Earlier this summer, the California Supreme Court ruled in Iskanian v. CLS that while class action waivers in employment arbitration agreements are enforceable, similar waivers of the right to bring a representative action under PAGA are not enforceable. The Court reasoned that preventing a representative action under PAGA is contrary to California public policy because it undermines the state’s interest in fully penalizing employers who violate labor laws. The Iskanian Court ruled that California’s public policy was not preempted by the Federal Arbitration Act (“FAA”) because the FAA only applies to arbitration of private disputes and a PAGA plaintiff represents the interests of the state, not himself, such that the claim isn’t really a private dispute between an employee and his employer but rather a dispute between the state of California and a private employer. The Court held that the FAA does not apply to disputes between a state agency and a private employer. This reasoning is a stretch in this author’s opinion. At least one (so far) federal district court in California apparently agrees, having chosen not to follow Iskanian. In Fardig v. Hobby Lobby, a wage and hour putative class action, a Central District judge granted the employer’s motion to compel arbitration, rejecting the plaintiffs’ argument that a PAGA representative action waiver in the arbitration agreement was unenforceable. The court held that FAA preemption is an issue of federal law and that federal courts are not bound by the California Supreme Court’s opinion that the FAA does not preempt California public policy with respect to PAGA representative action waivers. The court went on to hold that it disagreed with Iskanian and that a PAGA claim filed by an employee is a dispute between the employee and his employer, not between the state of California and the employer. As such, the district court held that the FAA applied and preempted any California public policy weighing against enforceability of a PAGA representative action waiver. This means that the individual plaintiffs will now have to litigate their individual wage claims in private arbitration and do not have the right to pursue any class or representative PAGA claims in any forum.
The Fardig v. Hobby Lobby decision (August 11, 2014, Central District Case No. SACV 14-00561 JVS) is a favorable development for California employers as it demonstrates that there is some continued viability of PAGA representative action waivers in employment arbitration agreements, notwithstanding Iskanian. Employers should also note that the parties is Iskanian have until late September to petition for review of the decision by the United States Supreme Court. If that happens, it is quite possible that the Supreme Court will reverse the PAGA portion of the Iskanian opinion. Even if review is not sought (or is sought but denied), employers facing the issue of enforceability of a PAGA representative action waiver should remove California state court cases to federal court wherever possible.
The California Supreme Court wasn’t the only court focused on arbitration agreements today. The Ninth Circuit also issued a pair of decisions relating to the enforceability of class waiver provisions in employment arbitration agreements. In both instances, the Ninth Circuit upheld the enforceability of the agreements.
In the first case, Johnmohammadi v. Bloomingdale’s, the Ninth Circuit considered whether a class waiver provision was enforceable to bar court litigation of wage and hour claims brought on behalf of a putative class of employees. The narrow issue before the court was whether the class waiver violated the Norris-LaGuardia Act and/or the National Labor Relations Act, both of which protect employees’ rights to engage in concerted activities for mutual aid and protection and prohibit employers from restraining or interfering with these rights. The court held that the class waiver provision did not violate either Act because the arbitration agreement allowed employees 30 days to elect to opt-out of the agreement. Had the plaintiff opted out, she would have been free to pursue her class claims in court. By not opting out, she elected to proceed with any claims individually in arbitration. The court held that this opt-out right effectively precluded a finding that the plaintiff was coerced into waiving class claims or otherwise restrained from pursuing them. The plaintiff admitted she was aware of the arbitration agreement and the right to opt-out and that she did not elect to do so. There was no evidence that the plaintiff was coerced into not opting out. On these facts, the Ninth Circuit held that the class waiver provision in the agreement was enforceable and not in violation of the NLRA or Norris-LaGuardia Act.
In the second case decided by the Ninth Circuit today, Davis v. Nordstrom, the court considered whether a class action waiver provision that the employer added to its arbitration policy (set forth in an employee handbook, not a free-standing agreement) was enforceable to preclude an employee from litigating wage and hour claims on behalf of a putative class in court. The court held that the handbook provision was an enforceable agreement and that the class waiver provision was enforceable.
