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.

Diverging from other California authority, the Fourth Appellate District, Division Three, holds that the FAA preempts the CLRA's ban on class action waivers

Opinions concerning arbitration issues seem less about uniformity of analysis these days and more about the politics of arbitration.  Sophistry comes to mind.  Consider the following observation: "Section 2 of the Federal Arbitration Act (FAA) provides that an arbitration provision '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."  AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1753, 179 L. Ed. 2d 742 (2011), J. Thomas conc.  This seems straightforward enough.  And yet, in Caron v. Mercedes-Benz Financial Services USA LLC (July 30, 2012), the Court of Appeal (Fourth Appellate District, Division Three), managed to conclude that the Consumer Legal Remedies Act (CLRA) prohibition on class action waivers in any consumer contract was pre-empted by the FAA.  A rule prohibiting class action waivers in any form of consumer contract is, according to this reasoning, not a ground in law for the revocation of such contracts.  It is, instead, a provision that "interferes" with the FAA.

I could walk through the analysis and discuss it in a neutral and dispassionate tone, but that would waste precious minutes of my life.  Blunt will serve just as well here.  The reasoning in Caron is nonsensical.  The Supreme Court claims that its FAA jurisprudence is intended only to "place arbitration agreements on an equal footing with other contracts...."  Concepcion, 131 S. Ct. at 1742.  That's not what is happening here.  Instead, the FAA is being used to grant a superior status to arbitration agreements.  Case in point?  The Caron decision:

Defendants argue the trial court erred because the FAA preempts the CLRA's prohibition against class action waivers and therefore the trial court could not rely on the CLRA as a ground for denying Defendants' petitions. Based on the United State Supreme Court's decision in AT&T Mobility LLC v. Concepcion (2011) ___ U.S. ___, ___; 131 S.Ct. 1740 (AT&T Mobility), we agree the FAA preempts the CLRA's anti-waiver provision because the provision acts as an obstacle to the FAA's intention of enforcing arbitration agreements according to their terms.

Slip op., at 2.  What?  The FAA, in section 2, limits the FAA's reach.  The Caron Court doesn't ensure that an arbitration agreement is judged on an equal footing with other contracts.  It is placing arbitration agreements before a state's right to specify the lawful subject matter of contracts.  The reasoning used in Caron could be used to vitiate section 2 of the FAA.  After all, every defense to a contract is an "obstacle" to the FAA's intention of enforcing arbitration agreements according to their terms, even if those terms are unlawful.  Caron dismisses this limitation on the FAA's reach by simply concluding that the case before it presents the same situation as Concepcion:

The plaintiffs in AT&T Mobility “argue[d] that the Discover Bank rule, given its origins in California's unconscionability doctrine and California's policy against exculpation, is a ground that 'exist[ed] at law or in equity for the revocation of any contract' under FAA § 2” and therefore the FAA did not preempt the rule. (AT&T Mobility, supra, 131 S.Ct. at p. 1746.) The Supreme Court rejected that argument, explaining the FAA's preemptive effect may “extend even to grounds traditionally thought to exist '"at law or in equity for the revocation of any contract[]"'" when those grounds “have been applied in a fashion that disfavors arbitration.” (Id. at p. 1747.)

Slip op., at 13.  From this, the Caron Court concludes that the same reasoning would apply here.  However, that distorts the facts.  In Caron, the agreement at issue contained the following "poison pill" clause:

If any part of this Arbitration Clause, other than waivers of class action rights, is deemed or found to be unenforceable for any reason, the remainder shall remain enforceable. If a waiver of class action rights is deemed or found to be unenforceable for any reason in a case in which class action allegations have been made, the remainder or this Arbitration Clause shall be unenforceable.

Slip op., at 4.  This agreement anticipates the potential illegality of the clause at issue.  By its own terms, the agreement chooses to reject arbitration if it must occur in the class context.  There is no law banning arbitration here.  There is a general rule govering consumer contracts that specifies the lawful terms of those agreements.  The agreement contains a self-executing kill switch.  Had the agreement been silent, the Stolt-Neilsen analysis should have concluded that, aware of California law, the parties anticipated the potential for a class action.  But how the Court concludes that the CLRA's regulation of consumer contracts constitutes "interference" with consumer contracts sufficient to pre-empt the CLRA's general regulation of consumer contracts is beyond me.

