Following the Epic decision by the Supreme Court, today the Ninth Circuit formally vacated Morris v. Ernst & Young, LLP in a per curiam Opinion. And I bet you were wondering if they would Resist! They did not.
Yes, yes I did write that post title. In Sprunk v. Prisma LLC (August 23, 2017), the Court of Appeal (Second Appellate District, Division One) considered whether a defendant in a putative class action can waive its right to compel arbitration against absent class members by deciding not to seek arbitration against the named plaintiff. The Court agreed that it did, holding that Prisma LLC "waived its right to seek arbitration by filing and then withdrawing a motion to compel arbitration against the named plaintiff, Maria Elena Sprunk, and then waiting until after a class had been certified to seek arbitration against class members." Slip op., at 2.
Some of the less interesting issues in the opinion concern the sufficiency of evidence of arbitration agreements with class members. The juicy stuff, however, is described as follows:
Plan B [Prisma LLC] also raises a legal issue concerning the status of absent class members. Plan B argues that the trial court erred in considering Plan B’s delay in moving to compel arbitration before the court decided class certification because the unnamed class members were not parties until a class was certified. Because this argument raises an issue of law concerning the time period that the trial court could properly consider in analyzing waiver, we review it de novo. (Sky Sports, Inc. v. Superior Court (2011) 201 Cal.App.4th 1363, 1367 (Sky Sports) [applying the de novo standard to the issue whether a defendant “waived its right to compel arbitration because it did not bring the motion before certification of a class that included parties to the arbitration agreement”].)
Slip op., at 12. The Court concluded that strategic delay can properly result in waiver:
An 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. For example, Bower was a putative wage and hour class action in which the defendant engaged in discovery and attempted to settle the case on a classwide basis when the class was a modest size. (Bower, supra, 232 Cal.App.4th at pp. 1038–1040.) When the plaintiff sought an amendment that would have expanded the class, the defendant (Inter-Con) moved to compel arbitration. The trial court found waiver, and the appellate court affirmed, concluding that Inter-Con’s decision to delay seeking arbitration “appears to have been tactical.” (Id. at pp. 1045, 1049). Based upon Inter-Con’s litigation conduct, “[o]ne can infer that InterCon chose to conduct discovery, delay arbitration, and seek a classwide settlement because it saw an advantage in pursuing that course of action in the judicial forum.” (Id. at p. 1049.) Such conduct provided substantial evidence to support the finding that “Inter-Con’s actions were inconsistent with a right to arbitrate.” (Id. at p. 1045.)
Slip op., at 18. The discussion about waiver is extensive (seriously - about 24 pages of the opinion concern waiver). The Court seems to leave the door open for situations where the trial court believes that there is a bona fide desire to wait for an expected clarification in the law, but it would seem to be a risky bet for a defendant if its actions could just as well be perceived as done for strategic benefit.
I'm somewhat surprised that this hasn't come up more frequently.
Knapp, Petersen & Clarke, André E. Jardini, Gwen Freeman and K. L. Myles successfully represented Plaintiff and Respondent.
Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014) held that PAGA representative claims for civil penalties are not subject to arbitration. In Esparza v. KS Industries, L.P. (August 2, 2017), the Court of Appeal (Fifth Appellate District) tackled the question of whether any claims asserted under PAGA can be "individual" claims, and, if so, how are they treated for purposes of arbitration agreements. The issue arose, in particular, because it appeared that the plaintiff asserted, within the PAGA claim, a claim to recover wages under Labor Code section 558, which, unlike the other PAGA penalties (in the sense of the word meaning something akin to a fine) sought, would result in the recovery of the underlying wages owed, with no portion going to the State from the recovered wages. The Court directed the plaintiff on remand to declare unequivocally whether only penalties would be sought or whether, in addition, individual recovery claims would be pursued. The Court concluded that such individual recovery claims would be severed and arbitrated.
Don't see the Fifth Appellate District having to wade into these issues regularly, so hat tip to that District for getting into the PAGA mix.
The trial court was technically affirmed, but the holding and directions on remand make this one a win for defendant/respondent, who was represented by Call & Jensen, John T. Egley and Jamin S. Soderstrom.
