Articles from December 2014

Zaborowski v. MHN Gov’t Services: 9th Cir. Affirms Arb. Agreement as Unconscionable and Unenforceable

In an unpublished, partly divided opinion, the Court of Appeals for the Ninth Circuit affirmed a ruling by Judge Susan Illston for the Northern District of California, finding that MHN’s arbitration agreement in an employment contract is unconscionable and unenforceable. Zaborowski v. MHN Government Services, Inc., et al., No. 13-15671 (9th Cir. Dec. 17, 2014) (slip op. available here). As to the unconscionability issue, the three judges on the panel agreed, but split where Judge Ronald Gould dissented as to the lower court’s decision not to sever the offending provisions, holding the whole agreement unenforceable instead.

The Ninth Circuit agreed with the lower court that the arbitration agreement was both procedurally and substantively unconscionable. Substantively, multiple aspects of the arbitration clause were correctly found to be unconscionable, including a “unjustifiably one-sided” arbitrator-selection clause; a drastically shortened six-month limitations period; a costs-and-fees shifting clause which awarded fees to a “substantially prevailing party” in contrast to statutory cost-shifting provisions in state and federal law; and excessive filing fees and waiver of punitive damages. Slip op. at 3-6 (citing Chavarria v. Ralph’s Grocery Co., 733 F.3d 916). Regarding the unreasonably shortened statute of limitations, the Ninth Circuit found that it did not provide a party sufficient time to effectively pursue judicial remedies, stating, “[t]he district court correctly noted that violations of labor laws are not discovered overnight: It takes time to recognize the violation, investigate it, and file a claim.” Additionally, it found that “the costs-and-fee-shifting clause results in an ‘unreasonable’ and ‘unexpected’ allocation of risks [citing Samaniego v.Empire Today LLC, 140 Cal. Rptr. 3d 492, 497 (2012)],” which serves to chill employees from seeking vindication of their rights through arbitration.

Judge Gould dissented as to the issue of severance; he would reverse the district court’s ruling on this issue, require severance, and leave the arbitration agreement in place. He wrote, “[i]n my view, Concepcion and its progeny should create a presumption in favor of severance when an arbitration agreement contains a relatively small number of unconscionable provisions that can be meaningfully severed and after severing [them], the arbitration agreement can still be enforced.” Slip op., Gould dissenting op. at 2 (citing AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011)).

Removal of PAGA Claims Denied Cert Review in Baumann v. Chase, while Dart Cherokee Eases Removal of Class Actions

On December 15, 2014, the U.S. Supreme Court denied Chase Investment Services Corp.’s petition for certiorari to review a precedent-setting decision in March by the Ninth Circuit in Baumann v. Chase Investment Services Corp., where the court had held the company could not remove the plaintiff’s wage-and-hour claims for PAGA penalties to federal court either under CAFA or traditional diversity jurisdiction. No. 12-55644 (9th Cir. March 13, 2014) (Mr. Baumann is represented by Capstone Law APC). Previously, a Ninth Circuit panel had denied Chase’s request to have the full court rehear the decision in the case. The decision by the Ninth Circuit in March reversed a California district court’s ruling that the aggrieved employees’ claims to civil penalties could be aggregated to satisfy the amount in controversy requirement for diversity jurisdiction.

Meanwhile, on the same day, the U.S. Supreme Court ruled that a class action defendant is not required to provide evidence to support its effort to remove its case. Dart Cherokee Basin Operating Co. LLC v. Owens, Case No. 13-719, 574 U.S. __ (2014) (slip op. available here). The plaintiff, royalty owner Brandon Owens, originally filed suit in Kansas state court. The majority concluded that the Tenth Circuit Court of Appeals had abused its discretion in refusing to review the lower court’s erroneous decision that the defendant, an energy company, had provided insufficient evidence to support its removal bid in a multi-million dollar class action over oil and gas royalties to federal court and further, could not cure the defect by submitting evidence post-removal. A defendant only needs to include a “plausible allegation” that the amount in controversy meets the jurisdictional threshold in a notice of removal, not evidentiary proof. Slip op. at 7.

The Court previously granted the defendant’s petition for writ of certiorari. Dart argued that the Tenth Circuit’s ruling split with other circuit courts which had held that the notice of removal need only satisfy a notice-pleading standard requiring a “short and plain statement of the grounds for removal.” 28 U.S.C. § 1446(a). Justice Ruth Bader Ginsburg wrote for the 5-4 majority, “[the Tenth Circuit’s denial of Dart’s request for review] froze the governing rule in the circuit for this case and future [CAFA] removal notices, with no opportunity for defendants in Dart’s position responsibly to resist making the evidentiary submission” and that the denial created a “bizarre” situation. Slip op. at 12-13. Justices John Roberts, Stephen Breyer, Samuel Alito, and Sonia Sotomayor also joined the majority, holding that a removal notice need only plausibly allege, not detail proof of, the amount in controversy.

Writing for the dissenters, Justice Antonin Scalia, joined by Justices Anthony Kennedy and Elena Kagan, said that the review was “improvidently granted” and the case should not have been taken up at all. Slip op., Scalia dissenting op. at 2. Since the Tenth Circuit gave no reason for its refusal to review the district court ruling, there was no evidence that the appeals court had abused its discretion. “Not long ago we held . . . that an appellate court should not presume that a district court intended an incorrect legal result when the order is equally susceptible of a correct reading . . . .” Slip op., Scalia dissenting op. at 2-3 (citing Sprint/United Management Co. v. Mendelsohn, 52 U.S. 379, 386 (2008)). Justice Clarence Thomas concurred with the dissent as to all but the last sentence—he opined that the high court did not even have jurisdiction to even review the Court of Appeals’ denial of permission to appeal.

