Posts belonging to Category Arbitration



United States ex rel. Welch v. My Left Foot Children’s Therapy: 9th Cir. Rules Arb Agreement Does Not Apply in Former Employee’s Whistleblower Lawsuit

In September, the Ninth Circuit Court of Appeals affirmed a ruling that rejected a company’s attempt to force its former employee into arbitration under a very broadly-worded agreement that she had signed at the time of hire. See United States and State of Nevada ex rel. Welch v. My Left Foot Children’s Therapy, LLC, et. al, No. 16-16070 (9th Cir. Sept. 11, 2017) (slip op. available here). Specifically, the court held that the broad arbitration provision did not cover an employee’s claim under the False Claims Act (FCA), because an FCA claim belongs to the government, and in this case, neither the United States nor the state of Nevada had agreed to arbitrate its claims. Id. at 4.

The plaintiff in Welch was an employee working for My Left Foot Children’s Therapy (MLF), who filed a whistleblower complaint in federal court alleging that MLF violated the FCA by presenting fraudulent claims to federal health care programs. See id. at 6. The United States and Nevada declined to intervene, and thus, Welch proceeded with her claim. Id. On October 19, 2015, the defendants moved to compel arbitration of Welch’s FCA claims pursuant to the Federal Arbitration Act (FAA) and the arbitration agreement contained in her employment contract. Id. at 6. The arbitration agreement stated in relevant part:

I agree and acknowledge that the Company and I will utilize binding arbitration to resolve all disputes that may arise out of the employment context. Both the Company and I agree that any claim, dispute, and/or controversy that either I may have against the Company . . . or the Company may have against me, arising from, related to, or having any relationship or connection whatsoever with my seeking employment by, or employment or other association with the Company shall be submitted to and determined exclusively by binding arbitration under the Federal Arbitration Act.

Id. (emphasis added).

On June 13, 2016, the district court denied the defendants’ motion to compel arbitration on the basis that Welch’s arbitration agreement did not extend to the United States or Nevada, the parties that owned the underlying FCA claims. Following this, on September 11, 2017, the Ninth Circuit affirmed the district court’s decision. Specifically, the Ninth Circuit held that the material terms (“arising out of,” “related to,” and “having any relationship or connection whatsoever”) of the agreement only covered claims directly related to the plaintiff’s employment. Id. at 13-17. The court reasoned that here, the FCA suit had no direct connection with Welch’s employment because even if Welch had never been employed by the defendants, assuming other conditions were met, she would still have been able to sue them for presenting false claims to the government. Id. Thus, her ability to bring this claim did not necessarily arise from her employment and was not covered by the arbitration agreement. Id.

The court also stated that the arbitration agreement only covered claims between Welch and MLF (id. at 15), and did not cover claims brought on behalf of another party—the United States or Nevada. This reasoning has been echoed in other types of qui tam actions such as those brought under the Private Attorneys General Act of 2004 (“PAGA”). Like FCA claims, in a PAGA action, a plaintiff brings the case for violations of the California Labor Code on behalf of the real party in interest—the state of California. As such, the California Supreme Court has also held that such actions are not covered by arbitration agreements to which the real party in interest—the state of California—has not assented. See Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 386 (2014).  However, it is important to note that the Ninth Circuit also stated in dicta that, had the parties wanted to agree to arbitrate FCA claims, they were free to have drafted a broader agreement that covers “any lawsuits brought or filed by the employee whatsoever” or “all cases Welch brings against MLF, including those brought on behalf of another party.” See slip op. at 17.

Thus, while this holding is another victory in the fight against adhesive arbitration agreements in qui tam-type actions, it may also provide some guidance to employers wishing to force qui tam actions under the FCA into arbitration.

