Posts belonging to Category Arbitration

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

California Court of Appeal: PacPizza Can’t Deliver on Arbitration Bid

On May 1, 2015, the California Court of Appeal, First Appellate District, affirmed a Contra Costa County Superior Court decision denying a defendant pizza restaurant’s motion to compel arbitration in a wage-and-hour class action brought by former employees. Both the trial and appellate courts found that PacPizza had waived its right to arbitration by engaging in extensive litigation for many months before filing the motion to compel. The appellate court’s opinion was certified for publication on June 1, 2015. See Oregel v. PacPizza, LLC, No. A141947 (Cal. Ct. App. May 1, 2015) (slip opinion available here).

Oregel demonstrates what not to do as a defendant that wishes to enforce an arbitration clause. As noted by the Court of Appeal, PacPizza answered two class complaints, attended two case management conferences, negotiated a briefing schedule on a motion for class certification, and propounded and responded to extensive discovery, which included admissions that an arbitration agreement did exist—all without indicating any intent to enforce an arbitration agreement. PacPizza’s motion to compel arbitration was not filed until after the plaintiff’s motion for class certification had been filed, seventeen months after the initial complaint.

Relying heavily on St. Agnes Med. Ctr. v. PacifiCare of California, 31 Cal. 4th 1187 (2003), the trial court and court of appeal found that PacPizza had waived its right to arbitration by: (1) acting inconsistently with that right when continuing with the litigation; (2) engaging in discovery and progressing well into the class certification preparation and briefing stage without indicating an intent to arbitrate; (3) requesting arbitration enforcement only after a long delay; (4) taking advantage of judicial discovery and participating in other procedures not available in arbitration; and (5) affecting, misleading, and prejudicing the opposing party with the delay. Only one St. Agnes factor, regarding cross-complaints, did not affirmatively favor a finding of waiver. Both courts also noted that PacPizza’s delay may have been a strategic ploy to attempt arbitration only if the plaintiff’s class certification motion seemed likely to be granted (the proposed class was later certified by the trial court). As one may expect, this gamesmanship displeased both courts.

Oregel is not a close case of waiver. Rather, it occupies the extreme end of the spectrum where a defendant has engaged in extensive judicial litigation prior to seeking to compel arbitration, which clearly amounts to waiver. Oregel thus joins a growing collection of cases wherein defendants have essentially forfeited their rights to compel arbitration by not doing so soon enough, creating additional work and expense for all involved. This type of dilatory conduct results in waiver because it undermines the traditional policy justifications for contractual arbitration, which are that it saves time and money.

Authored by: 
Jonathan Lee, Associate

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

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