Posts belonging to Category Arbitration

9th Cir. Articulates “Iskanian Rule” for Federal Courts

On September 28, 2015, the Ninth Circuit Court of Appeals weighed in on a very contentious issue—the enforceability of waivers of claims brought pursuant to the Private Attorneys General Act (“PAGA”)—an issue that had divided the district courts for the last several years. See Sakkab v. Luxottica Retail North America, Inc., 803 F.3d 425 (9th Cir. 2015) (slip op. available here). The majority, agreeing with the California Supreme Court’s decision in the landmark Iskanian case (Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014)), found that an employee cannot waive the right to bring a representative PAGA action, and that any agreement seeking to waive such rights prospectively is unenforceable, a holding that is now becoming known as the “Iskanian Rule.” As a result, the lower court’s holding that the Iskanian rule is preempted by the Federal Arbitration Act (“FAA”) was reversed in part, and the case was remanded for the district court to decide in which forum (court or arbitration) the plaintiff’s representative PAGA claims would be resolved.

The plaintiff, a former employee of LensCrafters, had filed an employment class action lawsuit against Luxottica, alleging that the defendant misclassified the plaintiff and other employees as supervisors, in order to improperly exempt them from overtime wages and meal and rest break requirements. The defendant sought to compel arbitration pursuant to an alternative dispute resolution (ADR) agreement contained in its “Retail Associate Guide.” The plaintiff argued that the portion of the ADR agreement prohibiting him from bringing PAGA claims on behalf of other employees was unenforceable under California law; thus, even if his claims were compelled to arbitration, he could not be denied a forum for his PAGA claims. The district court rejected the plaintiff’s argument and granted the defendant’s motion to compel arbitration only of the plaintiff’s individual claims, concluding that the FAA preempted the state law Iskanian rule. The plaintiff in Sakkab appealed.

Judge Milan Smith authored the majority opinion, arguing that Iskanian is not preempted by the FAA because it has nothing directly to do with arbitration. The thrust of the majority’s position was that PAGA actions are not necessarily “procedurally” complex, and that only state law rules that would require complex procedures in arbitration, resulting in “procedural morass,” run afoul of Concepcion’s rule against states interfering with “fundamental attributes of arbitration.” Slip op. at 19, 25-27. The majority bolstered its conclusion by adopting the preemption framework set out by the Iskanian court, which rested on the notion that PAGA claims are unique in that they are brought on behalf of the state to enforce the law, unlike private actions for damages which involve only private rights. As such, the United States Supreme Court’s FAA preemption case law, which mandates preemption of state law rules that implicate private rights, does not extend to a state law rule that disallows employers from enforcing waivers of PAGA claims. The dissent, however, reiterating the holding in AT&T Mobility v. Concepcion, 563 U.S. 333 (2007), would find that the FAA generally preempts any law that creates a special rule disfavoring arbitration or conflicts with the FAA’s objectives, and views no distinction between bans on PAGA claims and bans on class action waivers for the purpose of FAA preemption.

This ruling is particularly significant since it is the first endorsement of Iskanian, a state case, by a federal appellate court, and California federal courts will now be required to follow this rule. The defendant Luxottica has filed a petition seeking rehearing en banc, the plaintiff-appellant’s response to which is due by January 15, 2016.

Authored by: 
Robin Hall, Associate

Garrido v. Air Liquide: Gentry Test Resurrected by Second Appellate District

On October 26, 2015, the California Court of Appeal, Second Appellate District affirmed a Los Angeles County Superior Court decision denying a defendant’s motion to compel arbitration. See Garrido v. Air Liquide Indus. U.S. LP, No. B254490, 2015 Cal. App. LEXIS 946 (2nd Dist. Div. 2 Oct. 26, 2015) (slip opinion available here). In doing so, the court applied a test from Gentry v. Superior Court, 42 Cal. 4th 443 (2007), a once-prominent case widely thought to be obsolete in the wake of Concepcion (AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2007)) and Iskanian (Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014)). Gentry was, for a time, the leading California case on the enforceability of class action waivers in arbitration agreements. While Concepcion did not specifically overrule Gentry, many courts treated it as such, and the California Supreme Court put to rest any doubts in Iskanian, stating: “a state’s refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the FAA [Federal Arbitration Act]. . . [and] our holding to the contrary in Gentry has been abrogated by recent United States Supreme Court precedent.” Iskanian at 359-360 (internal citations omitted).

