Posts belonging to Category Arbitration

Complaining that California “leads the field” in circumventing United States Supreme Court’s pro-arbitration precedent Concepcion, Prudential Overall Supply petitioned for certiorari on August 15, 2017, seeking review of California’s Fourth Appellate District’s ruling that claims under California’s Private Attorneys General Act (“PAGA”) cannot be arbitrated. Betancourt v. Prudential Overall Supply, No. E064326 (4th District Div. 2, March 7, 2017) (slip op. available here) (petition for writ of certiorari available here). In April 2015, Betancourt filed a representative action suit solely based on PAGA against his employer, Prudential Overall Supply. Within the single PAGA claim, the plaintiff alleged violations of overtime and minimum wage law, meal and rest period requirements, timely pay and final pay requirements, and recordkeeping and wage statement requirements, among other claims. In a March 7, 2017 decision, the Court of Appeal affirmed the trial court’s denial of Prudential’s motion to compel arbitration of the plaintiff’s claim for penalties under PAGA. Slip op. at 2.

First, Prudential argued that Betancourt had already agreed to arbitrate the PAGA claim and that an arbitrator would decide the scope and application of the agreement. Id. at 10-11. Additionally, Prudential claimed since the “representative claims” portion of the agreement could be severed, Betancourt could be compelled to arbitrate his claims. Id. at 11. Prudential further asserted that if Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 5th 348 (2014), is interpreted as prohibiting arbitration of all PAGA claims, then the state law prohibiting arbitration is preempted by the Federal Arbitration Act (FAA). Id. at 12. Finally, Prudential, citing Sakkab v. Luxottica Retail North America, Inc. (2015 9th Cir.) 803 F.3d 425, contended that California law permits arbitration of PAGA claims. Id. at 12-13. Repeatedly citing Iskanian, the appellate court rejected each of these arguments, holding that Prudential could not “rely on a predispute waiver by a private employee to compel arbitration in a PAGA case, which is brought on behalf of the state . . .” because “[t]he state is not bound by Betancourt’s predispute agreement to arbitrate.” Id. at 8; see also id. at 9-13 (applying Iskanian in greater detail) (internal citations omitted). Further, the Court of Appeal noted that a state rule prohibiting arbitration of PAGA claims is not preempted by the FAA because it falls outside of the scope of the FAA, as PAGA “is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state . . . .” Slip op. at 10 (citing Iskanian, at 386-87, emphasis in original).

The Court of Appeal also rejected the defendant’s other argument, which was based on an alleged defect in the pleadings. The defendant argued that because Betancourt had sought non-PAGA remedies in the prayer for relief, e.g., for unpaid wages, business expenses, interest, and attorney’s fees, in addition to civil penalties, the action was not actually a PAGA action and that the plaintiff was trying to disguise a standard wage-and-hour action in order to evade arbitration. Slip op. at 4, 8-9. Yet, the trial court had found and the appellate court agreed, such a challenge is a challenge against the pleadings, and should have been brought as a motion to strike—not as a motion to compel arbitration. Id. at 9. As the Court of Appeal aptly noted, “Prudential accuses Betancourt of attempting to make an ‘end run around arbitration’ by incorrectly labeling his claims as a PAGA matter. It appears to this court that Prudential may be attempting to make an ‘end run” around a demurrer or motion to strike . . . .” Id. at 9.

Overall, the Court of Appeal’s Betancourt opinion makes a strong case for PAGA claims being inarbitrable, based on the fact that the state—the real party in interest in every PAGA action—is not a party to an employee’s bilateral agreement to arbitrate his or her employment claims, and thus cannot be bound by that agreement. Whether the United States Supreme Court will break its streak of rejecting cert petitions based on PAGA issues in Betancourt remains to be seen.

Authored By:
Jennifer Bagosy, Senior Counsel
CAPSTONE LAW APC

In a decision likely to spur defendants to make immediate motions to compel arbitration in class actions, the California Court of Appeal, Second District, found that a defendant who chose to wait for class certification before seeking arbitration had waived the right to arbitrate. Sprunk v. Prisma LLC, No. B268755 (2nd Dist. Div. 1 Aug. 23, 2017) (slip op. available here). In Sprunk, the plaintiff filed a wage-and-hour class action in October 2011, alleging she and a class of exotic dancers had been misclassified as independent contractors and had consequently been denied wages, meal periods, and reimbursement of business expenses. The plaintiff and all putative class members had signed arbitration agreements.

Sprunk moved for class certification in September 2014. In opposing the motion, Prisma argued that a class action was not superior to other forms of litigation because the class members had signed arbitration agreements. The trial court granted class certification in April 2015, rejecting Prisma’s “superiority” argument. In August of 2015, Prisma filed two motions to compel arbitration, seeking to enforce two different arbitration clauses. By that time, Sprunk and Prisma had litigated for four years, during which time discovery was conducted, depositions were taken, and defendant moved for arbitration, then withdrew the motion, and ultimately renewed its motion to compel arbitration. In October of 2015, the trial court denied the motions. Prisma appealed.

