Employment arbitration agreement upheld by Second Appellate District; employee claims must proceed on individual basis

And the war rages on without an end in sight.  In Reyes v. Liberman Broadcasting, Inc. (August 31, 2012), the Court of Appeal (Second Appellate District, Division One) reversed a trial court order denying a petition to compel arbitration.  Along the way, the Court rejected a barrage of challenges to the enforceability of the arbitration agreement or the viablity of an implied class action bar.  Here's a time-saving hint: it doesn't go well for the employee Respondent.

The Court summarized the issue like so:

The Arbitration Agreement is expressly governed by the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.). The Arbitration Agreement provides that LBI and Reyes "agree to submit to final and binding arbitration all claims, disputes and controversies arising out of, relating to or in any way associated with" Reyes's employment or its termination. Specific claims identified in the Arbitration Agreement include wage claims, unfair competition claims, and claims for violation of federal, state, local, or other governmental law. (Ibid.) The Arbitration Agreement does not contain an express class arbitration waiver. However, the Arbitration Agreement does provide that "each party to the arbitration may represent itself/himself/herself, or may be represented by a licensed attorney." The Arbitration Agreement provides for "discovery sufficient to adequately arbitrate [the parties'] claims,"but authorizes the "arbitrator to impose . . . appropriate limits on discovery." Reyes signed an acknowledgment of his receipt of the Arbitration Agreement stating that he could read the Arbitration Agreement in both English and Spanish.

Slip op., at 2.  The case was litigated for just over one year before the employer indicated an intention to move to compel arbitration.

First, the Court examined whether the arbitration agreement allowed for class arbitration agreements, concluding that it did not:

Like the arbitration provision in Kinecta, the Arbitration Agreement in the instant case makes no reference to any parties other than plaintiff and defendant. It provides only for the "final and binding arbitration" of "all claims, disputes and controversies arising out of" Reyes's employment or its termination. The plain language of the Arbitration Agreement further states that each party may only represent "itself/himself/herself" or "may be represented by a licensed attorney." There is no mention of class action claims in the Arbitration Agreement. (As in Kinecta, class actions are not listed among the expressly excluded claims.) Furthermore, Reyes has not presented any evidence showing any intent by the parties to provide for class arbitration in the Arbitration Agreement. Therefore, we hold that because the plain language of the Arbitration Agreement provides only for the bilateral arbitration of Reyes's claims, the Arbitration Agreement does not authorize class arbitration. The Arbitration Agreement, like the arbitration provision in Kinecta, bars class arbitration because the parties did not agree to class arbitration.

Slip op., at 6.

Next, the Court concluded that the employer did not waive the right to petition to compel arbitration because, prior to doing so, the law in California appeared to require a class arbitration.

The Court also noted a difference of opinion as to whether Gentry was overruled by Concepcion.  However, after an extensive discussion, the Court then concluded that even if Gentry remains good law, as was the ruling in Brown v. Ralphs, the plaintiff did not meet the burden of showing all Gentry factors.

The Court then wrapped up its waiver discussion with a detailed discussion of the various factors considered in the waiver context, including delay, extent that litigation machinery was invoked, and other factors.  The Court easily concludes that waiver did not occur.

Finally, the Court discusses the NLRB's D.R. Horton decision.  While the opinion gets roughly two full pages of opninion space, there is little in the way of full analysis of the underlying premise from D.R. Horton, namely, that the NLRA renders illegal any agreement that interferes with concerted activity.  Instead, like other California appellate panels, this Court simply repeats the observation that the NLRB lacks the specific agency expertise to receive deference in its analysis of the FAA.  That may be, but no effort is made to tackle the underlying analysis supplied by the NLRB.  For example, the United States Supreme Court has held that illegal contract provisions are void. Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 77-78, 102 S. Ct. 851, 856 (1982).  In Kaiser Steel, the U.S. Supreme Court held that courts need not defer to the exclusive competence of the NLRB when asked to enforce an agreement that would violate sections 7 or 8 of the NLRA.  Enforcement of an arbitration agreement that precludes class actions is enforcement of an agreement that interferes with the concerted activity right protected by the NLRA.  That application of the FAA is void due to illegality.  Illegality is a contractual defense of general application unaffected by Concepcion or the FAA.  Until a Court of Appeal directly answers this argument, supported by authority well above the NLRB's pay grade, then the lip service given to D.R. Horton is meaningless and holdings resting on that lip service rest on nothing.

A different other day, another arbitration decision: Gentry maybe not preempted

This is also a day of the week ending in the letter "Y."  Hence, a new arbitration opinion to discuss.  In Truly Nolen of America v. Superior Court (August 13, 2012), the Court of Appeal (Fourth Appellate District, Division One) examined several arbitration issues in a putative class action wage & hour matter.  Adding to the miasma of conflicting aribtration opinions in California, this Court concluded that Gentry was not preempted by Concepcion and must be followed under principles of stare decisis.  However, the Court also found that, on the factual record in the trial court, the Gentry test was not satisfied.  Instead, the Court directed the trial court to permit briefing on the issue of whether the parties' agreement includes an implied agreement to permit class arbitration.

