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.
Posts belonging to Category Arbitration
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)).
In November, the California Court of Appeal, Fourth Appellate District, ruled unanimously in a wage-and-hour action involving Garden Fresh (owner and operator of Souplantation & Sweet Tomatoes restaurants) that courts, not arbitrators, decide whether an agreement to arbitrate disputes between parties authorizes class or representative arbitrations, where an agreement is silent as to the availability such non-individual arbitrations. Garden Fresh Restaurant Corp. v. Superior Court of San Diego County, No. D066208 (Fourth Dist. Div. 1 Nov. 17, 2014) (slip op. available here). Citing the Sixth Circuit’s decision in Reed Elsevier Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), the court held that, where an arbitration agreement does not “clearly and unmistakably” provide for class and/or representative arbitration, a “gateway issue” for the court to determine is whether a collective arbitration is allowed. Slip op. at 14.
In 2013, the plaintiff, former employee Moreno, filed a class and representative action under the Private Attorney General Act (PAGA) against Garden Fresh, alleging violations of the California Labor Code, PAGA, and California Unfair Competition Law. Garden Fresh moved to compel to arbitration the plaintiff’s individual claims since plaintiff had signed arbitration agreements, and moved to dismiss the class and PAGA claims, arguing that the arbitration agreements did not address the arbitration of such claims. A trial court granted the motion to compel, but referred the claims to an arbitrator, deferring to the arbitrator to determine whether the parties’ agreements contemplated class and/or representative arbitration.
Citing Reed Elsevier, where the Sixth Circuit had stated that the Supreme Court had “given every indication that classwide arbitrability is a gateway issue” because resolving the question is fundamental to how the parties will resolve their dispute, the court stated, “[f]or similar reasons, we conclude that a court, not an arbitrator, should also decide whether the parties agreed to arbitrate representative claims, such as the [PAGA] claim in this case . . . .” Slip op. at 11-12. The United States Supreme Court has repeatedly left the question open, but has stated in the past that class proceedings change the scope and nature of arbitration so fundamentally that it cannot be assumed that the parties agreed to it implicitly, even though they entered into an arbitration agreement. The panel cited Concepcion, which held that class arbitration was inconsistent with arbitration under the Federal Arbitration Act, to support expanding its conclusions to representative claims in addition to classwide claims. Ultimately, the ruling vacated part of the trial court’s order and directed it to answer the question as to whether the parties agreed to arbitrate class and/or representative claims and to determine whether the PAGA claims should be bifurcated and handled outside of arbitration.