The DOJ announced on Friday, June 16, 2017, that it was reversing its position on the validity of class action waivers in arbitration agreements and would file an amicus brief in support of the employer's position in NLRB v. Murphy Oil. I get that a change in administration can bring with it a change in policy, but this is unfortunate in that it overtly politicizes a legal analysis that should at least attempt to be a textual analysis that doesn't depend on which way the wind blows. I suppose Judge Posner has the right of it when he argues that all the supposedly dispassionate judicial reasoning is just a veneer over personal preference and wanting anything as significant as this issue to be decided apolitically is laughably naive. Still, I think the better approach for the DOJ would have been to undertake the equivalent of a noisy withdrawal, officially retracting its position and choosing to take a neutral position in the case.
Mohamed v. Uber Technologies, Inc. (9th Cir. Dec. 21, 2016) isn't the first decision to hold, in the face of a motion to compel arbitration in a wage and hour suit, that (1) PAGA claims should be severed from the rest of the claims and proceed in Court, and (2) the arbitrability of all other claims was for an arbitrator to determine. The Court said:
In Iskanian v. CLS Transp. L.A., LLC, 327 P.3d 129 (Cal. 2014), the California Supreme Court held that where “an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.” Id. at 149. We have held that the Federal Arbitration Act does not preempt this rule. Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425, 427 (9th Cir. 2015).
Slip op., at 21.
Law is driven as much by unforeseen consequences as it is by any rational planning. The Labor Code Private Attorneys General Act of 2004 (PAGA) is exhibit one. Over the last five or so years, inexorable advance of the Federal Arbitration Act looked as if it would cut a fatal swath through many class actions. But, somewhat unexpectedly, PAGA has served as a counterpoint in the wage & hour sector. In Perez v. U-Haul Co. of California (Sept. 16, 2016), the Second Appellate District, Division Seven, affirmed the trial Court's ruling that U-Haul could not assert an arbitration agreement to compel the plaintiffs to individually arbitrate whether they qualified as “aggrieved employee[s],” to determine in arbitration whether they had standing to pursue a PAGA claim.
The Court agreed with Williams v. Superior Court, 237 Cal. App. 4th 642 (2015), which also held that California law prohibits the enforcement of an employment agreement provision that requires an employee to individually arbitrate whether he or she qualifies as an “aggrieved employee” under PAGA, and then (if successful) to litigate the remainder of the “representative action in the superior court.” Slip op., at 11-12. The Court concluded by dismissively rejecting the notion that the FAA can apply to claim belonging to a governmental entity or its designated proxy.
Gregg A. Farley, of the Law Offices of Gregg A. Farley, and Sahag Majarian, of the Law Offices of Sahag Majarian, represented Plaintiff and Respondent Sergio Lennin Perez; Larry W. Lee and Nicolas Rosenthal. of the Diversity Law Group, and Sherry Jung, of the Law Offices of Sherry Jung, represented Plaintiff and Respondent Erick Veliz.
If you have insomnia or just want to test the lower bounds of your will to live, you can view the text of the proposed rules from the Consumer Financial Protection Bureau (along with about 350 pages of commentary before you actually get to the proposed rules - it's a lot like the longest law review article you've ever read).
Nothing says Cinco de Mayo like arbitration. I have no idea what that means, so don't ask. Anyhow, the Consumer Financial Protection Bureau will propose a regulation today that will ban contract terms that prohibit consumers from filing class action lawsuits. And the Chamber of Commerce is none to happy about this development. You can read the details at politico.com, which posted an opinion piece by Lisa A.Rickard, the president of the U.S. Chamber of Commerce's Institute for Legal Reform and David Hirschmann, the president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness. If you don't have time to read the article, allow me to paraphrase: "Damn trial lawyers! Get off my lawn!"
Next up on the update list is Iskanian v. CLS Transportation Los Angeles LLC (June 23, 2014). In Iskanian, a limousine driver filed a class action lawsuit on behalf of himself and similarly situated employees for his employer’s alleged failure to compensate its employees for, among other things, overtime and meal and rest periods. Plaintiff also asserted a PAGA claim. The employee had entered into an arbitration agreement that waived the right to class proceedings. The defendant moved to compel arbitration. After the court granted the motion, Gentry v. Superior Court (2007) 42 Cal.4th 443 (Gentry) was decided and the Court of Appeal issued a writ of mandate directing reconsideration in light of Gentry. On remand, the defendant withdrew the motion and the plaintiff moved for certification. A class was certified.