Integrity Staffing v. Busk: Security Checks Not Compensable Under FLSA

On December 9, 2014, the United States Supreme Court ruled in a 9-0 decision that hourly warehouse workers at two warehouses in Nevada are not entitled to compensation under the Fair Labor Standards Act (“FLSA”) for time spent waiting to undergo and going through security screens at the end of their shifts. Integrity Staffing Solutions Inc. v. Busk, 574 U.S. __, No. 13-433 (2014) (slip op. available here). The Court reversed the Ninth Circuit Court of Appeals’ decision which held that the half hour at the end of each workday that employees spent waiting to go through the antitheft security checks could be compensable under the FLSA because the screens were “necessary” to the employees’ primary work as warehouse employees and done solely for the benefit of Integrity Staffing, the employer. Busk v. Integrity Staffing Solutions Inc., 713 F.3d 525 (9th Cir. 2013).

Justice Clarence Thomas, writing for the Court, reasoned that the security screens were neither “integral” nor “indispensable” to the employees’ principal work activities of packing goods for shipment, and thus did not under the FLSA, as amended by the Portal-to-Portal Act. Slip op. at 5 (internal citations omitted). The Court held that an activity is not integral and indispensable to an employee’s principal activities “unless it is an intrinsic element of those activities and one with which the employee cannot dispense if he is to perform those activities.” Slip op. at 6. Applying that standard to the case before it, the Court held that the security screenings were not an “intrinsic element” of retrieving products from warehouse shelves or packaging them to be shipped, stating that Integrity Staffing “could have eliminated the screenings altogether without impairing the employees’ ability to complete their work.” Id. at 7. The Court also noted that its conclusion is consistent with the Department of Labor’s (“DOL”) regulations, and its 1951 Opinion Letter, which found non-compensable pre-shift security checks at a rocket-powder plant for employees carrying matches and other items that had direct bearing on the safety of the employees (the DOL had also argued as an amicus for Integrity Staffing).

In a concurring opinion joined by Justice Elena Kagan, Justice Sonia Sotomayor noted the DOL reached the same conclusion regarding similar security screenings shortly after Congress amended the FLSA by enacting the Portal-to-Portal Act in 1947 and stated that the Court owes deference to the DOL’s determination. Though the concurrence omitted the “intrinsic element” language, it defined an “indispensable activity” as “one where an employee could not dispense with it without impairing his ability to perform the principal activity safely and effectively” (emphasis added). Slip op., Sotomayor concurring op. at 1. The concurrence stated that the security searches were merely “part of the process by which the employees egressed their places of work, akin to checking in and out and waiting in line to do so—activities that Congress clearly deemed to be preliminary or postliminary [under the Portal-to-Portal Act].” Id. (internal citations omitted).

Because it is based entirely on the FLSA and the Portal-to-Portal Act, Busk should have little to no effect on lawsuits brought under the California Labor Code or related regulations or rules. Indeed, unlike the FLSA, California’s wage and hour laws expressly provide that all time during which an employee is “subject to the control of an employer” is compensable. California Industrial Welfare Commission Order 9. 

CA Ct. of App. Follows 6th Cir.’s Reed Elsevier Ruling re Class Arbitration

In November, the California Court of Appeal, Fourth Appellate District, ruled unanimously in a wage-and-hour action involving Garden Fresh (owner and operator of Souplantation & Sweet Tomatoes restaurants) that courts, not arbitrators, decide whether an agreement to arbitrate disputes between parties authorizes class or representative arbitrations, where an agreement is silent as to the availability such non-individual arbitrations. Garden Fresh Restaurant Corp. v. Superior Court of San Diego County, No. D066208 (Fourth Dist. Div. 1 Nov. 17, 2014) (slip op. available here). Citing the Sixth Circuit’s decision in Reed Elsevier Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), the court held that, where an arbitration agreement does not “clearly and unmistakably” provide for class and/or representative arbitration, a “gateway issue” for the court to determine is whether a collective arbitration is allowed. Slip op. at 14.

In 2013, the plaintiff, former employee Moreno, filed a class and representative action under the Private Attorney General Act (PAGA) against Garden Fresh, alleging violations of the California Labor Code, PAGA, and California Unfair Competition Law. Garden Fresh moved to compel to arbitration the plaintiff’s individual claims since plaintiff had signed arbitration agreements, and moved to dismiss the class and PAGA claims, arguing that the arbitration agreements did not address the arbitration of such claims. A trial court granted the motion to compel, but referred the claims to an arbitrator, deferring to the arbitrator to determine whether the parties’ agreements contemplated class and/or representative arbitration.

Citing Reed Elsevier, where the Sixth Circuit had stated that the Supreme Court had “given every indication that classwide arbitrability is a gateway issue” because resolving the question is fundamental to how the parties will resolve their dispute, the court stated, “[f]or similar reasons, we conclude that a court, not an arbitrator, should also decide whether the parties agreed to arbitrate representative claims, such as the [PAGA] claim in this case . . . .” Slip op. at 11-12. The United States Supreme Court has repeatedly left the question open, but has stated in the past that class proceedings change the scope and nature of arbitration so fundamentally that it cannot be assumed that the parties agreed to it implicitly, even though they entered into an arbitration agreement. The panel cited Concepcion, which held that class arbitration was inconsistent with arbitration under the Federal Arbitration Act, to support expanding its conclusions to representative claims in addition to classwide claims. Ultimately, the ruling vacated part of the trial court’s order and directed it to answer the question as to whether the parties agreed to arbitrate class and/or representative claims and to determine whether the PAGA claims should be bifurcated and handled outside of arbitration.