California Mediation and Arbitration

Delegation: Ninth Circuit Concludes That Delegation Clause Is Enforceable, Regardless Of Whether Arbitration Clause Is Found To Be Enforceable

Nesting dolls (Matryoshka dolls). Wikipedia. Published under GNU Free Documentation License, Version 1.2, and any subsequent versions.

        We can analogize the next case to a nesting doll problem. The delegation clause in an arbitration agreement (Agreement) is a mini-agreement nested in the Agreement. The Agreement is nested in an employment contract, consumer contract, or some other contract. The different contracts can be analyzed separately, and their relationship to one another must be considered.

        Here, a district court judge found the nested delegation clause to clearly and unmistakably delegate arbitrability issues to the arbitrator. However, the judge also found the delegation clause to be substantively and procedurally unconscionable, and therefore unenforceable. This conclusion was based on the fact that the Agreement contained a pre-dispute jury trial waiver. The waiver, however, only kicked in if the Agreement was found to be unenforceable. Having determined that the delegation clause was unenforceable, the judge then concluded that the Agreement itself was unenforceable, based on the same pre-dispute jury waiver. The defendant employer, seeking to compel arbitration, appealed the adverse ruling. Kenneth Holley-Gallegly v. TA Operating, LLC, 22-55950 (9th Cir.  7/21/23) (Smith, Hamilton, Collins).

        The Court of Appeals reversed, directing the district court to order the arbitrator to decide the arbitrability issue. The reason? The pre-dispute waiver of a jury trial did not infect the nested delegation clause. The arbitrator could still decide the issue of arbitrability. If the arbitrator decided that the case was arbitrable, then the waiver of a jury trial became irrelevant, because the case would never be litigated in court, and there could not be a jury trial. Thus, the jury waiver could only possibly have effect if the arbitrator decided the Agreement was unenforceable -- i.e., reached the same conclusion as the district court judge. Under the delegation clause, the arbitrator might conclude that the Agreement was unenforceable or enforceable, and either way, the delegation clause could be operable.

PAGA: Fifth District Affirms Denial Of Motion To Compel Arbitration Because Blanket Waiver Of PAGA Claims Is Unenforceable

Agreement Was Not Ambiguous.

        The court explained in Duran v. Employbridge Holding Company, F084167 (5th Dist. filed 4/27/23 pub. 5/30/23) (Franson, Hill, Smith) that the provision "claims under PAGA . . . are not arbitrable under this Agreement" is not ambiguous. "It is not objectively reasonable to interpret the phrase 'claims under PAGA' to include some PAGA claims while excluding others. Thus, the carve-out provision excludes all the PAGA claims from the agreement to arbitrate." 

        While the law in this area remains somewhat in flux, it appears that the rule is that an individual plaintiff's claim may be arbitrated, and under California law, as interpreted by California's courts, the PAGA plaintiff still has standing to pursue representative claims affecting other individuals in court. The standing issue is before the California Supreme Court. 

Waiver: Ninth Circuit Holds Waiver Of Right To Arbitrate Did Not Occur Despite Delay In Bringing Motion To Compel

Defendant Consistently Asserted Right To Arbitrate And Litigation Conduct Was De Minimis.

        The Supreme Court case Morgan v. Sundance, Inc. (2022) has made it easier to argue that a party has waived its right to arbitrate for two reasons: first, while the party resisting arbitration bears the burden of establishing a waiver of the right to arbitrate, it no longer bears a "heavy burden." Second, the party resisting arbitration no longer needs to show that it will be prejudiced if the court were to order arbitration. Despite the greater ease with which a waiver of the right to arbitrate has been waived, the Ninth Circuit agreed with the trial court that defendant had not waived its right to arbitrate. Teresa Armstrong v. Michaels Stores, Inc., 21-15397 (9th Cir.  2/13/23) (McKeown, Fletcher, Bennett).