After the United States Supreme Court issued AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S.Ct. 1740] (Concepcion) and invalidated Discover Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank), CLS renewed its motion to compel arbitration. The trial court granted the renewed motion.
On appeal, the Court of Appeal agreed that Concepcion invalidated Gentry. The court also declined to follow a National Labor Relations Board ruling that class action waivers in adhesive employment contracts violate the National Labor Relations Act. With respect to the PAGA claim, the Court of Appeal construed the plaintiff’s position to be that PAGA does not allow representative claims to be arbitrated, holding that the FAA precludes states from withdrawing claims from arbitration and that PAGA claims must be argued individually, not in a representative action, according to the terms of the arbitration agreement.
The Supreme Court granted review, examining (1) whether a state’s refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the FAA, and (2) whether the FAA precludes the California Legislature from deputizing private litigants to pursue claims on behalf of the State.
While the plaintiff argued that Gentry survives Concepcion because it does not state a categorical rule such as that articulated in Discover Bank, the Court disagreed:
[T]he fact that Gentry’s rule against class waiver is stated more narrowly than Discover Bank’s rule does not save it from FAA preemption under Concepcion. The high court in Concepcion made clear that even if a state law rule against consumer class waivers were limited to “class proceedings [that] are necessary to prosecute small-dollar claims that might otherwise slip through the legal system,” it would still be preempted because states cannot require a procedure that interferes with fundamental attributes of arbitration “even if it is desirable for unrelated reasons.” (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1753]; see American Express Co. v. Italian Colors Restaurant (2013) 570 U.S. __, __ & fn. 5 [133 S.Ct. 2304, 2312 & fn. 5] (Italian Colors).) It is thus incorrect to say that the infirmity of Discover Bank was that it did not require a case-specific showing that the class waiver was exculpatory. Concepcion holds that even if a class waiver is exculpatory in a particular case, it is nonetheless preempted by the FAA. Under the logic of Concepcion, the FAA preempts Gentry’s rule against employment class waivers.
Slip op., at 7-8. Next, the Court concluded that the reasoning in Sonic II was insufficient to save Gentry:
Sonic II went on to explain that “[t]he fact that the FAA preempts Sonic I’s rule requiring arbitration of wage disputes to be preceded by a Berman hearing does not mean that a court applying unconscionability analysis may not consider the value of benefits provided by the Berman statutes, which go well beyond the hearing itself.” (Sonic II, supra, 57 Cal.4th at p. 1149, italics added.) The Berman statutes, we observed, provide for fee shifting, mandatory undertaking, and several other protections to assist wage claimants should the wage dispute proceed to litigation. (Id. at p. 1146.) “Many of the Berman protections are situated no differently than state laws concerning attorney fee shifting, assistance of counsel, or other rights designed to benefit one or both parties in civil litigation.” (Id. at p. 1150; see, e.g., Lab. Code, § 1194, subd. (a) [one-way fee shifting for plaintiffs asserting minimum wage and overtime claims].) The value of these protections does not derive from the fact that they exist in the context of a pre-arbitration administrative hearing. Instead, as Sonic II made clear, the value of these protections may be realized in “potentially many ways” through arbitration designed in a manner “consistent with its fundamental attributes.” (Sonic II, at p. 1149; see ibid. [“Our rule contemplates that arbitration, no less than an administrative hearing, can be designed to achieved speedy, informal, and affordable resolution of wage claims . . . .”].)
Slip op., at 9-10. Since Sonic II did not prohibit the use of an arbitration procedure that satisfied the Berman statutes, the Court concluded that Sonic II survived Concepcion, unlike Gentry, which directly compared class actions that interfered with arbitration to the arbitration procedure.