Nordstrom had a long-standing arbitration policy in its employee handbook, but the policy did not include class waiver language. The handbook did include language indicating that Nordstrom would provide employees with 30 days written notice of any substantive changes to the arbitration provision in the handbook to allow employees to consider the changes and decide whether or not to continue employment subject to those changes. In July and August 2011, Nordstrom revised its arbitration policy to require that employees arbitrate any employment claims individually and to preclude the filing of class claims. Nordstrom sent letters to its employees in June 2011 advising them that the arbitration policy had been modified and provided a copy of the new policy. In August 2011, the plaintiff filed a putative class action alleging wage and hour violations against Nordstrom.
Nordstrom moved to compel arbitration of the plaintiff’s individual claims, but the district court denied the motion. The district court held that no “agreement” was ever reached because Nordstrom did not provide clear notice to employees of the change, that it would go into effect in 30 days, and that by continuing employment employees would be bound by the change. The Ninth Circuit reversed the district court’s ruling and held that the plaintiff had entered into an enforceable agreement by continuing her employment after notice of the change to the arbitration policy, thereby agreeing to the change. “While the communications with its employees were not the model of clarity, we find that Nordstrom satisfied the minimal requirements under California law for providing employees with reasonable notice of a change to its employee handbook by sending a letter to [the employees] informing them of the modification, and not seeking to enforce the arbitration provision during the 30 day notice period.”
As for Nordstrom’s failure to expressly alert employees that by continuing employment for 30 days they would be agreeing to the change to the arbitration policy, the Ninth Circuit held that California law does not require employers to expressly inform employees that continued employment constitutes acceptance of policy modifications. As such, this was not a basis for invalidating the class waiver or for finding that no agreement was reached.
The Ninth Circuit’s decisions in these two cases are here and here. While today's Ninth Circuit opinions are favorable for California employers, employers are cautioned that best practice is still to have any arbitration agreement be a separate agreement rather than simply a part of an employee handbook. Additionally, it is a good idea to specifically advise employees not only that their employment is at-will, but also that this means the employer has the right to modify the terms and conditions of employment at any time and that continued employment constitutes the employee's acceptance of any such modifications.
Today the California Supreme Court issued its much-anticipated opinion in Iskanian v. CLS Transportation, addressing the post-AT&T Mobility v. Concepcion enforceability of class and representative action waivers in employment arbitration agreements under California law. The decision is a mixed bag for California employers. On the positive side, the Court held, consistent with Concepcion, that class action waivers are enforceable. The Court also held that class and collective action waivers do not categorically violate the National Labor Relations Act (“NLRA”) (rejecting the NLRB’s D.R. Horton analysis). That’s the good news. The bad news is that the Court held that PAGA representative action waivers in arbitration agreements are not enforceable. Thus, through properly drafted arbitration agreements, employers effectively can prevent class claims alleging wage and hour violations, but cannot prevent piggy-back “representative” claims brought under PAGA and, under the Court’s reasoning, the employee must be permitted to pursue his or her representative PAGA claim in some forum.
Class Waiver Provisions Are Enforceable
Prior to today’s decision in Iskanian, the California Supreme Court took the position that class waivers in employment arbitration agreements are “sometimes” enforceable. The test for determining enforceability was set forth by the Court in 2007 in Gentry v. Superior Court, 42 Cal.4th 443, 463-64:
“When it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider the [following] factors [ ]: the modest size of the potential recovery, the potential for retaliation against members of the class, the fact that absent class members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration. If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘vindicate [their] unwaivable rights in an arbitration forum.’”
Application of the Gentry factors resulted in many trial courts invalidating class waiver provisions in arbitration agreements in wage and hour cases. Today the California Supreme Court held that Gentry was effectively overruled by Concepcion and is preempted by the Federal Arbitration Act (“FAA”). As a result, class action waivers in employment arbitration agreements are now generally enforceable under California law.