Section 2 of the FAA is not a nugatory clause.  Efforts to interpret it out of existence should be rejected.  Given that Caron diverges from Fisher v. DCH Temecula Imports LLC, 187 Cal. App. 4th 601 (2010), it appears that further guidance from the California Supreme Court would benefit parties to consumer contracts.

BREAKING NEWS: In Coito v. Superior Court, California Supreme Court addresses work product privilege for witness statements and identities

The issue of witness identity surfaces in a number of interesting ways in class actions.  A few years ago, a number of cases examined whether plaintiffs could discovery the identity and contact information of putative class members.  With little qualification, that question was answered in the affirmative (the nature of privacy interests involved define the outer limits on such discovery, but usually yield to the right to obtain discovery of witness identity).  Today, in Coito v. Superior Court (June 25, 2012), the California Supreme Court examined the work product protections applicable to (1) recordings of witness interviews conducted by investigators employed by defendant's counsel, and (2) information concerning the identity of witnesses from whom defendant's counsel has obtained statements. The trial court sustained objections to production of such material, concluding as a matter of law that the recorded witness interviews were entitled to absolute work product protection and that the other information sought was work product entitled to qualified protection.   A divided Court of Appeal reversed, concluding that work product protection does not apply to any of the disputed items.

The Supreme Court held that the correct result is somewhere between what the trial court decided and what the court of appeal decided:

We conclude that the Court of Appeal erred. In light of the legislatively declared policy and the legislative history of the work product privilege, we hold that the recorded witness statements are entitled as a matter of law to at least qualified work product protection. The witness statements may be entitled to absolute protection if defendant can show that disclosure would reveal its “attorney's impressions, conclusions, opinions, or legal research or theories.” (§ 2018.030, subd. (a).) If not, then the items may be subject to discovery if plaintiff can show that “denial of discovery will unfairly prejudice [her] in preparing [her] claim . . . or will result in an injustice.” (§ 2018.030, subd. (b).)

As to the identity of witnesses from whom defendant's counsel has obtained statements, we hold that such information is not automatically entitled as a matter of law to absolute or qualified work product protection. In order to invoke the privilege, defendant must persuade the trial court that disclosure would reveal the attorney's tactics, impressions, or evaluation of the case (absolute privilege) or would result in opposing counsel taking undue advantage of the attorney‟s industry or efforts (qualified privilege).

Slip op., at 2.

The Court went on to analyze first the recorded statements of witnesses collected by an investigator at the behest of an attorney.  Following that analysis, the Court expressly overruled a number of cases on this issue:

In sum, we disapprove Fellows v. Superior Court, supra, 108 Cal.App.3d 55, People v. Williams, supra, 93 Cal.App.3d 40, Rodriguez v. McDonnell Douglas Corp., supra, 87 Cal.App.3d 626, and Kadelbach v. Amaral, supra, 31 Cal.App.3d 814 to the extent they suggest that a witness statement taken by an attorney does not, as a matter of law, constitute work product. In addition, Greyhound, supra, 56 Cal.2d 355, which was decided before the Legislature codified the work product privilege, should not be read as supporting such a conclusion. At the same time, we reject the dicta in Nacht & Lewis, supra, 47 Cal.App.4th at page 217 that said “recorded statements taken by defendants‟ counsel would be protected by the absolute work product privilege because they would reveal counsel's 'impressions, conclusions, opinions, or legal research or theories' . . . . [Citation.]” Instead, we hold that a witness statement obtained through an attorney-directed interview is entitled as a matter of law to at least qualified work product protection. A party seeking disclosure has the burden of establishing that denial of disclosure will unfairly prejudice the party in preparing its claim or defense or will result in an injustice. (§ 2018.030, subd. (b).) If the party resisting discovery alleges that a witness statement, or portion thereof, is absolutely protected because it “reflects an attorney's impressions, conclusions, opinions, or legal research or theories” (§ 2018.030, subd. (a)), that party must make a preliminary or foundational showing in support of its claim. The trial court should then make an in camera inspection to determine whether absolute work product protection applies to some or all of the material.

