Posts belonging to Category Arbitration



Arbitration Agreements Imposed on Exotic Dancers Held Unconscionable

The U.S. District Court for the Northern District of California recently held that an arbitration agreement in the “Performer Contracts” of exotic dancers was both procedurally and substantively unconscionable and denied a motion to compel arbitration brought by their employer nightclub operator, SFBSC Management, LLC (“BSC”).  See Roe v. SFBSC Management, LLC, No. 14-cv-03616-LB (N.D. Cal. March 2, 2015) (slip opinion available here).

While the Federal Arbitration Act (“FAA”) incorporates a strong federal policy of enforcing arbitration agreements, it “does not confer a right to compel arbitration of any dispute at any time.” Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 474 (1989). Under the FAA, federal courts may refuse to enforce an arbitration agreement based on generally applicable state-law contract defenses, such as fraud, duress, or unconscionability. In particular, contractual unconscionability includes both a procedural and substantive component, analyzed by courts on a sliding scale wherein the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required and vice versa.

In Roe, the plaintiff exotic dancers had brought a collective and class action complaint alleging various state and federal wage-and-hour law violations, contending that BSC had misclassified them as independent contractors, rather than employees. BSC sought to compel these claims to arbitration pursuant to the agreement within the dancers’ Performer Contracts requiring that all disputes be decided by binding arbitration. Slip op. at 2.

The plaintiffs argued that the arbitration agreement was unconscionable, in part because of the coercive circumstances surrounding the signing of the agreements. Specifically, the plaintiffs presented evidence that the clubs’ management presented them with the contracts when they were “mostly naked” and then rushed them to sign. The dancers were told that they could not take the contracts home to review and believed they could not review prior to signing them. Id. at 4-5. The plaintiffs also contended that the option given on some of the contracts to “accept or reject” the terms was a sham, alleging that the club would purposely “lose” the agreement if a performer checked the “reject” checkbox and would present the performer with a new agreement to fill out “correctly,” or else management would find a reason not to hire the performer. Id. at 5. Management even presented the contracts for signing when performers were intoxicated, according to the plaintiffs. Based on these facts, Magistrate Judge Laurel Beeler found procedural unconscionability, which focuses on the circumstances surrounding the negotiation of the contract and arises from surprise or oppression.

Further, the court also found several terms of the agreement to be substantively unconscionable, focusing on the harshness and one-sidedness of the contract’s terms. The court found that the “one-way ban” on collective actions, barring the plaintiffs from consolidating claims, lacked mutuality as consolidation was forbidden only for the plaintiffs’ claims—even though defendants are also able to certify classes under Federal Rule of Civil Procedure 23. The court also found substantively unconscionable the cost-shifting and cost-sharing provisions of the arbitration agreement, which required, among other things, that the “costs of arbitration shall be borne equally by performer and owner unless the arbitrator concludes that a different allocation is required by law.” Id. at 16. The court noted that the Ninth Circuit has time and again rejected such cost-allocation terms requiring employees to split arbitrator’s fees–which can be exorbitantly high–with the employer. Id. at 16.

The court ultimately declined to sever the problematic provisions from the contract and deemed the entire arbitration agreement unenforceable. As a result, BSC’s motion to compel arbitration of the exotic dancers’ claims was denied. With this ruling, the court found it was “keeping in mind the ‘overarching’ concern to do justice, and the fact that arbitration, however valuable and strongly preferred, is meant only to provide an alternative forum to litigation, not to overstuff one party’s quiver.” Id. at 17.

BSC plans to appeal this decision to the Ninth Circuit Court of Appeals.

Authored by: 
Liana Carter, Senior Counsel
CAPSTONE LAW APC

McGill v. Citibank: Consumer Attorneys Buoyed by Grant of Review

On April 1, 2015, the California Supreme Court granted review of McGill v. Citibank to decide whether Citibank can use an arbitration clause to stymie a customer from pursuing public injunctive relief under California’s consumer protection statutes. If awarded, a public injunction allows a successful litigant to stop an unlawful business practice statewide. The stakes are high: if the Court sides with Citibank, this powerful tool for California consumers effectively will be eviscerated. However, many plaintiffs lawyers are hopeful that the California Supreme Court will demonstrate the same inclination to prevent the further erosion of public remedies in California as it did in Iskanian v. CLS Transportation (see infra). McGill v. Citibank N.A.232 Cal. App. 4th 753 (2014), rev. granted, No. S224086 (Cal. April 1, 2015).

In McGill, the plaintiff (represented by Capstone Law APC) brought claims under California’s consumer protection statutes (the Consumer Legal Remedies Act, the Unfair Competition Law, and False Advertising Law) against Citibank for misrepresenting its “Credit Protector” insurance program to its cardholders. Along with damages, Ms. McGill sought to enjoin Citibank from engaging in this unfair business practice. The trial court partially granted Citibank’s motion to compel arbitration, but kept the public injunction remedy in court pursuant to the holding of two earlier Supreme Court decisions, Broughton v. Cigna Healthplans of California, 21 Cal. 4th 1066 (1999) and Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003) (together referred to as having established the “Broughton-Cruz rule”). The Broughton-Cruz rule holds that, to the extent they seek public injunctive relief under California’s consumer protection statutes, claims must remain in court, even if all the other claims are sent to arbitration.