        Waiver of the right to arbitrate cases tend to be pretty fact-specific. The plaintiff in  Armstrong filed her complaint against her employer in state court in October 2017. Defendant removed the case to federal court, and an amended complaint was filed. Some small amount of discovery was conducted. The Epic Systems case was decided by the Supreme Court in 2018, holding that an agreement requiring individual arbitration was enforceable and did not violate the National Labor Relations Act of 1935 provision allowing employees to engage in collective action. After Epic Systems was decided, Defendant moved to compel arbitration in 2018. Under those circumstances, the panel held that Michaels Stores had not waived its right to arbitrate.

        We posted about the Morgan v. Sundance decision on 5/24/22. We have also written two articles in the Daily Journal about waiver of the right to arbitrate and the discrepancy between federal law, which no longer requires a showing of prejudice to prove waiver, and California state law.

 

Waiver: Fourth District Div. 2 Holds Lengthy Delay And Failure To Timely Take Affirmative Steps To Arbitrate Results In Waiver Of Right To Arbitrate

Thirty-Nine Page Slip Opinion Hinges On Issue Of Waiver.

        The Court of Appeal addresses a variety of issues in the context of a complicated procedural history in Desert Regional Medical Center v. Leah Miller and Desert Regional Medical Center v. Lynn Fontana, E076058 and E076069 (4/2  1/6/23) (Codrington, Ramirez, Raphael). 

        The procedural history was complicated by the overlapping pendency of a collective bargaining grievance procedure and the lawsuits brought by individual employees, who were employees at the Desert Regional Medical Center (DRMC). Did the individual actions need to be stayed while the union procedure was exhausted? Did the arbitrability of these cases need to be decided by the court or the arbitrator? Did the Federal Arbitration Act or the California Arbitration Act apply? Did the Labor Commissioner have jurisdiction to hear claims brought by the employees, or did the claims need to be arbitrated? Were the employees estopped from arguing that the employer waived the right to arbitrate? Was prejudice necessary to find a waiver of the right to arbitrate? Interesting questions, but in the end the outcome hinged on whether the employer waived the right to arbitrate.

        In the end, the Court of Appeal affirmed the trial court's order denying a motion to arbitrate, agreeing that the employer waived its right to arbitrate. There was an issue as to how long the employer had delayed bringing a motion to arbitrate. That delay was at least a year, possibly up to four years. The court concluded that even during a one year delay, the employer acted inconsistently with asserting a right to arbitrate by engaging in further litigation procedure.

 

 

 

Waiver: First District, Div. 2 Applies Federal Rule Governing Waiver Of The Right To Arbitrate

Because The Parties Agreed That The Federal Arbitration Act Applied, Applying The Federal Rule In Morgan v. Sundance, Inc. Was Necessary.

        When the first paragraph of an opinion tells us that the party seeking to compel arbitration waited 19 months to bring a motion to compel arbitration, the court has pretty much telegraphed that one way or another, it will find a waiver of the right to arbitrate. That was the case in Britani Davis v. Shiekh Shoes, LLC, No. A161961 (1/2  10/31/22) (Richman, Miller, Mayfield).

        Basically, the federal rule applied in Davis when determining whether a party has waived its right to arbitrate, because the parties agreed that the Federal Arbitration Act applied to the case. As set forth in Morgan v. Sundance, Inc.,  142 S.Ct. 1708 (2022), the federal rule asks whether the party seeking to compel arbitration has evinced an intent to forego arbitration by acting inconsistently with the right to arbitrate. In contrast, California courts have required a finding of prejudice to the party seeking to avoid arbitration before they will find a waiver of the right to arbitrate. Quach v. California Commerce Club, Inc., 78 Cal.App.5th 470 (2022).

        We now have a situation where, if the Federal Arbitration Act and Morgan apply, a California court will not require a finding of prejudice in order to find a waiver of the right to arbitrate. The FAA can apply if the parties contracted for it to apply, or if interstate commerce is involved. However, if the California Arbitration Act, Quach, and a long line of California cases apply, then prejudice may be determinative to a finding of waiver of the right to arbitrate. The California Supreme Court has accepted a petition for review of Quach, so perhaps we will find out if California will require prejudice in the future in cases where the FAA does not apply, or whether California will conform its case law to the federal rule.