Class Waiver Provisions Do Not Categorically Violate the NLRA
Plaintiff Iskanian alternatively argued that the class action waiver in his arbitration agreement was unenforceable because it violated his rights under the NLRA. Iskanian relied on the NLRB’s decisions in D.R. Horton and related cases, in which the NLRB reasoned that class waiver provisions prohibit employees from engaging in collective concerted activity for mutual aid and protection, and that the right to do so is guaranteed by the NLRA. The California Supreme Court (like the majority of courts that have addressed the issue) rejected the NLRB’s reasoning and held that the class waiver provision in this case did not run afoul of the NLRA. Notably, the Court carefully limited its holding to the specific arbitration agreement before it, suggesting that in some other factual contexts a class waiver might violate the NLRA:
“Notably, while upholding the class waiver in Horton II, the Fifth Circuit affirmed the Board’s determination that the arbitration agreement at issue violated section 8(a)(1) and (4) of the NLRA insofar as it contained language that would lead employees to reasonably believe they were prohibited from filing unfair labor practice charges with the Board. Moreover, the arbitration agreement in the present case, apart from the class waiver, still permits a broad range of collective activity to vindicate wage claims. CLS points out that the agreement here is less restrictive than the one considered in Horton. The arbitration agreement does not prohibit employees from filing joint claims in arbitration, does not preclude the arbitrator from consolidating the claims of multiple employees, and does not prohibit the arbitrator from awarding relief to a group of employees. The agreement does not restrict the capacity of employees to ‘discuss their claims with one another, pool their resources to hire a lawyer, seek advice and litigation support from a union, solicit support from other employees, and file similar or coordinated individual claims.”
The Court stated: “We have no occasion to decide whether an arbitration agreement that more broadly restricts collective activity would run afoul of section 7 [of the NLRA].”
PAGA Representative Action Waivers Are NOT Enforceable
The agreement at issue in Iskanian included not only a waiver of class claims in arbitration, but also a waiver of “representative” claims. The representative claim alleged by the plaintiff in Iskanian was a PAGA claim. The Court thus considered whether a waiver of representative claims under PAGA was enforceable. The Court’s answer? No. The Court reasoned that the employee’s right to bring a PAGA action is an unwaivable statutory right because that statute is intended for public benefit (collecting penalties for wage and hour violations that could otherwise be pursued by a public agency) and an individual cannot, by private agreement, waive that public benefit. “The PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state’s interests in enforcing the Labor Code an in receiving the proceeds of civil penalties used to deter violations. Of course, employees are free to choose whether or not to bring PAGA actions when they are aware of Labor Code violations. But it is contrary to public policy for an employment agreement to eliminate this choice altogether by requiring employees to waive the right to bring a PAGA action before any dispute arises.”
The employer argued that because the arbitration agreement only prohibits representative claims, not individual PAGA claims, it does not result in any improper waiver of the right to bring a PAGA action. The plaintiff argued that PAGA claims can only be brought as representative claims. Without deciding whether or not an individual claim is permissible under PAGA, the Court held that the provision was unenforceable regardless because “a prohibition of representative claims frustrates the PAGA’s objectives.” As such, the Court held that “where an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.”
The Court acknowledged that a state law rule may not be enforced if it is preempted by the FAA. However, the Court held that its rule against PAGA waivers does not frustrate the FAA’s objectives and, therefore, is not preempted by the FAA. The Court reasoned that the FAA’s objective is to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action effectively is a public dispute between the employer and the state Labor and Workforce Development Agency. “We conclude that California’s public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the Labor and Workforce Development Agency’s interest in enforcing the Labor Code, does not interfere with the FAA’s goal of promoting arbitration as a forum for private dispute resolution.”
So What Now?
The Court did not resolve how the action would proceed on remand, given that some claims were subject to arbitration while the PAGA claim was not. “This raises a number of questions [on remand]: (1) Will the parties agree on a single forum for resolving the PAGA claim and the other claims?” (2) If not, is it appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation? (3) If such bifurcation occurs, should the arbitration be stayed pursuant to Code of Civil Procedure section 1281.2? The parties have not addressed these questions and may do so on remand.”
As noted above, the Iskanian decision is mixed news for California employers. It remains to be seen whether CLS will seek review of the Court’s PAGA-related ruling before the United States Supreme Court. In the meantime, California employers should review their arbitration agreements to optimize enforceability in light of today’s decision. Among other things, employers should ensure that their agreements contain class waiver language if they do not already. The agreements should also include some language making clear that employees retain the right to file administrative charges with the NLRB and that the agreement is not intended to prohibit their exercise of rights under the NLRA. Employers should also ensure that their agreements contain a severability clause and provision for what happens in the event of bifurcated claims with some proceeding in arbitration and others in court. The full Iskanian opinion is available here.
