BREAKING NEWS: Iskanian v. CLS Transportation Los Angeles, LLC eulogizes Gentry and buttresses PAGA

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.

Ninth Circuit joins the list of other Circuits rejecting Norris-LaGuardia and NLRA-based challenges to individual arbitration requirements

While I'm sad to report it, I am not particularly surprised at this point. Today, in Johnmohammadi v. Bloomingdale’s, Inc. (9th Cir. June 23, 2014), the Ninth Circuit came rather close to joining other Circuits when it rejected a challenge to the enforcement of an arbitration clause that precludes collective enforcement of claims in any forum, whether judicial or arbitral. While they Court recognized that there was some support for the plaintiff's position, it also found on the facts that the protections called for by the plaintiff were unavailable. A key passage is as follows:

Johnmohammadi contends that filing this class action on behalf of her fellow employees is one of the “other concerted activities” protected by the Norris-LaGuardia Act and the NLRA. There is some judicial support for her position. See, e.g., Eastex, Inc. v. NLRB, 437 U.S. 556, 565–66 (1978); Brady v. Nat’l Football League, 644 F.3d 661, 673 (8th Cir. 2011); Mohave Elec. Coop, Inc. v. NLRB, 206 F.3d 1183, 1189 (D.C. Cir. 2000); Salt River Valley Water Users’ Ass’n v. NLRB, 206 F.2d 325, 328 (9th Cir. 1953). But we need not decide whether Johnmohammadi has correctly interpreted this statutory phrase. To prevail, she must still show that Bloomingdale’s interfered with, restrained, or coerced her in the exercise of her right to file a class action. In our view, Bloomingdale’s did none of these things.

Slip op., at 8.

Arbitration agreement that arguably applied California law on the issue of enforceability is, ironically, unenforceable

It's been a while since I have posted here.  It's not for lack of interest in finding something appropriate to address, but the interesting decisions have been few and far between.  Plus this "start your own firm" thing tends to eat up a lot of time in the early days.  Of course, with several big decisions likely to drop from the California Supreme Court any day, this may have been the calm before the storm.  While we wait for those fireworks, here's a fascinating arbitration decision.  In Imburgia v. DirecTV, Inc. (April 7, 2014), the Court of Appeal (Second Appellate District, Division One) affirmed the denial of a petition to compel arbitration.  The analysis is striking for the fact that it forcefully challenges some contrary conclusions by federal courts.  Whether it remains published while other arbitration decisions have been taken and held is another question.

The particulars of the case are all but ignored as irrelevant, though it is clear that the case is a consumer class action from the claims alleged.  The customer agreement specified that JAMS rules would apply.  However, the agreement went on to state as follows:

“Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity. Accordingly, you and we agree that the JAMS Class Action Procedures do not apply to our arbitration. If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”

Slip op., at 3.  The customer agreement also specified that Section 9, containing the arbitration requirement, was governed by the FAA and that the entire section was unenforceable if the agreement to dispense with class arbitration procedures was found to be unenforceable.

The trial court found the agreement unenforceable.  On appeal, the Court considered the conundrum created by a clause incorporating state law into the determination as to whether a class action waiver was unconscionable:

The question before us, then, is how to interpret section 9’s choice of law concerning enforceability of the class action waiver. Where section 9 requires us to consider whether “the law of your state would find this agreement to dispense with class arbitration procedures unenforceable,” does it mean “the law of your state to the extent it is not preempted by the FAA,” or “the law of your state without considering the preemptive effect, if any, of the FAA”? Plaintiffs argue that it means the latter, and we agree

Slip op., at 6.  The Court agreed that the basic rule of construction under which the specific controls the general where the two are inconsistent.  The Court observed that:

If we apply state law alone (for example, the antiwaiver provision of the CLRA) to the class action waiver, then the waiver is unenforceable. If we apply federal law, then the class action waiver is enforceable and any state law to the contrary is preempted. That is a sufficient inconsistency to make plaintiffs’ principle of contract interpretation applicable. Indeed, the entire preemption analysis of Concepcion is based on a conflict or inconsistency between the Discover Bank rule and the FAA.

