Judge Susan Illston has stymied an employer’s attempt to force into arbitration a group of employees alleging that they were erroneously classified as independent contractors. See Zaborowski v. MHN Govt. Servs., Inc., No. 12-5109 (N.D. Cal. Apr. 3, 2012) (order denying motion to compel arbitration). The plaintiffs contend that by misclassifying them as independent contractors, their employer avoided providing them with benefits they are entitled to under California law. Judge Illston found the employment contract that plaintiffs signed to be “so permeated with unconscionability” that the arbitration clause within the contract was rendered unenforceable. Order at 13.

She began her analysis by noting that “Concepcion explicitly reaffirmed California’s general contract defense of unconscionability as applied to arbitration agreements,” adding that “[o]nly ‘defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue’ are preempted by the FAA, and therefore invalid,” quoting directly from the Supreme Court’s Concepcion decision to underscore the continued vitality of California’s unconscionability doctrine. Order at 4.

Judge Illston proceeded to enumerate the various ways in which the at-issue arbitration clause is unconscionable (order at 5-10):

• The arbitration clause is buried in the last of 23 paragraphs, and not set apart or highlighted in any way;
• Signing the arbitration clause was a condition of employment, with no opportunity to negotiate the terms;
• The clause imposes a six-month statute of limitations, far shorter than the usual three-year statute of limitations applicable to workplace violations;
• The clause unilaterally empowers the employer to choose the pool of arbitrators;
• Discovery is limited so as to disadvantage employees;
• The arbitration provision has the effect of negating California fee-shifting statutes designed to address the inherent asymmetry in resources between employers and employees; and
• Similarly, by prohibiting the arbitrator from awarding punitive damages, the arbitration provision further eliminates statutory protections.

Judge Illston concluded that the unconscionable provisions so permeated the at-issue arbitration clause as to not be severable, and on that basis denied the defendant’s motion. While unconscionability analysis is typically fact- and case-specific, the Zaborowski decision is likely to be much-cited by counsel and relied on by judges, as it addresses provisions that frequently appear in the arbitration clauses that are part of employment contracts.

Last week, a twelve-member Ninth Circuit en banc panel issued a new decision in the battle over arbitration and the U.S. Supreme Court’s holding in AT&T Mobility v. Concepcion. See Kilgore v. KeyBank Nat’l Assn., No. 10-15934 (9th Cir. Apr. 11, 2013) (slip opinion available here). In Kilgore, students at a flight-training school sued KeyBank, the originator of their student loans, after KeyBank and the school allegedly colluded to mislead and defraud the students. A three-judge Ninth Circuit panel previously ruled that Concepcion overruled Broughton v. Cigna Healthplans, 21 Cal. 4th 1066, 988 P.2d 67 (1999), and Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003), which held that public injunctive relief claims are not arbitrable as a matter of California public policy, in the CLRA and UCL contexts, respectively. See slip op. at 14-16.

In an opinion by Andrew D. Hurwitz, the en banc panel held that the district court should have compelled arbitration because the at-issue arbitration clause did not fall under the public injunction exception to the Federal Arbitration Act (FAA). See slip op. at 6. Accordingly, as the public injunction exception did not apply, the decision did not take the position that Concepcion overruled Broughton and Cruz. Instead, the decision embraces a public/private distinction that could inform the continuing debate around Concepcion’s scope. See slip op. at 16-17. The majority also rejected the plaintiffs’ contention that the at-issue arbitration clause is unconscionable under California law. See slip op. at 12-14.

In a compelling dissent, grounded in the case’s real-life facts rather than arcane doctrines purporting to divine the FAA’s application to Kilgore’s claim against KeyBank, Judge Harry Pregerson detailed the career “crash landing” awaiting the flight-training students who found themselves deeply in debt and without a job. See slip op. at 19-21 (Pregerson, J., dissenting). Pregerson concluded that “the majority opinion strips [the plaintiffs] and their classmates of the ability to find recourse in state or federal court,” and contrary to the majority found the at-issue arbitration clause substantively and procedurally unconscionable under California law. Slip op. at 22-26.