Last week, a California Court of Appeal overturned a trial court decision denying an employer's petition to compel arbitration where the trial court found that the arbitration agreement was unconscionable. In overturning the trial court's ruling, the Court of Appeal held that the trial court erred in even reaching the issue of whether the agreement was unconscionable because the arbitration agreement included a provision expressly delegating to the arbitrator authority to determine issues of enforceability of the agreement. The provision stated:
"The arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including but not limited to, any claim that all or any part of the Agreement is void or voidable."
Relying on United States Supreme Court precedent in Rent-A-Center, West v. Jackson, 561 U.S. 63 (2010), the court held that delegation clauses, like this one, are enforceable as long as the delegation language is "clear and unmistakeable" and the provision is not revocable under state law principles such as fraud, duress or unconscionability (limited to the fairness of the delgation provision itself and not the fairness of the arbitration agreement as a whole). The court held the language of the delegation provision before it was clear and unmistakeable and that the provision itself was not unconscionable because there is nothing inherently unfair about authorizing an arbitrator, rather than a court, to decide issues relating to the enforceability of the arbitration agreement. As such, the court held that the delegation provision was enforceable and an arbitrator, not the court, should have decided whether the parties' arbitration agreement as a whole was enforceable and applicable to the parties' dispute. For these reason, the Court of Appeal overturned the trial court's denial of the employer's petition to compel arbitration because the trial court lacked authority to rule on the petition.
In its decision, the Court of Appeal noted that some California courts have in the past refused to enforce delegation provisions such as the one at issue in this case. However, the Court dismissed those cases as pre-dating more recent United States Supreme Court precedent, such as Rent-A-Center and AT&T Mobility v. Concepcion, which strongly favor enforceability of arbitration agreements according to their terms.
The case is Tiri v. Lucky Chances, Inc. and is available here. Employers may wish to consider including provisions in their arbitration agreements that specifically delegate authority to the arbitrator to decide whether the agreement is enforceable. This is one tool for keeping unconscionability decisions out of the hands of trial courts that are sometimes inconsistent in ruling on these issues. However, delegating authority to the arbitrator is not entiretly without risk, as one recent case before the United States Supreme Court demonstrated. In Oxford Health Plans v. Sutter, the parties' arbitration agreement contained a delegation clause and, pursuant to that clause, an arbitrator interpreted the agreement as allowing class claims in arbitration (a ruling that almost certainly would not have been made in court). Because of the very limited grounds for judicial review of an arbitrator's rulings, the arbitrator's interpretation of the agreement in that case was upheld. Bottom line--employers should think carefully about the provisions in their arbitration agreements, including deciding what issues to delegate to the arbitrator, and ensure that these provisions are very clearly drafted to best ensure that the agreement is enforced as intended. Employers must also periodically review their agreements to ensure that they are as beneficial as permissible in light of continually evolving case law.
March 11, 2014
Posted by Cal Labor Law in Arbitration Agreements
The California Supreme Court has scheduled oral argument for April 3, 2014 in Iskanian v. CLS Transportation, a case involving the enforceability of class/representative action waivers in employment arbitration agreements under California law. The Iskanian court ruled that California's "Gentry" test for invalidating class action waivers was no longer good law in light of the United States Supreme Court's decision in AT&T Mobility v. Concepcion, and that employers may not be compelled to arbitrate on a class wide basis where they have not specifically agreed to do so. The Iskanian court also held that the contractual waiver of the right to pursue a PAGA representative action in arbitration was similarly enforceable. Finally, the Iskanian court rejected the NLRB's D.R. Horton decision invalidating class action waivers in arbitration agreements on the ground that such waivers violate the NLRA. Our prior posts on the Iskanian case are here. Following oral argument in April, a decision by the California Supreme Court should issue by early July. California employers that have, or are considering, employment arbitration agreements will want to stay tuned for this key decision.