On appeal, Prisma relied upon Sky Sports, Inc. v. Superior Court, 201 Cal.App.4th 1363 (2011), for the proposition that it would have been premature to have filed its motion to compel arbitration prior to class certification. However, the Court of Appeal cited a critical distinction: in Sky Sports, the plaintiff had not signed an arbitration agreement although other members of the class had. In Prisma, the class representative (Sprunk) and all putative class members had signed arbitration agreements, giving Prisma the right to have sought to compel arbitration at the outset of litigation.

Noting that the trial court found Prisma had engaged in a strategic delay to give itself an opportunity to defeat the class, the Court of Appeal warned, “[a]n attempt to gain a strategic advantage through litigation in court before seeking to compel arbitration is a paradigm of conduct that is inconsistent with the right to arbitrate” and supports a finding of waiver. Slip op. at 18. The court also found Sprunk was prejudiced by the delay—had Prisma timely moved to compel arbitration, it could, “as a practical matter[,] have resolved the judicial proceedings with respect to the class” and could have “settled the question of whether the claims . . . should be adjudicated in a court or through arbitration.” Id. at 16-17.

This class action involving exotic dancers has clarified that a defendant wishing to compel arbitration must do so before the parties have invested time and energy in litigation, or risk waiver. Going forward, defendants must therefore dance quickly, or get off the table.

Authored by:
Arlene Turinchak, Senior Counsel
CAPSTONE LAW APC

On April 6, 2017, in a unanimous decision, the California Supreme Court held that a provision in Citibank’s mandatory cardholder arbitration agreement that waives the statutory right to seek public injunctive relief is contrary to California public policy and is thus unenforceable under California law. McGill v. Citibank, N.A., No. S224086 (Cal. Sup. Ct. April 6, 2017) (slip op. available here). The court rejected Citibank’s “overbroad view” of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., and concluded that the FAA does not preempt California law on this issue or otherwise require enforcement of the waiver provision. Slip op. at 1, 15. The court also found that public injunctive relief remains a remedy available to private plaintiffs with standing under California’s consumer protection statutes, and is not restricted to the class action context. Id. at 11-13.

In McGill, the plaintiff was a Citibank cardholder who paid a monthly premium for its “credit protector” plan, a type of credit insurance that deferred or credited certain amounts to her account upon a qualifying event, such as unemployment. She brought a class action based on Citibank’s deceptive marketing of this plan and handling of her claim when she became unemployed, alleging claims under California’s Unfair Competition and False Advertising laws (the “UCL” and “FAL,” respectively), the Consumers Legal Remedies Act (the “CLRA”), and the Insurance Code. McGill sought public injunctive relief, along with other remedies, against Citibank’s unlawful business practices. Relying on arbitration provisions imposed against the plaintiff through a unilateral “Notice of Change in Terms” to her Citibank card, Citibank filed a petition to compel arbitration on an individual basis. The trial court ordered all claims to arbitration except those for injunctive relief under the UCL, FAL, and CLRA based on the Broughton-Cruz rule, which provides that claims for public injunctive relief under these consumer protection statutes are not arbitrable under California law. Slip op. at 3. The Court of Appeal reversed, holding that the Broughton-Cruz rule is preempted by the FAA, and instructing the trial court to order all claims to arbitration, including the injunction claims.

In an opinion authored by Justice Ming Chin, the California Supreme Court reversed. The court found that the Broughton-Cruz rule was not at issue, as the parties agreed that the arbitration agreement purported to preclude McGill from seeking public injunctive relief in any forum, arbitral or judicial, whereas the Broughton-Cruz rule applies only when parties have agreed to arbitrate requests for such public injunctive relief. Slip op. at 8. The court addressed whether such an arbitration provision, which completely waives the right to seek public injunctive relief under the UCL, FAL, and CLRA, was unenforceable under California law. Applicable California law under Civil Code section 3513 provides that “a law established for a public reason cannot be contravened by a private agreement.” Noting that the public injunctive relief available under the UCL, CLRA, and FAL is primarily for the benefit of the general public and to remedy a public wrong rather than resolve a private dispute, the supreme court found that such a waiver under these statutes “would seriously compromise the public purposes the statutes were intended to serve.” Slip op. at 14. As such, Citibank’s arbitration provision that purports to waive the right to such public injunctive relief in all fora is invalid and unenforceable under California law. Id.

