Sandquist v. Lebo Automotive: Under Arbitration Agreement at Issue, Arbitrator Decides Whether Class Arbitration is Available

The California Supreme Court has issued an important decision on the availability of class arbitration: Sandquist v. Lebo Automotive, Inc. (2016) 1 Cal.5th 233. 

Timothy Sandquist worked for Lebo Automotive, Inc., as a car salesman. On Sandquist's first day of employment, his manager gave him approximately 100 pages of forms to complete as a condition of his employment. Among those pages were three arbitration agreements.

Twelve years later, Sandquist sued Lebo individually and on behalf of others, alleging race discrimination against non-Caucasian workers. The trial court compelled individual arbitration, and, upon learning that all putative class members were subject to the same arbitration policies, dismissed the class allegations with prejudice. The Court of Appeal reversed in part, holding that the trial court should have allowed the arbitrator to decide whether class arbitration was available.

The Supreme Court granted review and affirmed the Court of Appeal, holding as follows: 

No universal rule allocates the decision regarding the availability of class arbitration to either the court or the arbitrator. Instead, he parties' agreement determines who will decide. State law applies generally to disputed issues of contract interpretation and governs here, at least in the first instance. 

Each of the three arbitration policies at issue contained similar, comprehensive language. Each extended to all claims "arising from, related to, or having any relationship or connection whatsoever" with Sandquist's employment. Both Sandquist's substantive claims and the procedural question presented, whether he could pursue those claims in class arbitration, arose from his employment with Lebo. Clauses excluding certain issues from the arbitrator's purview did not prevent the arbitrator from deciding the availability of class arbitration. As a result, under state contract law, the parties' contract gave the issue to the arbitrator.

Existing California law does not establish a presumption that the question should be determined by the court, rather than by the arbitrator. California law does include a "strong presumption" that courts should determine the jurisdiction of arbitrators, but this does not mean that the court must determine the availability of class arbitration. Rather, it means that the court must decide the preliminary issue: Does the arbitrator have jurisdiction to decide whether class arbitration is available?

The Federal Arbitration Act (FAA) does not impose an "interpretive presumption that, as a matter of federal law, preempts state law rules of contract interpretation and alters the conclusion state law would otherwise reach here." The Unites States Supreme Court in Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444 held that the arbitration agreement in that case allocated the class arbitration availability question to the arbitrator, "Green Tree contains no controlling view concerning what presumption, if any, the FAA requires when interpreting the parties' agreement as to who decides class arbitration availability."

In general, the FAA presumes that courts should decide gateway questions of arbitrability, "e.g., whether there is an enforceable arbitration agreement or whether it applies to the dispute at hand." On the other hand, the FAA presumes that questions regarding procedures to be applied in arbitration will be decided by the arbitrator. Availability of class arbitration is not a gateway question of arbitrability. It is a question of contract interpretation and procedure to which arbitrators are well suited.

Two further considerations weigh in favor of allowing the arbitrator to decide the question. First, doing so is more consistent with the desire for expeditious results in arbitration. Second, doubts concerning an arbitration agreement's scope are resolved in favor of arbitration. 

Justice Werdegar wrote the opinion, with Chief Justice Cantil-Sakauye and Justices Liu and Cuéllar joining. Justice Kruger dissented, arguing that under the FAA, the availability of class arbitration is a "gateway question of arbitrability" that is presumptively for the court to decide. Justices Chin and Corrigan joined in the dissent. 

The opinion is available here.

Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing: Cal. Supreme Court Grants Review in Attorney Fee Arbitration Battle

Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2016) 244 Cal.App.4th 590 is not an employment law case, but it raises an interesting arbitration issue that may end up having an impact on employment law practice. The California Supreme Court granted review on April 27, and the issues presented are listed as follows:

(1) May a court rely on non-legislative expressions of public policy to overturn an arbitration award on illegality grounds?  

(2) Can a sophisticated consumer of legal services, represented by counsel, give its informed consent to an advance waiver of conflicts of interest?  

(3) Does a conflict of interest that undisputedly caused no damage to the client and did not affect the value or quality of an attorney’s work automatically (i) require the attorney to disgorge all previously paid fees, and (ii) preclude the attorney from recovering the reasonable value of the unpaid work?

The first issue obviously is of greatest interest for our purposes. Sheppard Mullin is case number S232946, and the Court's web page for it is here.

Espejo v. Southern California Permanente Med. Group: Defendants Properly Authenticated Electronically Signed Arbitration Agreement

In Espejo v. Southern California Permanente Medical Group (Cal.App. 4/22/16), Jay Espejo, M.D., sued Southern California Permanente Medical Group (SCPMG) and others for wrongful termination and whistleblower retaliation. The trial court denied defendants' motion to compel arbitration based on an electronically signed arbitration agreement. The Court of Appeal reversed, holding as follows: 

Defendants were not required to authenticate the arbitration agreement until Espejo challenged it. A party petitioning to compel arbitration must make a prima facie showing that an agreement exists, but not that it is enforceable. Only after the party opposing the petition challenges the agreement's authenticity does the petitioner bear the burden of proving it. As a result, the trial court erred in striking a supplemental declaration - not filed with the moving papers - that defendants used to authenticate the arbitration agreement. 

