California Mediation and Arbitration

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.

Arbitration, Public Injunctive Relief: Ninth Circuit Holds Non-Waivable Public Injunctive Relief Must Be Forward Looking And Benefit The General Public

Judge Berzon Dissents.

        Plaintiff Brandon Hodges brought a putative class action against Comcast, challenging its privacy and data-collection practices and seeking injunctive relief. The trial court denied Comcast's motion to compel arbitration, on the ground that Hodges sought public injunctive relief that could not be waived with an agreement to arbitrate. The Ninth Circuit panel remanded with instructions to  grant the motion. Judge Berzon dissented. Hodges v. Comcast, No. 19-16483 (9th Cir.  9/10/21) (Collins, VanDyke; Berzon, dsst.).

        The majority and dissenting opinions rely on whether Hodges was seeking "public injunctive relief," because California's "McGill rule" is that a party seeking public injunctive relief cannot waive the right to go to court. California Civil Code §3513 provides: "Any one may waive the advantage of a law intended solely for  his benefit. But a law established for a public reason cannot be contravened by a  private agreement."

        "[P]ublic injunctive relief within the meaning of McGill," writes Judge Collins, "is limited to forward-looking injunctions that  seek to prevent future violations of law for the benefit of the general public as a whole, as opposed to a particular class of persons, and that do so without the need to consider the individual claims of any non-party." The majority's view is  that Hodges' requested relief was for past wrongs, and would have benefited a limited private class; thus, public injunctive relief is not  at issue. And if the injunctive relief requested by Hodges requires an individualized look at claims, then the speed, efficiency, and economy of arbitration would be undermined, and the Federal Arbitration Act would preempt an expansive interpretation of the McGill rule that would undermine the purpose of arbitration.

        Judge Berzon dissents, pointing out that the injunctive relief requested by Hodges includes rewriting Comcast contracts, that such relief is forward looking, and that such relief would benefit a large swath of the  public, given that "Comcast reportedly had 2.2 million subscribers in the state, or 40% of the state cable market."  "At a minimum, in keeping with the liberal construction given to California's consumer protection statutes," writes Judge Berzon, "public injunctive relief must also include injunctions affecting the contract terms a business may offer to potential customers."

        COMMENT: It is sometimes said that  liberal judges want to keep the door to the federal  courthouse wide open (for every wrong there is a remedy), whereas conservative judges want to shut the door to prevent a flood of cases. So is it noteworthy in Hodges v. Comcast that Collins and VanDyke are  Trump appointments, and Berzon is a Clinton appointment?

 

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, Waiver, Employment, Civil Rights: Ninth Circuit Allows Statutory Claims, Including Civil Rights And Employment Discrimination, To Be Arbitrated

Zoller v. GCA Advisors Lays Out Rules For Determining Whether Statutory Claims Can Be Arbitrated.

        Zoller v. GCA Advisors, No. 20-15595 (9th Cir. 4/14/21) (Wallace, Smith, Restani), reverses the district court's denial of defendants' motion to compel arbitration of statutory employment discrimination and civil rights claims.

        Shannon Zoller, a corporate attorney turned investment banker, sued her former employer for contract claims, gender discrimination, denial of equal pay, and conspiracy to violate her civil rights. An agreement to arbitrate existed. The parties agreed to arbitrate some of the claims, but she refused to arbitrate her statutory claims. The district court agreed on the ground she did not knowingly waiver her right to pursue the statutory claims in court.

        Judge Wallace, writing for the court, explains that if the parties agree to arbitrate, statutory claims will be arbitrated, unless a party can prove a congressional intent to prelude a waiver of judicial remedies. This put a burden of proof on Zoller and she could not carry that burden.

        There is a proviso. Arbitration of Title VII claims for employment discrimination requires at least showing a knowing agreement to arbitrate employment disputes. Here, that was demonstrated by a number of documents that referred to employment and arbitration. Assuming, without deciding, that the "knowing waiver requirement remains good law", the appeal "is resolved on the arbitration agreement's clear language encompassing employment disputes and evidence that Zoller knowingly waived her right to a judicial forum to resolve her statutory claims."

        COMMENTS: This is an impactful case, since it makes it clear that statutory claims, including civil rights and employment claims, may be subject to arbitration, and that a carefully drafted agreement will result in a knowing waiver of the employee's right to a judicial forum. In his 2017 book, Closing the Courthouse Door: How Your Constitutional Rights Became Unenforceable, Erwin Chemerinsky discussed how arbitration has made it more difficult to get into court to vindicate rights. Zoller is an example of that trend. All her claims will now be sent to arbitration -- though it does not  automatically follow that her rights will be unenforceable.