Slip op., at 20.

The Court then considered discovery directed at the identity of witnesses from whom statements were collected:

The Court of Appeal reasoned that, because the recorded witness statements themselves were not entitled to work product protection, defendant could not refuse to answer form interrogatory No. 12.3. In so concluding, the majority disagreed with Nacht & Lewis, which held that the information sought by form interrogatory No. 12.3 is entitled as a matter of law to qualified work product protection to the extent it consists of recorded statements taken by an attorney. (Nacht & Lewis, supra, 47 Cal.App.4th at p. 217.) Justice Kane, in his separate opinion below, identified a third approach. He would have adopted a default rule requiring parties to respond to form interrogatory No. 12.3, while permitting parties to make a showing that the responsive material is entitled to qualified or absolute protection. As explained below, the approach suggested by Justice Kane is most consistent with the policies underlying the work product privilege.

Slip op., at 21.  The Court considered the various, hypothetical situations where a list of witnesses providing statements might reveal thoughts and impressions.  After discussing the extreme situations, the Court concluded that such discovery should usually be answered:

Because it is not evident that form interrogatory No. 12.3 implicates the policies underlying the work product privilege in all or even most cases, we hold that information responsive to form interrogatory No. 12.3 is not automatically entitled as a matter of law to absolute or qualified work product privilege. Instead, the interrogatory usually must be answered. However, an objecting party may be entitled to protection if it can make a preliminary or foundational showing that answering the interrogatory would reveal the attorney's tactics, impressions, or evaluation of the case, or would result in opposing counsel taking undue advantage of the attorney's industry or efforts. Upon such a showing, the trial court should then determine, by making an in camera inspection if necessary, whether absolute or qualified work product protection applies to the material in dispute.

Slip op., at 24.  The decision was unanimous.

Trial courts should groan in pain at this outcome.  It guarantees that counsel will view their client as having nothing to lose in refusing to provide this information.  Which guarantees that trial courts will have to resolve these fights by reviewing lists of names in camera.  Of course, bad faith refusal to respond will, in the long run, cost parties their credibility with the trial court, but they won't internalize the cost effectively unless strict discovery sanctions are imposed.

Christopher et al. v. Smithkline Beecham Corp., dba Glaxosmithkline holds, 5-4, that pharma sales reps are exempt as "outside salespersons"

The United States Supreme Court, in Christopher et al. v. Smithkline Beecham Corp., dba Glaxosmithkline (June 18, 2012), examined the question of whether pharmaceutical sales representatives, whose primary duty was to obtain nonbinding commitments from physicians to prescribe their employer’s prescription drugs, were correctly classified as exempt from overtime pay requirements set forth in the Fair Labor Standards Act.  In the courts below, defendant moved for summary judgment, arguing that plaintiffs were “employed in the capacity of outside salesman,” §213(a)(1), and therefore were exempt from the FLSA’s overtime compensation requirement. The District Court agreed and granted summary judgment to defendant. Plaintiffs filed a motion to alter or amend the judgment, contending that the District Court had erred in failing to accord controlling deference to the DOL’s interpretation of the pertinent regulations, which the DOL had announced in an amicus brief filed in a similar action. The District Court rejected this argument and denied the motion. The Ninth Circuit, agreeing that the DOL’s interpretation was not entitled to controlling deference, affirmed.

The opinion was decided on sharply divided 5-4 lines, with one majority opinion and one minority opinion. The opinion considered three of the DOL’s regulations: §§541.500, 541.501, and 541.503. The Court referred to the three regulations as the “general regulation,” the “sales regulation,” and the “promotion-work regulation,” respectively.