Defendants met their burden of authenticating Espejo's electronic signature on the arbitration agreement. 

[Defendants' declarant] detailed SCPMG’s security precautions regarding transmission and use of an applicant’s unique user name and password, as well as the steps an applicant would have to take to place his or her name on the signature line of the employment agreement and the [arbitration agreement]. Based on this procedure, she concluded that the “name Jay Baniaga Espejo could have only been placed on the signature pages of the employment agreement and the [arbitration agreement] by someone using Dr. Espejo’s unique user name and password. . . . [¶] Given this process for signing documents and protecting the privacy of the information with unique and private user names and passwords, the electronic signature was made by Dr. Espejo” on the employment agreement and the [arbitration agreement] at the date, time, and IP address listed on the documents.

The opinion is available here. 

Ling v. P.F. Chang's: Court Rules on Attorney Fee Award in Overtime and Meal Period Arbitration

In Ling v. P.F. Chang's China Bistro, Inc. (Cal.App. 3/25/16), Cynthia Ling sued P.F. Chang's for unpaid overtime and missed meal and rest periods, alleging that Chang's improperly classified her as an exempt employee while working as a floor manager. An arbitrator found that Ling was exempt as a floor manager, but also found that Chang's failed to provide her with meal periods during a brief training period. The arbitrator awarded Ling approximately $8,500 for missed meal periods and Labor Code section 203 waiting time penalties. Finding that Chang's was the prevailing party, the arbitrator awarded it $29,000 in costs under Code of Civil Procedure section 1032 and over $200,000 in attorney fees under Labor Code section 218.5.

The trial court corrected the award, holding that Ling was the prevailing party on her meal period claim and remanding to the arbitrator to award her fees, exclusive of those incurred solely in pursuing her unsuccessful overtime claim.

On remand, the arbitrator rejected Ling's fee request, relying on Kirby v. Immoos Fire Protection, Inc. (4/30/12) 53 Cal.4th 1244 (discussed here), but awarded Ling her costs as the prevailing party under CCP 1032(a)(4). The trial court confirmed the award, and both parties appealed. The Court of Appeal affirmed, holding as follows:

The trial court properly corrected the arbitrator's initial award because the arbitrator exceeded his powers by issuing an award that "contravened an explicit legislative expression of public policy."

Because plaintiff's missed meal periods claim (as it related to her service as a floor manager) and overtime claim required identical proof, the attorney's fees award for defending the 'factually inextricably intertwined' meal periods claim was effectively a fee award for defeating plaintiff's overtime claim, prohibited by section 1194.

The Court rejected Chang's argument that the Federal Arbitration Act (FAA) prohibited the trial court from remanding the attorney fee issue. Similar to the California Arbitration Act (CAA), the FAA provides for vacatur where an arbitrator exceeds his or her powers.

The Court rejected Ling's argument that the trial court should have vacated the initial award in its entirety, rather than merely correcting it. The trial court had no authority to vacate the award in its entirety and thus upset the arbitrator's ruling on the misclassification issue. 

The arbitrator did not exceed his authority in issuing his second award. 

The arbitrator was bound to follow Kirby and properly denied Ling attorney fees on her meal period claim. 

The arbitrator's denial of fees on the section 203 waiting time penalty claim did not deprive Ling of any unwaivable statutory right. An action for waiting time penalties based on failure to pay for missed meal periods is not an "action brought for the non-payment of wages" under section 218.5. 

Following Kirby, section 226.7 cannot support a section 203 penalty because section 203, subdivision (b) tethers the waiting time penalty to a separate action for wages. Because a section 203 claim is purely derivative of 'an action for the wages from which the penalties arise,' it cannot be the basis of a fee award when the underlying claim is not an action for wages.

The trial court erred in awarding Ling fees she incurred on her petition to vacate the first arbitration award. Neither the parties' agreement nor any statutory provision authorized any such award.

The opinion is available here. 

Baltazar v. Forever 21: Clause Allowing Parties to Seek Preliminary Injunctive Relief in Court Does Not Render Arbitration Agreement Unconscionable

In Baltazar v. Forever 21, Inc. (12/20/12) 212 Cal.App.4th 221 (discussed here), an individual discrimination, harassment, and constructive discharge action, the trial court denied the defendants' motion to compel arbitration, and the Court of Appeal reversed, holding:

• Unconscionability analysis survives Concepcion. 
• The defendant did not show that the agreement evidenced "a transaction involving commerce," so the California Arbitration Act (CAA) applied, rather than the Federal Arbitration Act (FAA). 
• Because the CAA allows parties to seek provisional remedies in court, an arbitration agreement allowing parties to do so was not substantively unconscionable. 

The California Supreme Court granted review and issued its opinion on Monday. In a unanimous opinion written by Justice Leondra Kruger, the Court affirmed, holding as follows: 

The arbitration agreement was contained within a contract of adhesion, but there was no element of surprise or duress, and the fact that Forever 21 did not give Baltazar a copy of the AAA arbitration rules did not lead to heightened scrutiny of the agreement's substantive terms.

