Posts belonging to Category Arbitration

McCarthy v. Toyota: Manufacturer Cannot Hitch a Ride on Car Dealers’ Arb Agreements with Buyers

In McCarthy v. Toyota Motor Corporation, C.D. Cal., Oct. 20, 2020 (slip op. available here), the district court recently held that Toyota could not compel three class action plaintiffs to arbitrate their auto defect claims based on arbitration provisions in purchase agreements and a lease that they had entered into with their Toyota dealers. Although Toyota was a non-signatory to the agreements, it argued that it had standing to enforce the agreements based on a theory of equitable estoppel and as a third party beneficiary to one of the agreements.

“The theory behind equitable estoppel is that a plaintiff may not, ‘on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a non-signatory.’” In re Henson, 869 F.3d 1052, 1060 (9th Cir. 2017) (quoting Murphy v. DirecTV, Inc., 724 F.3d 1218, 1229 (9th Cir. 2013). Toyota’s equitable estoppel theory was that “‘Plaintiffs’ claims against [it] rely upon and are intimately founded on and intertwined with Plaintiffs’ agreements’ [with the dealers] such that Toyota may enforce the arbitration provision in Plaintiffs’ agreements based on equitable estoppel.”

The Ninth Circuit rejected this argument in Kramer v. Toyota Motor Corp., 705 F.3d 1122 (9th Cir. 2013), and the district court held that Kramer controlled. As in Kramer, the district court found that the plaintiffs’ claims against Toyota (fraudulent, deceptive, and/or misleading conduct in failing to disclose the defect, and breach of manufacturer warranties) arose independently from the terms of the agreements containing the arbitration agreements. None of the plaintiffs’ claims referenced or relied on the terms of the agreements with the dealers.

Toyota also argued that under the terms of the lease agreement it was an “affiliate” of the dealer within the meaning of the arbitration provision and was therefore a “Covered Party” under that provision. Applying basic rules of contractual interpretation, the district court rejected the argument.

Among other observations, the district court noted that the term “affiliate” was not defined in the provision and there was nothing in the provision that indicated the term was meant to apply broadly to any entity with a corporate tie to the dealer. On the contrary, all of the parties listed as “Covered Parties” in the provision had a direct connection to the lease. Further, for third parties to be “Covered Parties,” they not only had to provide products and services in connection with the lease, but they also had to be sued as co-defendants with the other Covered Parties. Toyota’s position that the term “affiliate” should be read to include any corporate entity with any ties to the dealer or other listed entities (all of whom had direct connections with the lease) was “incongruously broad,” in the view of the court. The lease agreement also explicitly disclaimed any effect on the manufacturer’s warranties at issue in the action.

In sum, the automobile lease and purchase agreements in McCarthy are contracts between consumers and car dealers; they pertain to that relationship only. They are not drafted to protect the manufacturer from the consequences of its own fraud against consumers, product defects, or breach of manufacturer warranties. Consequently, they provide no road to arbitration for Toyota.

Authored by:
Robert Friedl, Senior Counsel

Adams v. Postmates: Arbitrator to Decide If Mass Arb Violates Class Action Waiver, Says 9th Cir.

In Adams v. Postmates, Inc., 9th Cir. Sept. 29, 2020 (slip op. available here), the Ninth Circuit recently affirmed an order granting the petition of over 5,200 delivery drivers to compel Postmates to arbitrate their misclassification claims pursuant to an arbitration provision in their fleet agreement. Adams v. Postmates, Inc., 414 F.Supp.3d 1246 (2019). The drivers filed individual arbitration demands with the American Arbitration Association and paid their portion of the arbitration filing fees. Id. at 1251. The petition was filed after Postmates refused to pay its share, which is estimated to be $9.36 million. Id. Postmates contended that the petitioners were improperly pursuing a “de facto class action” in violation the class action and representative action waivers in the fleet agreement.

The Ninth Circuit held that the delegation provision in the fleet agreement clearly delegated that issue to the arbitrator. The agreement granted the arbitrator exclusive authority to resolve disputes over the interpretation of the agreement, except that any claim that the class action waiver is “unenforceable, unconscionable, void, or voidable” was to be resolved by a court. Postmates’ argument that the delivery drivers violated the class action waiver was not an attack on the validity the class action waiver itself.

