Posts belonging to Category Arbitration

The Supreme Court has issued its highly-anticipated decision in “Amex III”, the latest installment in an attack on class actions thinly disguised as an affection for the “liberal federal policy favoring arbitration.” The 5-3 majority (Justice Sotomayor abstained) reversed the Second Circuit and held that the Court of Appeals ruled contrary to the Federal Arbitration Act (FAA) when it invalidated an arbitration clause’s class action waiver, even though a class action would have been the plaintiff’s only way of effectively vindicating its antitrust claims against the defendant, American Express. See American Express Co. v. Italian Colors Restaurant, 570 U. S. ___ (2013) (slip opinion available here).

Italian Colors Restaurant, joined by other restaurants and retailers, sued American Express alleging that the credit card mainstay violated antitrust law by forcing merchants to accept its debit cards as a condition of accepting its charge cards. American Express sought to enforce an arbitration agreement, which included a class action waiver, but was rebuffed by the Second Circuit, which held that a prohibition against collective actions would impair the plaintiffs’ ability to enforce their statutory rights under the Sherman Act because the cost of plaintiffs’ individually arbitrating their dispute would be prohibitive and would thus effectively deprive them of protection under the antitrust laws. See In re Amer. Express Merchants’ Litig., 667 F. 3d 204 (2d Cir. 2012).

However, the majority opinion written by Justice Antonin Scalia stated that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” Slip op. at 4. After some odd bedfellow-ing in recent Fourth Amendment decisions, the Court returned to its familiar split, with Justices Alito, Thomas and Kennedy joining Scalia, along with Chief Justice Roberts. Justice Kagan wrote a dissent supported by three votes that will no doubt be widely described as “stinging,” which explains that: “here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.” Slip op., dissent, at 1. Justice Sotamayer recused herself because she had been on the Second Circuit when the case was before it.

Ostensibly at least, the decision turned on careful consideration of the “effective vindication doctrine,” which is widely regarded to have originated in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), and which stands for the reasonable proposition that an arbitration clause that functions as an exculpatory clause (e.g., a clause prohibiting all antitrust claims) need not be enforced. The majority suggests that the doctrine “originated as dictum” (slip op. at 6), before going into several paragraphs of analysis that treat the doctrine as if it were in fact dictum (slip op. at 6-7). On this point, the dissent gets the better of the argument, and in doing so likely saves what it portrays as a narrow doctrine. See slip op., dissent at 8, n.3. Justice Kagan persuasively argues that the majority is “dead wrong” when it contends that, in Mitsubishi, the Supreme Court didn’t reach the issue of whether an arbitration agreement’s potential deprivation of the right to pursue federal remedies is a permissible ground for deeming the arbitration agreement unenforceable, by noting that Mitsubishi merely did not reach whether the at-issue arbitration clause did in fact nullify the ability to vindicate a federal right. Id. (“But [in Mitsubishi] we stated expressly that if the agreement did so (as Amex’s does), we would invalidate it.”)

A similar issue of particular importance in California — whether an arbitration agreement that purports to waive a person’s ability to seek civil penalties under PAGA may be deemed unenforceable — is unaffected by the Amex III decision, as the controlling law remains that PAGA waivers in arbitration agreements may be properly found unenforceable, since a PAGA action is “fundamentally a law enforcement action designed to protect the public and not to benefit private parties,” and thus does not frustrate the purposes of the FAA. See Brown v. Ralphs Grocery, 197 Cal. App. 4th 489, 502 (2011). Likewise, while Amex III exclusively discusses the economic factors that could impede the vindication of a right, it does not address or alter the non-economic factors that the California Supreme Court identified in Gentry v. Super. Ct. that are to be considered in determining whether an arbitration agreement in the employment context impermissibly blocks vindication of an unwaivable right. See Gentry, 42 Cal. 4th 443 (2007).

In Amex III, however, the majority brought to bear arguments more compelling than those in earlier arbitration/class action rulings, noting that the at-issue class action waiver “no more eliminates those parties’ right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938.” Slip op. at 7. While the Kagan dissent didn’t directly address that argument, it had a provocative retort, styled around arbitration provisions that would be permissible under the majority’s scheme and are indistinguishable from candidly exculpatory provisions that the majority would have to concede the invalidity of, including the Amex CEO as the designated arbitrator, no relief even on a finding of liability, and prohibiting economic testimony in an antitrust case. See slip op., dissent at 3.