First, the majority observed that the DOL’s own interpretation of its regulations was not consistent over time. In briefs filed before the Second and Ninth Circuits, “the DOL took the view that ‘a “sale” for the purposes of the outside sales exemption requires a con- summated transaction directly involving the employee for whom the exemption is sought.’” Slip op., at 9. After certiorari was granted in this matter, the DOL took the position that “ ‘[a]n employee does not make a “sale” for purposes of the “outside salesman” exemption unless he actually transfers title to the property at issue.’ ” Slip op., at 9.

Next, the majority observed that Auer deference to the DOL’s ambiguous regulations was not justified because to do so would allow for imposition of “potentially massive liability on respondent for conduct that occurred well before that interpretation was announced.” Slip op., at 10. Continuing, the Court said:

Until 2009, the pharmaceutical industry had little reason to suspect that its longstanding practice of treating detailers as exempt outside salesmen transgressed the FLSA. The statute and regulations certainly do not provide clear notice of this. The general regulation adopts the broad statutory definition of “sale,” and that definition, in turn, employs the broad catchall phrase “other disposition.” See 29 CFR §541.500(a)(1). This catchall phrase could reasonably be construed to encompass a nonbinding commitment from a physician to prescribe a particular drug, and nothing in the statutory or regulatory text or the DOL’s prior guidance plainly requires a contrary reading. See Preamble 22162 (explaining that an employee must “in some sense” make a sale); 1940 Report 46 (same).

Slip op., at 12. Then the majority noted that, despite the industry’s decades of applying an exempt classification, the DOL never initiated any enforcement action.

The majority then discussed the DOL’s interpretations and found them unpersuasive, particularly with respect to the definition of “sale.” The Court held:

This new interpretation is flatly inconsistent with the FLSA, which defines “sale” to mean, inter alia, a “consignment for sale.” A “consignment for sale” does not involve the transfer of title. See, e.g., Sturm v. Boker, 150 U. S. 312, 330 (1893) (“The agency to sell and return the proceeds, or the specific goods if not sold . . . does not involve a change of title”); Hawkland, Consignment Selling Under the Uniform Commercial Code, 67 Com. L. J. 146, 147 (1962) (explaining that “‘[a] consignment of goods for sale does not pass the title at any time, nor does it contemplate that it should be passed’” (quoting Rio Grande Oil Co. v. Miller Rubber Co. of N. Y., 31 Ariz. 84, 87, 250 P. 564, 565 (1926))).

Slip op., at 15. The majority then spends some time construing the regulation itself, concluding that the language of the statute was intended to broadly include all manner of transactions that, in certain industries, were tantamount to a sale in the most conventional sense. In the regulated industry of pharmaceutical sales, the majority observed that the representatives did all that was allowed:

Obtaining a nonbinding commitment from a physician to prescribe one of respondent’s drugs is the most that petitioners were able to do to ensure the eventual disposition of the products that respondent sells. This kind of arrangement, in the unique regulatory environment within which pharmaceutical companies must operate, comfortably falls within the catch- all category of “other disposition.”

Slip op., at 20-21.

The minority opinion, authored by Justice Breyer, accepted the majority’s description of the job in question and agreed that deference to the DOL interpretation was not justified given the recent change in that interpretation. Instead, the minority opnion simply disagrees with the construction of the language at issue:

Unless we give the words of the statute and regulations some special meaning, a detailer’s primary duty is not that of “making sales” or the equivalent. A detailer might convince a doctor to prescribe a drug for a particular kind of patient. If the doctor encounters such a patient, he might prescribe the drug. The doctor’s client, the patient, might take the prescription to a pharmacist and ask the pharmacist to fill the prescription. If so, the pharmacist might sell the manufacturer’s drug to the patient, or might substitute a generic version. But it is the pharmacist, not the detailer, who will have sold the drug.

Minority slip op., at 3. The minority opinion concludes that the representatives stimulate sales eventually made by others:

The detailer’s work, in my view, is more naturally characterized as involving “[p]romotional activities designed to stimulate sales . . . made by someone else,” §541.503, e.g., the pharmacist or the wholesaler, than as involving “[p]romotional activities designed to stimulate” the detailer’s “own sales.”