Postmates’ arbitration agreement does exactly what it was designed to do. It protects Postmates from class actions by drivers by compelling their claims to arbitration. Then, it precludes drivers from arguing to an arbitrator that the class action waiver is unenforceable by reserving that issue for a court. It did not anticipate drivers petitioning to compel arbitration en masse which, if allowed, will likely negate the very advantages to employers that class action waivers were meant to preserve.

It remains to be seen whether the drivers’ tactic of filing over 5,200 arbitration demands violated the class action waiver, or whether Postmates will be required to pay millions of dollars in arbitration filing fees. Those issues will now be for the arbitrator to decide.

Authored by:
Robert Friedl, Senior Counsel

McGill v. Citibank Breathes New Life into Roberts v. AT&T Mobility

A consumer class action against AT&T Mobility for cell phone data “throttling” was revived on March 14, 2018, by the Northern District of California, courtesy of a motion to reconsider and subsequent denial of a motion to compel arbitration (as to all but one of the plaintiffs) in Roberts v. AT&T Mobility, No. 15-cv-03418-EMC (slip op. available here). The case was on remand from the Ninth Circuit after it affirmed the district court’s order compelling arbitration. Roberts v. AT&T Mobility LLC, 877 F.3d 833 (9th Cir. Dec. 11, 2017), petition for cert. filed (U.S. March 9, 2018) (No. 17-1287). While Roberts was on appeal, the California Supreme Court handed down its decision in McGill v. Citibank, 2 Cal.5th 945 (2017), holding that an arbitration agreement that waives the right to seek the statutory remedy of public injunctive relief in any forum is contrary to California public policy and therefore unenforceable. On reconsideration, the district court relied on McGill to deny AT&T’s motion to compel arbitration because it contained a pre-dispute waiver of public injunctive relief.

The Roberts arbitration saga began in April 2016 when the district court compelled arbitration, rejecting the plaintiffs’ First Amendment challenge to the Federal Arbitration Act (FAA). On appeal, the plaintiffs argued that an order forcing arbitration would violate the Constitution’s Petition Clause because the plaintiffs had not “knowingly and voluntarily give[n] up their right to have a court adjudicate their claims.” Roberts v. AT&T Mobility LLC, 877 F.3d 833, 836 (9th Cir. 2017). However, the First Amendment right to petition is a guarantee only against abridgment by the government, and a plaintiff must get over the threshold showing of a state action to make a valid Petition Clause claim. Id. at p. 837. The Ninth Circuit shot down the plaintiffs’ constitutional argument primarily because AT&T’s conduct was not fairly attributable to the state. Id. at 839.

One month after Roberts was remanded to the district court, the plaintiffs filed for reconsideration of the district court’s order compelling arbitration based on McGill. In granting reconsideration, Judge Edward Chen noted that two other judges in the Northern District already had relied on McGill to deny motions to compel arbitration in similar circumstances. See McArdel v. AT&T Mobility LLC, 2017 WL 4354998 (N.D. Cal. Oct. 2, 2017), appeal docketed, No. 17-17246 (Nov. 2, 2017); Blair v. Rent-A-Center, Inc., No. C-17-2335 WHA (Oct. 25, 2017), appeal docketed, No. 17-17221 (Oct. 30, 2017).

Procedurally, the district court rejected AT&T’s argument that the plaintiffs had delayed in bringing the motion to reconsider, finding that the plaintiffs had exercised “reasonable diligence.” Slip op. at 3. On the merits, the district court examined the California Supreme Court’s rationale in McGill. Id. at 6. The court noted that McGill had not held that public injunctive relief claims are inarbitrable, but rather that the at-issue agreement in that case was “unenforceable because it prohibited her from pursuing public injunctive relief in any forum—arbitration or otherwise.” Id. This distinction is important as it avoids potential preemption by the FAA. See, e.g., Ferguson v. Corinthian College, 733 F.3d 928, 929 (9th. Cir. 2013) (noting that the Broughton-Cruz rule exempting claims for “public injunctive relief” from arbitration is preempted by the FAA). The district court also noted that the anti-waiver defense adopted in McGill applied to contract formation in general, not just arbitration contracts. Slip op. at 7. As such, it met the U.S. Supreme Court’s mandate that courts place arbitration agreements on equal footing with other contracts. AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

Finally, the district court rejected AT&T’s preemption argument, that claims for public injunctive relief interfere with the fundamental attributes of arbitration because they are “indistinguishable” from class-wide injunctive relief, which can be forcibly waived via an arbitration agreement consistent with the FAA. Slip op. at 9. The court analogized claims for public injunctive relief under the consumer protection statutes to representative actions under the California Private Attorneys General Act (PAGA), which the California Supreme Court has likewise held to be unwaivable. Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal.4th 348, 381 (2014), accord Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425, 427 (9th Cir. 2015).