The clause in the arbitration agreement allowing parties to seek preliminary injunctive relief in court is not unconscionable. Even if employers are more likely to seek such relief, the clause merely reiterates a provision of the CAA. Cal. Code Civ. Proc. section 1281.8(b). The Court disapproved Trivedi v. Curexo Technology Corp., 189 Cal.App.4th 387 (discussed here) to the extent it suggests otherwise.

The agreement required both parties to arbitrate all employment-related claims. The fact that it listed as examples the types claims typically brought by employees did not create confusion as to whether the clause required Forever 21 to arbitrate any employment-related claims that it may have against an employee.

The agreement's provision that "all necessary steps will be taken to protect from public disclosure [Forever 21's] trade secrets and proprietary and confidential information" did not render the agreement unconscionable. 

The opinion is available here. 

I believe that this is the first majority opinion written by Justice Kruger in an employment law case. I am very interested to see the impact that she and the Court's other newest member, Justice Mariano-Florentino Cuéllar, will have on the Court's employment law rulings. Both began serving in January, 2015. 

Carbajal v. CWPSC: Arbitration Agreement Unconscionable, Unenforceable

In Carbajal v. CWPSC, Inc. (Cal.App. 2/26/16), the plaintiff filed a putative wage and hour class action against her former employer, CW. Relying on an arbitration agreement with a class action waiver, CW moved to compel the plaintiff to arbitrate her individual claims. The trial court denied the motion, holding the arbitration agreement unconscionable. The Court of Appeal affirmed, holding as follows:

CW failed to meet its burden of demonstrating that the Federal Arbitration Act (FAA) applied. "The party asserting FAA preemption bears the burden to present evidence establishing a contract with the arbitration provision affects" (1) the channels of interstate commerce, (2) the instrumentalities of interstate commerce and persons or things in interstate commerce, or (3) those activities having a substantial relation to interstate commerce. CW "presented no evidence to establish any connection to interstate commerce."

CW's arbitration agreement had a moderate level of procedural unconscionability. The agreement was a contract of adhesion. The agreement stated that arbitration would proceed under AAA rules, but it did not state which set of AAA rules would apply. CW did not give the plaintiff a copy of the applicable rules, tell her where to find the rules, offer to explain the arbitration provision, or give her an opportunity to review any rules.

The arbitration agreement also had a moderate level of substantive unconscionability. It required the plaintiff to bring all claims in arbitration, but "broadly authorize[d] CW to seek any type of injunctive relief in court." It waived the requirement that CW post a bond to obtain injunctive relief. The agreement also provided that each party should bear its own fees, which would interfere with the plaintiff's right to recover attorney fees if she prevailed on certain of her wage claims.

A provision giving CW the right to appeal an award granting class-wide relief was not substantively unconscionable.

Here, the arbitration provision states, “the arbitrator shall have no authority or jurisdiction to enter an award or otherwise provide relief on a class, collective or representative basis.” If the arbitrator awarded any form of class relief, CW Painting would be entitled to challenge the award in court and have it set aside regardless of whether the Agreement’s arbitration provision included the appeal term Carbajal challenges. The appeal term therefore does not increase the arbitration provision’s substantive unconscionability.

Given the moderate level of both procedural and substantive unconscionability, the agreement was unenforceable.

The presence of three substantively unconscionable provisions supported the conclusion that the agreement was "permeated with unconscionability," and the trial court did not abuse its discretion in refusing to sever the unconscionable terms from the agreement.

The Court did not address the plaintiff's contentions that Labor Code section 229 precludes arbitration of her Labor Code claims, and that CW could not enforce the Agreement because CW never signed it.

The opinion is available here.

Carmax v. Areso: SCOTUS Denies Review of Case Applying Iskanian

In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014) (discussed here), the California Supreme Court held that an arbitration agreement "requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy" and unenforceable. In Fowler v. CarMax (Cal.App. unpub. 1/25/15), the California Court of Appeal affirmed in part a trial court order enforcing a class action waiver and compelling arbitration of individual wage and hour claims, but followed Iskanian in holding that the trial court erred in compelling arbitration of PAGA claims.

On December 14, 2015, the Supreme Court of the United States denied certiorari of the decision in Fowler, sub nom. CarMax Auto Superstores California, LLC v. Areso. The SCOTUS web page for CarMax is here, and the SCOTUSblog page for it is here.

DIRECTV, Inc. v. Imburgia: SCOTUS Rules on Concepcion and the "Law of Your State"

A quick word on DIRECTV, Inc. v. Imburgia (SCOTUS 12/14/15), in which the Supreme Court held that a California Court of Appeal erred in refusing to enforce a class action waiver in a somewhat unique arbitration clause. The clause provided that the entire arbitration provision was unenforceable if the “law of your state” made class-arbitration waivers unenforceable, but also declared that the arbitration clause was governed by the Federal Arbitration Act (FAA).