Next, the Court considered the holdings of D.R. Horton Inc. & Cuda (2012) 357 NLRB No. 184 [2012 WL 36274] (Horton I) and the subsequent decision by the Fifth Circuit (Horton II). The Court concluded that the NLRA did not overrule the FAA, consistent with other courts considering the issue:
We thus conclude, in light of the FAA’s “ ‘liberal federal policy favoring arbitration’ ” (Concepcion, supra, 563 U.S. at p.__ [131 S.Ct. at p. 1745]), that sections 7 and 8 the NLRA do not represent “a contrary congressional command” ’ overriding the FAA’s mandate. (CompuCredit v. Greenwood, supra, 565 U.S. at p. __ [132 S.Ct. at p. 669.) This conclusion is consistent with the judgment of all the federal circuit courts and most of the federal district courts that have considered the issue. (See Sutherland v. Ernst & Young, LLP (2d Cir. 2013) 726 F.3d 290, 297 fn. 8; Owen v. Bristol Care, Inc. (8th Cir. 2013) 702 F.3d 1050, 1053–1055; Delock v. Securitas Sec. Servs. USA, Inc. (E.D.Ark. 2012) 883 F.Supp.2d 784, 789–790; Morvant v. P.F. Chang’s China Bistro, Inc. (N.D.Cal. 2012) 870 F.Supp.2d 831, 844–845; Jasso v. Money Mart Express, Inc. (N.D.Cal. 2012) 879 F.Supp.2d 1038, 1048–1049; but see Herrington v. Waterstone Mortg. Corp. (W.D.Wis. Mar. 16, 2012) No. 11-cv-779-bbc [2012 WL 1242318, at p. *5] [defendant advances no persuasive argument that the Board interpreted the NLRA incorrectly].)
Slip op., at 21. At this juncture, and given the composition of the U.S. Supreme Court, it is exceedingly unlikely that the conclusion of Horton I will be accepted.
After analyzing and rejecting the plaintiff’s waiver argument, the Court turned to the PAGA claim. After the Court explained the history of the statute, the first question examined was whether an employee’s right to bring a PAGA action is waivable. Concluding that PAGA rights could not be waived, the Court said:
The unwaivability of certain statutory rights “derives from two statutes that are themselves derived from public policy. First, Civil Code section 1668 states: ‘All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.’ ‘Agreements whose object, directly or indirectly, is to exempt [their] parties from violation of the law are against public policy and may not be enforced.’ (In re Marriage of Fell (1997) 55 Cal.App.4th 1058, 1065.) Second, Civil Code section 3513 states, ‘Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.’ ” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 100 (Armendariz).)
Slip op., at 34. The Court then said, “Notwithstanding the analysis above, a state law rule, however laudable, may not be enforced if it is preempted by the FAA.” Examining that second question, the Court held that the PAGA right is not a “private” right, existing only as a grant of a public right:
We conclude that the rule against PAGA waivers does not frustrate the FAA’s objectives because, as explained below, the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency.
Slip op., at 36-37. This distinction, which was uncertain until this decision, was the source of inconsistent outcomes when other courts examined the issue of whether PAGA claims were subject to arbitration agreements.
Justice Chin authored a concurrence, though he restated his disagreement with the contention that Sonic II survived Concepcion.
Justice Werdegar concurred with the majority opinion regarding PAGA, but dissented as to the enforceability of any clause depriving employees of the right to engage in concerted action: “Eight decades ago, Congress made clear that employees have a right to engage in collective action and that contractual clauses purporting to strip them of those rights as a condition of employment are illegal. What was true then is true today.” Werdegar diss. & conc., at 1. Justice Werdegar strongly defended the right to engage in concerted activity, despite the FAA:
An arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract” (9 U.S.C. § 2, italics added). Here, we deal with a provision—the waiver of the statutorily protected right to engage in collective action—that would be unenforceable in any contract, whether as part of an arbitration clause or otherwise. The FAA codifies a nondiscrimination principle; “[a]s the ‘saving clause’ in § 2 indicates, the purpose of Congress in 1925 was to make arbitration agreements as enforceable as other contracts, but not more so.”
Werdegar diss. & conc., at 9. Justice Werdegar’s dissenting opinion as to the interaction of the NLRA, the Norris-Laguardia Act and the FAA is an exceptional defense of the position advocated by the plaintiff and in Horton I. If nothing else, it is worth a thorough reading by practitioner in the wage and hour field.
The California Supreme Court has just issued its opinion in Iskanian v. CLS Transportation Los Angeles, LLC (June 23, 2014). In a nutshell, here's the scorecard:
The question is whether a state's refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the FAA. We conclude that it is and that our holding to the contrary in Gentry v. Superior Court (2007) 42 Cal.4th 443 (Gentry) has been abrogated by recent United States Supreme Court precedent.
[W]e conclude that an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy. In addition, we conclude that the FAA's goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state‘s behalf. Therefore, the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment contract.
Slip op., at 1-2. Tough day to be opposed to the FAA's all-consuming rights grab. But the PAGA ruling is a small salve.