Nelsen v. Legacy Partners: Court of Appeal Affirms Order Compelling Individual Arbitration of California Wage Claims

It seems like we have new cases every day dealing with arbitration, so why should today be any different?

In Nelsen v. Legacy Partners Residential, Inc. (7/18/12) --- Cal.App.4th ---, the plaintiff, Nelsen, worked as a property manager for the defendant, LPI. Nelsen filed a putative class action against LPI alleging violation of various California wage and hour laws and the UCL. Cal. Bus & Prof. Code 17200 et seq. Nelsen had signed an agreement to arbitrate any disputes with LPI, and LPI moved to compel individual arbitration. The trial court (San Francisco Superior, Judge Charlotte Walter Woolard) granted the motion to compel individual arbitration and stayed the action. Nelsen appealed from the order. Citing Franco v. Athens Disposal Co., Inc. (2009) 171 Cal.App.4th 1277, Nelsen argued that the trial court's order constituted a "death knell" for the putative class action, making the order appealable.

The Court of Appeal affirmed. First, the Court questioned whether the case truly implicated the death knell doctrine, as Nelsen had not explained "how the trial court‘s order makes it impossible or impracticable for her to proceed with the action at all." Slip op. at 5. Regardless, the Court exercised its discretion to treat the appeal as a petition for writ of mandate. Ibid.

On the merits, the Court first considered whither the arbitration clause at issue was unconscionable. The Court held that "several factors support a finding LPI's arbitration agreement is procedurally unconscionable": it was a contract of adhesion; the arbitration section's header did not mention arbitration; and the arbitration language was in a smaller font than other portions of the form. Slip op. at 7.

As to substantive unconscionability, the Court found that the arbitration clause at issue was identical to the one at issue in Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, except that the one clause that the California Supreme Court found objectionable in Little -- a clause allowing an appeal of an award greater than $50,0000 -- was not present here. The Court held that Little controlled, and the arbitration clause was not substantively unconscionable.

The Court next examined whether the agreement's class action ban was unenforceable on public policy grounds. "Relying on Gentry v. Superior Court (2007) 42 Cal.4th 443 (Gentry), Nelsen contends requiring individual arbitration of her wage and hour claims would violate California public policy even if the arbitration agreement is otherwise found to be valid and enforceable." Slip op. at 10. Citing Arguelles-Romero v. Superior Court (2010) 184 Cal.App.4th 825 (discussed here), Court explained Gentry as follows:

Gentry holds that when a class action is requested in a wage and hour case notwithstanding an arbitration agreement expressly precluding class or representative actions, the court must decide whether individual arbitration is so impractical as a means of vindicating employee rights that requiring it would undermine California‘s public policy promoting enforcement of its overtime laws. If the court makes that determination, Gentry requires that it invalidate the class arbitration waiver and require class arbitration. Gentry further held that refusing to enforce class arbitration waivers on such public policy grounds would not violate the FAA.

Slip op. at 10-11.

The agreement did not expressly waive class arbitration. LPI argued that silence on class arbitration did not constitute a waiver (but also did not constitute consent to class arbitration), and Gentry did not apply. Nelsen argued that the agreement‘s silence constitued a de facto waiver of class arbitration, and Gentry did apply. The Court agreed with Nelsen, holding that Gentry applies whether the agreement explicitly waives class arbitration or implicitly does so by indicating no consent to class arbitration. Slip op. at 11.

The Court next examined the arbitration clause to determine whether it in fact permitted class arbitration. Relying on Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp. (2010) ___ U.S. ___ [130 S.Ct. 1758] (discussed here), the Court held that the agreement did not permit class arbitration.

While the arbitration agreement in issue broadly encompasses any employment-related "claim, dispute, or controversy . . . which would otherwise require or [allow] resort to any court," it contains one very significant limitation. The agreement only covers claims, disputes, and controversies "between myself and Legacy Partners," that is, between Nelsen and LPI. A class action by its very nature is not a dispute or controversy "between [Nelsen] and Legacy Partners."

Slip op. at 14. The Court cited to Kinecta Alternative Financial Solutions, Inc. v. Superior Court (2012) 205 Cal.App.4th 506 (discussed here), noting that it decided "a nearly identical question" language and reached the same conclusion. Slip op. at 14. 

Having held that the agreement did not permit class arbitration, the Court turned to whether it was enforceable under Gentry. The Court cited a number of cases holding that AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___ (discussed here) overturns Gentry, but it declined to reach this issue. Instead, the Court held that Nelsen had failed to make the factual showing required under Gentry.

Having relied on Gentry in her opposition to the motion to compel in the trial court, it was Nelsen's burden to come forward there with factual evidence supporting her position classwide arbitration was required. She is not entitled to a remand for the purpose of affording her a second opportunity to produce such evidence, as she now requests.

Slip op. at 17.

The Court next considered whether the NLRB's decision in D.R. Horton (discussed here) afforded Nelsen any relief. The Court declined to follow D.R. Horton.

The Board's decision reflects a novel interpretation of section 7 and the FAA. It cites no prior legislative expression, or judicial or administrative precedent suggesting class action litigation constitutes a "concerted activit[y] for the purpose of . . . other mutual aid or protection" (29 U.S.C. § 157), or that the policy of the FAA favoring arbitration must yield to the NLRA in the manner it proposes.

Slip op. at 19. The Court cited to a number of district court decisions both before and after D.R. Horton that disagree with its analysis. Grabowski v. C.H. Robinson (S.D.Cal. 2011) 817 F.Supp.2d 1159, 1168–1169; Slawienski v. Nephron Pharmaceutical Corp. (N.D.Ga. 2010) 2010 WL 5186622, *2; Jasso v. Money Mart Exp., Inc. (N.D.Cal. 2012) ___ F.Supp.2d ___ [2012 WL 1309171, *4–*7]; and LaVoice v. UBS Financial Services, Inc. (S.D.N.Y. 2012) 2012 WL 124590, *6. (I do not typically blog district court decisions -- just too many of them.) The Court also cited to Iskanian v. CLS Transportation Los Angeles, LLC (2012) 206 Cal.App.4th 949 (discussed here), which rejected the D.R. Horton analysis.

The Court then held that D.R. Horton could not apply because the NLRA does not apply to "any individual employed as a supervisor." The Court concluded that Nelsen's title as a "property manager" likely excluded her from coverage by the NLRA.

Finally, the Court considered whether the trial court could order her injunctive relief claims to arbitration under the Broughton-Cruz doctrine. The Court held: "(1) Nelsen waived her Broughton-Cruz argument by failing to raise it in the trial court; and (2) Broughton-Cruz has, in any event, been abrogated in the wake of Concepcion." Slip op. at 20-21. Citing Kilgore v. KeyBank, Nat. Assn. (9th Cir. 2012) 673 F.3d 947 (discussed here), the Court held: "Since Broughton-Cruz prohibits outright the arbitration of claims for public injunctive relief, it is in conflict with the FAA." Slip op. at 22.

The Court distinguished the recent decision in Hoover v. American Income Life Insurance Co. (2012) 206 Cal.App.4th 1193:

[Hoover], cited by Nelsen following oral argument, does not convince us otherwise. Hoover does not mention Kilgore or analyze Concepcion's potential relevance to the continued application of Broughton-Cruz. Moreover, the court in Hoover found the arbitration agreement in issue was not subject to the FAA and did not encompass state statutory claims. That is not our case.

Slip op. at 22.

The decision is available here.