find Waiver Of Right To Arbitrate

Arbitration Agreements Must Be Placed On Equal Footing With Other Contracts -- So Courts Can't Make Up Special Procedural Rules That Apply Only To Arbitration.

        In a unanimous opinion penned by Justice Elena Kagan, the Supreme Court holds that courts cannot create arbitration-specific federal procedural rules, such as the rule that prejudice is necessary to find a waiver of the right to arbitrate, based on the Federal Arbitration Act policy favoring arbitration. Morgan v. Sundance, No. 31-328 (US S.Ct. 5/23/22).

        Petitioner Morgan, an employee, sued respondent Sundance, which owned the Taco Bell franchise where Morgan worked, alleging Sundance fudged time-keeping records so as to avoid paying overtime to employees. Her contract with her employer included a mandatory arbitration agreement. Sundance filed a motion to dismiss, answered, and mediated, before deciding after eight months to arbitrate. The District Court, finding prejudice to Morgan by the conduct of Sundance, and waiver of the right to arbitrate, denied the motion to arbitrate. The Eighth Circuit Court of Appeals disagreed, finding no prejudice, and thus no waiver of the right to arbitrate.

        A common definition of waiver is that it involves the intentional relinquishment of a known right. Applying that definition, a party that knows of its right to arbitrate and acts inconsistently with that right, can be found to have waived the right to arbitrate. But many courts have added the additional element of prejudice before they will find waiver of the right to arbitrate. Applying a definition of waiver that includes the element of prejudice has enabled defendants to test the waters in litigation, and then decide later to arbitrate, arguing that there has been no prejudice to plaintiff.

        The Morgan v. Sundance case is interesting because it requires consideration of two conflicting policies: The FAA favors arbitration, and the FAA also requires that arbitration agreements be treated on equal footing with other contracts. Here, the two policies came into conflict. In Morgan v. Sundance, the "equal footing" argument wins out. Arbitration does not get special treatment -- in this case, special treatment that would have favored the employer. Thus, in evaluating whether there has been a waiver, it is improper to add an additional element, prejudice, that would not typically be found in other instances where courts ask whether there has been an intentional relinquishment of a known right.

        How this case will be handled on remand is somewhat muddied: "The parties have also quarreled about whether to understand that inquiry as involving rules of waiver, forfeiture, estoppel, laches, or procedural timeliness. We do not address those issues." So on remand, the court could choose a different procedural framework. But the waiver framework seems like it would offer a pretty clean approach: the respondent knew of its right to arbitrate, chose to litigate, inconsistent with its right to arbitrate, and thus intentionally relinquished a known right.

        COMMENT: Several years ago, my colleague Mike Hensley and I had a case before the Ninth Circuit, in which we argued that our defendant client, a cosmetology school, had not waived its right to arbitrate because the plaintiff had not been prejudiced by our client's conduct. The Ninth Circuit panel disagreed with our position and found a waiver had occurred. Martin v. Yasuda, 829 F.3d 1118 (2016). Later, in the district court once again, our client's motion for summary judgment on the underlying merits was granted. Procedural battles over the right to arbitrate are important, but do not necessarily govern the outcome.

 

 

 

 

Arbitration, Delegation, Choice Of Law: Sixth District Affirms Denial Of Motion To Compel Arbitration Because There Was No Agreement To Arbitrate

Whether An Arbitration Agreement Exists Was A Gateway Issue For The Court To Decide.

        Agreeing with the trial court that there was no agreement express or implied to arbitrate, the Court of Appeal affirms the trial court's order denying employer's motion to compel arbitration in a putative class action wage and hours case brought by a trucker. Mendoza v. Trans Valley Transport et al., H044372 (6th Dist.  3/1/22) (Greenwood, Elia, Grover). This is a 55-page opinion and I will be brief.

        First, the opinion addressed choice of law: did the California Arbitration Act or the Federal Arbitration Act apply? Answer: the CAA applied, because of the carve-out in the FAA for "workers engaged in foreign or interstate commerce," meaning transportation workers. And Mr. Mendoza fell into the carve-out category because he was a trucker. Therefore, the CAA applied.

        Second, the Court of Appeal refused to enforce a delegation clause delegating the issue of contract formation to an arbitrator. It found the issue to have been forfeited because it was only raised in reply papers. Nevertheless, addressing the merits, the Court concluded that not all gateway issues are delegable, and the issue of whether an agreement to arbitrate existed was one for the courts to decide.

