Ninth Circuit Further Weighs In on Arbitration Agreements
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.