In the trial court, defendant moved to compel arbitration.  The arbitration agreements did not contain a specific provision pertaining to the availability or unavailability of classwide arbitration.  The court granted the motion to compel arbitration, but rejected defendant's request that the court order individual arbitration, relying on Gentry v. Superior Court, 42 Cal. 4th 443 (2007).  Defendant petitioned for review.

The Court set forthan extensive history of arbitration law in California, beginning with cases before Stolt-Neilsen and Concepcion.  It is very exiting, so I will not spoil it by summarizing it here.  Then the Court discussed the impact of Concepcion on Discover Bank and Gentry.  Having concluded the history lesson, the Court had to choose from the conflicting decisions as to whether Gentry remains valid law.

Exercising caution, the Court threaded the eye of the needle, concluding that it doubted the analysis of cases finding Genry valid but agreeing with the plaintiffs that it was nevertheless obligated to follow decisions of the California Supreme Court until expressly invalidated: "On federal statutory issues, intermediate appellate courts in California are absolutely bound to follow the decisions of the California Supreme Court, unless the United States Supreme Court has decided the same question differently."  Slip op., at 23.

Having so concluded, the Court then considered whether the evidentiary record was sufficient to support a finding that the Gentry factors were present.  The Court concluded that the plaintiffs failed to connect attorney declarations with the facts of the case.  Based on an insufficient evidentiary record, the Court reversed the trial court's finding that Gentry required a class arbitration.

Next, the Court examined other contentions.  First, the Court agreed that an arbitartion agreement may include an implied agreement to class arbitration:  "Relying on Stolt-Nielsen, the courts have recognized that an implied agreement may be sufficient to support class arbitration."  (Slip op., at 33.)  Although plaintiffs did not raise the issue in the trial court, the Court concluded that they were not precluded from doing so on remand.  The Court left it to the trial court to develop the record as to whether the parties' agreement includes an implied agreement to class arbitrations.  Notably, the Court recognized that California contract law would govern the analysis of whether an implied agreement permitting arbitration agreements exists.

Next, as with several other Courts of Appeal, the Court, in cursory fashion, rejected the contention that the NLRA protects employees from the enforcement of contract provisions that would impede their right to undertake concerted activity, including class actions.  I have commented elsewhere on the paucity of analysis supplied by other Courts in California (Iskanian and Nelsen), and this Court did nothing to advance the analysis beyond more than something akin to bare assertion based on skepticism.  As an aside, even if the Court believes that its scant analysis is correct, the existence of the NLRA and the many decisions protecting class actions as concerted activity should, at minimum, supply the requisite implied intent to permit class arbitrations.  After all, the defendant could not have intended to violate the NLRA, could it?

With every class-related arbitration decision issued in California, the need for comprehensive, detailed holdings from the California Supreme Court grows.  I urge the California Supreme Court to assist parties in consumer and employment class actions by sweeping up all of these decisions and rendering a number of much needed rulings as quickly as possible.

Confusion surrounding arbitration agreements rapidly escalating in California following conflicting decisions in Hoover, Iskanian

I've been working on a project involving arbitration issues.  My uncertainty about whether to keep all of my powder dry, so to speak, caused a fair bit of my delay in commenting about two relatively new arbitration decisions from California Courts of Appeal.  In Hoover v. American Income Life Insurance Company (June 13, 2012), the Court of Appeal (Fourth Appellate District, Division Two) affirmed a trial court's denial of a motion to compel arbitration.  In Iskanian v. CLS Transportion Los Angeles, LLC (June 4, 2012), the Court of Appeal (Second Appellate District, Division Two) affirmed a trial court order granting a motion to compel arbitration and dismissing class claims.  Looks like the unremarkable results of Courts of Appeal deferring to finding of trial courts, right?  No.  So very wrong.  What these two actually do is create an explicit rift on the issue of whether statutory rights, at least in the labor context, are subject to individual arbitration.  In the process, the Iskanian Court rejects its sister-division's holding in Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011) that Concepcion does not apply to PAGA's representative claims.  The Iskanian Court also refused to follow the NLRB's D.R. Horton decision that protects an employee's right to pursue class claims as a form of concerted activity.  The two cases also disagree as to the reach of Concepcion and Stolt-Neilsen. In sum, the relative clarity that existed in California following Gentry and Discover Bank is now a distant memory.  The California Supreme Court will need to resolve these issues soon, regardless of whether the United States Supreme Court takes on any of these issues in the future.