        Third, the Court agreed that the parties had not agreed to arbitrate. The problem was that, while the employee acknowledged receipt of a handbook and 14 other items, and acknowledged that any questions he had were answered, nothing in the mass of documents pointed him to an arbitration clause, and there was no signature line for the arbitration policy that could have been found in the handbook.  Nor would the Court conclude that there was an "implied in fact" contract, simply because the employee received the handbook and continued to work for the company, because nothing drew the employee's attention to the arbitration policy. 

        COMMENT: Employers who want to make an arbitration agreement "stick" should include signature lines, and make it clear and unmistakable in writing to the employee that the employee is agreeing to arbitrate. We note that Mendoza was Spanish speaking and did not read or write English. The employer's director of human resources testified that his custom and  practice was to explain the written material to employees and that a Spanish translation was provided, which, however, Mendoza did not recall. For employees who may not be fluent in English, it is preferable to have clear and unmistakable evidence that they have received a written translation.

Employment, Legislation, FAA Preemption: Can California Protect Employees From Mandatory Pre-Dispute Arbitration Agreements And Avoid Federal Preemption?

Paul Dubow And Marc Alexander Have Published An Article About FAA Preemption And California's AB 51.

        The article, entitled Can California Protect Employees From Entering Into Mandatory Pre-Dispute Arbitration Agreements?, appears in California Litigation, Vol. 34, No. 3 (2021). Paul Dubow is a seasoned mediator and arbitrator in the Bay Area, and Marc Alexander is your blogger.

        The article is republished here, with the permission of the California Lawyers Association and California Litigation, the journal of the Litigation Section of the CLA.

Pending Case, PAGA, FAA: Viking Cruises, Inc. v. Moriana Is A Case To Watch

The United States Supreme Court Granted Cert On December 15, 2022.

        The issue: "Whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under the California Private Attorneys General Act."

        Readers of this blog will know that California courts have repeatedly ruled, following Iskanian, that employees cannot be forced to arbitrate PAGA representative claims. The basic reason underlying this conclusion is that PAGA representative claims are in the nature of qui tam actions, and therefore the interest of the state of California is involved. But since the state is not a party to the employee's arbitration agreement, arbitration of representative claims cannot be compelled. The issue before the United States Supreme Court is whether this "carve-out" of mandatory arbitration is preempted by the Federal Arbitration Act.

        COMMENT: I have been publishing this blog since 2012, and I don't think I have ever before predicted the outcome of a case. This time, I'm going to stick my neck out and predict that the Supreme Court's decision, given the current composition of the court and its decision to take the case, will not go well for the employee. We shall see. If my prediction proves to be accurate, I will let you know. And if I'm wrong . . . well, we'll see.

Arbitration, FAA, Transportation: 9th Circuit Agrees Domino's Drivers Transporting Pizza Ingredients To Franchisees Intrastate Are Engaged In Interstate Commerce

Engaged In Interstate Commerce, Domino's Drivers Delivering Pizza Ingredients Intrastate Are Exempt From Requirements of Federal Arbitration Act. 9 U.S.C § 1.

 

 

How Domino's Makes Its Pizza ↑

Downtown LA Pizza. Carol Highsmith, photographer. 2012. Library of Congress. ↑

Jon Stewart Deep Dish Pizza Rant. ↓

 

                                                                                 

        In an opinion penned by Judge Hurwitz, the 9th Circuit affirmed a  district court  decision denying Domino 's motion to compel arbitration in a labor law lawsuit brought by drivers who delivered pizza ingredients from a central distribution center to Domino's franchisees. Carmona v. Domino's Pizza, No. 21-55009 (9th Cir.  12/23/21) (Hurwitz, McLane, Parker).     

        The Federal Arbitration Act exempts transportation workers engaged in interstate commerce from the requirements of the FAA. The drivers working for  Domino's work in-state, but when they deliver pizza ingredients to Domino's franchisees, they are acting as  workers engaged in a “single, unbroken stream of interstate commerce” that renders interstate commerce a “central part” of their job description. Judge Hurwitz relied on a similar 9th Circuit case involving Amazon delivery drivers, Rittmann v. Amazon.com, Inc., 971 F.3d 904 (9th Cir. 2020). See our earlier 8/31/20 post on Rittmann. 

        Judge Hurwitz writes that there are distinctions between the Amazon and Domino's Pizza cases: "The customers to whom the Amazon drivers delivered the interstate goods in Rittmann initiated the purchases online with Amazon . . .  while the Domino’s franchisees order the goods from the Supply Center in California only after Domino’s has already purchased them. But this is a distinction without a difference." In the end, the drivers are still participating in a single, unbroken stream of interstate commerce.  

 

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.