As many predicted, the Fifth Circuit’s recent invalidation of the NLRB’s D.R. Horton decision has not caused the NLRB to revise its enforcement position on the subject of class action waivers in employment arbitration agreements. The NLRB basically takes the position that, unless overruled by the United States Supreme Court (as opposed to a circuit court of appeal), Board decisions (such as D.R. Horton) remain in effect and are binding on the NLRB’s administrative law judges (“ALJ”). A decision last week from an ALJ in Leslie’s Poolmart, Inc. and Keith Cunnigham evidences the NLBR’s continued adherence to its D.R. Horton decision and policy. Indeed, the Leslie’s Poolmart decision actually expands D.R. Horton by holding that an arbitration agreement that was silent on the issue of class and collective claims still violated Section 7 of the NLRA by interfering with employees’ rights to engage in collective, concerted activity for mutual aid and protection.
In Leslie’s Poolmart, employees were required to sign an arbitration agreement upon hire, whereby they agreed that they would arbitrate any employment-related disputes. The agreement said nothing about whether an employee could pursue class or representative relief in arbitration. Notwithstanding his agreement to arbitrate, employee Cunningham filed a class action lawsuit in California state court against Leslie’s, alleging various wage and hour violations. Leslie’s removed the case to federal court and then filed a motion to compel arbitration of Cunningham’s individual claims and requested that the class claims be dismissed. The court granted the motion (with the exception of a PAGA claim, which the court held was exempt from individual arbitration).
Not to be deterred, Cunningham filed a charge with the NLRB alleging that Leslie’s arbitration agreement and efforts to enforce it violated section 7 of the NLRA. Last week, a NLRB ALJ agreed. The ALJ held that she was still bound by D.R. Horton regardless of the fact that the Fifth Circuit effectively overruled the decision. The ALJ further held that D.R. Horton applied even though the arbitration agreement in this case (unlike the one at issue in D.R. Horton) did not expressly preclude arbitration of class or representative claims. The ALJ reasoned that even though the agreement did not expressly foreclose class claims, it effectively foreclosed such claims because the employer required all employees to sign the agreement and responded to court actions by making motions to compel individual arbitration and to dismiss any class allegations. Thus, the ALJ found that the agreement interfered with employees’ ability to engage in collective concerted activity. The ALJ further held that a single employee's filing of a class action claim (even without active participation of any other employee) constituted protected concerted activity. The ALJ ordered Leslie’s to rescind its arbitration policy and/or to revise it to make clear that employees can pursue class claims either in arbitration or in court. The ALJ further ordered Leslie’s to file a motion with the district court requesting that it vacate its order compelling Cunningham to arbitrate his individual claims. The January 17, 2014 Leslie’s Poolmart decision is available in full on the NLRB’s website here.
Unless and until the United States Supreme Court overrules D.R. Horton, it appears, at least for now, that some plaintiffs' class action lawyers may continue using unfair labor practice charges as a last ditch effort to try to avoid dismissal of their class claims. Given the wide rejection by courts of the NLRB's D.R. Horton decision, the ultimate success of this type of tactic is doubtful.
Today, the Fifth Circuit issued its decision in D.R. Horton v. NLRB, invalidating the NLRB's holding that D.R. Horton's arbitration agreement violated the NLRA by prohibiting employees from pursuing employment claims on a class or collective basis. The NLRB had reasoned that disallowing class and collective claims in arbitration and in court precludes employees from exercising their right under the NLRA to engage in collective, concerted activity for mutual aid and protection. The Fifth Circuit disagreed.
Relying on recent United States Supreme Court decisions starting with AT&T Mobility v. Concepcion, the Fifth Circuit held that the Federal Arbitration Act (FAA) requires that arbitration agreements be enforced according to their terms and that a provision prohibiting class-wide arbitration is an enforceable term. The Fifth Circuit further held that nothing in the NLRA or its legislative history evinces any Congressional intent to ovveride the FAA, and that general language in the NLRA relating to "mutual aid and protection" could not be interpreted as an expression of Congress' intent to override the FAA.
The NLRB argued that its ruling was valid because it did not require employers to allow class-wide arbitration. Instead, it simply required employers to allow employees to pursue relief on a class-wide basis either in arbitration or in court. The Fifth Circuit held that there was nothing in the NLRA suggesting that a prohibition on class-wide claims violates the NLRA. The court also held that requiring employers to allow employees to pursue class-wide claims (either in court or in arbitration) has the effect of disfavoring arbitration, in contravention of the FAA.
