Posts belonging to Category Arbitration

In Hernandez v. DMSI, N.D. Cal Follows Iskanian

On February 3, 2015, Judge Edward Chen of California’s Northern District issued an order in Hernandez v. DMSI Staffing LLC, No. C-14-1531 EMC (N.D. Cal Feb. 3, 2015) (slip op. available here), denying DMSI’s motion to compel arbitration to the extent it sought to enforce a waiver of the plaintiff’s representative claims under California’s Private Attorneys General Act (PAGA), following the reasoning of the California Supreme Court in its landmark ruling in Iskanian v. CLS Transportation. In Iskanian, the California Supreme Court held that an arbitration agreement precluding representative claims under PAGA is invalid as a matter of California public policy, and moreover that California’s rule against forced waivers of PAGA enforcement actions is not preempted by the Federal Arbitration Act (FAA). The Court emphasized that PAGA disputes—like qui tam actions—are between the state and the employer, and not between two contracting private parties.

Judge Chen’s recent ruling in Hernandez follows Iskanian’s reasoning, analogizing PAGA actions to qui tam actions, insofar as under PAGA a private citizen files suit in court to enforce the California Labor Code on behalf of the government. In Hernandez, the plaintiff sought civil penalties under PAGA for violations of the Labor Code, including: failure to pay minimum wage, failure to pay wages for all hours worked, failure to pay overtime, failure to pay wages timely upon termination, and failure to provide accurate and compliant wage statements. Defendants DMSI and Ross Stores sought to compel arbitration of the plaintiff’s individual claims, and to have the district court dismiss the plaintiff’s representative claims under PAGA. The court rejected the defendants’ arguments in support of enforcing the PAGA waiver, focusing on the enforceability of PAGA waivers under state law and on whether the state non-waiver rule is preempted by the FAA.

First, Judge Chen examined the issue of enforceability of PAGA waivers under state law. The court likened PAGA representative actions to qui tam actions, since they are both fundamentally law enforcement actions in which the real party in interest is the government, but where a private citizen plaintiff is authorized to bring the suit. The opinion went on to state that FAA preemption of the ban on PAGA waivers would not only “hinder the state’s ability to enforce its laws through qui tam actions” but would also “disable one of the primary mechanisms for enforcing the Labor Code.” (slip op. at 15, quoting Iskanian, 59 Cal. 4th 348 at 384.) Judge Chen expressed concern that compelling arbitration of a PAGA claim could “entirely waiv[e] a state agency’s statutory remedy,” since a PAGA action is invariably a “representative” action, and would thus be entirely extinguished by enforcing a “representative action” waiver. (Slip op. at 15.)

Second, Judge Chen analyzed whether the state law non-waiver rule is preempted by the FAA. The court noted that whether the FAA preempts the California rule announced in Iskanian is an issue of federal law, as to which the federal district courts are not bound by Iskanian. (Id. at 9.) Nonetheless, the court found Iskanian persuasive. The court further reasoned that the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), only bars state rules that “interfere with fundamental attributes of arbitration,” such as efficiency, informality, and expeditiousness, and “[t]he Iskanian rule against waiver of PAGA claims does not threaten to undermine the fundamental attributes of arbitration” because PAGA actions need not adhere to the time-intensive formalities of a Rule 23 class action, such as class certification and notice to absent plaintiffs. (Slip op. at 10-11, discussing Baumann v. Chase lnv. Servs. Corp., 747 F.3d 1117 (9th Cir. 2014).)

The court also rejected the defendant’s reliance on Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928 (9th Cir. 2013), which held that the FAA preempts the Broughton-Cruz rule. In Broughton-Cruz, a plaintiff seeking broad injunctive relief under various consumer statutes could not be compelled to arbitrate those claims; in Ferguson, the court determined that a state law that precludes arbitration of a particular type of claim must be preempted by the FAA. Judge Chen distinguished PAGA actions from the consumer claims addressed in Broughton-Cruz and Ferguson, reiterating the qui tam nature of PAGA actions—a PAGA action is not a dispute between two private parties, but brought on behalf of the state, which retains the majority of the penalties collected. On this point, the Hernandez court flatly disagreed with the several federal district courts that have refused to follow Iskanian, holding that these courts are simply incorrect because they fail to distinguish between the public law enforcement aspect of PAGA and the private enforcement actions for injunctive relief at issue in Ferguson.

