California Mediation and Arbitration

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

Ambiguous And Unconscionable.

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

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

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

Unconscionability, PAGA, 1281.2, FAA: CCA 2nd Dist. Div. 6 Holds Iskanian Survives, Sort Of

Court Of Appeals Affirms Denial Of Motion To Compel Arbitration.

 

It's alive, it's alive !

        We harbor the suspicion that Navas v. Fresh Venture Foods, LLC, B31288A (2/6  11/21/22) (Gilbert, Yegan, Perren), was published so that the Court of Appeal could tell us that while Viking River Cruises v. Moriana overrules Iskanian, to the extent that Iskanian does not allow PAGA claims to be split between individual and representantive claims, "Nevertheless, Iskanian still survives."

        Navas, Lopez, and Ramos sued their employer FVF for various wage and hour violations, including a PAGA claim. The trial court denied FVF's motion to compel arbitration. It held that the employer had not proved that Lopez and Ramos had signed the agreement. As to Navas, the court ruled his agreement was unconscionable. The employer appealed.,

        The Court of Appeal agreed that there was a lack of sufficient evidence to establish that Lopez and Ramos signed the employment agreement. The Court also agreed that Navas' agreement was unconscionable.

        The comments about PAGA are most interesting. The Court explains that in Viking River Cruises, "the United States Supreme Court held 'the FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.'" In Viking, the trial court refused to allow arbitration of the individual claim because it could not be split from the representative claim. Under Viking, the employer and employee can agree to arbitrate an individual PAGA claim.

        In Navas, however, the Court of Appeal concludes that though an individual PAGA claim can be arbitrated by agreement, here, the employer failed to observe standards required for a purported waiver of a PAGA claim by the employee. The employer failed to explain the employee waiver to a Spanish-speaking employee and to obtain the employee's consent to waiver of the right to bring a PAGA claim in court. So here the employee will be able to bring individual and representative PAGA claims in court.

        COMMENT: The trial court also stayed the arbitration pending litigation, relying on CCP §1281.2. There is no provision in the Federal Arbitration Act like 1281.2, so defendant argued that the stay was preempted by the FAA, which required the arbitration to go forward. However, the Court of Appeal explains that while the agreement incorporated FAA law, it also incorporated California civil procedure, and California procedure had not been preempted by a reference to FAA law.

Unconscionability, Severance, PAGA, Claim Preclusion: Second District Div 7 Holds Arbitration Agreement, Permeated With Substantive Unconscionability, Is Unenforceable

Trial Judge No. 1 Found The Arbitration Agreement Enforceable, No. 2 Found It Enforceable, And Court Of Appeal Agreed With No. 2.

        Chris Mills sued his former employer for disability discrimination and related employment claims. Employer FSG successfully enforced an arbitration agreement, the trial judge holding unconscionable provisions in the agreement were severable. An appeal followed, but that appeal is not the subject of this post. Mills also filed a class action lawsuit for labor law violations, including PAGA claims, and FSG again moved to compel arbitration, but in front of a different trial judge. Despite the fact that the arbitration provision under consideration was the same in both lawsuits, the second judge found the arbitration provision to be permeated by unconscionability, and refused to enforce it. The second judge's order is the subject of FSG's appeal. Chris Mills v. Facility Solutions Group, Inc., B313943 (2/7  11/1/22) (Feuer, Perluss, Segal).

        Of course, FSG argued claim or issue preclusion required trial judge No. 2 to accept the ruling of trial judge No. 1, who found the arbitration agreement to be enforceable. But there had been no final adjudication on the merits, because an order granting a motion to compel arbitration is not appealable, and review of the order must await appeal of the judgment confirming an arbitration award. [Note: our sidebar category is collateral estoppel/res judicata, admittedly no longer the favored terms of art, having been replaced by claim and issue preclusion.]

        The agreement, being a condition of employment, was adhesive and had aspects of procedural unconscionability. The arbitration agreement was also substantively unconscionable because it unfairly allocated costs and attorney fees to the employee, limited discovery, improperly barred tolling of the statute of limitations, and included an invalid waiver of representative PAGA claims.

        The last point, regarding invalid waiver of representative PAGA claims, is interesting in light of the SCOTUS ruling in Moriana v. Viking River Cruises, holding that California law invalidating contractual waivers of the right to assert representative claims under PAGA is preempted by the FAA, insofar as PAGA precludes division of actions into individual and representative claims. Because the court in Mills, however, did not require Mills to arbitrate, there was no need to divide his individual and representative claims: both could be litigated. Justice Feuer sides with Justice Sotomayor's concurring opinion in Moriana that even if the employee is required to arbitrate individual claims, under California law, the employee still has standing to bring a representative action. However, Justice Feuer does not need to decide the issue of standing, since Mills was not required to arbitrate.