The Fifth Circuit's decision was not an all-out win for D.R. Horton, however. The Fifth Circuit held that D.R. Horton's arbitration policy reasonably could be interpreted as preventing employees from pursuing administrative claims with the NLRB (based on broad language explaining that the employee was waiving the right to file a lawsuit "or other civil proceeding" relating to an employment dispute). As a result, the court held that the NLRB properly ordered D.R. Horton to take corrective action to revise its policy to clarify that employees are not prohibited from filing charges with the NLRB.
The Fifth Circuit's decision in D.R. Horton is the first circuit court decision addressing the D.R. Horton issue in a direct appeal from a NLRB action. However, many courts throughout the country, including many in California and in the Ninth Circuit have similarly rejected the NLRB's D.R. Horton analysis and refused to follow it. It remains to be seen what the NLRB will do in response to the Fifth Circuit's decision. The NLRB could petition for review to the United States Supreme Court. In the meantime, the NLRB may continue to follow and apply its D.R. Horton analysis to invalidate class waivers in jurisdictions outside the Fifth Circuit. Alternatively, the NLRB could abandon its attack on class waivers consistent with the weight of court decisions rejecting the NLRB's analysis in this regard. Time will tell.
For now, arbitration agreements with class action waiver provisions remain an effective tool for employers to prevent class-wide employment claims.
The Fifth Circuit's decision is available here.
This week, the Ninth Circuit has issued two new decisions on the enforceability of arbitration agreements post-Concepcion. In the first case, Ferguson v. Corinthian Colleges, the court issued an opinion favoring enforcement of arbitration agreements by striking down over a decade of California-based precedent holding that arbitration may not be compelled where the action is one seeking public injunctive relief. This precedent was widely known as the “Broughton-Cruz” rule (which was also adopted by the Ninth Circuit in Davis v. O’Melveny & Myers). The Ninth Circuit correctly held that, in light of the Supreme Court’s instruction in Concepcion, courts cannot carve out particular types of claims (such as claims for public injunctive relief) from arbitration. In the Corinthian Colleges case, the plaintiffs were vocational students who alleged that the college misled them through misrepresentations about future employment opportunities. The plaintiffs sought an injunction to preclude the college from continuing to make such misrepresentations to recruit future students. Corinthian sought to compel arbitration of the plaintiffs’ claims, but a federal district court refused to enforce the arbitration agreement. The Ninth Circuit reversed, holding that the claims were arbitrable regardless of the fact that they sought public injunctive relief. While not an employment case, the Corinthian Colleges case provides further federal precedent preventing California district courts from refusing to enforce arbitration simply because a specific type of claim is at issue. This principle applies equally to disputes concerning arbitration agreements in employment cases. The Corinthian Colleges case is available here.
The Ninth Circuit’s second arbitration decision this week was less arbitration-friendly. That case, Chavarria v. Ralphs Grocery, involved an employment arbitration agreement between a grocery store employee and the grocery chain. The employee filed a putative class action for alleged Labor Code violations and Ralphs sought to compel arbitration of the individual employee’s claim based on an arbitration policy the employee accepted as part of her employment application. The district court found the arbitration agreement unconscionable under California law and refused to compel arbitration. This week, the Ninth Circuit agreed with the district court’s holding that the agreement was unconscionable and unenforceable under California law (i.e. Armendariz and its progeny). The court specifically held that Concepcion and subsequent United States Supreme Court decisions do not affect the continued validity of state law unconscionability doctrine as a means for invalidating an arbitration agreement. Applying California’s unconscionability law, the court held that Ralphs’ arbitration agreement was procedurally unconscionable because it was presented to employees on a “take it or leave it” basis with no ability to negotiate, and the arbitration terms were not provided to employees until three weeks after they signed the agreement (i.e. the employment application). The court also agreed with the district court’s finding that the agreement was substantively unconscionable, meaning that it was unfairly one-sided so as to “shock the conscience.” The court focused on two provisions of the arbitration policy—the arbitrator selection provision and the costs provision. With respect to arbitrator selection, the court determined that the process would always result in the arbitrator being one proposed by Ralphs, which was unfairly one-sided. That is because the policy provided that each side could propose three arbitrators, followed by an alternating strike method allowing the party not demanding arbitration to strike first. In the court’s view, the party not demanding arbitration would always be Ralphs in any employee-initiated claim and that would always result in the last arbitrator standing being on Ralphs' list. (In this author’s view, that interpretation is a little tortured because in a typical case, the employee files a lawsuit in state court rather than “demanding” arbitration. The employee opposes arbitration and the employer has to “demand” it by making a motion to compel arbitration with the court. Ralphs also made this argument, but the Ninth Circuit rejected it.) The policy also specifically disallowed the use of AAA or JAMS arbitrators, which meant that those institutions’ rules for neutral arbitrator selection could not be used.