Slip op., at 6.  The Court then addressed decisions identified by DirecTV as having rejected the plaintiffs' argument.  After dismissing two as inapplicable to the issue before it, the Court squarely addressed the third:

The third case, however, is a decision in the federal multidistrict litigation that parallels the instant state court actions. In an “[i]ndicative [r]uling” under rule 62.1 of the Federal Rules of Civil Procedure, the federal district court stated that the reference to “the law of your state” in section 9 of the customer agreement could not mean that enforceability of the class action waiver should be determined exclusively under state law, because that would render “meaningless” section 10’s general statement that the arbitration agreement is governed by the FAA. (In re DIRECTV Early Cancellation Fee Marketing and Sales Practices Litigation (C.D.Cal. 2011) 810 F.Supp.2d 1060, 1071.) We disagree. The specific reference to state law concerning the enforceability of the class action waiver creates a narrow and specific exception to the general provision that the arbitration agreement will be governed by the FAA. It does not render that general provision meaningless. In addition, the district court’s analysis does not address the principles that a specific provision controls over a general one and that ambiguous language is construed against the interest of the drafter. For all of these reasons, we decline to follow the district court’s decision.

Slip op., at 8-9.

The Court then discussed Murphy v. DIRECTV, Inc.  724 F.3d 1218 (9th Cir. 2013), decided after briefing was completed, for its holding that federal law "is the law of ever state":

We find the analysis in Murphy unpersuasive. On the one hand, insofar as the court’s reasoning is a matter of contract interpretation, it means that when the parties used the phrase “the law of your state,” they meant “federal law plus (nonfederal) state law.”  Murphy provides no basis for concluding that the parties intended to use the phrase “the law of your state” in such a way, and we a re aware of none. On the contrary, a reasonable reader of the customer agreement would naturally interpret the phrase “the law of your state” as referring to (nonfederal) state law, and any ambiguity should be construed against the drafter.  On the other hand, insofar as the court reasoned that contract interpretation is irrelevant because the parties are powerless to opt out of the FAA by contract, we are aware of no authority for the court’s position. Rather, as we have already observed, if the customer agreement expressly provided that the enforceability of the class action waiver “shall be determined under the (nonfederal) law of your state without considering the preemptive effect, if any, of the FAA,” then that choice of law would be enforceable; Murphy cites no authority to the contrary.  Consequently, the dispositive issue is whether the parties intended to make that choice.  As a result, “the parties’ various contract interpretation arguments” are not “largely irrelevant.”

Slip op., at 9-10 (parentheticals added by Court when discussing Murphy because Murphy asserted that all federal law is state law; footnotes omitted).  After ripping a few federal decisions to shreds, the Court concluded that the entire arbitration provision was nullified by its own terms.

What will happen now?  We'll have to wait for the petition for review to see.

I'll be back with a podcast the day before Easter and any case write-ups that come along before then.  Sorry to be away so long.

An exceptional oral argument on the D.R. Horton arbitration issue

One of the things that had me preoccupied recently was an oral argument in the Ninth Circuit.  Coincidentally, the same day that I was there, Dennis Moss, one of my former employers, was arguing his own case before the Ninth Circuit.  In Fatemeh Johnmohammadi v. Bloomingdale's, Inc., the same issue of Section 7 and 8 rights running up against class action waivers addressed in D.R. Horton was raised.  You can listen to the argument here.  In light of the Fifth Circuit's decision (which I haven't yet written about), it seems like a better than typical bet that if the Ninth Circuit were somehow convinced to part company with the Fifth Circuit, the Supreme Court would end up with the final say on this debate.

In American Express Co., et al. v. Italian Colors Restaurant, et al. (June 20, 2013), the Supreme Court tries to take class arbitration off life support

Supreme Court.png

This one made me too sad to write about it quickly.  I had to grieve first.  Another day, another chance for the United States Supreme Court to pork litigants with an arbitration ruling.  In today's chapter, American Express Co., et al. v. Italian Colors Restaurant, et al. (June 20, 2013), we have the last saga in a long-running case addressing effective vindication of statutory rights.   Merchants who accept American Express cards brought a class action against Amex for violations of the federal antitrust laws. According to the merchants, American Express used its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing credit cards. This tying arrangement, they said, violated §1 of the Sherman Act. They sought treble damages for the class under §4 of the Clayton Act.  The agreement with Amex contains a clause that requires all disputes between the parties to be resolved by arbitration. The agreement also provides that“[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” In re American Express Merchants’ Litigation, 667 F. 3d 204, 209 (CA2 2012).  The Court of Appeal reversed an order compelling arbitration, agreeing with the merchants that the expense required to prove antitrust claims was so high that no individual merchant would be able to vindicate their statutory rights without the ability to aggregate claimants in a class action.

