Posts belonging to Category Arbitration

The California Court of Appeal recently affirmed a trial court’s denial of defendant Integrated Healthcare’s petition to compel arbitration. Avery v. Integrated Healthcare Holdings, Inc., No. G046202, ___ Cal. App. 4th ___ (Jun. 27, 2013) (available here). Despite the decision’s ostensibly narrow holding, the unanimous three-judge panel underscored that employers facing a wage-and-hour class action will not be able to seize on recent developments in arbitration jurisprudence with evidence amounting to little more than an “incomplete and confusing patchwork of documents.” Slip op. at 25. On July 23, 2013, nearly a month after the decision was issued, California’s influential Fourth Appellate District, Division Three, ordered Avery published in the Official Reports, stating: “Pursuant to California Rules of Court, rule 8.1105(c), and for good cause shown, nonparty Capstone Law’s request to publish the opinion filed on June 27, 2013 is GRANTED.” See Order Granting Request for Publication.

The defendant premised its contention that the plaintiffs must proceed in individual arbitration rather than pursue a class action on the plaintiffs having signed a form acknowledging receipt of an employee handbook, which was purported to contain the hospital’s arbitration policy – euphemistically called the “Open Door Policy and Fair Treatment Process.” See slip op. at 3-5. (In fact, the defendant brought eight separate motions to compel eight named plaintiffs in related putative class actions to arbitrate.) The trial court denied all of the arbitration motions with the finding that the defendant had “‘failed to meet [its] burden to show that any of the Plaintiffs are subject to an enforceable arbitration agreement’” and the defendant appealed. Slip op. at 7.

In the 3-0 decision upholding the motions’ denial in all respects, despite one motion being subject to a “substantial evidence” standard while the rest were subject to de novo review, Associate Justice Richard Aronson began by noting that one plaintiff had not even signed the form acknowledging receipt of an employee handbook, and that plaintiff could not be deemed to have agreed to arbitration under an implied-in-fact contract theory premised on the plaintiff having continued working and thereby having implicitly agreed to arbitration. See slip op. at 13-14. In particular, the opinion gave emphasis to the defendant’s erroneous contention that it need not establish that the employee ever received the employee handbook to make out its implied-in-fact theory. Slip op. at 16-17.

As to the other employees, the decision faulted the defendant for failing to establish the actual arbitration terms that would govern the plaintiffs’ claims. “Although we agree Plaintiffs . . . generally agreed to a Fair Treatment Process by signing one or more of these documents, we nonetheless affirm the trial court’s order denying the motions to compel arbitration because Integrated failed to present sufficient evidence establishing the specific Fair Treatment Process it presented to the trial court was the Fair Treatment Process to which Plaintiffs agreed.” Slip op. at 17 (emphasis in original).

Thus, while the decision expressly limited its holding to the facts at hand, Avery reiterates a general proposition of law set forth earlier in Kleveland v. Chicago Title Ins. Co., 141 Cal. App. 4th 761 (2006), demanding specificity in the purported arbitration terms when a defendant attempts to enforce an arbitration agreement by way of an employee handbook acknowledgement. “The party seeking to enforce an arbitration provision incorporated by reference must establish the provision it seeks to enforce is the same provision to which the parties agreed.” Slip op. at 18, citing Kleveland at 765.

Again relying on the Kleveland decision, Avery takes seriously the “mutual consent [that] is an essential element of any contract,” a mutuality that many recent aggressively pro-arbitration decisions have seemingly disregarded. In a portion of Avery likely to be much cited by prospective wage-and-hour class representatives, the decision concludes that “it is not sufficient for the party seeking to compel arbitration to show the parties generally agreed to arbitrate their disputes by incorporating some arbitration provision into their contract. Rather, the party must establish the precise arbitration provision which the parties incorporated into their agreement to govern their disputes.” Slip op. at 19-20.

By now, and most prominently in AT&T Mobility v. Concepcion, the narrative whereby the U.S. Supreme Court interprets the Federal Arbitration Act (FAA) so as to put the continued viability of class actions in doubt is sufficiently familiar that the time is ripe for a counter-narrative. And that is exactly what Stanford Law School Professor Janet Cooper Alexander sets out in a new article, To Skin a Cat: Qui Tam Actions as a State Legislative Response to Concepcion, 46 U. MICH. J.L. REFORM 101 (forthcoming Summer 2013) (available here). Alexander, a former Supreme Court clerk to Justice Thurgood Marshall and currently the Fredrick I. Richman Professor of Law at Stanford, is a recognized expert on civil procedure, federal jurisdiction, and the historical evolution of procedure in state and federal courts, in addition to having compiled a substantial body of work as a practitioner as a partner at Morrison & Forester before becoming an academic.