The court further found that the FAA, as construed in Concepcion, did not preempt this rule of California law, and rejected Citibank’s views to the contrary. Slip op. at 14-15. Under the FAA’s “savings clause” and U.S. Supreme Court precedent, arbitration agreements are only “as enforceable as other contracts, but not more so,” and may be invalidated by generally applicable contract defenses. Id. at 15. The court held that the contract defense at issue here, Civil Code section 3513’s proscription that a law established for a public reason cannot be contravened by a private agreement, is grounds under state law for revoking any contract, not just arbitration agreements, and thus a generally applicable contract defense. Id. at 15-16. The court concluded that the FAA does not require enforcement of a provision that, in violation of generally applicable California contract law, waives the right to seek in any forum public injunctive relief under the UCL, FAL, or CLRA. Id. at 17. The FAA does not require such enforcement “merely because the provision has been inserted into an arbitration agreement. To conclude otherwise would [be] contrary to Congress’s intent.” Id. at 16. The court specified that this holding is in line with recent U.S. Supreme Court precedent indicating that the FAA does not require enforcement of arbitration provisions that forbid the assertion of certain statutory rights or eliminate the right to pursue a statutory remedy. Id. Significantly, the court rejected Citibank’s contention that this principle only applies to the forfeiture of a federal statutory right, as opposed to a state statutory right. Id. at 17.

The court also held that the 2004 amendments to the UCL and FAL ushered in by voters under Proposition 64 do not preclude a private plaintiff, who has standing to file a private action (e.g., “suffered injury in fact and has lost money or property as a result of” a violation of the UCL or FAL), from requesting public injunctive relief in connection with that action, even if the plaintiff does not allege class claims, answering a question that had been left unanswered since 2004. Slip op. at 11-13.

Requesting a broad injunction to require businesses to change their unlawful acts is often the primary form of relief for consumers challenging unfair and deceptive business practices. As such, McGill provides broad protections to consumers who cannot be forced by businesses like Citibank into contractually waiving their right to public injunctive relief under California’s consumer protection statutes.

Authored By:
Liana Carter, Senior Counsel
CAPSTONE LAW APC

In Norcia v. Samsung Telecommunications America, LLC, et al., No. 14-16994 (9th Cir. Jan. 19, 2017) (slip op. available here), the Ninth Circuit Court of Appeals sided with a consumer in denying Samsung’s attempt to enforce an “in-the-box” arbitration clause (contained within a warranty brochure) accompanying his purchase of a Galaxy S4 phone. In February 2014, Plaintiff Norcia filed a consumer class action lawsuit alleging Samsung made misrepresentations as to the storage capacity and performance of the Galaxy S4 phone. Samsung moved to compel arbitration based on an arbitration clause buried within the 101-page “Product Safety & Warranty Information” brochure that accompanied the phone inside the box. The district court denied the motion to compel arbitration, holding that no agreement to arbitrate claims had formed between the two parties, and Samsung appealed.

On appeal, Samsung principally argued that the inclusion of the arbitration provision in the “Product Safety & Warranty Information” brochure created a valid contract under California law between Samsung and the plaintiff to arbitrate all claims related to the Galaxy S4 phone. The Ninth Circuit disagreed, relying on well-established principles of California contract law that generally an offeree’s silence in response to an offer does not constitute assent to a contract when the offeree reasonably did not know that an offer had been made. Slip op. at 9.

The court indicated that the inclusion of an offer by Samsung to arbitrate “[a]ll disputes with Samsung arising in any way from . . . the sale, condition or performance of the products” in a “Product Safety & Warranty Information” brochure would not put a “reasonable person in [Plaintiff] Norcia’s position . . . on notice that the brochure contained a freestanding obligation outside the scope of the warranty” and that a “reasonable person [would not] understand that receiving the seller’s warranty and failing to opt out of an arbitration provision contained within the warranty constituted assent to a provision requiring arbitration of all claims against the seller, including claims not involving the warranty.” Slip op. at 19. Thus, because the evidence before the court demonstrated that the plaintiff had not expressly assented to any agreement in the brochure, and that he had not signed the brochure or otherwise acted in a manner that would show his intent to use silence, or failure to opt out, as a means of accepting the arbitration agreement, no valid agreement to arbitrate had been formed. The court also separately rejected Samsung’s argument that it was a third-party beneficiary of the customer agreement between Verizon and Norcia and that Norcia had agreed to arbitrate his claims by signing the Customer Agreement based on the complete absence of any evidence that the plaintiff and Verizon had intended Samsung to benefit from the arbitration agreement.

This ruling denying Samsung’s push for arbitration is a narrow victory for consumer rights in what is an otherwise unfavorable climate for defeating such industry efforts. This ruling may also bode well for those consumers whose Galaxy Note 7 phones exploded or caught fire. The Galaxy Note 7, like the Galaxy S4 in Plaintiff Norcia’s case, was accompanied “in the box” by an arbitration clause tucked away in the safety and warranty brochure. If so, absent any evidence that the consumer expressly assented to the arbitration clause and in the event California law is applied, the Ninth Circuit’s ruling in Norcia should provide support for defeating any motion to compel arbitration in those actions. 

Authored By:
Lee Cirsch, Senior Counsel
CAPSTONE LAW APC