The Court held that the FAA preempted the Court of Appeal's decision. As explained in this article by Ronald Mann on SCOTUSblog, the opinion rests on three basic premises: "First, the Court concludes that the contract unambiguously refers to valid state law, not to the doctrine preempted by the Court’s decision in Concepcion." Second, "references to the 'law' of a state refer to 'valid law,' rather than 'the law as it would be in the absence of federal preemption.'" Third, the Court of Appeal relied on the fact that the language at issue was in an arbitration clause and failed to provide "any real non-arbitration justification for the ruling...."

The opinion is available here, and the SCOTUSblog page on the opinion is here.

Governor Vetoes Employment Arbitration Bill

I wrote recently in the Daily Journal ("Does the FAA cover your agreement?") about AB 465 (Legislative Counsel's Digest here), which would have enacted Labor Code section 925, providing, inter alia, as follows:

No person may require another person, as a condition of employment, to agree to the waiver of any legal right, penalty, forum, or procedure for any employment law violations; no person may threaten, retaliate, or discriminate against another person based on a refusal to agree to such waiver; any such waiver required as a condition of employment or continued employment is unconscionable, against public policy, and unenforceable; any waiver of a person’s employment rights must be knowing, voluntary, in writing, and expressly not made as a condition of employment.

Governor Brown vetoed AB 465 on October 11. His veto message is here.

Carlson v. Home Team Pest Defense: Court Affirms Order Denying Enforcement of Unconscionable Arbitration Agreement

A quick word on Carlson v. Home Team Pest Defense (8/17/15) --- Cal.App.4th ---, an individual action in which the Court of Appeal affirmed a trial court order denying the defendant's motion to compel arbitration, holding as follows:

The arbitration agreement was procedurally unconscionable because it was a contract of adhesion presented it on a take-it-or-leave it basis, and the defendant did not provide the plaintiff with its specific Dispute Resolution Policy or the AAA arbitration rules incorporated into it. If the plaintiff had refused to sign, she would have lost both the job offer and her unemployment insurance benefits.

The agreement was substantively unconscionable primarily because the agreement required the plaintiff to arbitrate all claims, but allowed the defendant to sue the plaintiff in court for violation of its competition and intellectual property claims. The trial court's finding that the agreement was "one-sided, objectively unreasonable, and lacked mutuality" was supported by other factors as well.

The Federal Arbitration Act (FAA) did not preempt California's unconscionability analysis, which is a "generally applicable contract defense" under the FAA.

Given all of the substantively unconscionable provisions of the arbitration agreement, the trial court did not abuse its discretion by invalidating the entire agreement, rather than severing a provision requiring the parties to share the costs of arbitration from the agreement. Severing all of the one-sided provisions from the agreement would have required the court to re-write it entirely.

The opinion is available here.

Performance Team Freight Systems v. Aleman: Truck Drivers Failed to Demonstrate that Their Independent Contractor Agreements Fell Outside Scope of FAA

Performance Team Freight Systems, Inc. v. Aleman (11/2/15) --- Cal.App.4th --- is another case dealing with the scope of the Federal Arbitration Act (FAA) and the exclusion for contracts of employment of transportation workers "engaged in foreign or interstate commerce." See Garrido v. Air Liquide Industrial U.S. LP (10/26/15) --- Cal.App.4th --- (discussed here); Garcia v. Superior Court (Southern Counties Express, Inc.) (5/15/15) --- Cal.App.4th --- (discussed here). 

In Performance Team, a number of truck drivers filed individual DLSE wage and hour claims against the respondent. The respondent then filed a superior court action to compel arbitration and stay the DLSE actions pursuant to an arbitration clause in the drivers' independent contractor agreements. The trial court denied the motions, holding that the drivers were transportation workers engaged in foreign or interstate commerce and therefore excluded from the scope of the FAA. The court further held that the drivers' claims fell outside the scope of their independent contractor agreements.

The Court of Appeal reversed, holding as follows:

Even if the drivers were transportation workers engaged in foreign or interstate commerce - an issue which the Court did not decide - the drivers failed to meet their burden to demonstrate that their independent contractor agreements were "contracts of employment."

The only evidence relevant to the issue of whether the individual respondents entered into contracts of employment was presented by Performance Team, which submitted the subject agreements and the declaration of its driver manager. Each agreement was labeled “Independent Contractor Agreement” and specifically described each individual respondent as an “independent contractor.” Each agreement further stated: “For all purposes, [individual respondent] shall be an independent contractor and not an employee of [Performance Team].”

Absent such evidence, the trial court erred in finding that the FAA did not apply.

The trial court also erred in finding that the drivers' claims fell outside of the scope of the arbitration agreement. The agreement provided: "Any dispute between the parties with respect to the interpretation or the performance of the terms of this Agreement may be submitted to arbitration...." The drivers contended that they performed the trucking services required by the agreements, and resolving the drivers' claims would require interpretation of the agreement's terms. The claims thus fell squarely within the scope of the arbitration agreement.

Finally, the Court erred in finding unconscionability. Although the agreement was substantively unconscionable because it required the parties to share the cost of arbitration and failed to provide a procedure similar to a Berman hearing, the drivers failed to introduce evidence that the agreement was procedurally unconscionable. 