        COMMENT: While acknowledging that there is no per se rule that severance can never be used if there is more than one item of substantive unconscionability, Justice Feuer explains why, as a matter of policy, the court should not sever and rewrite the contract here: "[U]pholding this type of agreement with multiple unconscionable terms would create an incentive for an employer to draft a one-sided arbitration agreement in the hope employees would not challenge the unlawful provisions, but if they do, the court would simply modify the agreement to include the bilateral terms the employer should have included in the first place."

Arbitration, Enforceability: No Agreement Where Company Was Unable To Establish Automatic Sending Of Electronic Receipt

Existence Of Agreement Was Not An Issue To Delegate To Arbitrator.   

              Fiona Trinity sued Life Insurance Company of North America and individuals (LINA parties) for employment-related claims. The LINA Parties moved unsuccessfully to compel arbitration in the trial court, and the Court of Appeal affirmed. The LINA parties could not establish the existence of an agreement to arbitrate, and even if they could, the agreement would have been unconscionable. Trinity v. Life Insurance Company of America et al., B312302 (2/7  5/23/22) (Perluss, Segal, Feuer).

        The defendant's PMK had testified as to the contract procedure, explaining that  once the employee had  clicked on a link indicating he or she had read an online employee handbook, which included an arbitration agreement, they would receive an email confirming their assent to the terms of the handbook. The problem was that the employer could not produce the automatically generated receipt and did not know how to retrieve it, and the employee did not remember reading or agreeing to the handbook. 

        While issues of arbitrability were delegated to the arbitrator here, whether there is an agreement to arbitrate in the first place is an issue for the judge to decide. The issue of arbitrability cannot be delegated under the terms of a nonexistent agreement.

        COMMENT: In the 21st century, there is still at least one advantage to the use of a paper document with an inked signature. Electronic signing is permissible, but then one must carefully follow procedure and have a good storage and retrieval system for electronic data.

Arbitration, Delegation, Unconscionability: CCA 4/3 Affirms Order Denying Motion To Compel Arbitration Because Of Flawed Delegation And Unconscionability

Substantive Unconscionability To Trip Over.

        This is a tragic case involving the death of a recently graduated UCLA engineering student in the throes of an acute psychotic episode. He was briefly in a care facility where the precariousness of his condition was recognized. Allegedly he required constant supervision, which was not provided, and he killed himself. When the young man's parents sued,  the facility moved to compel arbitration. The trial court denied the request, and the Court of Appeal affirmed. Brandon Nelson, et al. v. Dual Diagnosis Treatment Center, No. G059565 (4/3  4/19/22) (Goethals, O'Leary, Moore).

        Defendants argued that a broad arbitration clause had delegated the issue of arbitrability to the arbitrator. The court disagreed, finding the language of delegation less than "clear and unmistakable." (Note: because the presumption is that this threshold issue will be decided by a judge, the "clear and unmistakable" standard must be overcome to undo the presumption.)  Furthermore, there was contradictory language in the contract leaving areas of review to a court, and this undermined the argument that delegation of issues to the arbitrator was effective.

        On the issue of procedural unconscionability, the Court of  Appeal concluded, "the adhesive nature of the alleged contract, failing to provide Brandon with the AAA arbitrability terms on which Sovereign now relies while providing contrary terms in the emollment [?] agreement it drafted, and Brandon's impaired mental state all combine to result in a high level of procedural unonscionability." The court noted that during intake, Brandon could not focus and concentrate for more than 10 to 20 seconds at a time. Indeed, the court wondered, "how a 26-year-old man in the throes of an acute psychotic episode could be legally competent but, due to our dispositional analysis, we need not resolve that issue here."

        As to substantive unconscionability, the court observed: "Here, the contract imposed on Brandon not just a damages cap, but required a unilateral release of almost any conceivable claim he could assert against Sovereign."

        Best Line: The best line in the opinion was borrowed from the late Justice David G. Sills, who often had the best line: sometimes "substantive unconscionability was 'so present that it [was] almost impossible to keep from tripping' over it."

 

Arbitration, Unconscionability: CCA 2/2 Agrees Adhesive Contract Allowing Unfair Fee Shifting And Drastically Limiting Discovery Is Unconscionable

Joseph Merced Nunez v. Cycad Management LLC, B306986 (2/2  3/18/22) (Lui, Ashmann-Gerst, Chavez).

        Nunez, a gardener, sued Cycad for employment-related claims. Cycad moved, unsuccessfully, to compel arbitration. The Court of Appeal now holds: "Substantial evidence supports factual findings that the Agreement is adhesive because it was presented to Nunez as a nonnegotiable condition of his employment. It is procedurally unconscionable because it was given to Nunez in English, which he cannot read, without adequate explanation or a fee schedule. It is substantively unconscionable because it allows the arbitrator to shift attorney fees and costs onto Nunez and drastically limits his ability to conduct discovery."