The 5 Justice majority opinion, authored by Justice Scalia, focused its analysis on the meaning of the “effective vindication” exception to the requirements of the FAA, concluding that it did not apply to a prohibitively expensive process for resolving claims on an individual basis only:

But the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy. See 681 F. 3d, at 147 (Jacobs, C. J., dissenting from denial of rehearing en banc). The class-action waiver merely limits arbitration to the two contracting parties. It no more eliminates those parties’ right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938, see Fed. Rule Civ. Proc. 23, 28 U. S. C., p. 864 (1938 ed., Supp V); 7A C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure §1752, p. 18 (3d ed. 2005). Or, to put it differently, the individual suit that was considered adequate to a
ssure “effective vindication” of a federal right before adoption of class-action procedures did not suddenly become “ineffective vindication” upon their adoption.

Slip op., at 7.  The majority, in referring in later discussion to Concepcion, made it very clear that, while you may have a “right” conferred by statute, you have no right to insist on an effective method to enforce that “right.”

The dissent, authored by Justice Kagan, offers a passionate but ultimately unavailing criticism of the majority’s holding:

Here is the nutshell version of this case, unfortunately obscured in the Court’s decision. The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract’s arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool’s errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability—even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.

Slip diss. op., at 1.  The dissent began by positing an uncontroversial proposition: “We would refuse to enforce an exculpatory clause insulating a company from antitrust liability—say, ‘Merchants may bring no Sherman Act claims’—even if that clause were contained in an arbitration agreement.” Slip diss. op., at 2.  But the dissent then observed, “If the rule were limited to baldly exculpatory provisions, however, a monopolist could devise numerous ways around it.”  Slip diss. op., at 3.

Applied as our precedents direct, the effective- vindication rule furthers the purposes not just of laws like the Sherman Act, but of the FAA itself. That statute reflects a federal policy favoring actual arbitration—that is, arbitration as a streamlined “method of resolving dis- putes,” not as a foolproof way of killing off valid claims. Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U. S. 477, 481 (1989). Put otherwise: What the FAA prefers to litigation is arbitration, not de facto immunity. The effective-vindication rule furthers the statute’s goals by ensuring that arbitration remains a real, not faux, method of dispute resolution. With the rule, companies have good reason to adopt arbitral procedures that facili- tate efficient and accurate handling of complaints. With- out it, companies have every incentive to draft their agreements to extract backdoor waivers of statutory rights, making arbitration unavailable or pointless. So down one road: More arbitration, better enforcement of federal statutes. And down the other: Less arbitration, poorer enforcement of federal statutes. Which would you prefer?  Or still more aptly: Which do you think Congress would?

Slip diss. op., at 5-6.  The balance of the dissent is an effective and scathing dismantling of the majority reasoning.  In conclusion, Justice Kagain writes:  “To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled.” Slip diss. op., at 14.  But it is for naught at this point.  The majority opinion is the one that will rule day, and it is the one that should cause great concern if not checked legislatively.

Episode 3 of the Class Re-Action Podcast is now live

PodcastThumbnail.jpg

Paul Bland, of Public Justice, was more than up to the challenge of explaining the intellectual dishonesty and depravity of the Supreme Court's most recent hatchet job on employees and consumers.  Well, he didn't use those words, so consider that my editorial paraphrase of what happened in Episode 3.  Available for download, streaming audio in your browser and through iTunes. 

California Supreme Court activity for week of April 8, 2013

On April 10, 2013, the California held its (usually) weekly conference.  Significant results include:

  • in Flores v. West Covina Auto Group, the Petition was granted and the matter held, pending resolution of Iskanian v. CLS Transportation (Court of Appeal affirmed a trial court order compelling individual arbitration in a case alleging class claims).

The U.S. Supreme Court has agreed to hear Oxford Health Plan LLC's appeal of an order requiring it to consent to class arbitration

Here we have yet another opportunity for the United States Supreme Court to clarify whether class arbitrations are appropriate without express consent to participate in a class arbitration.  The issue is described as follows:

Whether an arbitrator acts within his powers under the Federal Arbitration Act (as the Second and Third Circuits have held) or exceeds those powers (as the Fifth Circuit has held) by determining that parties affirmatively “agreed to authorize class arbitration,” Stolt-Nielsen S.A. v. Animalfeeds Int'l Corp., based solely on their use of broad contractual language precluding litigation and requiring arbitration of any dispute arising under their contract.