Despite the broad reach of the FAA and the Concepcion line of cases enforcing class action waivers in arbitration agreements, Garrido followed and affirmed an important exception for certain employees established by Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001). Section 1 of the FAA specifically exempts “transportation workers,” such as the plaintiff in Garrido, who was a truck driver who shipped goods for the defendant across state lines. The appellate court in Garrido reasoned that the FAA could not preempt Gentry where the FAA did not apply. Instead, it found that the California Arbitration Act (CAA) applied, and where only the CAA applies, actions to collect due and unpaid wages under California Labor Code section 229 (which would be preempted under the FAA) can be maintained in court. Thus, the Garrido court held that preemption principles did not come into play, and the Gentry’s holding that public policy is a valid defense to enforcement of an arbitration agreement remains viable under the CAA.

In Gentry, the California Supreme Court articulated four factors to determine whether a class action waiver should be enforced in pre-dispute employment arbitration agreements: “the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.” Gentry at 463. Utilizing this analysis, both the trial court and appellate court in Garrido ultimately found the arbitration agreement unenforceable due to a lack of a sufficient alternative to a class action, because: (1) the plaintiff’s likely recovery was a modest $11,000; (2) evidence showed that many of the defendant’s truck drivers felt that their jobs were in jeopardy and (3) were ignorant of their rights to breaks; and (4) requiring numerous employees suffering the same harm to separately seek vindication is inefficient and would drive up the costs of arbitration. See slip op. at 12-13.

Interestingly, the Second Appellate District, Division Two, which issued the recent Garrido decision, was the same court that held in a 2012 Iskanian appeal that Gentry was overruled by Concepcion. “Now, we find that the Concepcion decision conclusively invalidates the Gentry test.” Iskanian v. CLS Transportation Los Angeles, LLC, 206 Cal. App. 4th 949, 959 (Cal. App. 2d Dist. 2012).

Authored by: 
Jonathan Lee, Associate

Saravia v. Dynamex: District Court Rebuffs Dynamex’s Motion to Compel Arbitration

Earlier this month, Judge William Alsup of the Northern District of California denied defendant Dynamex’s motion to compel arbitration of the plaintiff’s wage-and-hour putative class claims. Saravia v. Dynamex Inc., et al., No. 3:14-cv-05003 (N.D. Cal. Oct. 6, 2015) (slip op. available here). In the same order, the court also granted in part and denied in part the plaintiff’s motion for conditional class certification.

The plaintiff, a former delivery driver, who operated a business that provided delivery services for Dynamex and other shipping companies, alleged that Dynamex misclassified him and other delivery drivers as independent contractors and that they were thereby denied minimum wage and overtime pay under the Fair Labor Standards Act. Slip op. at 2. Dynamex presented to the plaintiff, and the plaintiff had signed, delivery services agreements in 2010, 2011, and 2012. Id. at 6. The defendants then jointly moved to compel arbitration, which the district court denied. In denying the motion to compel arbitration, the court made three central findings: (1) the Texas choice-of-law provisions in the two arbitration agreements (2011 and 2012) were unenforceable; (2) the “delegation clauses” by which the defendant purported to delegate to an arbitrator gateway questions of “arbitrability” were both procedurally and substantively unconscionable, and thus unenforceable; (3) and the arbitration agreements, as a whole, were both procedurally and substantively unconscionable, and thus unenforceable. 