Authored by:
Ruhandy Glezakos, Associate
CAPSTONE LAW APC

Betancourt v. Prudential Overall Supply: CA Ct. of App. Reiterates that PAGA Claims Cannot Be Arbitrated, Prudential Files Appeal

Complaining that California “leads the field” in circumventing United States Supreme Court’s pro-arbitration precedent Concepcion, Prudential Overall Supply petitioned for certiorari on August 15, 2017, seeking review of California’s Fourth Appellate District’s ruling that claims under California’s Private Attorneys General Act (“PAGA”) cannot be arbitrated. Betancourt v. Prudential Overall Supply, No. E064326 (4th District Div. 2, March 7, 2017) (slip op. available here) (petition for writ of certiorari available here). In April 2015, Betancourt filed a representative action suit solely based on PAGA against his employer, Prudential Overall Supply. Within the single PAGA claim, the plaintiff alleged violations of overtime and minimum wage law, meal and rest period requirements, timely pay and final pay requirements, and recordkeeping and wage statement requirements, among other claims. In a March 7, 2017 decision, the Court of Appeal affirmed the trial court’s denial of Prudential’s motion to compel arbitration of the plaintiff’s claim for penalties under PAGA. Slip op. at 2.

First, Prudential argued that Betancourt had already agreed to arbitrate the PAGA claim and that an arbitrator would decide the scope and application of the agreement. Id. at 10-11. Additionally, Prudential claimed since the “representative claims” portion of the agreement could be severed, Betancourt could be compelled to arbitrate his claims. Id. at 11. Prudential further asserted that if Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 5th 348 (2014), is interpreted as prohibiting arbitration of all PAGA claims, then the state law prohibiting arbitration is preempted by the Federal Arbitration Act (FAA). Id. at 12. Finally, Prudential, citing Sakkab v. Luxottica Retail North America, Inc. (2015 9th Cir.) 803 F.3d 425, contended that California law permits arbitration of PAGA claims. Id. at 12-13. Repeatedly citing Iskanian, the appellate court rejected each of these arguments, holding that Prudential could not “rely on a predispute waiver by a private employee to compel arbitration in a PAGA case, which is brought on behalf of the state . . .” because “[t]he state is not bound by Betancourt’s predispute agreement to arbitrate.” Id. at 8; see also id. at 9-13 (applying Iskanian in greater detail) (internal citations omitted). Further, the Court of Appeal noted that a state rule prohibiting arbitration of PAGA claims is not preempted by the FAA because it falls outside of the scope of the FAA, as PAGA “is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state . . . .” Slip op. at 10 (citing Iskanian, at 386-87, emphasis in original).

The Court of Appeal also rejected the defendant’s other argument, which was based on an alleged defect in the pleadings. The defendant argued that because Betancourt had sought non-PAGA remedies in the prayer for relief, e.g., for unpaid wages, business expenses, interest, and attorney’s fees, in addition to civil penalties, the action was not actually a PAGA action and that the plaintiff was trying to disguise a standard wage-and-hour action in order to evade arbitration. Slip op. at 4, 8-9. Yet, the trial court had found and the appellate court agreed, such a challenge is a challenge against the pleadings, and should have been brought as a motion to strike—not as a motion to compel arbitration. Id. at 9. As the Court of Appeal aptly noted, “Prudential accuses Betancourt of attempting to make an ‘end run around arbitration’ by incorrectly labeling his claims as a PAGA matter. It appears to this court that Prudential may be attempting to make an ‘end run” around a demurrer or motion to strike . . . .” Id. at 9.

Overall, the Court of Appeal’s Betancourt opinion makes a strong case for PAGA claims being inarbitrable, based on the fact that the state—the real party in interest in every PAGA action—is not a party to an employee’s bilateral agreement to arbitrate his or her employment claims, and thus cannot be bound by that agreement. Whether the United States Supreme Court will break its streak of rejecting cert petitions based on PAGA issues in Betancourt remains to be seen.