Hoover concerned a dispute as to whether an individual was misclassified as an independent contractor rather than an employee.  Hoover framed where its analysis would go very early in the opinion, with this footnote:

The conclusions we reach here avert any dependence, as urged by AIL, on two recent United States Supreme Court opinions, addressing the issue of class arbitrations for antitrust claims and consumer sales contracts. (Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (2010) ___ U.S. ___, 130 S.Ct. 1758; AT&T Mobility LLC v. Concepcion (2011) ___ U.S. ___, 131 S.Ct. 1740.) “AT&T does not provide that a public right . . . can be waived if such a waiver is contrary to state law.” (Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489, 500, 502-503.) We also do not need to address the unconscionability argument and the continuing viability of Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83.)

Hoover slip op., at 3 n. 2.  From this we know that (1) Hoover views Concepcion and Stolt-Nielsen as limited to consumer sales contracts and antitrust issues respectively, and (2) Hoover views Brown v. Ralphs as correctly decided.

Hoover first discusses (extensively, if you are interested) the concept of waiver following too great a delay in moving to compel arbitration.  That discussion doesn't pave a lot of new ground.

Hoover gets interesting when it talks about the Labor Code claims asserted in the matter:

As a general rule, state statutory wage and hour claims are not subject to arbitration, whether the arbitration clause is contained in the CBA or an individual agreement. The CBA cannot waive the right to sue under applicable federal or state statutes because these statutory rights “devolve on petitioners as individual workers, not as members of a collective organization.” (Barrentine v. Arkansas-Best Freight System, Inc. (1981) 450 U.S. 728, 745, overruled on other grounds in Gilmer v.  Interstate/Johnson Lane Corp. (1991) 500 U.S. 20; Zavala v. Scott Brothers Dairy, Inc. (2006) 143 Cal.App.4th 585, 592 [rule applicable to wage claims under Labor Code and IWC wage orders].)

Hoover slip op., at 15-16.  Continuing, Hoover held:

An individual arbitration agreement also does not apply to an action to enforce statutes governing collection of unpaid wages, which “may be maintained without regard to the existence of any private agreement to arbitrate. . . .” (§ 229.) The intent is to assure a judicial forum where there exists a dispute as to wages, notwithstanding the strong public policy favoring arbitration. (Ware v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1972) 24 Cal.App.3d 35, 43; Flores v. Axxis Network & Telecommunications, Inc. (2009) 173 Cal.App.4th 802, 811.) An exception to the general rule occurs when there is federal preemption by FAA, as applied to contracts evidencing interstate commerce. (Perry v. Thomas (1987) 482 U.S. 483, 490.)

Hoover slip op., at 17.  Statutory claims for unpaid wages may proceed in court, regardless of an agreement to arbitrate.  Zowwee!  But wait - there is an exception for contracts related to interstate commerce.  Does Hoover fit into that exception?  No, says the Hoover Court:

Based on this record, it cannot be said the subject agreement involves interstate commerce. AIL had the burden to demonstrate FAA coverage by declarations and other evidence. (Shepard v. Edward Mackay Enterprises, Inc. (2007) 148 Cal.App.4th 1092, 1101; Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 213-214.) The only established facts are that Hoover was a California resident who sold life insurance policies. Even though AIL is based in Texas, there was no evidence in the record establishing that the relationship between Hoover and AIL had a specific effect or “bear[ing] on interstate commerce in a substantial way.” (Citizens Bank v. Alafabco, Inc. (2003) 539 U.S. 52, 56-57.) Hoover was not an employee of a national stock brokerage or the employee of a member of a national stock exchange. (Thorup v. Dean Witter Reynolds, Inc., supra, 180 Cal.App.3d at p. 233; Baker v. Aubry (1989) 216 Cal.App.3d 1259, 1266.) Unlike the plaintiff in Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1287, Hoover did not work in other states or engage in multimillion dollar loan activity that affected interstate commerce by negotiating with a bank that was headquartered in another state. Under these circumstances, if the FAA did not apply, the exception favoring federal preemption and arbitration did not operate.

Hoover slip op., at 17-18.  So that's going to get some unmentionables in a twist.

Iskanian is, at least in spirit, the antimatter to Hoover's matter.  Iskanian involves a certified class that avoided arbitration once before, when the issuance of Gentry caused the reversal of the trial court's first Order compelling arbitration.  Following Concepcion and Stolt-Nielsen, the defendant in Iskanian tried again.  This time, the Iskanian Court affirmed the second Order compelling individual arbitration.  In the process, the Court gave Concepcion and Stolt-Nielsen the broadest possible constructions, held Gentry overruled, disregarded Brown v. Ralphs and rejected protections supplied by the NLRA and preserved by D.R. Horton.