In the article, Alexander begins with the premise that Concepcion has spelled the demise of “virtually all consumer and employment claims,” and notes that there is no realistic likelihood of federal legislation that would return such class actions to their status quo ante. However, Alexander identifies “an alternative approach that could be taken at the state level,” and describes that alternative approach as entailing “statutory qui tam actions to enforce civil penalties for violations of state consumer protection and employment laws.” Indeed, though not formally under the qui tam rubric, the California Labor Code’s Private Attorneys General Act, known as PAGA, performs exactly as Alexander describes, and has thus far proven immune to Concepcion-based challenged, most notably in Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), cert denied, 132 S. Ct. 1910 (2012).

Alexander contends that “the rationale of Concepcion simply does not apply” to PAGA actions, since they are brought for public rather than private benefit, to ensure compliance with state law. Alexander states her thesis thusly: “Indeed, allowing private parties to contract away the state legislature’s chosen means of enforcing claims belonging to the state would seriously impair the state’s ability to execute core governmental functions. It would be an intrusion into state sovereignty that should give pause to neo-federalists such as the majority in Concepcion.” Alexander at 101.

After noting the practical and legal challenges to legislating around Concepcion, Alexander distinguishes PAGA as an exemplary qui tam-like action, and suggests both amendments to it and free-standing legislation capable of meaningful enforcement of consumer and employment laws (without triggering FAA preemption). Under PAGA, employees bring representative actions that do not require satisfaction of the familiar class action elements (ascertainability, commonality, etc). PAGA actions are also atypical of most private litigation, in that the nominal plaintiff is recovering civil penalties, the majority of which go to the State of California, with the plaintiff taking only a 25 percent “bounty.” See Alexander at 126-132. Thus, it is through PAGA and other qui tam analogues that Alexander proposes to achieve the public benefits associated with class actions, while avoiding the Supreme Court’s current fixation on the “liberal federal policy favoring arbitration.” Suggesting the potentially unlimited breadth of such an undertaking, Alexander writes that “[n]othing would prevent states from creating qui tam actions to enforce any statute containing civil penalties payable to the state.” Alexander at 122.

Thus far, PAGA immunity from FAA preemption has been confirmed, both in California state court (Brown v. Ralphs) as well as in federal court (Urbino v. Orkin Serv’s of California), suggesting the broader utility of the qui tam approach. Additionally, as Alexander notes, while the denial of certiorari in Brown v. Ralphs cannot necessarily be construed as an endorsement by the Supreme Court, it does mean that the case failed to sufficiently motivate at least four Justices to take it on, despite it being the single most important post-Concepcion decision with respect to preserving the ability to effect aggregate enforcement of state laws. See Alexander at 129, n.144.

The Alexander article is notable for its skepticism that the Supreme Court is motivated by anything other than an animus against class actions. For instance, after indicating that the Justices in the Concepcion majority had been prominently aligned with state autonomy, “Concepcion demonstrates that for these Justices, a disdain for consumer class action litigation and individuals’ access to courts outweighs any commitment to federalism and state autonomy.” Alexander at 103.

Glenn Danas of Capstone Law APC, the principal architect of the winning briefing in Brown v. Ralphs, commented on Professor Alexander’s article, stating that it “hits the nail on the head in explaining how qui tam-type actions, like PAGA, provide the states with a mechanism for enforcing their own laws that cannot be emasculated or extinguished by corporations using mandatory arbitration agreements.” Danas added, “we’ve been making nearly identical arguments since Concepcion issued, with multiple appellate courts agreeing, and now the California Supreme Court will hopefully decide that public law enforcement rights such as those embodied by PAGA do not yield to waivers contained in private adhesion contracts.”

Alexander proposes drafting “[a] statute similar to PAGA [to create] a mechanism for private plaintiffs to sue to enforce statutory penalties in a qui tam action.” Alexander at 132. She thus envisions PAGA’s application to only specified California Labor Code provisions being expanded to cover “unfair competition, insurance, environmental protection, and other subjects where contracts of adhesion are common.” Id. Further, Alexander suggests changing PAGA’s confusing and much-litigated language about actions being brought on behalf of so-called “aggrieved employees” and replacing it with a clear and direct statement to the effect that such actions are brought “on behalf of the state.” Alexander at 133. In addition to greater clarity, Alexander contents that such a provision would also “make it more likely that a court would find Concepcion inapplicable.” Id.

Alexander’s thesis is far from an outlier; PAGA-like civil penalty actions have attracted considerable attention from other scholars examining how the Concepcion-created voids might be filled. See, e.g., Spencer, J., Arbitration, Class Waivers, and Statutory Rights, 35 HARV. J.L. & PUB. POL’Y 991 (Summer 2012); Wasserman, R., Legal Process in a Box, or What Class Action Waivers Teach Us about Law-making, 44 LOY. U. CHI. L.J. 391 (Winter 2013).

In ruling on a motion to compel arbitration, U.S. District Judge Christina A. Snyder has held that an arbitration clause cannot prevent a plaintiff from pursuing intrinsically representative actions under PAGA, California’s Labor Code Private Attorneys General Statute, in arbitration. Cunningham v. Leslie’s Poolmart, Inc., No. 13-2122 (C.D. Cal. June 25, 2013) (order on defendant’s motion to compel arbitration, available here). Although the decision otherwise substantially sided with the defendant’s arguments that the U.S. Supreme Court’s AT&T Mobility v. Concepcion ruling preempted the plaintiff’s cited authority, Judge Snyder extensively distinguished representative PAGA actions from the class actions that fall within the ambit of Concepcion.

