Posts belonging to Category Arbitration

A unanimous panel of California’s intermediate appellate court has upheld a trial court ruling that denied the defendant’s petition to compel arbitration. See Franco v. Arakelian Enterprises, Inc., __ Cal. App. 4th __ (Nov. 26, 2012). The decision from the Second Appellate District’s Division One took up whether the U.S. Supreme Court’s AT&T v. Concepcion ruling abrogated Gentry v. Superior Court (42 Cal. 4th 443 (2007)). In contrast to a decision out of Division Two of the Second District from earlier this year, Iskanian v. CLS Transportation (206 Cal. App. 4th 949 (2012)), Franco II holds that it does not.

Franco II involves a class action suit brought by a truck driver for meal and overtime violations, where the defendant employer attempted to compel individual arbitration pursuant to an arbitration clause with a class action waiver in plaintiff’s employment contract. Franco I (Franco v. Athens Disposal Co., Inc., 171 Cal. App. 4th 1277 (2009)) is a pre-Concepcion ruling in the same case, with essentially the same holding as Franco II, notwithstanding the intervening Concepcion decision.

In Gentry, the California Supreme Court held that, in arbitration agreements governing employment, class action waivers may be unenforceable in “some circumstances [where they] . . . would lead to a de facto waiver [of employees’ statutory rights] and would impermissibly interfere with employees’ ability to vindicate [those] rights.” Gentry at 457. In Franco II, the Second District held that Concepcion leaves room for California courts to make individual findings on the validity of waivers, thus limiting the preemption analysis of Concepcion to state rules that would categorically exempt a certain type of contract from arbitration. “We conclude that Gentry remains good law because, as required by Concepcion, it does not establish a categorical rule against class action waivers but, instead, sets forth several factors to be applied on a case-by-case basis to determine whether a class action waiver precludes employees from vindicating their statutory rights.” Franco II, slip op. at 3.

In reaching this holding, the Franco II panel credited the attestations of the plaintiff’s counsel that there was little chance of an attorney taking on the plaintiff’s case as an individual matter, owing to the maximum recovery of just over $10,000 being vastly exceeded by the legal resources necessary to prosecute the individual action. “The United States Supreme Court has recognized the necessity of a class action in cases where, as here, the potential recovery exceeds the cost of litigating a plaintiff‘s claims on an individual basis.” Slip op. at 63.

The Franco II court conducted what might be the California Court of Appeal’s most thorough history of U.S. Supreme Court case law on arbitration, cataloging decisions from 1953 to the present. This history included post-Concepcion developments in courts across the country. Additionally, this court outlined the history of the Vindication of Statutory Rights doctrine, central to the California Supreme Court case Armendariz v. Foundation Health Psychcare Services, Inc. (24 Cal. 4th 83 (2000)) and the U.S. Supreme Court case Green Tree Financial Corp.-Ala. v. Randolph (531 U.S. 79 (2000)). This doctrine permits the invalidation of arbitration agreements where an individual would be unable to effectively vindicate his or her statutory rights in the particular arbitral forum outlined in the arbitration agreement. This doctrine was a central component of the Franco II court’s finding that Gentry had not been overruled, as “Concepcion did not address or question prior Supreme Court cases recognizing that an arbitration agreement may be unenforceable if it prevents a plaintiff from vindicating his or her statutory rights.” Slip op. at 14.

The split between divisions of the Court of Appeal’s Second District will be resolved pursuant to the California Supreme Court’s grant of review of Iskanian on September 19, 2012. While it is probable that the Supreme Court will grant and hold review of Franco II pending its decision in Iskanian, the Court may instead consider Franco II alongside Iskanian. Additionally, the Vindication of Statutory Rights doctrine, as well as other issues addressed in Franco II, will likely be addressed by the U.S. Supreme Court when it reviews the Second Circuit case In re Am. Express Merchants’ Litig. (“Amex III”) later this term.

The California Court of Appeal has affirmed a trial court’s ruling in which it declined to hear the defendant’s motion to compel arbitration because to do so would have exceeded the trial court’s jurisdiction. See Ayyad v. Sprint Spectrum, L.P., __ Cal. App. 4th __ (Cal. Ct. App. 2012).

This ruling seemingly marks the end of a case with a long procedural history, including appeals to the California and U.S. Supreme Courts. Filed in 2003, the Ayyad complaint alleged that Sprint’s mandatory early-termination fees violated California consumer protection statutes. In 2006, the class was certified, but the certification order included a provision whereby Sprint would be able, upon a finding of liability on the termination fee claims, to offset the class’s damages with its own breach of contract claims. Thereafter, the case became one of the few class actions to go to trial, providing a rare illustration of classwide claims being adjudicated.

The month-long jury trial found the early-termination fees to be unenforceable contract terms and determined that the class was entitled to monetary damages in excess of $73 million as well as injunctive relief. However, the jury also found in favor of Sprint on its breach of contract cross claim, and assessed damages more than three times that of the class award, yielding a net recovery of some $151 million for Sprint. Because the class certification order provided that only the class could recover money damages, the $151 million was negated, and Sprint was required to enact the injunctive relief that was awarded to the class.

The arbitration dispute arose when Sprint, after unsuccessful appeals to the California and U.S. Supreme Courts, won a motion for a new trial, but as to damages only. Sprint appealed, but the Court of Appeal affirmed the trial court in all respects, circumscribing the trial court’s jurisdiction on remand only to the retrial of damages. Sprint moved to compel the new trial to arbitration, which the trial court denied.

