Posts belonging to Category Arbitration

On May 1, 2015, the California Court of Appeal, First Appellate District, affirmed a Contra Costa County Superior Court decision denying a defendant pizza restaurant’s motion to compel arbitration in a wage-and-hour class action brought by former employees. Both the trial and appellate courts found that PacPizza had waived its right to arbitration by engaging in extensive litigation for many months before filing the motion to compel. The appellate court’s opinion was certified for publication on June 1, 2015. See Oregel v. PacPizza, LLC, No. A141947 (Cal. Ct. App. May 1, 2015) (slip opinion available here).

Oregel demonstrates what not to do as a defendant that wishes to enforce an arbitration clause. As noted by the Court of Appeal, PacPizza answered two class complaints, attended two case management conferences, negotiated a briefing schedule on a motion for class certification, and propounded and responded to extensive discovery, which included admissions that an arbitration agreement did exist—all without indicating any intent to enforce an arbitration agreement. PacPizza’s motion to compel arbitration was not filed until after the plaintiff’s motion for class certification had been filed, seventeen months after the initial complaint.

Relying heavily on St. Agnes Med. Ctr. v. PacifiCare of California, 31 Cal. 4th 1187 (2003), the trial court and court of appeal found that PacPizza had waived its right to arbitration by: (1) acting inconsistently with that right when continuing with the litigation; (2) engaging in discovery and progressing well into the class certification preparation and briefing stage without indicating an intent to arbitrate; (3) requesting arbitration enforcement only after a long delay; (4) taking advantage of judicial discovery and participating in other procedures not available in arbitration; and (5) affecting, misleading, and prejudicing the opposing party with the delay. Only one St. Agnes factor, regarding cross-complaints, did not affirmatively favor a finding of waiver. Both courts also noted that PacPizza’s delay may have been a strategic ploy to attempt arbitration only if the plaintiff’s class certification motion seemed likely to be granted (the proposed class was later certified by the trial court). As one may expect, this gamesmanship displeased both courts.

Oregel is not a close case of waiver. Rather, it occupies the extreme end of the spectrum where a defendant has engaged in extensive judicial litigation prior to seeking to compel arbitration, which clearly amounts to waiver. Oregel thus joins a growing collection of cases wherein defendants have essentially forfeited their rights to compel arbitration by not doing so soon enough, creating additional work and expense for all involved. This type of dilatory conduct results in waiver because it undermines the traditional policy justifications for contractual arbitration, which are that it saves time and money.

Authored by: 
Jonathan Lee, Associate
CAPSTONE LAW APC

The U.S. District Court for the Northern District of California recently held that an arbitration agreement in the “Performer Contracts” of exotic dancers was both procedurally and substantively unconscionable and denied a motion to compel arbitration brought by their employer nightclub operator, SFBSC Management, LLC (“BSC”).  See Roe v. SFBSC Management, LLC, No. 14-cv-03616-LB (N.D. Cal. March 2, 2015) (slip opinion available here).

While the Federal Arbitration Act (“FAA”) incorporates a strong federal policy of enforcing arbitration agreements, it “does not confer a right to compel arbitration of any dispute at any time.” Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 474 (1989). Under the FAA, federal courts may refuse to enforce an arbitration agreement based on generally applicable state-law contract defenses, such as fraud, duress, or unconscionability. In particular, contractual unconscionability includes both a procedural and substantive component, analyzed by courts on a sliding scale wherein the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required and vice versa.

In Roe, the plaintiff exotic dancers had brought a collective and class action complaint alleging various state and federal wage-and-hour law violations, contending that BSC had misclassified them as independent contractors, rather than employees. BSC sought to compel these claims to arbitration pursuant to the agreement within the dancers’ Performer Contracts requiring that all disputes be decided by binding arbitration. Slip op. at 2.

The plaintiffs argued that the arbitration agreement was unconscionable, in part because of the coercive circumstances surrounding the signing of the agreements. Specifically, the plaintiffs presented evidence that the clubs’ management presented them with the contracts when they were “mostly naked” and then rushed them to sign. The dancers were told that they could not take the contracts home to review and believed they could not review prior to signing them. Id. at 4-5. The plaintiffs also contended that the option given on some of the contracts to “accept or reject” the terms was a sham, alleging that the club would purposely “lose” the agreement if a performer checked the “reject” checkbox and would present the performer with a new agreement to fill out “correctly,” or else management would find a reason not to hire the performer. Id. at 5. Management even presented the contracts for signing when performers were intoxicated, according to the plaintiffs. Based on these facts, Magistrate Judge Laurel Beeler found procedural unconscionability, which focuses on the circumstances surrounding the negotiation of the contract and arises from surprise or oppression.