The opinion is available here.

Garrido v. Air Liquide: FAA Does Not Apply in Action by Interstate Transportation Worker; Gentry Factors Apply, and Trial Court Properly Denied Motion to Compel Individual Arbitration

In Garrido v. Air Liquide Industrial U.S. LP (10/26/15) --- Cal.App.4th ---, the plaintiff worked as a truck driver for the defendant, delivering industrial gases in California and neighboring states. He filed a putative class action alleging wage and hour violations against the defendant. The defendant moved to compel individual arbitration pursuant to arbitration agreement, which stated that it was governed by the Federal Arbitration Act (FAA).

The trial court denied the motion to compel arbitration. Analyzing the case under Gentry v. Superior Court (2007) 42 Cal.4th 443, the court held that the defendant could not enforce the agreement because doing so would prevent the plaintiff from bringing a class claim and would stand as an obstacle to his right to vindicate statutory labor rights. The defendant appealed, and the Court of Appeal affirmed, holding as follows:

Although the agreement stated that it would be governed by the FAA, the FAA did not apply here. The FAA does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce," which includes "transportation workers." As a truck driver transporting goods across state lines, the plaintiff was a "transportation worker," and the FAA did not apply.

Without the FAA, the California Arbitration Act (CAA) applied.

Although the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, that Gentry’s rule against employment class waivers was preempted by the FAA, Gentry still controls cases where the FAA does not apply. "While Iskanian made clear that the Gentry rule is preempted by the FAA, it did not go beyond that finding. Therefore, the Gentry rule remains valid under the CAA."

Substantial evidence supported the trial court's finding that the four Gentry factors were met: the potential recovery for any individual was modest; there existed a potential for retaliation against the employees; the plaintiff testified that he did not know of his rights during his employment, and the court could infer that the same was true of the other employees; and requiring each employee to bring a separate action would create "real world obstacles to the vindication of class members’ rights..."

"In light of these determinations, the trial court correctly found that a class proceeding here would be a significantly more effective way of allowing employees to vindicate their statutory rights," and the defendant could not enforce the arbitration agreement.

The opinion is available here.

Sakkab v. Luxottica: Ninth Circuit Holds that Federal Arbitration Act Does Not Preempt Iskanian Holding that PAGA Representative Action Waivers Are Unenforceable

In Sakkab v. Luxottica Retail North America, Inc. (9th Cir. 9/28/15) ___ F.3d ___, the Ninth Circuit has held that the Federal Arbitration Act (FAA) does not preempt the holding of Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014) that agreements to waive representative claims under the Labor Code Private Attorneys General Act of 2004 (PAGA) are not enforceable.

Plaintiff Shukri Sakkab filed a class and PAGA representative action against Luxottica, accusing it of misclassifying supervisors in its Lenscrafters stores as exempt employees. The district court granted Luxottica's motion to compel arbitration of all claims and dismissed Sakkab's complaint. Sakkab appealed, arguing that the waiver of his PAGA claims was not enforceable. The Ninth Circuit reversed, holding as follows:

The FAA provides that an agreement to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The FAA preempts state law "to the extent that it 'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'" However, under its "savings clause," the FAA does not preempt "generally applicable contract defenses, such as fraud, duress, or unconscionability."

The FAA does not preempt Iskanian, which held that that pre-dispute agreements to waive PAGA claims are unenforceable. First, the Iskanian rule is a "generally applicable contract defense" that bars any waiver of PAGA claims, "regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement."

Second, the rule does not conflict with the FAA's purposes: overcoming judicial hostility toward arbitration, and ensuring enforcement of the terms of arbitration agreements. 

Iskanian does not evidence judicial hostility toward arbitration. It does not prohibit arbitration of PAGA claims. "It provides only that representative PAGA claims may not be waived outright." 

Iskanian does not conflict with the FAA's goal of ensuring enforcement of the terms of arbitration agreements. In AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 321, the Supreme Court considered California's Discover Bank rule, which invalidated agreements to waive class claims in certain consumer cases. Concepcion held that the alternative to such a waiver, class arbitration, would sacrifice the principal advantages of arbitration: informality, speed, and efficiency. The Court thus held that the Discover Bank rule interfered with the parties' selection of the arbitral forum.

In contrast, because class actions and representative PAGA actions differ fundamentally, the Iskanian rule prohibiting waiver of representative PAGA claims "does not diminish parties’ freedom to select informal arbitration procedures."

Because a PAGA action is a statutory action for penalties brought as a proxy for the state, rather than a procedure for resolving the claims of other employees, there is no need to protect absent employees’ due process rights in PAGA arbitrations.... Because representative PAGA claims do not require any special procedures, prohibiting waiver of such claims does not diminish parties’ freedom to select the arbitration procedures that best suit their needs. Nothing prevents parties from agreeing to use informal procedures to arbitrate representative PAGA claims.

Finally, the Court's conclusion that the FAA does not preempt the Iskanian rule is bolstered by the fact that PAGA is part of California's legislative scheme for enforcing its labor laws, and such legislation falls within California's police powers. A PAGA action is a form of qui tam action, and the FAA was not intended to preclude states from authorizing qui tam actions. 