The appellate court reversed, holding that the Broughton-Cruz rule had been preempted by “the sweeping directive” of the Federal Arbitration Act (“FAA”) as stated in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which struck down a California rule barring class action waivers. See McGill at 757. However, the intermediate court relied on passages from Concepcion that simply recited decades-old principles from Southland Corp. v. Keating, 465 U.S. 1 (1984) and Perry v. Thomas, 482 U.S. 483 (1987) precluding states from exempting private claims from being brought in the arbitral forum—cases that Broughton and Cruz carefully distinguished in lengthy analyses. In fact, the Court in Broughton and Cruz took its cue from a separate line of U.S. Supreme Court precedent meant to preclude an arbitration agreement from forcing a “prospective waiver of a party’s right to pursue statutory remedies.” Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 637 (1985); see also American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2310 (2013).

Importantly, Broughton and Cruz recognized that arbitrators have no power to issue public injunctions, as they have no jurisdiction over nonparties. See Broughton at 1081, Cruz at 312. This “institutional shortcoming” precludes public injunctions from being issued by arbitrators at all—even if the claimant were completely successful in proving the merits of her claims in arbitration. Id. In other words, a plaintiff would waive his or her right to pursue public injunctions if it were not preserved in court; the remedy itself would be extinguished simply by virtue of its transfer from court to arbitration.

Broughton and Cruz also held that the FAA did not preempt a state law rule preserving wholly public claims or remedies such as the public injunction, which is not aimed at “resolv[ing] a private dispute but to remedy a public wrong.” Broughton, 21 Cal. 4th at 1079-80. This principle was just recently reaffirmed in Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal. 4th 348, 387-88 (2014), which held that the FAA did not preempt a state law protecting public enforcement action like the Private Attorneys General Act representative action from forfeiture. Iskanian embodies the Court’s recognition that the FAA, as intended by Congress and construed by the U.S. Supreme Court, does not have unlimited preemptive reach. A decision upholding the Broughton-Cruz rule would be consistent with both Iskanian and the non-waiver principle only recently reaffirmed by the U.S. Supreme Court in Italian Colors.

However, the fate of the Broughton-Cruz rule may not even be reached in McGill. Unlike the agreements in Broughton and Cruz, Citibank’s arbitration agreement contains a term expressly precluding an arbitrator from awarding public injunctions. Thus, the California Supreme Court may well strike the offending term on unconscionability grounds or as a clear violation of the non-waiver principle, without reaching the broader issue of whether an arbitration agreement can be invalidated due to the inherent unavailability of certain remedies in the arbitral forum.

Authored by: 
Ryan Wu, Senior Counsel
CAPSTONE LAW APC

Studies Reveal That Class Actions Are Still Vital To Consumer Justice

In 2013, the U.S. Chamber of Commerce (which represents some of the largest corporations in the world), published a memo purporting to be “An Empirical Analysis of Class Actions” (available here). The memo, drafted by attorneys at the corporate defense firm Mayer Brown LLP, determined that class actions do not provide a significant benefit to consumers, based on a review of class actions filed in 2009.

However, when the National Association of Consumer Advocates (NACA) and the American Association for Justice (AAJ) reviewed the same cases in a report released last month, they arrived at a very different conclusion (report available here). The NACA/AAJ report found that class actions remain hugely advantageous to consumers in a wide range of cases. Notable benefits to consumers included:

  • Recovery of $25 million for consumers overcharged for propane by Ferrellgas, who allegedly reduced the amount of propane in its tanks without notifying consumers or changing the labels;
  • Recovery of $219 million for investors in Bernie Madoff’s Ponzi scheme who lost their retirement savings; 
  • Relief for thousands of disabled and elderly residents of New York City Housing Authority buildings, who forced the city to repair broken elevators in a timely matter; and 
  • Award of $27.8 million for property owners who suffered damages due to the 2008 spill of coal ash sludge from a burst dike at a coal plant operated by the Tennessee Valley Authority.

The Consumer Financial Protection Bureau (CFPB), created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, has been charged with studying the impact of pre-dispute arbitration agreements in the context of consumer financial products and services, and is poised to release a report later in 2015 that is expected to show that forced arbitration clauses impact tens of millions of consumers and deny relief to consumers harmed by illegal or abusive practices in the financial services industry.

The CFPB released its preliminary results in December 2013 (available here), which found that a sampling of just eight consumer class actions settled between 2010-2012 yielded $350 million in payments to more than 13 million consumers. See CFPB Arbitration Study Preliminary Results at 104. The study also found that, despite the fact that arbitration clauses with class action waivers are standard in the financial industry, few consumers choose to arbitrate their claims (the American Arbitration Association, or AAA, which administers the vast majority of alternative dispute resolution proceedings for large companies, reported fewer than 300 cases each year between 2010 to 2012). Id. at 13. In that same time frame, the study found 29 instances where the AAA “declined to administer the arbitration because of the company’s failure to pay required fees or deposits” and refused to administer further disputes concerning those companies, denying the opportunity for relief for even those intrepid consumers who chose to go the arbitration route. Id. at 117. Of the 29 cases, 28 were consumer-filed disputes, and 23 were credit card disputes.

Thus, class actions are not only beneficial to consumers, but often are the only way to achieve justice against powerful corporations. In the words of former U.S. Supreme Court Justice William O. Douglas, “The class action is one of the few legal remedies the small claimant has against those who command the status quo.” Eisen v. Carlisle and Jacquelin, 417 U.S. 156, 186 (1974).

 

Editor’s Note: the CFPB Arbitration Study was released on March 10, 2015 and is available here.

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.