Further, the court also found several terms of the agreement to be substantively unconscionable, focusing on the harshness and one-sidedness of the contract’s terms. The court found that the “one-way ban” on collective actions, barring the plaintiffs from consolidating claims, lacked mutuality as consolidation was forbidden only for the plaintiffs’ claims—even though defendants are also able to certify classes under Federal Rule of Civil Procedure 23. The court also found substantively unconscionable the cost-shifting and cost-sharing provisions of the arbitration agreement, which required, among other things, that the “costs of arbitration shall be borne equally by performer and owner unless the arbitrator concludes that a different allocation is required by law.” Id. at 16. The court noted that the Ninth Circuit has time and again rejected such cost-allocation terms requiring employees to split arbitrator’s fees–which can be exorbitantly high–with the employer. Id. at 16.

The court ultimately declined to sever the problematic provisions from the contract and deemed the entire arbitration agreement unenforceable. As a result, BSC’s motion to compel arbitration of the exotic dancers’ claims was denied. With this ruling, the court found it was “keeping in mind the ‘overarching’ concern to do justice, and the fact that arbitration, however valuable and strongly preferred, is meant only to provide an alternative forum to litigation, not to overstuff one party’s quiver.” Id. at 17.

BSC plans to appeal this decision to the Ninth Circuit Court of Appeals.

Authored by: 
Liana Carter, Senior Counsel
CAPSTONE LAW APC

On April 1, 2015, the California Supreme Court granted review of McGill v. Citibank to decide whether Citibank can use an arbitration clause to stymie a customer from pursuing public injunctive relief under California’s consumer protection statutes. If awarded, a public injunction allows a successful litigant to stop an unlawful business practice statewide. The stakes are high: if the Court sides with Citibank, this powerful tool for California consumers effectively will be eviscerated. However, many plaintiffs lawyers are hopeful that the California Supreme Court will demonstrate the same inclination to prevent the further erosion of public remedies in California as it did in Iskanian v. CLS Transportation (see infra). McGill v. Citibank N.A., 232 Cal. App. 4th 753 (2014), rev. granted, No. S224086 (Cal. April 1, 2015).

In McGill, the plaintiff (represented by Capstone Law APC) brought claims under California’s consumer protection statutes (the Consumer Legal Remedies Act, the Unfair Competition Law, and False Advertising Law) against Citibank for misrepresenting its “Credit Protector” insurance program to its cardholders. Along with damages, Ms. McGill sought to enjoin Citibank from engaging in this unfair business practice. The trial court partially granted Citibank’s motion to compel arbitration, but kept the public injunction remedy in court pursuant to the holding of two earlier Supreme Court decisions, Broughton v. Cigna Healthplans of California, 21 Cal. 4th 1066 (1999) and Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003) (together referred to as having established the “Broughton-Cruz rule”). The Broughton-Cruz rule holds that, to the extent they seek public injunctive relief under California’s consumer protection statutes, claims must remain in court, even if all the other claims are sent to arbitration.

The appellate court reversed, holding that the Broughton-Cruz rule had been preempted by “the sweeping directive” of the Federal Arbitration Act (“FAA”) as stated in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which struck down a California rule barring class action waivers. See McGill at 757. However, the intermediate court relied on passages from Concepcion that simply recited decades-old principles from Southland Corp. v. Keating, 465 U.S. 1 (1984) and Perry v. Thomas, 482 U.S. 483 (1987) precluding states from exempting private claims from being brought in the arbitral forum—cases that Broughton and Cruz carefully distinguished in lengthy analyses. In fact, the Court in Broughton and Cruz took its cue from a separate line of U.S. Supreme Court precedent meant to preclude an arbitration agreement from forcing a “prospective waiver of a party’s right to pursue statutory remedies.” Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 637 (1985); see also American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2310 (2013).

Importantly, Broughton and Cruz recognized that arbitrators have no power to issue public injunctions, as they have no jurisdiction over nonparties. See Broughton at 1081, Cruz at 312. This “institutional shortcoming” precludes public injunctions from being issued by arbitrators at all—even if the claimant were completely successful in proving the merits of her claims in arbitration. Id. In other words, a plaintiff would waive his or her right to pursue public injunctions if it were not preserved in court; the remedy itself would be extinguished simply by virtue of its transfer from court to arbitration.