Finally, and perhaps most importantly, the Hernandez court noted that principles of federalism support the court’s conclusion of no preemption, reasoning that labor law enforcement traditionally falls within a state’s police powers, and state sovereignty depends on a state’s authority over its law enforcement. Thus, “state laws dealing with matters traditionally within a state’s police powers are not to be preempted unless Congress’s intent to do so is clear and manifest.” (Slip op. at 14, citing Californians For Safe & Competitive Dump Truck Transp. v. Mendonca, 152 F.3d 1184, 1186 (9th Cir. 1998).)

In any event, given the firm rejection of the federal district courts that have refused to follow Iskanian, an eventual showdown in the Ninth Circuit Court of Appeals seems likely.

U.S. Supreme Court Denies CLS’ Cert. Petition in Iskanian

On Tuesday, January 20, 2015, the United States Supreme Court declined certiorari review of Iskanian v. CLS Transportation Los Angeles, LLC, No. 14-341. In June 2014, the California Supreme Court ruled that class action waivers in arbitration agreements are generally enforceable in light of Concepcion, but that waivers of representative claims brought under PAGA are not enforceable—holding that an employee’s right to bring a PAGA representative action is unwaivable and that the state law rule is not preempted by the FAA. Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (June 23, 2014). By denying cert., the Supreme Court leaves intact the California high court’s ruling requiring that representative actions brought under the PAGA proceed on a representative basis in some forum, whether it be court or in arbitration.

Bower v. Inter-Con: CA Ct. of App. Upholds Employer’s Waiver of Arb.

On December 31, 2014, a California Court of Appeal issued a ruling affirming the trial court’s decision to deny employer Inter-Con Security Systems Inc.’s motion to compel arbitration of a putative wage-and-hour class action. Bower v. Inter-Con Security Systems Inc., No. A135940 (First Dist. Div. 3 Dec. 31, 2014) (slip op. available here). The court held that the company had waived its right to arbitration because it knew of an existing right to compel arbitration, it acted inconsistently with that right by requesting discovery documents relating to the entire potential class, and its actions prejudiced the plaintiff. 

In August of 2011, the plaintiff Bower, a former security guard, filed a wage-and-hour class action lawsuit against Inter-Con. The lawsuit alleged that the defendant failed to provide armed guard employees the required meal and rest periods under California law. While Inter-Con did not immediately file a petition to compel arbitration, it stated as an affirmative defense and in its objections to the plaintiff’s discovery that Bower’s claims were subject to arbitration. However, although the defendant agreed to provide responses and documents limited to the plaintiff’s individual capacity, it provided “at least one substantive answer” regarding class issues and even propounded its own discovery on class-wide issues. Slip op. at 2. Inter-Con argued that it was not uncommon for wage-and-hour defendants to seek information on individuals with similar claims, so seeking class-wide discovery was not inconsistent with its right to arbitrate. The opinion, written by Justice William McGuiness and joined by Justices Stuart Pollak and Peter Siggins, states, “We will simply reiterate the trial court’s response to Inter-Con’s claim: ‘Come on. Of course it is.’ Discovery concerning individuals who may support a plaintiff’s factual claims is distinct from classwide discovery.” Id. at 8.

Inter-Con only sought to compel arbitration after the plaintiff indicated he would amend his complaint to include unarmed guards and after settlement negotiations fell through, around May of 2012. The defendant contended that its actions did not prejudice the plaintiff because Inter-Con did not gain an unfair advantage in the litigation, other than causing the plaintiff to incur court costs and legal expenses. However, the court found that Inter-Con’s actions caused the plaintiff unreasonable delay in taking advantage of the efficiencies of arbitration, and that was sufficient to waive the defendant’s right to compel arbitration. Among other tactics, the defendant pursued a class-wide settlement in its settlement negotiations even though the arbitration agreement’s terms limited its claims to arbitration on an individual basis only, which led the plaintiff believe the company intended to pursue a resolution in court. The court concluded, “The crux of the prejudice suffered by Bower is that he suffered delay and incurred costs in litigating and attempting to settle class claims that Inter-Con led him to believe would be encompassed within the litigation.” Slip op. at 11.

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)).