First, regarding Gentry, Iskanian said:

Now, we find that the Concepcion decision conclusively invalidates the Gentry test. First, under Gentry, if a plaintiff was successful in meeting the test, the case would be decided in class arbitration (unless the plaintiff could show that the entire arbitration agreement was unconscionable, in which case the agreement would be wholly void). But Concepcion thoroughly rejected the concept that class arbitration procedures should be imposed on a party who never agreed to them. (Concepcion, supra, 131 S.Ct. at pp. 1750-1751.) The Concepcion court held that nonconsensual class arbitration was inconsistent with the FAA because: (i) it “sacrifices the principal advantage of arbitration—informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment”; (ii) it requires procedural formality since rules governing class arbitration “mimic the Federal Rules of Civil Procedure for class litigation”; and (iii) it “greatly increases risks to defendants,” since it lacks the multilevel review that exists in a judicial forum. (Id. at pp. 1751-1752; see also StoltNielsen S. A. v. AnimalFeeds Int'l Corp. (2010) 130 S. Ct. 1758, 1775 [“a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so”].) This unequivocal rejection of court-imposed class arbitration applies just as squarely to the Gentry test as it did to the Discover Bank rule.

Iskanian slip op., at 8-9.  But the Court wasn't done:

Third, the premise that Iskanian brought a class action to “vindicate statutory rights” is irrelevant in the wake of Concepcion. As the Concepcion court reiterated, “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” (131 S.Ct. at p. 1753.) The sound policy reasons identified in Gentry for invalidating certain class waivers are insufficient to trump the far-reaching effect of the FAA, as expressed in Concepcion. Concepcion's holding in this regard is consistent with previously established law. (See Perry v. Thomas, supra, 482 U.S. at p. 484 [finding that § 2 of the FAA preempts Lab. Code, § 229, which provides that actions for the collection of wages “may be maintained 'without regard to the existence of any private agreement to arbitrate'”]; Southland Corp. v. Keating (1984) 465 U.S. 1, 10-11 [holding that the California Supreme Court's interpretation of the Franchise Investment Law as requiring judicial consideration despite the terms of an arbitration agreement directly conflicted with section 2 of the FAA and violated the Supremacy Clause]; Preston v. Ferrer (2008) 552 U.S. 346, 349-350 [holding, “when parties agree to arbitrate all questions arising under a contract, state laws lodging primary jurisdiction in another forum, whether judicial or administrative, are superseded by the FAA”].)

Iskanian slip op., at 9-10.  In its analysis, the Iskanian Court selectively disregarded valid federal law recognizing that vindication of statutory rights remains a basis for declining to enforce an arbitration agreement.  And all of this leaves unanswered the true foundational question: how does the federal government have the constitutional authority over a state's distribution of disputes alleging state law violations in state courts?  Even Concepcion cannot be viewed as answering that question, as it was decided in federal courts over which the federal government does have jurisdiction.  Anyhow, Iskanian had more carnage to release...

Next, the Iskanian Court rejected D.R. Horton, but without any cogent analysis as to why it was incorrectly decided. In D.R. Horton, the NLRB held that a mandatory, employer-imposed agreement requiring all employment-related disputes to be resolved through individual arbitration (and disallowing class or collective claims) violated the NLRA because it prohibited the exercise of substantive rights protected by section 7 of the NLRA.  Section 7 provides in part that employees shall have the right “to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection . . . .”  (29 U.S.C. § 157.)   The NLRB found that “employees who join together to bring employmentrelated claims on a classwide or collective basis in court or before an arbitrator are exercising rights protected by Section 7 of the NLRA.”  However, that holding was not new to D.R.Horton, as Iskanian implies.  Rather, decades of authority confirm that class and collective actions constitute protected concerted activity.  That, at least, is well-settled.

Next, Iskanian declares that since D.R. Horton analyzes laws beyond the NLRA, the Court would not defer to it.  Problematically, declining to defer is different than independently reaching the same result following a review of the relevant authority.  Here, Iskanian seems to view a right to decline to defer as a right to choose the alternative construction, absent any analysis.  Instead, the Court said:

The D.R. Horton decision identified no “congressional command” in the NLRA prohibiting enforcement of an arbitration agreement pursuant to its terms. D.R. Horton’s holding—that employment-related class claims are “concerted activities for the purpose of collective bargaining or other mutual aid or protection” protected by section 7 of the NLRA, so that the FAA does not apply—elevates the NLRB's interpretation of the NLRA over section 2 of the FAA. This holding does not withstand scrutiny in light of Concepcion and CompuCredit.

Iskanian slip op., at 13.  Iskanian is simply wrong.  D.R. Horton provided a very detailed discussion of the fact that the FAA does not authorize agreements that violate federal law, including the NLRA and related statutory provisions.  The NLRB was working squarely within its area of expertise when it concluded that an agreement interfering with section 7 rights was unenforceable as an illegal contract.  The fact that the agreement was an arbitration agreement is irrelevant.  Illegal contracts are unenforceable.  Concepcion did not change contract law precluding enforcement of illegal agreements.  Moreover, the NLRB noted in D.R. Horton that the Norris-LaGuardia Act was enacted after the FAA.  Thus, it cannot be said that the FAA "overruled" the NLRA.  Rather, if anything, the NLRA limited the FAA in that it defined a new zone of contracts that were illegal.  Iskanian Court don't care!