        COMMENT: We have posted a number of times on cases in which the court finds that the inability of an employee to read the language in which a contract is written is a factor to be considered in a procedural unconscionability analysis. "Procedural unconscionability arises when an arbitration agreement 'was neither provided in a Spanish-language copy nor explained to respondents who did not understand written English.'" Penilla v. Westmont Corp., 3 Cal.App.5th 205, 209 (2016). Here are some things an employer could have considered doing: (1) provide a translation of the contract; (2) provide an oral explanation of the contract and arbitration provision in the language spoken by the employee; (3) obtain a receipt in the language spoken by the employee acknowledging receipt of the translation; (4) provide several days for the employee to review the contract before signing it. Perhaps the employer did consider taking those steps and simply viewed those steps as impracticable. I note that Nunez was hired before AB 51 went into effect, legislation aimed at preventing employers from requiring employees to enter into mandatory pre-dispute arbitration provisions. There are questions as to how effective this legislation is likely to be, and I refer readers to the article authored by Paul Dubow and me on AB 51, aimed at preventing employers from requiring employees to enter into mandatory pre-dispute arbitration agreements.

        Why is the shifting of attorney fees and costs onto Nunez a problem? Armendariz holds that the employee cannot be forced to pay costs that would not be incurred if the case were litigated in court rather than arbitrated.

 

Arbitration, Unconscionability: Second District Div. 4 Affirms Trial Court's Holding Of Unconscionability, While Disagreeing On One Point With Brethren In Div. 7

The Dispute With District 2, Div. 4, Involved The Reasoning In Patterson v. Superior Court, 70 Cal.App.5th 473 (2021) (Patterson).

        The Court of Appeal affirmed the trial court's court denying Charter's motion in compel arbitration. Ramirez v. Charter Communications, Inc., B309408 (2/4  3/1/22)   (Willhite, Manella, Collins). The Court held that the arbitration provisions were unconscionable: the employment contract was one of adhesion; the was a shortened statute of limitations; an interim award of attorneys fees provision was unconscionable; the arbitration agreement was unfairly one-sided because it compelled arbitration of claims more likely to be brought by an employee, the weaker party; a limitation on depositions made it  harder for the employee to prove her case.

        The noteworthy part of the Ramirez opinion concerns the panel's critique of District 2 Division 7's reasoning in Patterson. The court in Patterson "considered the enforceability of a provision in the same arbitration agreement at issue here that awards attorney fees to the prevailing party on a motion to compel arbitration." The problem with such a provision is that FEHA entitles the prevailing defendant to attorney fees only if the employee’s action was "frivolous, unreasonable, or groundless," and that limitation is not found in Charter's arbitration provisions. In Patterson, however, the court imported the FEHA provision into the attorney's fees provision in order to save the provision. The court in Ramirez disagrees with the Patterson approach, construing the attorney's fees provision to be unambiguous, and therefore not subject to interpretive tinkering.

Arbitration, Unconscionability, Severability: CCA 4/3 Agrees Arbitration Agreement As Condition Of Employment With Limitations On Discovery And Statute Of Limitations Is Unconscionable

De Leon v. Pinnacle Property Management Services, LLC, G059801 (4/3  ord. to publish 12/8/21) (Marks, Fybel, Goethals).

        This case applies established principles to affirm the trial court's order denying employer's motion to compel arbitration. The trial court found the arbitration agreement procedurally and substantively unconscionable. Procedurally unconscionable, because it was a take-it-or leave it precondition to employment, making it a  contract of adhesion. Substantively unconscionable because it included a one year statute of limitation, and discovery limitations. Because there were two substantive flaws, the agreement was "permeated" with unconscionability, and therefore severability was not proper. 

        COMMENTS. The case is of interest, because statutes of limitation and limits on discovery do not  necessarily make an arbitration agreement substantively unconscionable. Therefore, the case distinguishes other  cases that address limitations on discovery and statutes of limitation. Shortened statutes of limitation that  limit the ability of an employee to assert statutory rights can be a problem. As to discovery limitations, the court notes that limitations that  appear neutral on their face may actually benefit an employer who has within its possession the information necessary to defend itself. The California Labor Commission requested that the opinion be certified for  publication.

        Also, we note that the contract was entered into in 2016. But if it had been entered into after January 1, 2020, the fact that arbitration was made a condition of employment would have raised an issue under AB 51. See our discussion of Chamber of Commerce v. Bonta.

Arbitration: Fourth District Div. 2 Addresses Issues Of Unconscionability, Delegation, Severability, And Fraud In Employee Arbitration Agreement

Ineffective Delegation Clauses, Fraud In The Execution, And Unconsciconability Result In Reversals.