It can reasonably be expected that Roberts will return to the Ninth Circuit. However, given the logical parallels between claims for public injunctive relief and PAGA, there is a good chance of another opinion like Sakkab upholding the California Supreme Court’s analysis, including with respect to FAA preemption. In any event, Roberts stands as a good reminder to the plaintiffs’ bar to be aware of the evolving law involving arbitration; a favorable decision in a recently-decided case may revive a class action from an order compelling arbitration.

Authored By:
John Stobart, Senior Counsel

United States ex rel. Welch v. My Left Foot Children’s Therapy: 9th Cir. Rules Arb Agreement Does Not Apply in Former Employee’s Whistleblower Lawsuit

In September, the Ninth Circuit Court of Appeals affirmed a ruling that rejected a company’s attempt to force its former employee into arbitration under a very broadly-worded agreement that she had signed at the time of hire. See United States and State of Nevada ex rel. Welch v. My Left Foot Children’s Therapy, LLC, et. al, No. 16-16070 (9th Cir. Sept. 11, 2017) (slip op. available here). Specifically, the court held that the broad arbitration provision did not cover an employee’s claim under the False Claims Act (FCA), because an FCA claim belongs to the government, and in this case, neither the United States nor the state of Nevada had agreed to arbitrate its claims. Id. at 4.

The plaintiff in Welch was an employee working for My Left Foot Children’s Therapy (MLF), who filed a whistleblower complaint in federal court alleging that MLF violated the FCA by presenting fraudulent claims to federal health care programs. See id. at 6. The United States and Nevada declined to intervene, and thus, Welch proceeded with her claim. Id. On October 19, 2015, the defendants moved to compel arbitration of Welch’s FCA claims pursuant to the Federal Arbitration Act (FAA) and the arbitration agreement contained in her employment contract. Id. at 6. The arbitration agreement stated in relevant part:

I agree and acknowledge that the Company and I will utilize binding arbitration to resolve all disputes that may arise out of the employment context. Both the Company and I agree that any claim, dispute, and/or controversy that either I may have against the Company . . . or the Company may have against me, arising from, related to, or having any relationship or connection whatsoever with my seeking employment by, or employment or other association with the Company shall be submitted to and determined exclusively by binding arbitration under the Federal Arbitration Act.

Id. (emphasis added).

On June 13, 2016, the district court denied the defendants’ motion to compel arbitration on the basis that Welch’s arbitration agreement did not extend to the United States or Nevada, the parties that owned the underlying FCA claims. Following this, on September 11, 2017, the Ninth Circuit affirmed the district court’s decision. Specifically, the Ninth Circuit held that the material terms (“arising out of,” “related to,” and “having any relationship or connection whatsoever”) of the agreement only covered claims directly related to the plaintiff’s employment. Id. at 13-17. The court reasoned that here, the FCA suit had no direct connection with Welch’s employment because even if Welch had never been employed by the defendants, assuming other conditions were met, she would still have been able to sue them for presenting false claims to the government. Id. Thus, her ability to bring this claim did not necessarily arise from her employment and was not covered by the arbitration agreement. Id.

The court also stated that the arbitration agreement only covered claims between Welch and MLF (id. at 15), and did not cover claims brought on behalf of another party—the United States or Nevada. This reasoning has been echoed in other types of qui tam actions such as those brought under the Private Attorneys General Act of 2004 (“PAGA”). Like FCA claims, in a PAGA action, a plaintiff brings the case for violations of the California Labor Code on behalf of the real party in interest—the state of California. As such, the California Supreme Court has also held that such actions are not covered by arbitration agreements to which the real party in interest—the state of California—has not assented. See Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 386 (2014).  However, it is important to note that the Ninth Circuit also stated in dicta that, had the parties wanted to agree to arbitrate FCA claims, they were free to have drafted a broader agreement that covers “any lawsuits brought or filed by the employee whatsoever” or “all cases Welch brings against MLF, including those brought on behalf of another party.” See slip op. at 17.

Thus, while this holding is another victory in the fight against adhesive arbitration agreements in qui tam-type actions, it may also provide some guidance to employers wishing to force qui tam actions under the FCA into arbitration.

Authored by:
Ruhandy Glezakos, Associate