Given the Court's holding that the PAGA waiver is invalid, the Court remanded to the district court to determine whether the PAGA claims should be arbitrated or litigated in court. 

The opinion is available here.

Universal Protection Service v. Superior Court (Parnow): Incorporation of AAA Rules into Arbitration Agreement Gives Arbitrator Power to Determine Whether Agreement Authorizes Class Arbitration

Universal Protection Service, LP v. Superior Court (Parnow) (8/18/15) --- Cal.App. 4th --- is another case addressing whether the court or arbitrator has authority to decide the arbitrability of claims.

Employees filed a class action and representative action under the Labor Code Private Attorneys General Act (PAGA) alleging wage claims against their former employer, Universal Protection Services (UPS). UPS cross-complained, seeking a declaration that (1) the trial court, not the arbitrator, should decide whether the parties' arbitration agreement barred class relief and (2) that the arbitration agreement barred class actions. UPS then moved to compel individual arbitration and stay the court proceedings. The trial court denied the petition, ruling that the arbitrator should decide the arbitrability issues. The Court of Appeal affirmed, holding as follows:

The American Arbitration Association (AAA) employment arbitration rules provide: "The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement." In addition, the AAA Supplementary Rules for Class Arbitrations give the arbitrator authority to decide "whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class."

Because the arbitration agreement incorporated the AAA rules, the arbitration agreement "clearly and unmistakably" gave the arbitrator the power to decide whether the agreement authorizes class arbitration.

The opinion is available here.

Brennan v. Opus Bank: Arbitration Agreement Incorporating AAA Rules Gives Arbitrator the Power to Determine Arbitrability of Employment Claims Between Sophisticated Parties

In Brennan v. Opus Bank, ___ F.3d ___ (9th Cir. 8/11/15), an executive-level employee, Brennan, sued his former employer, Opus, alleging that Opus violated his employment agreement. Brennan filed in district court, alleging that his employment agreement's arbitration clause was unconscionable and unenforceable. Opus moved to compel arbitration, arguing that the arbitration clause incorporated the rules of the American Arbitration Association (AAA), which require the arbitrator to determine the arbitrability of Brennan's claims. The district court granted the motion to compel, and the Ninth Circuit affirmed, holding as follows: 

Federal law applied to the arbitrability question because the agreement was a contract "evidencing a transaction involving [interstate] commerce" and thus fell under the Federal Arbitration Act (FAA). Further, the Employment Agreement did not "clearly and unmistakably" indicate that California’s law of arbitrability controlled, even though it provided that the parties would "retain the rights of all discovery provided pursuant to the California Code of Civil Procedure” and that “[a]ll rights, causes of action, remedies and defenses available under California law and equity . . . as though in a court of law.”

While the Employment Agreement is clear that California’s procedural rules, rights, and remedies apply during arbitration, it says nothing about whether California’s law governs the question whether certain disputes are to be submitted to arbitration in the first place.

Under federal arbitrability law, the agreement "clearly and unmistakably" delegated the arbitrability question to the arbitrator by incorporating the AAA rules. Nontheless, the Court limited its holding to situations involving "sophisticated parties" such as Brennan and Opus.

The case involved three separate agreements: (1) the Employment Agreement; (2) the arbitration agreement within the Employment Agreement; and (3) the delegation clause within the arbitration agreement.

[Because] Brennan failed to “make any arguments specific to the delegation provision,” [Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), 74], and instead argued “that the [Arbitration Clause] as a whole is unconscionable under state law,” id. at 75, “we need not consider that claim,” id. at 73, because it is for the arbitrator to decide in light of the parties’ “clear and unmistakable” delegation of that question, as we held above. Accordingly, the district court did not err in dismissing Brennan’s claims in favor of arbitration.

The opinion is available here.

Sanchez v. Valencia Holding Co: Cal. Supreme Court Addresses Unconscionability, Enforceability of Consumer Arbitration Agreement

In Sanchez v. Valencia Holding Company, LLC (8/3/15) --- Cal.4th ---, the California Supreme Court has addressed a number of issues involving the enforcement of an arbitration provision in a car dealer's sales contract. 

In the underlying decision, Sanchez v. Valencia Holding Company, LLC (11/23/11) 200 Cal.App.4th 11 (discussed here), the Court of Appeal found the arbitration provision unenforceable as procedurally and substantively unconscionable. The Court held that AT&T Mobility LLC v. Concepcion, 563 U. S. __, 131 S.Ct. 1740 (2011), did not apply because the question was not "the enforceability of a class action waiver or a judicially imposed procedure that is inconsistent with the arbitration provision and the purposes of the Federal Arbitration Act (FAA)." 

The Supreme Court granted review in 2012, stating the issue as whether the FAA, under Concepcion, preempts unconscionability analysis of an arbitration provision in a consumer contract. 

After granting review, the Court issued its decision in Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109 (discussed here), in which it held that unconscionability remains a valid defense to petitions to compel arbitration, provided that they not facially discriminate against arbitration, that they are enforced evenhandedly, and that they do not disfavor arbitration by imposing procedural requirements that interfere with fundamental attributes of arbitration. 