Connecting the unconscionability analysis to the purported efficiencies realized through arbitration, with distinctive candor and pragmatism, Pregerson explained that filing a claim in arbitration costs at least eight times more than filing the same case in California Superior Court, and that “[t]he high cost of arbitration will prevent many students from vindicating their rights, but will not limit KeyBank’s ability to defend itself. This asymmetry makes arbitration all the more unconscionable.” Slip op. at 25 (Pregerson, J., dissenting).

A Colorado federal court has sanctioned a class action defendant because of a letter sent by the defendant’s COO to former employees who were prospective class members. Sloan v. Ameristar Casinos, Inc., No. 12-1126 (D. Colo. Mar. 12, 2013) (order re defendant’s motion to stay). Magistrate Judge Kathleen Tafoya deemed the letter to be “misleading, coercive and . . . a blatant attempt to undermine the purposes of a collective action and to undermine the Notice approved by the court.” Order at 1-2. The Sloan sanction ruling closely coincides with a similar ruling sanctioning an FLSA defendant in a New York federal court. See Zamboni v. Pepe West 48th Street LLC, No 12-3157 (S.D.N.Y. Mar. 12, 2013).

Chiefly at issue in Sloan was a letter from Ameristar COO Larry Hodges, which was sent to putative class members who were former employees before any plaintiffs had opted into the conditionally-certified FLSA action. Judge Tafoya found a stay to be warranted, but not on the terms urged by the defendant. She determined that recipients of the letter “were misinformed about the case, the plaintiff, the plaintiff’s motives, the law and about any negative monetary ramifications of the case on opt-in plaintiffs” and that “it is imperative that all the putative class members receive correct information moving forward.” Order at 3. Judge Tafoya went on to say that “any stay, however, must be imposed on the case as a whole, . . . [and] until a corrective notice, at least, is sent to the putative class, the case is stalled.” Order at 4. Moreover, due to the defendant’s egregious conduct, she refused to stay the order enjoining defendants from communicating with absent class members. Id.

Last Friday, Orange County (California) District Attorney Tony Rackauckas announced that a $16 million settlement had been reached with Toyota concerning sudden acceleration defects. This settlement is entirely separate from last December’s widely-publicized $1.3 billion settlement compensating consumers for economic damages in connection with the same defects. Numerous cases also remain pending in federal multidistrict litigation on behalf of those who died or were injured as a result of sudden acceleration.

Using a procedural device whereby a DA may file an action on the public’s behalf, Tony Rackauckas stood in the role usually occupied by class representatives. While just a modest proportion of the total damages Toyota will ultimately pay as a result of the sudden acceleration defect, the Orange County DA’s $16 million settlement is significant in that it is precisely the kind that, if brought by individual consumers instead of a public official, could be blocked by the increasingly broad interpretation of the Federal Arbitration Act (FAA) that expounds on the five-member majority’s anti-class action doctrine in AT&T Mobility v. Concepcion.

California’s Unfair Competition Law (UCL) empowers district attorneys and other specified public officials to enforce important public rights or seek broad remedies for stark, unitary wrongs (like the sudden acceleration defect) that are suitable for class treatment. Even the most ardently hostile reading of the FAA does not support forcing a public prosecution into private arbitration, or finding that a prosecutor tacitly waived class or representative procedures. Thus, the device employed by District Attorney Rackauckas may stand as an impregnable bulwark against the continuing attack on consumers and workers seeking rational, efficient adjudication of claims in a single class or representative proceeding.

Of the $16 million paid by Toyota, $4 million is designated to pay costs and fees (including payment to outside counsel hired to prosecute the case), $4 million will go into a fund to help combat economic crime, and the remaining $8 million will be paid to a local gang prevention program. While fighting economic crime and gang activity has no obvious connection to automobile defects, at least one can argue that these programs are beneficial to the public at large.