Posts belonging to Category Arbitration

A pattern seems to be emerging among courts tasked with adjudicating attempts by defendant companies to force class action plaintiffs into arbitration, and the results are far more hopeful than initially expected of the post-AT&T Wireless v. Concepcion era. Most recently, a Nevada district court has joined this apparent trend, denying a motion to compel arbitration by the online retailer Zappos.com. See In re Zappos.com, Inc. Customer Data Security Breach Litig., No. 12-00325 (D. Nev. Sept. 27, 2012) (order denying motion to compel arbitration) (available here).

In the underlying lawsuit, the plaintiffs allege that they gave Zappos.com personal information in connection with purchases, and that the shoe retailer insufficiently protected their information from computer hackers. See Order at 2. The MDL proceeding that is pending in the District of Nevada comprises nine actions that were filed across the country. Earlier this year, Zappos.com moved to compel the totality of the proceedings to arbitration. Id. at 2 n.2.

Applying Nevada contract law to its analysis as to whether the parties did in fact agree to arbitrate, the court noted that the much-referenced “‘liberal federal policy regarding the scope of arbitrable issues is inapposite.’” Id. at 5, citing Comer v. Micor, Inc., 436 F.3d 1098, 1104 n.11 (9th Cir. 2006). On multiple grounds, Chief Judge Robert C. Jones found that there was no binding agreement to arbitrate. Foremost, he determined that the plaintiffs did not agree to the Zappos.com’s “Terms of Use,” which contained the at-issue arbitration clause. See id. at 7-10. In reasoning likely to influence other online retailers, Zappos.com was assailed for burying its Terms of Use “in the middle to bottom of every Zappos.com webpage among many other links,” with the court concluding that “[n]o reasonable user would have reason to click on the Terms of Use.” Id. at 8.

Moreover, in analysis akin to California’s unconscionability jurisprudence, the court also found the Zappos.com Terms of Use to be an illusory, and thus unenforceable, contract. See id. at 10-12. The court adopted the plaintiffs’ contention that the contract was illusory “because Zappos can avoid the promise to arbitrate simply by amending the provision, while Zappos.com users are simultaneously bound to arbitration.” Id. at 10.

California courts have similarly found such asymmetric contract terms to be unenforceable under the unconscionability doctrine, in cases such as Sanchez v. Valencia Holding Co. and Mayers v. Volt Management.
 

A strong body of law continues to develop denying defendants’ attempts to compel arbitration and, as a practical matter, elude meaningful enforcement of workplace- and consumer-protection laws. Most recently, the highly respected Judge Susan Illston, in California’s Northern District, rejected an attempt by American Honda Motor Co. (as a third-party non-signatory to a sale contract) to enforce an arbitration clause in a class action alleging defects in the Honda Accord. See Soto v. Amer. Honda Motor Co., Inc., No. 12-1377 (N.D. Cal. Oct. 3, 2012) (order denying motion to compel arbitration) (available here).

The at-issue arbitration clause was entered into between the plaintiff and the dealership where he bought his Accord, which in turn assigned the Installment Sale Contract comprising the arbitration clause to American Honda Finance Corp. (“AHFC”). See order at 2. American Honda Motor Co. was never a party to the contract. Accordingly, American Honda advanced three related theories in attempting to compel arbitration despite not being a party to the sale contract: (1) a theory that the contract incorporates third parties; (2) an equitable estoppel theory based on the plaintiff’s own reliance on the contract containing the arbitration clause; and (3) an agency theory, premised on the close business relationship between American Honda and AHFC. See id. at 4. Judge Illston serially rejected each of the three theories advanced by American Honda and, consequently, denied the motion to compel arbitration. See id. at 5-9.

The direct incorporation theory was easily rejected as a matter of literal contract interpretation. See id. at 5. The provision that American Honda had posited as the source of it being expressly incorporated as a beneficiary of the Installment Sale Contract was held, instead, to “refer to a secondary sale of the car, and not the relationship with the manufacturer AHM.” Id. So, too, was American Honda’s equitable estoppel theory rejected, as the plaintiffs’ product defect claims were found not to be closely intertwined with or dependent on the Installment Sales Contract. See id. at 5-7. For similar reasons, the court also rejected American Honda’s agency theory, finding that “AHFC’s agency relationship to AHM is limited to the financing of Honda vehicle sales and leases; it has no involvement with AHM’s design and manufacture of vehicles. Id. at 8.

The class action will thus remain in the Northern District, where the plaintiffs’ allegations of a “systemic design defect that results in burning motor oil at a faster rate than intended” will be adjudicated under statutes including California’s Consumer Legal Remedies Act, Unfair Competition Law, and the Magnuson-Moss Warranty Act. Id. at 1.