        COMMENT: I have written two recent articles in the Daily Journal about the subject: Waiver of the right to arbitrate revisited (November 3, 2022) and The United States and the California Supreme Courts are not on the same page (June 10, 2022). The links to the article will work if you subscribe to the Daily Journal, which, alas, is behind a paywall.

 

Waiver: 4th District Div 1 Rules Defendant Waived Right To Arbitrate Despite Comparatively Minor Delay, Given Unusual Circumstances

Defendant Waived Right To Arbitrate, Despite Minor Delay In Seeking To Compel Arbitration.

        The unusual circumstances in our next case explain the Court of Appeal's conclusion that defendant waived the right to arbitrate, despite a comparatively minor delay in seeking arbitration. Mary Leger v. R.A.C. Rolling Hills et al, D080705 (4/1  10/17/22) (McConnell, Irion, Do).

        Plaintiff Leger "suffers from late-stage dementia, severe diabetes, and severe contractures." She sued, alleging improper care during hospice care.  Her complaint was served on March 10. On March 29, her guardian ad litem filed a motion for trial preference. Defendant answered the complaint on April 6, alleging the existence of an agreement to arbitrate. On April 11, defendant filed an opposition to the motion for preference, without mentioning it wanted to arbitrate in its papers, or in the hearing. On April 22, the trial court granted Leger's motion for a preference, and three days later, defendant's counsel wrote a letter asking plaintiff to arbitrate. Defendant filed a petition to arbitrate, a hearing was held on May 26, the trial court took the matter under submission, and then denied the request to arbitrate. 

        The trial court found that although defendant's delay in seeking arbitration was "comparatively minor", it was “unreasonable, manifest and prejudicial given the unique circumstances of this action.” The Court of Appeal affirmed the order denying the petition to compel arbitration.

        COMMENT: The Court of Appeal acknowledged that it had not found a case on point with the unusual circumstances of this case. Usually such a short delay in petitioning to arbitrate would not result in a waiver of the right to arbitrate. However, as this case shows, there are situations in which even a "comparatively minor" delay in seeking arbitration may be inconsistent with asserting the right to arbitrate and may be prejudicial to the other side.    

          

 

 

Arbitration, Waiver: Your Blogger Has An Article About Waiver Of The Right To Arbitrate In The Daily Journal

The Article Is Entitled "The United States and the California Supreme Courts are not on the same page."

        My article in the June 10, 2022 online edition of the Daily Journal contrasts the analysis of waiver of the right to arbitrate in the SCOTUS case Morgan v. Sundance  (2022) with the analysis in the California Supreme Court case St. Agnes Medical Center v. PacifiCare of California (2003). SCOTUS does not require a showing of prejudice by the party opposing arbitration before the party seeking arbitration can be found to have waived its right to arbitrate [see my 5/24/22 post on Morgan v. Sundance]. The California Supreme Court views the matter differently. In 2003, the St. Agnes court endorsed federal cases requiring a finding of prejudice before there could be a waiver of the right to arbitrate. That is no longer the case after Morgan v. Sundance. Time to rethink the matter?

        Viewing the article online requires a subscription the Daily Journal.

Arbitration, Waiver: Waiver Of The Right To Arbitrate Requires A Showing Of Prejudice Under California Law

The California Supreme Court And SCOTUS Disagree About Waiver Of The Right To Arbitrate.