In yet another appeal — the one that generated the instant ruling — Sprint invoked the U.S. Supreme Court’s then recently issued AT&T Mobility v. Concepcion ruling. See slip op. at 5-6. Sprint argued that Concepcion required that the entire matter be retried, not in court but in arbitration, and not as a class action, but rather as individual arbitrations. Id.

Rather than being grounded in an interpretation of Concepcion, as Sprint had urged, the Court of Appeal’s Ayyad decision is an exemplar of procedural formalism: “Our directions permitted the trial court to take the steps necessary to adjudicate the issues of Sprint’s damages and the setoff calculation; they ‘did not leave open the option of reconsidering prior rulings or reopening the case on the facts and allowing a trial.’” Id. at 13 (citation omitted). As such, “[t]he trial court correctly rejected Sprint’s eleventh-hour attempt to undo the result of years of litigation.” Id. (footnote omitted).

The Court of Appeal held to the strict terms of its remand order in denying Sprint’s attempt to begin anew with individual arbitration, and did not reach Concepcion, but for the implicit holding that Concepcion did not trump the remand order’s narrowly drawn mandate.

California’s intermediate appellate courts continue to fashion a post-AT&T v. Concepcion jurisprudence that largely mirrors the pre-Concepcion era, with arbitration clauses regularly being deemed unenforceable. Most recently, California’s influential Second Appellate District was called on to consider a trial court’s granting of a defendant’s motion to compel arbitration in a prospective class action in which the plaintiffs alleged they were misclassified as exempt from overtime pay and other employer obligations. See Elijahjuan v. Superior Court, ___ Cal. App. 4th ____ (Cal. Ct. App. 2012). The Court of Appeal reversed, holding the at-issue arbitration clause to be “outside the ambit of the arbitration provision” that the defendant had relied on and that the trial court applied to the alleged workplace violations. Slip op. at 6.

The at-issue arbitration clause was within a contract signed by plaintiffs that stated: “the terms and procedures set forth herein shall be controlling if a dispute arises with regard to its application or interpretation.” Slip op. at 3. Though the trial court held that the clause required the plaintiffs to arbitrate their misclassification claims, the panel’s majority concluded that “Petitioners’ lawsuit does not concern the application or interpretation of the Agreements, but instead seeks to enforce rights arising under the Labor Code . . . The parties’ dispute therefore cannot be characterized as regarding the application or interpretation of the Agreements.” Slip op. at 6.

The Elijahjuan decision analogized to similar reasoning applied by the Ninth Circuit, in a circumstance where the at-issue arbitration clause plainly applied to a choice of law provision to which the parties had contractually agreed, but not to the plaintiff’s claims arising under the California Labor Code. See Slip op. at 6, citing Narayan v. EGL, Inc., 616 F.3d 895, 899 (9th Cir. 2010).

The takeaway from the Elijahjuan decision is straightforward: In California state and federal courts alike, where an arbitration clause is not expressly applicable to wage-and-hour claims but instead concerns other circumstances, the arbitration clause should not be applied beyond its scope, notwithstanding either Concepcion or the FAA’s “liberal policy favoring arbitration agreements.”

While the other defendants in the massive In re Checking Account Overdraft Litigation class action opted to settle, Wells Fargo instead gambled that it could force the plaintiffs into arbitration, in an attempt to avoid the massive payouts made by the other banks. So far, that tactic has not worked out for Wells Fargo. Now, the bank is facing the prospect of paying a nine-figure settlement, as the Eleventh Circuit has upheld the trial court’s denial of Wells Fargo’s motion to compel arbitration. See Garcia v. Wachovia Corp., ___ F.3d ___, (11th Cir. Oct. 26, 2012) (available here). See also In re Checking Account Overdraft Litig., No. 09-2036 (S.D. Fla. filed June 10, 2009) (Bank of America Notice of Settlement; U.S. Bank Joint Notice of Settlement).

The Court of Appeals affirmed the district court’s holding in all respects, agreeing that Wells Fargo acted contrary to an intention to arbitrate and that it would not have been futile for Wells Fargo to have moved to compel arbitration.  Wells Fargo’s now-dissolved subsidiary, Wachovia Bank, was also rebuffed in its attempt to compel arbitration, with the district court finding that Wachovia had waived its right to arbitrate.

Wells Fargo was given two opportunities by the district court to file a motion to compel arbitration, in November 2009 and April 2010, but declined to do so. Garcia at 4-5. “Wells Fargo even told the district court that . . . it ‘did not move for an order compelling arbitration . . . nor does it intend to seek arbitration of [plaintiffs’] claims in the future.’” Id. at 5. However, like many similarly situated defendants, Wells Fargo saw an opportunity with the Supreme Court’s issuance of AT&T v. Concepcion, and just two days later filed a motion to dismiss the five putative class actions in favor of arbitration or, in the alternative, to stay the proceedings pending arbitration. Id. at 5-6.

Wells Fargo argued that it did not waive its right to compel arbitration because, prior to Concepcion, a motion to compel arbitration would have been futile, since state laws made it impossible to enforce agreements to arbitrate on an individual (rather than classwide) basis. Id. at 6. However, the court ruled that such a motion would not have been futile, since Wells Fargo had a colorable argument: that the Federal Arbitration Act preempted state laws that barred enforcement of the arbitration agreements. Id. at 12-13. The court noted that the Concepcion decision itself demonstrates that such an argument could have been successful. Id.

Whether this ruling will lead to a settlement benefitting consumers remains to be seen, but the Wells Fargo plaintiffs appear to have scored a major victory.