Next, Iskanian opined that Brown v. Ralphs was wrongly decided:

In finding that Concepcion did not apply to PAGA representative claims, the Brown majority wrote: “[Concepcion] does not purport to deal with the FAA's possible preemption of contractual efforts to eliminate representative private attorney general actions to enforce the Labor Code. As noted, the PAGA creates a statutory right for civil penalties for Labor Code violations 'that otherwise would be sought by state labor law enforcement agencies.' . . . This purpose contrasts with the private individual right of a consumer to pursue class action remedies in court or arbitration, which right, according to [Concepcion], may be waived by agreement so as not to frustrate the FAA—a law governing private arbitrations. [Concepcion] does not provide that a public right, such as that created under the PAGA, can be waived if such a waiver is contrary to state law.” (197 Cal.App.4th at p. 500.)

Respectfully, we disagree with the majority's holding in Brown. We recognize that the PAGA serves to benefit the public and that private attorney general laws may be severely undercut by application of the FAA. But we believe that United States Supreme Court has spoken on the issue, and we are required to follow its binding authority.

Iskanian slip op., at 15.  Again, Iskanian avoids any analysis of authority that might undercut its decision.  Vindication of statutory rights is currently a recognized basis for declining to enforce an arbitration agreement.  All Iskanian does is point at Concepcion and declare that it is following it.  In doing so, Iskanian goes too far and creates a rift in California law that requires immediate attention by the California Supreme Court.

Two cases, two contrary sets of conclusions.

Remand of Sonic-Calabasas A, Inc. v. Moreno may provide more guidance on status of arbitration defenses in California

On Monday, October 31, 2011 (hello, Halloween), the United States Supreme Court issued the following Order:

10-1450 SONIC-CALABASAS A, INC. V. MORENO, FRANK The petition for a writ of certiorari is granted. The judgment is vacated, and the case is remanded to the Supreme Court of California for further consideration in light of AT&T Mobility LLC v. Concepcion, 563 U.S. ___ (2011).

In Sonic Calabasas A, Inc. v. Moreno (2011), reported at 51 Cal. 4th 659, a divided California Supreme Court (4-3) concluded that (1) "Berman" hearings are an unwaivable statutory right, (2) arbitration is an acceptable alternative to de novo review by the Superior Court, (3) a waiver of the right to a "Berman" hearing before the Labor Commissioner is against public policy, and (4) the waiver of a "Berman" hearing is unconscionable under standard contractual principles of unconscionability analysis.

What does this mean?  It means that the underpinnigs of Gentry may be explored in the follow-up opinion.  It also means that the new Justices, including the new Chief Justice of the California Supreme Court, may be deciding votes, given that Chief Justice George was in the majority and Justice Moreno authored the original opinion. 

Brown v. Ralphs Grocery Company decided, but dodges the Gentry-Concepcion issue and the NLRA prohibition on concerted activity bans

The Court of Appeal (Second Appellate District, Division Five) issued its opinion today in Brown v. Ralphs Grocery Company (July 12, 2011).  The opinion is notable for what it doesn't address.  As mentioned previously here, the Court had requested supplemental briefing on the issue of whether Concepcion dished out the Discover Bank treatment to Gentry v. Superior Court (2007) 42 Cal.4th 443.  After a few feverish days of writing an amicus brief (for CAOC) focused primarily on the fact that the National Labor Relations Act prohibits enforcement of any contract that would impede concerted activity by employees (including class actions to improve wages and working conditions), I was disappointed to see that the Court dodged the entire question, deciding the matter on the ground that a factual showing had not been made in the trial court to support the Gentry factors.  There is also a split decision discussion of how PAGA claims interact with motions to compel arbitration.

On balance, this non-opinion doesn't do much to answer the question of how Concepcion interacts with wage & hour class actions and the Gentry decision.  It will take another appellate vehicle to properly present those questions for review.

Concepcion has no application in many employment cases

About a week ago, on behalf of Consumer Attorneys of California ("CAOC"), I filed an amicus curiae brief in support of the plaintiff in Brown v. Ralphs Grocery Company.  In Brown, after oral argument, the Court of Appeal requested supplemental briefs on the question of whether AT&T Mobility LLC v. Concepcion (April 27, 2011) precludes the Gentry v. Superior Court (2007) 42 Cal.4th 443 defense to certain arbitration agreements.  After determining that the parties had not already addressed the issues, CAOC presented several bases for rejecting the contention that Concepcion overruled Gentry, including the fact that a bar on class actions violates the National Labor Relations Act's protection of concerted action by employees to improve their wages and working conditions.  You can view the brief viat the Spiro Moss website here.

Other attorneys at Spiro Moss contributed to the brief, including Dennis F. Moss (who conceived of the argument involving the NLRA), Gregory N. Karasik, and J. Mark Moore.  David M. Arbogast of Arbogast & Berns LLP also contributed to CAOC's brief.