This case concerns reimbursements to doctors.  And yet, the question that will likely remain unanswered is whether, in the employment context, the National Labor Relations Act preserves a right to concerted activity, including class litigation, even if in the arbitration context.  The case is entitled Oxford Health Plan LLC v. Sutter, and the docket is here.

More Supreme Court News from the December 14, 2012 Weekly Conference

While I reported on two depublication orders on Wednesday, other activity of note occured at the California Supreme Court's Weekly Conference hed on December 14, 2012.  The Court Granted a Petition for Review in Reyes v. Liberman Broadcasting (in which the Court of Appeal reversed the denial of a petition to compel arbitration) and Ordered the matter Held pending the outcome of Iskanian.  Many years from now we may know more about the extent to which arbitration agreements will be enforced in different settings.

Second Appellate District concludes that Gentry remains good law, despite Concepcion

While it may not last much longer than it takes the ink to dry on the opinion, the Court of Appeal (Second Appellate District, Division One), in Franco v. Arakenian Enterprises, Inc. (November 26, 2012) considered a significant question: "The question on appeal is whether Gentry was overruled by Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (2010) 559 U.S. ___ [130 S.Ct. 1758] (Stolt-Nielsen) and AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___ [131 S.Ct. 1740] (Concepcion)."  Slip op., at 3.  Summarizing a 65-page opinion, the Court said:

We conclude that Gentry remains good law because, as required by Concepcion, it does not establish a categorical rule against class action waivers but, instead, sets forth several factors to be applied on a case-by-case basis to determine whether a class action waiver precludes employees from vindicating their statutory rights. And, as required by Stolt-Nielsen, when a class action waiver is unenforceable under Gentry, the plaintiff's claims must be adjudicated in court, where the plaintiff may file a putative class action. Accordingly, we affirm.

Slip op., at 3.

The decision follows an earlier opinion in the matter, Franco v. Athens Disposal Co., Inc., 171 Cal. App. 4th 1277 (2009) (Franco I).  That procedural and factual history is extensive, and I won't summarize it.  The opinion also contains a footnote indicating that it invited comment on D.R. Horton, but because Franco did not respond to the request, the Court declined to address the impact of that matter.

 The decision also has an exhaustive review of arbitration decisions in the context of statutory claims.  After that history, the Court examined the reach of the Concepcion.  An extended portion of the Court's analysis cited approvingly to a law review analysis: Gilles & Friedman, After Class: Aggregate Litigation in the Wake of AT&T Mobility v. Concepcion (2012) 79 U.Chi. L.Rev. 623.

Ultimately, after looking at the Question Presented in Concepcion, the Court concluded that, in this case, Franco lacked the means, not the incentive, to pursue his claims.  That distinction, the Court held, justified the trial court's decision to deny the petition to compel arbitration.

Then, tucked right into the end of the opinion, the Court offered a monumental observation that would have had great significance if the Court had considered D.R. Horton:

Which brings us to the subject of Concepcion's effect, if any, on PAGA claims. We have already concluded that Athens Services's arbitration agreement — the MAP — contains two unenforceable clauses: the class action waiver and the prohibition on acting as an attorney general. (See Franco I, supra, 171 Cal.App.4th at pp. 1297–1300, 1303; fn. 2, ante.) Those clauses operate independently of each other: One restricts Franco‘s pursuit of his rest and meal period claims while the other prohibits his recovery under the PAGA. Together, they render the MAP tainted with illegality, making it unenforceable and permitting Franco to adjudicate his claims in a judicial forum. (See Franco I, at p. 1303; fn. 2, ante.) Concepcion does not preclude a court from declaring an arbitration agreement unenforceable if the agreement is permeated by an unlawful purpose.

Slip op., at 64.  See that?!  Right there?!  This Court gets it!  If you impose a contract that violates the law (e.g., the NLRA), then the contract is unenforcable in Court on the general ground of illegality.  Any contract that violates the NLRA, not just arbitration agreements, is void and unenforceable.  How hard is this, really?  And here we finally see a Court clearly articulate the illegality defense analysis, but the Court declined to address the NLRA argument because one of the parties was too busy to answer.  Wonderful.

Of course, this case may vanish for years when it gets sucked up into the California Supreme Court's Gentry re-examination.