The plaintiff contended that PAGA claims were within the scope of the at-issue arbitration agreement, while the defendant argued that by not expressly authorizing the arbitration of representative PAGA claims, the arbitration agreement prohibited such claims altogether. See order at 7. From these divergent positions, Judge Snyder set forth a detailed survey of PAGA’s inception and provisions, and concluded that PAGA actions “are not a sub-species of class actions” but rather a type of qui tam action. Order at 11. Critically, therefore, because “a plaintiff’s right under PAGA to pursue a bounty through a representative action is closely analogous to a qui tam relator’s right to pursue a bounty, an aggrieved employee’s rights under PAGA should also be characterized as substantive.” Order at 12.

Based on that core holding, the Cunningham decision weighed in on multiple important, and often nuanced, PAGA issues, including reconciling the dissonant holdings in Franco v. Athens Disposal Co. and Quevedo v. Macy’s, Inc. The court found Quevedo to be premised on the erroneous assumption that there is such a thing as an “individual PAGA claim” and found that Franco is not preempted by Concepcion. See order at 13-14.

Moreover, Cunningham distinguishes PAGA actions from the class actions at the center of Gentry and Discover Bank, two California cases that have been in jeopardy during the post-Concepcion era: “The fact that PAGA accomplishes state policy goals through granting substantive rights rather than access to procedures distinguishes the Franco rule from the rules in Gentry and Discover Bank,” and “although the FAA preempts state law imposing the presence of certain procedures in the arbitration, the FAA does not preempt state laws ensuring that a plaintiff may assert substantive rights in arbitration.” Order at 15-16.

Finally, Cunningham distinguishes the U.S. Supreme Court’s Stolt-Nielsen S.A. v. AnimalFeeds holding. See order at 17. Although an agreement to arbitrate cannot necessarily be inferred to tacitly comprise class claims, “[t]his reasoning does not, however, apply when considering whether an agreement to arbitrate encompasses representative PAGA claims” because “PAGA claims do not bind absent employees, and hence do not require the complex proceedings that must be used when binding absent class members.” Order at 17.

Last week’s U.S. Supreme Court decision in American Express Co. v. Italian Colors Restaurant, 570 U. S. ___ (2013) has occasioned diverse responses, ranging from the usual “nothing to see here” from more Pollyanic plaintiffs’ advocates, to the defense bar proclaiming that Amex III is apocalypse, again, for class actions, after having predicted roughly the same thing following the Supreme Court’s Dukes, Concepcion, and Comcast decisions.

The always thoughtful Paul Bland, of Trial Lawyers for Public Justice, has titled his piece on Amex III “Worst Supreme Court Arbitration Decision Ever,” and focuses on the Amex III majority’s candid embrace of class arbitration waivers as de facto exculpatory clauses: “You see, until now, the Supreme Court has said that courts should only enforce arbitration clauses where a party could ‘effectively vindicate its statutory rights.’ Today, in a sleight of hand, the five conservative justices said that this means that arbitration clauses should be enforced even when they make it impossible for parties to actually vindicate their statutory rights, so long as they have a theoretical ‘right’ to pursue that remedy.” 

Kimberly Kraweloc’s respected and much-watched UCL Practitioner also accentuated the negative, noting that “the Court held 5-3 that the arbitration clause was enforceable even though an arbitration proceeding would provide no effective means to vindicate the plaintiffs’ statutory rights under the federal antitrust laws.”

However, recalling the extreme predictions that immediately followed earlier decisions concerning similar subject matter, Paul Karlsgrodt is more measured in his ultimate assessment, asking “Will Amex III finally be the case to end class actions as we know them?” and responding: “Concepcion hasn’t, so I doubt Amex III will either.”

Blogger Michael Fox described the most likely practical consequence of Amex III for employers as follows: “a large number of employers who have not implemented arbitration plans will be re-thinking the decision.” With the Supreme Court also having recently endorsed class-wide arbitration in Oxford Health Plans LLC v. Sutter, employers will likely seek to provide for a waiver of class actions along with mandatory arbitration clauses.

Finally, the ever-florid Cato Institute proclaimed that Amex III “is a victory for freedom of contract, a boost for arbitration as an alternative to litigation, and a step forward in the Court’s ongoing recognition that the class action is just one legal vehicle among many, not some priority express train to be favored over other traffic.”

One wonders, though, whether the Scalia-led arbitration crusade even views class actions as “just one legal vehicle,” or aims to consign class actions to something even less significant. And while prior legislative responses have stalled, efforts such as the Arbitration Fairness Act of 2013, which would among other things prohibit arbitration agreements and class action waivers as a condition of employment, are drafted and ready to be acted on should the Supreme Court overreach.