    In Quach v. Cal. Commerce Club, B310458 (2/1  5/10/22 ) (Bendix, Rothschild; Crandall sitting by designation, conc. and dsst.), Justice Bendix, writing the majority opinion, explained that California Commerce Club had not waived its right to arbitrate, despite the fact that it knew from the time it filed its answer of its right to arbitrate, despite substantial delay, and despite engaging in litigation conduct inconsistent with arbitrate. Because? Because Plaintiff failed to demonstrate prejudice, having admitted he expended no costs in litigation he would not have expended had the case gone to arbitration earlier.  Under  St. Agnes Medical Center v. PacifiCare of California,  31 Cal.4th 1187, 1203 (2003) (St. Agnes Medical Center), prejudice is part of a multi-factor test used to establish waiver of the right to arbitrate, and spending money in litigation is not enough to establish prejudice. 

    Superior Court Judge Crandall concurred in part, agreeing that the arbitration agreement was not unconscionable, but he would have found prejudice based on the defendant's litigation conduct inconsistent with the right to arbitrate, knowledge of its right to arbitrate, and delay. He also pointed out that California courts have not applied a mechanical test to waiver, and have sometimes found great delay to result in prejudice. He did not believe that, under the circumstances, the plaintiff had to explain prejudice, and yet Crandall's dissent seems somewhat caught up in the straightjacket of having to rely on the finding of prejudice, based on California case law, in order to establish waiver. As my comment below explains, SCOTUS has now rejected a finding of prejudice as a necessary element in a waiver of the right to arbitrate. 

    "The unfairness of compelling non-unionized employees to forfeit their access to the civil justice system in favor of private arbitration is well recognized," write Crandall. He considers this "water under the bridge", but he would not extend mandatory arbitration for the benefit of the employer in a situation where he believes there has been a clear waiver of the right to arbitrate.

    COMMENT: In St. Agnes Medical Center, the California Supreme Court wrote: "More than two decades ago, we observed that '[u]nder federal law, it is clear that the mere filing of a lawsuit does not waive contractual arbitration rights. The presence or absence of prejudice from the litigation of the dispute is the determinative issue under federal law.'" That was then; this is now. Under Morgan v. Sundance [see my 5/24/22 post], decided this year, SCOTUS does not require a showing of prejudice to establish waiver of the right to arbitrate. Instead, SCOTUS places arbitration contracts on the same footing as other contracts. And the traditional test for waiver of a contractual right is intentional relinquishment of a known right. Presumably this could be established by showing that a party knew it had a right to arbitrate and acted inconsistently with its right to arbitrate by engaging in litigation. Adding "prejudice" as an element of waiver places arbitration agreements on a different footing than other contracts. Why should the rule in California be different than the rule established by SCOTUS? Of course, where California law applies, our appellate courts follow the California Supreme Court. But why should California's rule be different than SCOTUS's rule? 

    One might argue that adding the element of prejudice makes it harder to establish waiver, and thus harder to lose the right to arbitrate, and California wishes to encourage arbitration. But SCOTUS addressed this type of argument, and in the context of the Federal Arbitration Act, determined in an 9-0 decision penned by Justice Kagan, that the desire to promote arbitration should not trump the fundamental rule that arbitration agreements should be put on the same footing as other contracts. Perhaps it is time for the California Supreme Court to reconsider the rules governing waiver of the right to arbitrate.

        UPDATE: We have an article in the June 10, 2022 online edition of the Daily Journal entitled, "The United States and the California Supreme Courts are not on the same page." The article is about waiver of the right to arbitrate.

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.

 

 

 

 

Pending Case, Waiver: Ninth Circuit Panel Denies Petition For Rehearing And En Banc In Hodges v. Comcast

Panel Denies  Motion For Rehearing And Request For En Banc.

        On September 15, 2021, we posted about Hodges v. Comcast, No. 19-16483 (9th Cir.  9/10/21) (Collins, VanDyke; Berzon, dsst.) In that case, the court held that non-waivable public injunctive relief (i.e., relief that falls under the McGill rule), must be forward looking and benefit the general public. Judge Berzon dissented, believing that relief that would require Comcast to rewrite its contract with its customers would be forward looking  and benefit the  public, given the size of Comcast's customer base. On December 23, 2021, the panel denied a petition for a rehearing, and denied on behalf of the court a petition for a rehearing en banc.