Yet another California Court of Appeal panel has found that California’s unconscionability doctrine remains applicable to the analysis of petitions to compel arbitration. See Goodridge v. KDF Automotive Grp., Inc., ____Cal. App. 4th ____ (Aug. 24, 2012). In a unanimous opinion issued in August and ordered published on September 13th, the three-judge panel of California’s Fourth Appellate District (which includes Orange, San Diego, Riverside and San Bernardino Counties) held the arbitration clause in a purchase contract for a tire to be unconscionable. See slip op at 1.

In so ruling, the Goodridge panel affirmed the trial court’s rejection of the defendant’s argument that “‘[t]he United States Supreme Court in [AT&T Mobility LLC v. Concepcion (2011) ___ U.S. ___ [131 S.Ct. 1740, 179 L.Ed.2d 742] (AT&T)] makes it clear that unconscionability is no longer a valid objection to an arbitration agreement.’” Slip op. at 7. Looking to recent Ninth Circuit authority, Goodridge holds that Concepcion “‘did not overthrow the common law contract defense of unconscionability whenever an arbitration clause is involved. Rather, [AT&T] reaffirmed that the savings clause preserves generally applicable contract defenses such as unconscionability, so long as those doctrines are not ‘applied in a fashion that disfavors arbitration.’ ’” Slip op. at 11, citing Kilgore v. KeyBank, N.A., 673 F.3d 947, 963 (9th Cir. 2012).

With the enduring validity of California’s unconscionability jurisprudence established, the Goodridge decision goes on to find the at-issue arbitration clause both procedurally and substantively unconscionable, giving considerable weight to the plaintiff’s declaration testimony to the effect that the purchase agreement that contained the clause was presented to him on a “take it or leave it” basis and embodied onerous terms. See slip op. at 15-18. The decision notes that “[t]he arbitration clause was hidden within the lengthy prolix of the printed form presented by KDF to Goodridge” and that four particular terms “fall outside the reasonable expectations of Goodridge as the nondrafting party and are unduly oppressive.” Id. at 17, 19. For instance, while the arbitration clause’s appeals provision is ostensibly bilateral, by limiting appeals to awards in excess of $100,000, as a practical matter only the defendant would be able to avail itself of this right. See id. at 19-20. Similarly, the arbitration clause provides that either party can appeal an arbitrator’s imposition of injunctive relief. Id. at 21. Again, only the defendant would realistically benefit from this provision. Further, the clause requires the appealing party to advance the costs and fees of both parties, a term plainly disadvantageous to the plaintiff. See id. at 22-23.

The California Supreme Court is expected to conclusively determine the applicable scope of Concepcion in its upcoming review of three cases: the Second Appellate District’s rulings in Iskanian v. CLS Transp. Los Angeles, LLC and Sanchez v. Valencia, and the Fourth Appellate District’s ruling in Mayers v. Volt. 

Just days after the California Supreme Court granted the petition for review in Iskanian v. CLS Transp. Los Angeles, LLC, ___ Cal. App. 4th ___ (2012), the Ninth Circuit granted a motion for en banc rehearing in Kilgore v. KeyBank Nat’l Assn., No. 09-16703 (9th Cir. Sept. 21, 2012) (available here). Since both decisions entail critical interpretations of the U.S. Supreme Court’s AT&T Mobility v. Concepcion decision, it is expected that, in concert, Iskanian and Kilgore will substantially determine the jurisprudence governing arbitration agreements in California state and federal courts.

At issue in Kilgore are the holdings in two California Supreme Court cases, Broughton v. Cigna Healthplans (21 Cal. 4th 1066 (1999)) and Cruz v. PacifiCare Health Systems, Inc. (30 Cal. 4th 303 (2003)), which until Concepcion stood without credible dissent for the proposition that public injunctive relief claims under California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL), respectively, are not arbitrable as a matter of California public policy. The three-judge panel in Kilgore ruled that Concepcion overruled Broughton and Cruz. The en banc proceeding will reconsider that ruling.

In Iskanian, the California Supreme Court will be chiefly concerned with whether Concepcion overrules the unconscionability jurisprudence of Gentry v. Superior Court (42 Cal. 4th 443 (2007)) and whether Concepcion applies to actions seeking civil penalties under the California Labor Code’s Private Attorneys General Act, or PAGA. Reversal in both Iskanian and Kilgore would thus make for a decidedly different narrative than had been predicted when Concepcion was issued and many observers assessed it as the “death knell for class actions.” Instead, Concepcion has generally been narrowly interpreted. And where it has not been—as in Iskanian and Kilgore—those rulings have shown signs of frailty.