In declining to enforce the Texas choice-of-law provisions, the court applied the three prongs of California’s choice-of-law analysis. Slip op. at 6-7. First, the chosen state’s law must have a “substantial relationship” to the parties; the plaintiff conceded, and the court agreed, that this prong is met because Dynamex is headquartered in Texas. Id. Second, the forum state must have no “fundamental policy” inconsistent with the chosen state’s law; here, the court noted several differences between California and Texas law on the enforceability of arbitration agreements, finding “Texas law conflicts with fundamental aspects of California’s substantive law pertaining to unconscionability.” Id. at 7. Finally, the court applied the third prong of the choice-of-law analysis, and found that California has a materially greater interest than Texas in adjudicating the dispute because the plaintiff is located in California and the delivery service agreements at issue were executed and performed in California, whereas Texas’ only interest stems from the fact that one of the defendants is headquartered in that state. Id.

In declining to enforce the delegation clause, the court held that, under California law, if a delegation clause is both procedurally and substantively unconscionable, it may be severed from the broader agreement and rendered unenforceable. Slip op. at 8-9. The factors supporting procedural unconscionability included: (1) the agreements were form contracts, and the plaintiff was “tersely instructed to sign” them (id. at 9); (2) the agreements were written only in English, although the plaintiff had limited English comprehension (id. at 2, 9); (3) the plaintiff first received the agreements on the day they were to be executed (id. at 9); (4) the plaintiff was given no opportunity to re-negotiate any provision (id.); and (5) the defendant never provided the plaintiff with a copy of the rules that were to govern arbitration and that formed the sole basis for delegating arbitrability determinations under the 2012 agreement (id.). The court also indicated that delegation clauses—buried in the middle of more than 10 pages of boilerplate language and otherwise unexplained by the defendant—constituted “unfair surprise” that exacerbated the procedural unconscionability. Slip op. at 10. Although the plaintiff could have requested a translation of the agreements, but did not, and the defendant claimed the plaintiff could have sought to renegotiate the terms without adversely affecting his employment, the court nevertheless found that “the circumstances of the execution of those agreements were so oppressive that any such opportunity was meaningless.” Id. at 9-10.

The court also found the delegation clauses to be substantively unconscionable (substantively unfair) because: (1) the Texas forum selection clause would have imposed prohibitive expenses on the California plaintiff, even just for an arbitrability hearing (id. at 4, 11); (2) both agreements required the plaintiff to pay half the arbitral fees, again imposing substantial fees on the plaintiff (id. at 11); and (3) the agreements imposed two-way fee shifting where, by statute, the plaintiff would be subject to one-way fee shifting rules whereby only the employee, not the employer, could recover his attorneys’ fees as the prevailing party (id.). The court noted that “[s]evering the unenforceable provisions of an arbitration clause (or as here, a delegation clause) would allow an employer to draft one-sided agreements and then whittle down to the least-offensive agreement if faced with litigation, rather than drafting fair agreements in the first instance.” Slip op. at 12. Thus, the court found the delegation clauses to be unenforceable and held that the court must decide arbitrability.

The court found the same reasons for finding the delegation clause to be procedurally and substantively unconscionable as applicable to the broader arbitration agreements. Accordingly, the court denied the motion to compel arbitration. Slip op. at 12.

Authored By:
Katherine Kehr, Senior Counsel

Sanchez v. Valencia Holding Co.: Cal. Supreme Court Justices Spar over Substantive Unconscionability, But Provide Little Guidance

Last week, the California Supreme Court issued its much-anticipated opinion in Sanchez v. Valencia Holding Co., addressing whether state law concerning unconscionability in contract formation is preempted by the Federal Arbitration Act, 9 U.S.C. § 2, as interpreted by AT&T Mobility LLC v. Concepcion, 563 U. S. 321 (2011).  See Sanchez v. Valencia Holding Co., LLC, No. S199119 (Aug. 3, 2015) (slip opinion available here).  Many observers expected Sanchez to clarify the standard for determining unconscionability; however, that was not the case.