As to the costs provision in the policy, the Ninth Circuit held that this too was unconscionable. The policy itself is somewhat unclear, but generally provides that the arbitrator is to apportion arbitration-related fees to the parties at the outset of the proceeding subject to United States Supreme Court precedent on the subject and that if such precedent requires Ralphs to pay up to all of the arbitration fees, Ralphs would do that, but if United States Supreme Court precedent did not require such a result, then the arbitrator could apportion the arbitration fees/costs equally between the parties. The Ninth Circuit interpreted this provision as requiring the arbitrator in every case to impose substantial and prohibitive fees on the employee at the outset of the arbitration, so as to effectively preclude the employee from continuing with arbitration at all. On this basis, along with the unfair arbitrator selection provision, the court held that the agreement was substantively unconscionable. Having found that the agreement was both procedurally and substantively unconscionable, the court held that the arbitration agreement as a whole was unenforceable and that the employee could proceed with her claims in court. The Ralphs Grocery decision is available here.
The Ralphs Grocery decision, coupled with last week’s California Supreme Court decision in Sonic Calabasas, confirms that California state and federal courts will continue to recognize and apply California unconscionability law to review and potentially refuse to enforce employment arbitration agreements. Thus, litigation over the enforceability of these agreements is certain to continue, even though there have been huge employer-friendly gains in the last couple of years strengthening the enforceability of these agreements. The continued validity of the unconscionability doctrine serves as an important reminder to employers to review their arbitration policies and agreements to ensure that they pass muster under these standards. Employers are also reminded that important cases are still pending before the California Supreme Court on the issue of the enforceability of class action waivers in employment arbitration agreements and whether California's "Gentry" analysis for evaluating the enforceability of these waiver provisions is still valid in the wake of Concepcion. We will keep you updated on further developments in this area.
Today the California Supreme Court issued its opinion in Sonic-Calabasas v. Moreno, holding that an employment arbitration agreement is enforceable even where an employee is pursuing administrative remedies (typically for alleged unpaid wages) through the California Labor Commissioner.
The California Supreme Court had previously held in this same case that an arbitration agreement is unconscionable to the extent it seeks to preclude an administrative hearing before the Labor Commissioner. Following that ruling, however, the United States Supreme Court issued its decision in in AT&T Mobility v. Concepcion, striking down a similar California Supreme Court ruling that had found class action waivers is consumer contracts generally unconscionable and unenforceable. The United States Supreme Court thereafter ordered the California Supreme Court to reconsider its ruling in Sonic-Calabasas in light of Concepcion.
Today the California Supreme Court issued its new decision in "Sonic II." The Court held that Concepcion precludes a finding that an arbitration agreement is unconscionable simply because it requires parties to arbitrate a Labor Code dispute instead of permitting the employee to first proceed with an administrative hearing before the Labor Commissioner. Thus, an arbitration agreement now may still be enforced even in Labor Commissioner proceedings and require the parties to arbitrate their dispute. However, the California Supreme Court held that while there is no categorical unconscionability rule for arbitration agreements that preclude an administrative hearing before the Labor Commissioner, an arbitration agreement can still be deemed unenforceable if determined to be procedurally and substantively unconscionable (based on unfair terms above and beyond precluding an administrative hearing). The Court stated: "As with any contract, the unconscionability inquiry requires a court to examine the totality of the agreement's substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided." The Court further stated that the agreement "must provide an employee with an accessible and affordable arbitral forum for resolving wage disputes." The Court basically held that the unconscionability standards it long ago set forth in Armendariz remain good law even after Concepcion.