Perhaps naively, the three-member dissent argues that “[w]hat the FAA prefers to litigation is arbitration, not de facto immunity.” Slip op., dissent at 5. While that might be an accurate statement of what the drafters of the FAA intended, it appears that the majority is tacitly on the side of providing businesses not just with access to the arbitration forum, but also the de facto immunity that is any rational company’s most desired endgame when it aims to catch consumers or employees in arbitration’s adhesive flypaper.

With the admonition that “this is the price for agreeing to arbitration,” Justice Elena Kagan’s unanimous majority opinion in the much-anticipated Oxford v. Sutter has affirmed the Third Circuit’s deference, pursuant to Section 10(a)(4) of the Federal Arbitration Act (FAA), to an arbitrator’s conclusion that the parties had contractually agreed that their disputes could be adjudicated on a class-wide basis, in arbitration. See Oxford Health Plans LLC v. Sutter, No. 12–135, slip op. at 1-4 (U.S. June 10, 2013) (available here). While undeniably favorable in holding out the possibility of some class actions being salvaged, albeit in arbitration, the most prominent consequence of the Oxford decision is likely to be that those companies seeking to avoid class actions will be more assiduous in categorically proscribing class treatment in the arbitration agreements they extract from employees and consumers.

Oxford arose when doctors sued their insurance company over reimbursements, and the insurer moved to compel arbitration. Slip op. at 2. After the arbitrator initially found the parties had agreed to class-wide arbitration, the insurer sought reconsideration on the basis of the Supreme Court’s Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) decision, the most expansive reading of which has been that arbitrators’ referral to class-wide arbitration must be vacated when arbitrators conclude in favor of class arbitration on the basis of anything short of an unambiguous, overt, and mutual consent to use class arbitration. See, e.g., Reed v. Florida Metropolitan Univ., Inc., 681 F.3d 630 (5th Cir. 2012). Instead, Oxford largely adopts a narrower reading of Stolt-Neilsen, embodied in decisions like Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011), which focus on the quite inelastic range of judicial review afforded by the quite clear provisions of Section 10(a)(4) of the FAA and have found an intent to use class arbitration even where the parties’ arbitration agreement does not expressly consent to, or even reference, class arbitration.

Oxford turns entirely on the scope of judicial review under Section 10(a)(4). Under Oxford, there is little or no room for second-guessing the arbitrator’s interpretation provided the arbitrator has done a plausible impersonation of contract interpretation. Though seemingly an aggressive jurisprudential gesture, that Oxford is a unanimous decision is perhaps best explained by how little room Section 10(a)(4) leaves for cogent interpretation other than that adopted in the Kagan opinion concerning the deference owed arbitrators under Section 10(a)(4): “[C]onvincing a court of an arbitrator’s error—even his grave error—is not enough. So long as the arbitrator was ‘arguably construing’ the contract—which this one was—a court may not correct his mistakes. . . . The potential for those mistakes is the price of agreeing to arbitration.” Slip op. at 8.

When U.S. Supreme Court Associate Justice Antonin Scalia blithely dismissed adhesion contracts with the observation that “the times in which consumer contracts were anything other than adhesive are long past” (AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1750 (2011)), it was widely received as a death knell for the application of unconscionability analysis to arbitration agreements. And few contracts are more adhesive than those that are presented to employees on their first or last day of work; most newly-hired or newly-fired employees have little or no bargaining power. For that matter, employees typically have negligible bargaining power throughout their employment, when they are often asked to sign new contracts, tweaked to fully avail employers of new developments in the law.

Lou v. Ma Laboratories involved multiple agreements presented to plaintiff Cher Feng, both with and without arbitration provisions. See Lou v. Ma Labs., Inc., No. 12-5409 (N.D. Cal. May 17, 2013) (order denying motion to compel arbitration, available here). Yet despite the defendant having assiduously attempted to preserve its ability to force the plaintiff to arbitration, Judge William Alsup, of California’s Northern District, declined to enforce the at-issue arbitration agreement. See slip op. at 1-2.

Ms. Feng worked as an account manager at Ma Laboratories, and upon being hired, she signed a detailed, fourteen-page employment contract providing for disputes to be litigated in court. Slip op. at 1. However, a few months later, the plaintiff was asked to sign a nine-page “supplement” to the employment contract, which drastically changed the terms of her employment, including the addition of an arbitration clause, and which she contends she was required to sign in order to keep her job. Slip op. at 1-2.