Prior to the issuance of the U.S. Supreme Court’s landmark Concepcion decision, the Sanchez trial court had determined that the class action waiver contained within the at-issue consumer auto sale contract was unconscionable, rendering the entire agreement unenforceable.  The Second District Court of Appeal came to the same result, but on the basis that the arbitration provision was so one-sided as to be unconscionable, punting on the class waiver issue.  The California Supreme Court was then tasked with synthesizing the prior holdings with Concepcion, and found that, while Concepcion does not affect California’s defenses to contract formation, including unconscionability, it still requires enforcement of the contract’s class action waiver.  The California Supreme Court’s opinion reversed the Court of Appeal on the issue of unconscionability, finding that the agreement was not inordinately one-sided.  Slip op. at 2.   

The basic framework for finding unconscionability is well-established, and is the same standard for arbitration and non-arbitration agreements.  Procedural and substantive unconscionability must both be present for a court to refuse to enforce a contract or clause.  However, they need not be present in the same degree; rather, a “sliding scale” is invoked.  While procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, the standard for substantive unconscionability is more amorphous and has variously been described as requiring a finding that terms are “overly harsh,” “unduly oppressive,” “unfairly one-sided,” unfair “beyond a simple old-fashioned bad bargain,” and, most drastically, “so one-sided as to ‘shock the conscience.’”  Slip op. at 8.

In Sanchez, the California Supreme Court made the somewhat shocking pronouncement that the multiple formulations for substantive unconscionability “all mean the same thing.”  This is not particularly helpful when attempting to apply the standard to a particular agreement.  Does an agreement have to “shock the conscience” to be unconscionable or will “overly harsh” terms suffice?  How can these formulations really mean the same thing?  Sanchez provides no bright-line rule for litigants.  Rather, this case demonstrates that evaluating unconscionability is a fact-intensive process, highly dependent upon context, that requires inquiry into the “commercial setting, purpose, and effect” of an agreement, as the court demonstrates as it painstakingly analyzes the contract at issue.  Slip op. at 9.

The court addressed the fairness of each provision in turn, noting that much of the analysis is specific to the consumer sales context.  For example, the at-issue agreement in Sanchez allows for fee-shifting to the consumer in some situations, although the seller must advance arbitration fees.  Slip op. at 18.  The court held the allocation of costs and fees to be valid in the context of a luxury auto purchase, while noting that this would not be allowed in the employment context under the more rigorous standard of Armendariz v. Foundation Health Psychare Services, Inc. (Cal. 2000).  Slip op. at 20-21.  The court further distinguished the consumer and employment settings, noting that jobseekers are at a distinct disadvantage in terms of bargaining power due to economic pressures, while the purchaser of a luxury automobile, such as Mr. Sanchez, can not only afford any fees that may be imposed, but is also in a better position to negotiate contract terms.  Id.

The Sanchez opinion likely won’t change much for litigants.  It merely reaffirms the holdings in Concepcion and Armendariz, stating that: (1) contracts remain subject to state unconscionability law and (2) even if an agreement is deemed fair in the consumer context, it still may not pass muster under the more rigorous standard applied to employment agreements, due to greater pressure on employees and the lack of meaningful alternatives in negotiating.  Rather than formulating a bright-line rule for unconscionability, the Sanchez court instead demonstrated that courts should carefully scrutinize arbitration agreements on a case-by-case basis in order to determine if they are manifestly unfair to one party.

While the defense bar is claiming a victory in Sanchez, the case has an unexpected upside for plaintiffs: while the majority notes that many courts use what they perceive as the harsher “shock the conscience” standard as a default, the Court’s holding that unconscionability standards such as “unfairly one-sided” and “overly harsh” mean the same thing may prompt courts on the stricter end of the spectrum to develop more flexible standards for unconscionability in arbitration agreements.

Authored By:
Robert Friedl, Senior Counsel