More on AT&T Mobility LLC v. Concepcion

Unless you've been living in a compound, off the grid with no internet access in a medium sized city outside the capital of a troubled nation in South Asia, you undoubtedly are aware of the Supreme Court's decision in AT&T Mobility LLC v. Concepcion (April 27, 2011).  For a number of reasons, which I will revisit obliquely in a moment, I decided against providing any immediate analysis.  Apparently this silence was disconcerting to some, as several readers actually inquired about my silence.  Beginning first with a synopsis, here are some, but not all, of my comments on Concepcion.

The result was all but pre-determined by the way in which the issue was framed: "We consider whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures."  Slip op., at 1.  But Justice Scalia, writing for the Court, went ahead with the rest of the opinion.  The Court summarized the findings in the courts below:

In March 2008, AT&T moved to compel arbitration under the terms of its contract with the Concepcions. The Concepcions opposed the motion, contending that the arbitration agreement was unconscionable and unlawfully exculpatory under California law because it disallowed classwide procedures. The District Court denied AT&T’s motion. It described AT&T’s arbitration agreement favorably, noting, for example, that the informal disputeresolution process was “quick, easy to use” and likely to “promp[t] full or . . . even excess payment to the customer without the need to arbitrate or litigate”; that the $7,500 premium functioned as “a substantial inducement for the consumer to pursue the claim in arbitration” if a dispute was not resolved informally; and that consumers who were members of a class would likely be worse off. Laster v. T-Mobile USA, Inc., 2008 WL 5216255, *11–*12 (SD Cal., Aug. 11, 2008). Nevertheless, relying on the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005), the court found that the arbitration provision was unconscionable because AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions. Laster, 2008 WL 5216255, *14.

The Ninth Circuit affirmed, also finding the provision unconscionable under California law as announced in Discover Bank. Laster v. AT&T Mobility LLC, 584 F. 3d 849, 855 (2009). It also held that the Discover Bank rule was not preempted by the FAA because that rule was simply “a refinement of the unconscionability analysis applicable to contracts generally in California.” 584 F. 3d, at 857. In response to AT&T’s argument that the Concepcions’ interpretation of California law discriminated against arbitration, the Ninth Circuit rejected the contention that “ ‘class proceedings will reduce the efficiency and expeditiousness of arbitration’ ” and noted that “ ‘Discover Bank placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.’ ” Id., at 858 (quoting Shroyer v. New Cingular Wireless Services, Inc., 498 F. 3d 976, 990 (CA9 2007)).

Slip op., at 3.  At this point, I parenthetically comment as follows: "Right."

After describing the "liberal" federal policy favoring arbitration agreements, the Court described the savings clause of the FAA thusly:

The final phrase of §2, however, permits arbitration agreements to be declared unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.” This saving clause permits agreements to arbitrate to be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996); see also Perry v. Thomas, 482 U. S. 483, 492–493, n. 9 (1987). The question in this case is whether §2 preempts California’s rule classifying most collective-arbitration waivers in consumer contracts as unconscionable. We refer to this rule as the Discover Bank rule.

Slip op., at 5.  California law includes an unconscionability defense to any contract.  The consumers in Concepcion argued that this generally applicable defense, and California's general policy against exculpation, are not arbitration-specific, and even if they are, the same principles apply to any dispute resolution contract.  The Court commented:

When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA. Preston v. Ferrer, 552 U. S. 346, 353 (2008). But the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashion that disfavors arbitration. In Perry v. Thomas, 482 U. S. 483 (1987), for example, we noted that the FAA’s preemptive effect might extend even to grounds traditionally thought to exist “ ‘at law or in equity for the revocation of any contract.’ ” Id., at 492, n. 9 (emphasis deleted). We said that a court may not “rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what . . . the state legislature cannot.” Id., at 493, n. 9.

Slip op., at 7-8.  Before this decision was rendered, I knew that the outcome is dependent upon how you choose to look at the situation.  It is very subjective.  If one views a policy against exculpation as a policy applicable to all contracts, it is arbitration neutral.  If one views a policy against exculpation as directed at arbitration agreements, it would be invalidated under just that logic.  When the outcome is so subjective, the result is highly dependent upon the predilictions of the majority.

The Court then did something that I find highly inconsistent with Justice Scalia's professed refusal to consider legislative intent and other indicia of legislative meaning.  The Court restricted the FAA's savings clause to preclude any generally applicable contract defense that might interfere with the FAA (which begs the question of what defense that overcomes an arbitration agreement does not do so):

Although §2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives. Cf. Geier v. American Honda Motor Co., 529 U. S. 861, 872 (2000); Crosby v. National Foreign Trade Council, 530 U. S. 363, 372–373 (2000). As we have said, a federal statute’s saving clause “ ‘cannot in reason be construed as [allowing] a common law right, the continued existence of which would be absolutely inconsistent with the provisions of the act. In other words, the act cannot be held to destroy itself.’ ” American Telephone & Telegraph Co. v. Central Office Telephone, Inc., 524 U. S. 214, 227–228 (1998) (quoting Texas & Pacific R. Co. v. Abilene Cotton Oil Co., 204 U. S. 426, 446 (1907)).