Broughton and Cruz also held that the FAA did not preempt a state law rule preserving wholly public claims or remedies such as the public injunction, which is not aimed at “resolv[ing] a private dispute but to remedy a public wrong.” Broughton, 21 Cal. 4th at 1079-80. This principle was just recently reaffirmed in Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal. 4th 348, 387-88 (2014), which held that the FAA did not preempt a state law protecting public enforcement action like the Private Attorneys General Act representative action from forfeiture. Iskanian embodies the Court’s recognition that the FAA, as intended by Congress and construed by the U.S. Supreme Court, does not have unlimited preemptive reach. A decision upholding the Broughton-Cruz rule would be consistent with both Iskanian and the non-waiver principle only recently reaffirmed by the U.S. Supreme Court in Italian Colors.

However, the fate of the Broughton-Cruz rule may not even be reached in McGill. Unlike the agreements in Broughton and Cruz, Citibank’s arbitration agreement contains a term expressly precluding an arbitrator from awarding public injunctions. Thus, the California Supreme Court may well strike the offending term on unconscionability grounds or as a clear violation of the non-waiver principle, without reaching the broader issue of whether an arbitration agreement can be invalidated due to the inherent unavailability of certain remedies in the arbitral forum.

Authored by: 
Ryan Wu, Senior Counsel
CAPSTONE LAW APC

In 2013, the U.S. Chamber of Commerce (which represents some of the largest corporations in the world), published a memo purporting to be “An Empirical Analysis of Class Actions” (available here). The memo, drafted by attorneys at the corporate defense firm Mayer Brown LLP, determined that class actions do not provide a significant benefit to consumers, based on a review of class actions filed in 2009.

However, when the National Association of Consumer Advocates (NACA) and the American Association for Justice (AAJ) reviewed the same cases in a report released last month, they arrived at a very different conclusion (report available here). The NACA/AAJ report found that class actions remain hugely advantageous to consumers in a wide range of cases. Notable benefits to consumers included:

• Recovery of $25 million for consumers overcharged for propane by Ferrellgas, who allegedly reduced the amount of propane in its tanks without notifying consumers or changing the labels;
• Recovery of $219 million for investors in Bernie Madoff’s Ponzi scheme who lost their retirement savings; 
• Relief for thousands of disabled and elderly residents of New York City Housing Authority buildings, who forced the city to repair broken elevators in a timely matter; and 
• Award of $27.8 million for property owners who suffered damages due to the 2008 spill of coal ash sludge from a burst dike at a coal plant operated by the Tennessee Valley Authority.

The Consumer Financial Protection Bureau (CFPB), created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, has been charged with studying the impact of pre-dispute arbitration agreements in the context of consumer financial products and services, and is poised to release a report later in 2015 that is expected to show that forced arbitration clauses impact tens of millions of consumers and deny relief to consumers harmed by illegal or abusive practices in the financial services industry.

The CFPB released its preliminary results in December 2013 (available here), which found that a sampling of just eight consumer class actions settled between 2010-2012 yielded $350 million in payments to more than 13 million consumers. See CFPB Arbitration Study Preliminary Results at 104. The study also found that, despite the fact that arbitration clauses with class action waivers are standard in the financial industry, few consumers choose to arbitrate their claims (the American Arbitration Association, or AAA, which administers the vast majority of alternative dispute resolution proceedings for large companies, reported fewer than 300 cases each year between 2010 to 2012). Id. at 13. In that same time frame, the study found 29 instances where the AAA “declined to administer the arbitration because of the company’s failure to pay required fees or deposits” and refused to administer further disputes concerning those companies, denying the opportunity for relief for even those intrepid consumers who chose to go the arbitration route. Id. at 117. Of the 29 cases, 28 were consumer-filed disputes, and 23 were credit card disputes.

Thus, class actions are not only beneficial to consumers, but often are the only way to achieve justice against powerful corporations. In the words of former U.S. Supreme Court Justice William O. Douglas, “The class action is one of the few legal remedies the small claimant has against those who command the status quo.” Eisen v. Carlisle and Jacquelin, 417 U.S. 156, 186 (1974).

Editor’s Note: the CFPB Arbitration Study was released on March 10, 2015 and is available here.