Also after granting review, the Court ordered the parties to brief questions regarding the proper test for finding substantive unconscionability: 

[T]his court has used a variety of terms, including "unreasonably favorable" to one party (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1145); "so one-sided as to shock the conscience" (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (2012) 55 Cal.4th 223, 246); "unfairly one-sided" (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071-1072); "overly harsh" (Armendariz v. Foundation Health Psychare Services, Inc. (2000) 24 Cal.4th 83, 114); and "unduly oppressive" (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925). 

Which, the Court asked, is the proper test? 

Answering these questions, the Supreme Court reversed the decision of the Court of Appeal, holding as follows: 

A party must show both procedural and substantive unconscionability in order to void a contract. The analysis is "highly dependent on context," and the standard for substantive unconscionability may be stated in any number of different ways, including each of those set forth above. The standard is, "as it must be, the same for arbitration and nonarbitration agreements." 

The contract at issue was one of adhesion. Although not all contracts of adhesion are procedurally unconscionable, the "adhesive nature of the contract is sufficient to establish some degree of procedural unconscionability" and require analysis of substantive unconscionability. 

The contract provided that an award could not be appealed unless: it were for $0; it exceeded $100,000; or it granted a request for injunctive relief. This provision was not substantively unconscionable. The right to appeal awards of $0 or more than $100,000 is not "significantly more beneficial to the seller," the party drafting the contract. And given the "broad impact that injunctive relief may have on the car seller's business," it would not be unreasonable to allow the seller to appeal an award granting injunctive relief. 

The contract provided that the seller would advance the consumer's arbitration fees up to $2,500, subject to apportionment by the arbitrator, and the appealing party would pay the appellate fees and costs, subject to apportionment by the appellate panel. While this clause would be unconscionable in the context of unwaivable statutory employment rights, California allows arbitration fees and costs to be charged to consumers, except those who are indigent. Cal. Code Civ. Proc. 1284.3. As a result, a consumer attacking this clause would need to present evidence of his inability to pay these fees. The plaintiff here did not do so, and the clause therefore is not unconscionable. 

The contract provided that the parties retained their rights to self-help remedies, such as repossession. This was not unconscionable because: it is offset by a provision that allows the parties to go to small claims court; self-help remedies are always sought outside of the litigation process; and repossession fulfills a legitimate business need in the auto industry. 

The Consumer Legal Remedies Act (CLRA) provides that a consumer's waiver of his or her right to bring a class action is "unenforceable and void." This provision is preempted "insofar as it bars class waivers in arbitration agreements covered by the FAA." 

Justice Chin concurred in the result but dissented from the reasoning. He argued: the FAA requires enforcement of the class action waiver; unconscionability remains a valid defense after Concepcion; the consumer failed to establish either procedural unconscionability here; to be substantively unconscionability, a contract -- taken as a whole -- must "shock the conscience," and other formulations of the standard should not be used; and neither the individual clauses challenged nor the arbitration agreement as a whole was substantively unconscionable under any standard endorsed by the majority. 

The opinion is available here. 

Pinela v. Neiman Marcus: Court Invalidates "Delegation Clause" Giving Arbitrator Right to Rule on Enforceability of Arbitration Clause; Finds Arbitration Clause Unconscionable

In Pinela v. Neiman Marcus Group, Inc. (6/29/15) --- Cal.App.4th ---, the plaintiffs brought a class and PAGA representative action alleging a number of wage and hour violations. The trial court granted the defendant's motion to compel arbitration, except as to the PAGA claims. The trial court later reconsidered and denied the motion, holding that the arbitration agreement was illusory. The Court of Appeal affirmed, holding as follows:

Under Code of Civil Procedure section 1008, a trial court may exercise its inherent discretion to reconsider any issue at any time, and the trial court maintained jurisdiction to reconsider the arbitration order, even after entering that order compelling arbitration.

Although the arbitration agreement delegated questions of its enforceability to the arbitrator, this clause did not satisfy the conditions required for a valid delegation clause. First, Peleg v. Neiman Marcus Group,Inc. (2012) 204 Cal.App.4th 1425, (discussed here) found that the same delegation clause did not "clearly and unmistakably delegate enforceability questions to the arbitrator," as required, because a second clause regarding severability provided that the court may decide the same issue. Second, the delegation clause was not irrevocable, as required, because "both the delegation provision and the Agreement as a whole are unconscionable" and therefore revocable.

As to unconscionability, the Court found that the delegation clause was procedurally unconscionable because it was part of a contract of adhesion. In addition, it was substantively unconscionable because it included an element of surprise, in that an unsophisticated person likely would not understand it and because the clause imposed an "unfair burden that is different from the inherent features and consequences of delegation clauses" in that the agreement included a Texas choice-of-law provision that would not allow application of California's unconscionability analysis.

Having found that the delegation clause was unconscionable, the Court next found that the entire agreement was unconscionable, not because it was illusory, but because it included at least three unconscionable terms: the Texas choice-of-law clause; the clause providing for a shortened statute of limitations; and the clause allowing the arbitrator to award fees and costs "to the extent such an award is permitted by applicable law."