Authored By:
Jennifer Bagosy, Senior Counsel
CAPSTONE LAW APC

Sprunk v. Prisma LLC: Strategic Delay by Defendant Risks Arbitration Waiver

In a decision likely to spur defendants to make immediate motions to compel arbitration in class actions, the California Court of Appeal, Second District, found that a defendant who chose to wait for class certification before seeking arbitration had waived the right to arbitrate. Sprunk v. Prisma LLC, No. B268755 (2nd Dist. Div. 1 Aug. 23, 2017) (slip op. available here). In Sprunk, the plaintiff filed a wage-and-hour class action in October 2011, alleging she and a class of exotic dancers had been misclassified as independent contractors and had consequently been denied wages, meal periods, and reimbursement of business expenses. The plaintiff and all putative class members had signed arbitration agreements.

Sprunk moved for class certification in September 2014. In opposing the motion, Prisma argued that a class action was not superior to other forms of litigation because the class members had signed arbitration agreements. The trial court granted class certification in April 2015, rejecting Prisma’s “superiority” argument. In August of 2015, Prisma filed two motions to compel arbitration, seeking to enforce two different arbitration clauses. By that time, Sprunk and Prisma had litigated for four years, during which time discovery was conducted, depositions were taken, and defendant moved for arbitration, then withdrew the motion, and ultimately renewed its motion to compel arbitration. In October of 2015, the trial court denied the motions. Prisma appealed.

On appeal, Prisma relied upon Sky Sports, Inc. v. Superior Court, 201 Cal.App.4th 1363 (2011), for the proposition that it would have been premature to have filed its motion to compel arbitration prior to class certification. However, the Court of Appeal cited a critical distinction: in Sky Sports, the plaintiff had not signed an arbitration agreement although other members of the class had. In Prisma, the class representative (Sprunk) and all putative class members had signed arbitration agreements, giving Prisma the right to have sought to compel arbitration at the outset of litigation.

Noting that the trial court found Prisma had engaged in a strategic delay to give itself an opportunity to defeat the class, the Court of Appeal warned, “[a]n attempt to gain a strategic advantage through litigation in court before seeking to compel arbitration is a paradigm of conduct that is inconsistent with the right to arbitrate” and supports a finding of waiver. Slip op. at 18. The court also found Sprunk was prejudiced by the delay—had Prisma timely moved to compel arbitration, it could, “as a practical matter[,] have resolved the judicial proceedings with respect to the class” and could have “settled the question of whether the claims . . . should be adjudicated in a court or through arbitration.” Id. at 16-17.

This class action involving exotic dancers has clarified that a defendant wishing to compel arbitration must do so before the parties have invested time and energy in litigation, or risk waiver. Going forward, defendants must therefore dance quickly, or get off the table.

Authored by:
Arlene Turinchak, Senior Counsel
CAPSTONE LAW APC

McGill v. Citibank: Businesses Cannot Force CA Consumers to Waive Right to Seek Public Injunctive Relief

On April 6, 2017, in a unanimous decision, the California Supreme Court held that a provision in Citibank’s mandatory cardholder arbitration agreement that waives the statutory right to seek public injunctive relief is contrary to California public policy and is thus unenforceable under California law. McGill v. Citibank, N.A., No. S224086 (Cal. Sup. Ct. April 6, 2017) (slip op. available here). The court rejected Citibank’s “overbroad view” of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., and concluded that the FAA does not preempt California law on this issue or otherwise require enforcement of the waiver provision. Slip op. at 1, 15. The court also found that public injunctive relief remains a remedy available to private plaintiffs with standing under California’s consumer protection statutes, and is not restricted to the class action context. Id. at 11-13.