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, Waiver: Second District, Div. 5 Holds Delay + Conduct Inconsistent With Arbitration + Prejudice Adds Up To Waiver Of Right To Arbitrate

Complaint Filed November 11, 2016 And Motion To Compel Arbitration Filed November 20, 2018.

        Given two years elapsed between the time Plaintiff filed his putative class action wage and hour lawsuit, and the time Defendant filed its motion to compel arbitration, Defendant was going to have an uphill battle convincing the Court of Appeal that Defendant had not waived its right to arbitrate. Paul Garcia v. Haralambos Beverage Co., B296923 (2/5   1/4/21) (Kim, Baker, Moor).

        The leading California case for analyzing waiver of the right to arbitrate is Agnes Medical Center v. PacifiCare of California, 31 Cal. $th 1187 (2003). Agnes lays out six factors to examine to determine if there has been a waiver of the  right to arbitrate. Here, the court found three of the six to be present: undue delay, conduct inconsistent with asserting the right to arbitrate, and prejudice to the Plaintiff.

        COMMENT: Courts do not like it when they whiff defendants delayed moving to compel arbitration while waiting to see if they could first accomplish favorable results in litigation. Perhaps the court caught a  scent of that here, for Justice Kim wrote, "defendant here raised arbitration as a  belated strategy, if not as a strategy of last  resort."

 

Arbitration, PAGA: First District, Div. 1 Affirms Order Denying Lyft's Petition To Arbitrate PAGA Claims

Iskanian Is Still Good Law In California.

Once more unto the breach, dear friends, once more! Henry V, Act III, Scene I.

 

        Employers continue to seek to enforce contractual waivers of the right to litigate in court, and employees continue to punch back, insisting on the right to litigate Private Attorneys General Act of 2004 (PAGA) claims in court. Thus far, California courts have followed Iskanian, refusing to enforce the waiver of the right to pursue PAGA claims in court.

        In Brandon Olson v. Lyft, Inc., No. A156322 (1/2  10/29/20) (Richman, Stewart, Miller), the court again addresses whether Iskanian is still good law, and whether  it has been impliedly overruled by SCOTUS in Epic Systems Corp. v. Lewis, which liberally applied Federal Arbitration Act preemption to enforce an arbitration agreement with an employee.

        The short answer is that Iskanian, a California Supreme Court case, has not been overruled, and is still good law in California state court. Nor does Epic Systems, which involves different facts, change the legal analysis. Iskanian held that a PAGA claim is like  a qui tam claim, in which the plaintiff acts on behalf of the state. And therefore the plaintiff's contractual waiver of the right to litigate is not enforceable, because the plaintiff is acting on behalf of the state, which did not waive the right to arbitrate. Epic Systems did not involve a qui tam or PAGA representative claim in which the plaintiff acted as a representative of the state.

        Olson v. Lyft, Inc. relies heavily on the legal analysis in Correia v. NB Baker Electric, Inc., 32 Cal.App.5th 602 (2019), about which we posted on February 26, 2019. If you read the earlier post about Correia, you'll get a pretty fair summary of the argument in Olson v. Lyft. The later/latest case gathers the authority supporting the continuing viability of Iskanian.

 

Arbitration, Class, Waiver, FINRA: FINRA Rules Preventing Arbitration Of Class Actions Do Not Apply When There Is A Class Action Waiver

The Class Action Waiver Is Enforceable.

         When a financial advisor brought a putative class action against Credit Suisse for deferred compensation, Credit Suisse moved successfully to dismiss based on an arbitration requirement in its Employee Dispute Resolution Program. The financial advisor appealed, arguing that Financial Industry Regulatory Authority (FINRA) rule Rule 13204(a)(4) barred arbitration of his claim. Cristopher M. Laver v. Credit Suisse Securities (USA) LLC, No. . 18-16328 (9th Cir.  9/18/20) (Feinerman, Gould, Murguia).

        The FINRA rule provides in part, "A member or associated person may not enforce any arbitration agreement against a member of a certified or putative class action with respect to any claim that is the subject of the certified or putative class action" until certain conditions are met, for example, until there is a denial of  class certification.

        So why didn't the FINRA rule apply to bar arbitration of Mr.  Laver's class action claim? Because there was also a class action waiver, and the FINRA rules do not make a class action waiver unenforceable. Because the class action waiver is effective, there can be no class action, thus making the FINRA rule barring arbitration of class action claims inapplicable.