The opinion is available here.

Williams v. Superior Court (Pinkerton Governmental Services): Trial Court Cannot Split PAGA Action and Compel Arbitration of Individual Issues

Williams v. Superior Court (6/9/15) --- Cal.App.4th ---, is one of those rare opinions that is written clearly and concisely. The introduction gives you almost all you need to know:

Petitioner Andre Williams filed a single-count representative action pursuant to the Private Attorney General Act, Labor Code section 2699 et seq. (PAGA), alleging that real party in interest Pinkerton Governmental Services, Inc. (Pinkerton) violated various provisions of the Labor Code [related to rest periods]. In response, Pinkerton moved to enforce petitioner’s waiver of his right to assert a representative PAGA claim, or alternatively, for an order staying the PAGA claim, but sending the “individual claim” that petitioner had been subjected to Labor Code violations to arbitration pursuant to a written agreement. The trial court denied the motion to enforce the waiver, but granted the alternative relief. Williams petitioned this court for a writ reversing the trial court’s order, arguing that it violated Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 384 (Iskanian). We agree with the trial court that under Iskanian, the waiver of a right to assert a representative PAGA claim in any forum is unenforceable. However, we conclude that petitioner’s single cause of action under PAGA cannot be split into an arbitrable “individual claim” and a nonarbitrable representative claim. Accordingly, we grant the petition.

A little additional detail: Pinkerton argued, and the trial court agreed, that there was a "threshold dispute" as to whether Pinkerton denied the plaintiff rest periods, and that Pinkerton had the right to compel the plaintiff to arbitrate this dispute. The Court of Appeal rejected this argument.

The opinion is available here.

Khalatian v. Prime Time Shuttle: Under Federal Arbitration Act, Shuttle Driver's Misclassification Claims are Subject to Arbitration

In Khalatian v. Prime Time Shuttle (5/15/15) --- Cal.App.4th ---, the plaintiff brought an individual claim against the defendants, alleging that they misclassified him as an independent contractor, rather than as an employee. The defendants petitioned to compel arbitration, and the trial court denied the petition. The Court of Appeal reversed, holding as follows:

The Federal Arbitration Act (FAA) applied because the plaintiff was a shuttle driver who picked up and dropped off people primarily at LAX, and thus was involved in interstate commerce.

The arbitration agreement covered the plaintiff's allegation that he was misclassified. The agreement provided that "any controversy or claim ... arising out of or relating to" the parties' agreement, including any argument that the agreement was void or voidable, would be subject to arbitration. The plaintiff's claim that the agreement was void or voidable under California wage law arose out of and related to the parties' agreement. The fact that the plaintiff asserted statutory wage claims did not change this analysis.

The defendants did not waive their right to compel arbitration, even though they litigated for 14 months in court before filing their petition to compel. Waivers are not approved lightly, and the party claiming waiver bears a heavy burden of proof. 

Only one defendant served any discovery, and that discovery was limited. The plaintiff produced 177 pages of documents and gave little or no information in response to interrogatories. No depositions were taken and no discovery motions were filed. 

Other motion work also was limited. The defendants demurred to the complaint, but withdrew the demurrer when the parties agreed to allow the plaintiff to amend. 

Even though the defendants litigated for 14 months, the delay caused the plaintiff no prejudice. The defendants did not stretch out the litigation, and the trial date was more than a year away when the defendants filed their petition.

The opinion is available here. 

Garcia v. Superior Court: Court Must Rule on Application of FAA Before Ordering Arbitration of Truck Driver Wage Dispute

In Garcia v. Superior Court (Southern Counties Express, Inc.) (5/15/15) --- Cal.App.4th ---, the petitioners were truck drivers who were engaged by the defendant to haul shipping containers from the ports of Los Angeles and Long Beach to facilities throughout Southern California. The drivers repeatedly signed independent contractor agreements and vehicle leases, both of which included arbitration clauses.

The drivers filed wage claims with the Division of Labor Standards Enforcement (DLSE), alleging that the defendant improperly classified them as independent contractors, rather than employees. The defendant petitioned the Superior Court to stay the DLSE proceedings and compel arbitration. The trial court held evidentiary hearings, found that the arbitration agreements were not procedurally unconscionable, and compelled arbitration. The drivers sought writ relief, and the Court of Appeal reversed and remanded, holding as follows:

The Federal Arbitration Act (FAA) does not apply to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." 9 U.S.C. § 1 et seq.

The drivers argued that they were workers engaged in interstate commerce, and their contracts were exempt from the FAA. They argued that because the FAA did not apply, Labor Code section 229 would allow them to pursue their wage claims "without regard to the existence of any private agreement to arbitrate."

The defendant argued that the independent contractor agreements and vehicle leases were not "contracts of employment," the FAA applied, and the drivers should be compelled into arbitration.

The trial court erred in not deciding whether the independent contractor agreements and vehicle leases were contracts of employment for transportation workers engaged in interstate commerce, within the meaning of the FAA’s section 1 exemption.

The opinion is available here.