        In Najarro v. Sup. Ct. of the County of San Bernardino; Horizon Personnel Services Inc., et al, E076328   (4/2  10/22/21) (Raphael, Codrington, Slough), the court does plenty of slicing and dicing, because there  are two arbitration agreements, two sets of employees, employees who read Spanish, employees who don't read Spanish, a valid delegation clause, an ineffective delegation clause, evidence of unconscionability, and undecided issues of procedural unconscionability. It's a lengthy opinion, and here is the  court's own summary: "Because the first version [of the arbitration agreement] does not clearly and unmistakably delegate questions of arbitrability to the arbitrator, we grant the writ petition as to the employees who signed that version. As to two of these employees, the trial court must decide whether this first version is unconscionable, guided by our discussion below. As to the other two employees who signed this version, we find that the arbitration agreement is unenforceable for the separate reason of fraud in the execution. We also find that fraud in the execution voids the agreement for two of the employees who signed the other, second version of the arbitration agreement."

        COMMENT: One interesting takeaway is that a delegation clause that delegates issues to the arbitrator to decide may stumble and become ineffective if it is coupled with a severability clause allowing a court to decide some issues. So delegation clauses and severability clauses can interact and must therefore be drafted with care. A second takeaway is that when, as here, there was evidence as to some employees of fraud in the execution that was not rebutted, the court can decide there was no agreement to arbitrate, and need not move on to decide other defenses such as unconscionability. And a  third takeaway is that when the employees speak a foreign language (here, Spanish), or are illiterate, the courts have heightened awareness of the issue of procedural unconscionability.

Arbitrability, Delegation, Enforceability, Jurisdiction, Unconscionability: A Trifecta of Ninth Circuit Published Opinions

August 12, 2021 Was A Day Rich In 9th Circuit Arbitration Decisions.

Santiago Lim v. TForce Logistics, LLC, No. 20-55564 (9th Cir.  8/12/21) (Smith, Owens, Robreno).

        This case is about the gateway decision of arbitrability, delegation of that decision, and unconscionability. The panel holds that the delegation and arbitration clauses are procedurally and substantively unconscionable. Because the delegation clause is unconscionable, the court, not the arbitrator, gets to decide whether the arbitration clause  is enforceable, and agrees that that too is unconscionable. The provisions are "take it or  leave it", require costs splitting between the employer and the purported "independent contractors", call for  fee-splitting, and have a Texas venue provision.

CLMS Management Services LP v Amwins Brokerage of Georgia, 20-35428 (9th Cir. 8/12/21) (Christen, Hawkins, McKeown).

        This case presents an international law question: does the doctrine of reverse-preemption apply to a clause in an insurance contract, such that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a multilateral treaty, is  preempted by a Washington State rule that arbitration clauses in insurance contracts are not enforceable? Ordinarily, state law applies to insurance contracts, and in fact the McCarran-Ferguson Act can operate to reverse-preempt laws that contradict state law. However, in the case of treaties, a rule applies that  treaties that are "self-enforcing" are not preempted by state law. What does that  mean?

        A treaty is "self-enforcing" if it can be directly enforced in court  without the need for implementing legislation. The panel holds that the Convention the the Recognition and Enforcement of Foreign is self-enforcing. And therefore, reverse preemption does not  apply. And because Washington State law cannot be applied to invalidate the arbitration provision, it is enforceable.

Al-Qarqani v. Chevron, No. 19-17074 (9th Cir. 8/12/21) (Thomas, Kelly, Miller). 

        No small potatoes here, as the panel affirms the district court's refusal to allow enforcement of an $18,000,000,000 Egyptian arbitration award against Chevron. The core ruling is about jurisdiction.

        The heirs of an official who entered into a land concession agreement with Chevron in 1949 claimed entitlement to rent, and evidently the Egyptian arbitrators agreed. But when it  came time to petition to enforce the arbitral award under an arbitration agreement entered into earlier in 1933, the district court held that the parties never agreed to arbitrate, and therefore it denied enforcement on the merits.

        The Court of Appeals held that the  heirs had failed to make a non-frivolous argument for jurisdiction as to Chevron USA, which was not named in the Egyptian award, and because no non-frivolous argument for jurisdiction had been made, the Court could affirm the dismissal for lack  of subject-matter jurisdiction. (If the heirs had made a non-frivolous argument in favor of jurisdiction, then the Court would have assumed subject-matter jurisdiction).

        As to Chevron Corporation, the facts were a little different. The 1949 agreement failed to incorporate the 1933 arbitration agreement. As for the 1933 agreement with the arbitration clause, it had been signed by Saudi Arabia, not the heirs, and Chevron Corporation's rights and obligations under that earlier agreement had expired. The absence of an agreement to arbitrate was a reason to dismiss the petition to enforce the award on the merits rather than for a lack of jurisdiction