Throughout the Lou decision, Judge Alsup’s focus was on the arbitration clause in the contract supplement. In finding the clause unconscionable, Judge Alsup undertook unconscionability analysis under California law, which has both a substantive and procedural component. “To determine whether an arbitration agreement is unconscionable, courts apply a sliding scale: ‘the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.’” Slip op. at 3, citing Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114 (2000). By relying on Armendariz and only making passing reference to Concepcion, Alsup thus tacitly affirmed the continuing vitality of California’s unconscionability doctrine.

Judge Alsup determined that the at-issue arbitration clause was procedurally unconscionable due to it being a contract of adhesion, since there was effectively no opportunity to negotiate its terms. Slip op. at 3-4. In addition, Alsup held to California authority requiring that if the rules governing an arbitration are not attached to an arbitration contract that an employee signs, that weighs as evidence of procedural unconscionability. Slip op. at 4-6. It was as to the arbitration provision’s substantive unconscionability that Alsup deployed his sharpest criticism, assailing the contract’s lack of mutuality (the defendant could litigate claims for injunctive relief, whereas the employer couldn’t) and asymmetric, ambiguous fee-shifting provision. Slip op. at 7-8.

While the decision made clear that the ruling is limited to Ms. Feng’s arbitration agreement, and not to any other class member, it would be surprising if future motions to compel arbitration did not meet the same fate, since the company presumably used the same or similar documents and procedures with all of their employees.

In the continuing battle over class and representative actions, in which arbitration agreements have been increasingly found to be a valid tool for preventing groups of plaintiffs to adjudicate claims in a single proceeding, workers scored a victory this week: California’s Sixth Appellate District has held that the Federal Arbitration Act (FAA) does not require the enforcement of arbitration agreements that nullify workers’ statutory right to bring actions for recovery of civil penalties under PAGA, the California Labor Code’s Private Attorneys General Act. See Brown v. Super Ct. (Morgan Tire), No. H037271 (Cal. Ct. App. June 4, 2013) (available here).

“[A] private agreement purporting to waive the right to take representative action is unenforceable,” the unanimous three-judge panel held, “because it wholly precludes the exercise of this unwaivable statutory right.” Slip op. at 1. The panel noted that AT&T Mobility v. Concepcion, the leading case for those seeking to squelch representative actions through arbitration agreements, “does not require otherwise.” Slip op. at 2.

The plaintiffs worked for the defendant’s “Wheel Works” subsidiary and alleged various wage-and-hour violations. See slip op. at 2. In addition to seeking restitution and damages, the plaintiffs also sought to recover civil penalties, as the state’s proxy, arising from the same workplace violations. The plaintiffs signed a standard dispute-resolution contract, which provided for arbitration of disputes and prohibited arbitration “‘on a class basis or as a collective action or representative action.’” Slip op. at 3. When the action was filed, California had unambiguously made a public policy choice to invalidate representative action waivers in both consumer and wage-and-hour cases. Thereafter, however, a narrow majority of U.S. Supreme Court justices held, in Concepcion, that at least in the consumer context, the FAA trumped California’s policy decision as to representative action waivers. Seizing on the opportunity to extend Concepcion, the Brown defendant moved to compel arbitration, arguing that the FAA also abrogated California’s invalidation of representative action waivers in wage-and-hour actions. The trial court agreed and granted the defendant’s motion. Slip op. at 3.

The Court of Appeal reversed, formally by way of a writ of mandate. See slip op. at 4, 20. The decision comes amid anything but judicial unanimity on the dispositive issue, with Iskanian v. CLS Transportation coming down in favor of enforcing representative action waivers, whereas Franco v. Arakelian Ent. and Brown v. Ralphs hold that Concepcion does not require the enforcement of such waivers. The California Supreme Court is likely to forge the issue’s ultimate resolution when it decides whether to reverse or uphold Iskanian. And if, as did Associate Justice Eugene Premo in Brown v. Morgan Tire, the Supreme Court relies on Brown v. Ralphs, then reversal would appear likely in Iskanian, too.

Justice Premo explained that, similar to the Ralphs appellate court’s holding that FAA preemption would essentially nullify the benefits of PAGA, “[i]n the present case, the EDRP does not explicitly prohibit private attorney general actions but it does prohibit representative actions. Accordingly, it effectively prohibits the employee from prosecuting any PAGA claim at all.” Slip op. at 16. Thus, neither the FAA nor a particular arbitration contract may altogether block a worker from pursuing PAGA civil penalties on a class or collective basis, because a PAGA claim is intrinsically representative. See slip op. at 17.