Slip op., at 9.  After spending some time criticizing the dissent for disputing the majority's characterization of the legislative purpose in passing the FAA, the Court rejected the Discover Bank rule as a rule interfering with the FAA.  In doing so, the Court candidly declared all consumer contracts to be contracts of adhesion:

California’s Discover Bank rule similarly interferes with arbitration. Although the rule does not require classwide arbitration, it allows any party to a consumer contract to demand it ex post. The rule is limited to adhesion contracts, Discover Bank, 36 Cal. 4th, at 162–163, 113 P. 3d, at 1110, but the times in which consumer contracts were anything other than adhesive are long past.

Slip op., at 12.  Troubling comment pepper the Court's opinion.  For instance the Court observes, "And faced with inevitable class arbitration, companies would have less incentive to continue resolving potentially duplicative claims on an individual basis."  Slip op., at 13.  So what this evidently means is that, if a company faces only sporadic, individual challenges to its misconduct, it will have some incentive to buy those few people off, but if it faces a whole class, it will fight tooth and nail to retain its ill-gotten goods.  Charming.  What a great reason to favor arbitration agreements and bar class actions.

Wrapping up, the Court said, "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons."  Slip op., at 17.  One might observe two things at this point:  (1) There is a notable absence of conservative protection of federalism where the federal government is imposing dispute resolution procedures on state law claims in state courts, and (2) setting aside the unconstitutionality of federal interference in state dispute resolution procedures related to their substantive law, the federal government can certainly impose procedures that are inconsistent with the FAA.

Justice Thomas "reluctantly" concurred.  In his view, "As I would read it, the FAA requires that an agreement to arbitrate be enforced unless a party successfully challenges the formation of the arbitration agreement, such as by proving fraud or duress."  Slip op., concurrance, at 1-2.

Justice Breyer delivered the dissenting opinion, crisply defining the subjectivity of this debate in his summary of the issue:

The Federal Arbitration Act says that 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 (emphasis added). California law sets forth certain circumstances in which “class action waivers” in any contract are unen­ forceable. In my view, this rule of state law is consistent with the federal Act’s language and primary objective. It does not “stan[d] as an obstacle” to the Act’s “accomplish­ment and execution.” Hines v. Davidowitz, 312 U. S. 52, 67 (1941). And the Court is wrong to hold that the federal Act pre-empts the rule of state law.

Slip op., dissent, at 1.  The dissent found good support for its position in other California decisions:

The Discover Bank rule does not create a “blanket policy in California against class action waivers in the consumer context.” Provencher v. Dell, Inc., 409 F. Supp. 2d 1196, 1201 (CD Cal. 2006). Instead, it represents the “appli­ cation of a more general [unconscionability] principle.” Gentry v. Superior Ct., 42 Cal. 4th 443, 457, 165 P. 3d 556, 564 (2007). Courts applying California law have enforced class-action waivers where they satisfy general uncon­ scionability standards. See, e.g., Walnut Producers of Cal. v. Diamond Foods, Inc., 187 Cal. App. 4th 634, 647–650, 114 Cal. Rptr. 3d 449, 459–462 (2010); Arguelles-Romero v. Superior Ct., 184 Cal. App. 4th 825, 843–845, 109 Cal. Rptr. 3d 289, 305–307 (2010); Smith v. Americredit Financial Servs., Inc., No. 09cv1076, 2009 WL 4895280 (SD Cal., Dec. 11, 2009); cf. Provencher, supra, at 1201 (considering Discover Bank in choice-of-law inquiry). And even when they fail, the parties remain free to devise other dispute mechanisms, including informal mechanisms, that, in con­text, will not prove unconscionable. See Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 479 (1989).

Slip op., dissent, at 2-3.  The dissent then questioned the majority's asseration that individual, rather than class, arbitration is a "fundamental attribute" of arbitration:

When Congress enacted the Act, arbitration procedures had not yet been fully developed. Insofar as Congress considered detailed forms of arbitration at all, it may well have thought that arbitration would be used primarily where merchants sought to resolve disputes of fact, not law, under the customs of their industries, where the parties possessed roughly equivalent bargaining power.

Slip op., dissent, at 6.  If fact, the dissent spent a good deal of time challenging the assertions of the majority, which appear thinly supported in some areas:

the majority provides no convincing reason to believe that parties are unwilling to submit high-stake disputes to arbitration. And there are numerous counterexamples.

Slip op., dissent, at 8.    And the dissent also observed:

Because California applies the same legal principles to address the unconscionability of class arbitration waivers as it does to address the unconscionability of any other contractual provision, the merits of class proceedings should not factor into our decision. If California had applied its law of duress to void an arbitration agreement, would it matter if the procedures in the coerced agreement were efficient?