The Court held that it did not have sufficient information to rule on the unconscionability issue as to the arbitration agreement between Moreno and Sonic-Calabasas. It therefore remanded the issue to the trial court to determine. The Court provided guidance to trial courts to assist in making unconscionability determinations, characterizing the inquiry as a detailed factual inquiry that still permits the court to consider (among other factors) the effect of the waiver of certain benefits of an administrative proceeding before the Labor Commissioner. The Court's opinion basically precludes a bright line rule on when an arbitration agreement will be deemed unconscionable and instead ensures that trial courts will continue to come out all over the map on these issues.
Justice Chin, joined by Justice Baxter, authored a vigorous dissent in which he criticized the majority's unconscionability analysis and stated that the Court's analysis contravenes Concepcion.
The full 100-plus page opinion is available here.
Today the United States Supreme Court issued its opinion in American Express Co. v. Italian Colors Restaurant, holding that courts may not invalidate a contractual waiver of class arbitration simply because the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery he or she might receive. This case is not an employment case, but a case involving a merchant with a credit card contract with American Express. The merchant brought a class action against American Express, alleging violation of antitrust laws resulting in merchants being charged excessively high rates. The contract between American Express and its merchants contained an arbitration agreement whereby the merchants had to agree that any disputes would be resolved by binding arbitration and that there would be no right to have claims decided on a class basis in arbitration. Pursuant to this contractual agreement, American Express sought to compel individual arbitration of the merchant’s claim. The trial court granted the motion to compel arbitration but the court of appeal reversed, holding that the prohibitive costs the merchant would face in arbitration to prove an antitrust violation precluded effective vindication of statutory rights and rendered the class waiver unenforceable. Specifically, the individual merchant only stood to recover between $12,000-$38,000 in damages, but it would cost at least several hundred thousand dollars, and possibly more than one million dollars, to prove the violation through expert analysis. The court of appeal concluded that requiring an individual to bear such cost in arbitration while precluding class wide relief, effectively eviscerated the right to pursue the action in the first place. The United States Supreme Court granted certiorari and reversed.
In today’s decision (a 5-3 decision authored by Justice Scalia), the Supreme Court held that the Federal Arbitration Act (FAA) requires that arbitration agreements be enforced according to their contractual terms, even for claims alleging a violation of a federal statute, unless the FAA's mandate has been overridden by a contrary congressional command. The Court made clear that neither the antitrust laws nor Rule 23 of the Federal Rules of Civil Procedure contains any congressional command that individuals be permitted to pursue antitrust violations on a class basis. The court further rejected application of an "effective vindication" exception used by some courts to invalidate class waivers in arbitration agreements. Under that exception, which the Court emphasized originated from dicta in an earlier Supreme Court decision, courts sometimes invalidate arbitration agreements that operate to prospectively waive a party's rights to pursue a statutory remedy. The Court held that there was no reason to apply any such exception in this case because the arbitration agreement did not result in a waiver of the merchant's right to pursue an antitrust claim. The merchant could still pursue the claim in arbitration, even though not on a class basis. "[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy." The court further reasoned that if courts could invalidate arbitration agreements based on a principle of cost versus benefit analysis of individual versus class wide claims, this would require courts, in ruling on a motion to compel arbitration, to undertake an analysis of the legal requirements for success on the merits on a claim, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success. "Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure." The Court thus held that the arbitration agreement, including its class waiver, was enforceable as written under the FAA.
Today's Supreme Court decision is yet another example of the Court's strong position on enforcing arbitration agreements, including class waivers, according to their terms and the parties' intentions. While this is not an employment action, the analysis and reasoning in the decision carries over to cases interpreting the enforceability of arbitration agreements and class waivers in the employment context and may well impact the California Supreme Court's upcoming analysis in important employment cases pending before it on the issue of enforceability of employment arbitration agreements in California, including on the issue of class waivers. As readers of this blog know, the California Supreme Court is expected to decide this year whether the United States Supreme Court's recent decision in AT&T Mobility v. Concepcion (and the FAA) preempt California laws relating to the enforceability of arbitration agreements and class waivers in such agreements in employment cases, particularly in wage and hour class actions and PAGA representative actions.