In McGill, the plaintiff was a Citibank cardholder who paid a monthly premium for its “credit protector” plan, a type of credit insurance that deferred or credited certain amounts to her account upon a qualifying event, such as unemployment. She brought a class action based on Citibank’s deceptive marketing of this plan and handling of her claim when she became unemployed, alleging claims under California’s Unfair Competition and False Advertising laws (the “UCL” and “FAL,” respectively), the Consumers Legal Remedies Act (the “CLRA”), and the Insurance Code. McGill sought public injunctive relief, along with other remedies, against Citibank’s unlawful business practices. Relying on arbitration provisions imposed against the plaintiff through a unilateral “Notice of Change in Terms” to her Citibank card, Citibank filed a petition to compel arbitration on an individual basis. The trial court ordered all claims to arbitration except those for injunctive relief under the UCL, FAL, and CLRA based on the Broughton-Cruz rule, which provides that claims for public injunctive relief under these consumer protection statutes are not arbitrable under California law. Slip op. at 3. The Court of Appeal reversed, holding that the Broughton-Cruz rule is preempted by the FAA, and instructing the trial court to order all claims to arbitration, including the injunction claims.

In an opinion authored by Justice Ming Chin, the California Supreme Court reversed. The court found that the Broughton-Cruz rule was not at issue, as the parties agreed that the arbitration agreement purported to preclude McGill from seeking public injunctive relief in any forum, arbitral or judicial, whereas the Broughton-Cruz rule applies only when parties have agreed to arbitrate requests for such public injunctive relief. Slip op. at 8. The court addressed whether such an arbitration provision, which completely waives the right to seek public injunctive relief under the UCL, FAL, and CLRA, was unenforceable under California law. Applicable California law under Civil Code section 3513 provides that “a law established for a public reason cannot be contravened by a private agreement.” Noting that the public injunctive relief available under the UCL, CLRA, and FAL is primarily for the benefit of the general public and to remedy a public wrong rather than resolve a private dispute, the supreme court found that such a waiver under these statutes “would seriously compromise the public purposes the statutes were intended to serve.” Slip op. at 14. As such, Citibank’s arbitration provision that purports to waive the right to such public injunctive relief in all fora is invalid and unenforceable under California law. Id.

The court further found that the FAA, as construed in Concepcion, did not preempt this rule of California law, and rejected Citibank’s views to the contrary. Slip op. at 14-15. Under the FAA’s “savings clause” and U.S. Supreme Court precedent, arbitration agreements are only “as enforceable as other contracts, but not more so,” and may be invalidated by generally applicable contract defenses. Id. at 15. The court held that the contract defense at issue here, Civil Code section 3513’s proscription that a law established for a public reason cannot be contravened by a private agreement, is grounds under state law for revoking any contract, not just arbitration agreements, and thus a generally applicable contract defense. Id. at 15-16. The court concluded that the FAA does not require enforcement of a provision that, in violation of generally applicable California contract law, waives the right to seek in any forum public injunctive relief under the UCL, FAL, or CLRA. Id. at 17. The FAA does not require such enforcement “merely because the provision has been inserted into an arbitration agreement. To conclude otherwise would [be] contrary to Congress’s intent.” Id. at 16. The court specified that this holding is in line with recent U.S. Supreme Court precedent indicating that the FAA does not require enforcement of arbitration provisions that forbid the assertion of certain statutory rights or eliminate the right to pursue a statutory remedy. Id. Significantly, the court rejected Citibank’s contention that this principle only applies to the forfeiture of a federal statutory right, as opposed to a state statutory right. Id. at 17.

The court also held that the 2004 amendments to the UCL and FAL ushered in by voters under Proposition 64 do not preclude a private plaintiff, who has standing to file a private action (e.g., “suffered injury in fact and has lost money or property as a result of” a violation of the UCL or FAL), from requesting public injunctive relief in connection with that action, even if the plaintiff does not allege class claims, answering a question that had been left unanswered since 2004. Slip op. at 11-13.

Requesting a broad injunction to require businesses to change their unlawful acts is often the primary form of relief for consumers challenging unfair and deceptive business practices. As such, McGill provides broad protections to consumers who cannot be forced by businesses like Citibank into contractually waiving their right to public injunctive relief under California’s consumer protection statutes.

Authored By:
Liana Carter, Senior Counsel
CAPSTONE LAW APC