Slip op., dissent, at 9.  It is with irony not lost on me that the dissent concluded as follows:

[F]ederalism is as much a question of deeds as words. It often takes the form of a concrete decision by this Court that respects the legitimacy of a State’s action in an individual case. Here, recognition of that federalist ideal, embodied in specific language in this particular statute, should lead us to uphold California’s law, not to strike it down. We do not honor federalist principles in their breach.

Slip op., dissent, at 12.  So Concepcion ends with the "liberal" justices decrying the death of federalist principles.  I think we need to revisit the "strict constructionist" labels that get tossed around.  Maybe Posner really has it right when he says, essentially, that every judge does whatever they damn well want, reverse engineering a justification that makes them feel good about their decision.

I've seen a number of theories floated around for responding to Concepcion.   In Marks v. United States, 430 U.S. 188 (1977), the Supreme Court oexplained how the holding of a case should be viewed where there is no majority supporting the rationale of any opinion: “When a fragmented Court decides a case and no single rationale explaining the result enjoys the assent of [the majority], the holding of the Court may be viewed as that position taken by those Members who concurred in the judgments on the narrowest grounds.” Marks, 430 U.S. at 193.  I don't think it likely that California courts will parse the holdings of the Court and the concurring opinion for a narrower holding.  Justice Thomas said that, even though he differs slightly in the reasoning, the result will generally be the same.  Marks isn't going to accomplish what plaintiffs would like it to accomplish.

Calling for legislative action is just silly.  Either something gets through Congress or it doesn't.  If it does, it may moot all of this, but the assumption must be that it won't.  With that in mind, non-legislative responses to Concepcion should occupy the plaintiffs' class action bar.

I've suggested on several occasions that I favor the argument that the FAA is unconstitutional when applied to state law claims in state courts.  I believe, and will believe even if a Court says otherwise, that the FAA is exclusively a procedural statute regulating how substative claims are to be resolved.  Unless the federal government would purport to pre-empt contract law of the states, a dubious effort in its own right, I believe the Commerce Clause goes too far when it treads upon the sovereignty of states deciding their own dispute resolution procedures.  Procedural rules are no place for some form of partial pre-emption.  But I also doubt that any Court would have the stomach to declare the FAA unconstitutional as applied to state law claims in state courts.

I have a project in the works that may affect how far Concepcion applies in, at least, the wage & hour context.  Once it is in the can and safe from intermeddlers, I'll report in detail on that project and what I view as better ways to keep Concepcion in its proper place.

Trial court, in Avalos v. La Salsa, Inc., offers early glimpse of how California courts may reconcile Stolt-Nielsen and Gentry

Earlier today, in Avalos v. La Salsa, Inc., JCCP 4488, the Santa Barbara Superior Court, Judge Denise deBellefeuille presiding, granted the defendants’ motion for reconsideration of a class certification order in to consider the impact of the recent United States Supreme Court decision in Stolt-Nielsen S. A. v. AnimalFeeds International Corp., 130 S.Ct. 1758 (2010) on the coordinated proceedings before the Court.  After an extensive analysis of Stolt-Nielsen, including its interaction with Gentry v. Superior Court, 42 Cal. 4th 443 (2007), the Court affirmed the certification order previously entered.  While the certification aspect is mildly interesting, the Court's extensive discussion of the interplay between arbitration clauses and class actions in California is the pot of gold in this unusually thorough trial court order.  While the attached opinion is a tentative ruling, the Court adopted its tentative without modification.

You can view the embedded opinion in the acrobat.com flash viewer below:

If the viewer isn't working for you (say, if you are viewing this on an iPad or iPhone), you can download the opinion here.

Arguelles-Romero v. Superior Court explains rules in Gentry and Discover Bank

If you were an arbitration agreement, this is your moment in the spotlight.  In Arguelles-Romero v. Superior Court (May 13, 2010), the Court of Appeal (Second Appellate District, Division Three) granted a petition for a writ of mandate after the trial court ordered the plaintiff to submit to individual arbitration.  The trial court also ruled that a class action waiver provision in the automobile financing contract was not unconscionable.  That finding by the trial court prompted the Court of Appeal to spend a good deal of time discussing the two different tests presented in the California Supreme Court cases of Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005) (Discover Bank) and Gentry v. Superior Court, 42 Cal. 4th 443 (2007) (Gentry).  The Court of Appeal held:

While we hold the trial court did not err in finding the class action waiver was not unconscionable, we also conclude that it should have also performed a discretionary analysis on whether a class action is a significantly more effective practical means of vindicating the unwaivable statutory rights at issue. We therefore grant the petition and remand with directions.

Slip op., at 2.  To provide some context, the Court stated the basic standard of review as follows:

“California law, like federal law, favors enforcement of valid arbitration agreements.” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97 (Armendariz).) Under both federal and California law, arbitration agreements are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the voiding of any contract. (Id. at p. 98 & fn. 4.) Unconscionability is a recognized contract defense which can defeat an arbitration agreement. (Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 1099.)

Slip op., at 12.

Cutting right to it, here is the first money quote:

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