Minority slip op., at 5. The minority emphasized the fact that doctors determine what to prescribe, based on medical need:

To the contrary, the document makes clear that the pharmaceutical industry itself understands that it cannot be a detailer’s “primary duty” to obtain a nonbinding commitment, for, in respect to many doctors, such a commitment taken alone is unlikely to make a significant difference to their doctor’s use of a particular drug. When a particular drug, say Drug D, constitutes the best treatment for a particular patient, a knowledgeable doctor should (hence likely will) prescribe it irrespective of any nonbinding commitment to do so. Where some other drug, however, is likely to prove more beneficial for a particular patient, that doctor should not (hence likely will not) prescribe Drug D irrespective of any nonbinding commitment to the contrary.

Minority slip op., at 6. The minority concluded by dismissing the majority’s fears that a salesman who takes an order would suddenly become non-exempt by transferring the order to jobber’s employee to be filled. The minority noted that the example created no basis for fear, given that the salesman had obtained a firm commitment to buy the product. Regardless of the quality of the counter-arguments, the minority opinion by Justice Breyer is just that, a minority opinion, and "sales" are evidently in the eye of the beholder.

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.

Court of Appeal declines to extend Lebrilla "crash parts" holding to all non-OEM parts installed under insurance policy

Lebrilla v. Farmers Group, Inc., 119 Cal. App. 4th 1070 (2004) reversed a trial court's denial of certification in a suit against an automobile insurer.  The suit alleged that sheet metal parts known as "crash parts" were used to effectuate accident repairs, but the "crash parts" were not manufactured by original equipment manufacturers.  The use of "crash parts" allegedly resulted in substandard repairs that did not restore damaged vehicles to pre-loss condition.  In Ortega v. Topa Insurance Company (May 24, 2012), the Court of Appeal (Second Appellate District, Division Three) examined a similar, but not identical situation, in which non-OEM parts were used to complete repairs to vehicles.  The trial court concluded that common issues could not predominate when evaluation of a breach of contract claim would require a comparison of each installed non-OEM part to the OEM equivalent to determine whether the repair part was inferior to the OEM part.

The Court of Appeal agreed:

We do not read Lebrilla v. Farmers Group, Inc., supra, 119 Cal.App.4th 1070, to suggest, for example, that all non-OEM replacement parts are uniformly inferior. That case addressed crash parts. (Id. at p. 1073 & fn. 1.) In this case, to recover damages each member of the putative Steered Claimant Class (Class B) must identify the non-OEM part, which includes radiators and heat and cooling systems, among others, and prove the particular manufacturer's part is inferior. Thus, unlike Lebrilla, the court would have to determine whether the installed repair part is inferior. As alleged, common issues do not predominate.

Slip op., at 18.  Pretty straightforward analysis.  When the issue was the adequacy of "crash parts," the question of their adequacy could be resolved on a classwide basis.  Here, the the issue of adequacy could vary wildly, depending upon what part was replaced and what manufacturer supplied the replacement part.  This particular case provides an example of the relatively narrow category of class complaints that reveal predominance issues on the face of the complaint itself.

(Surprising) California Supreme Court activity for the week of May 14, 2012

The California Supreme Court held its (usually) weekly conference on May 16, 2012.  Highly notable results include:

• Review was granted in Duran v. U.S. Bank National Association (February 6, 2012). The Court of Appeal reversed a trial verdict for a class of managers claiming misclassification and decertified the class.  The case was covered on this blog here.  I would have put the odds on obtaining review at zero when I wrote about Duran in February.  But, after reading Brinker, there were a number of comments suggesting that the Supreme Court might support the forms of sampling evidence used in the Duran trial.  Of course, review may also have been granted to clarify that decertification by the Court of Appeal was inappropriate, with the better approach being to remand for a new trial and reconsideration of the certification question by the trial court.  All that speculation aside, I am shocked, SHOCKED, to find that review was granted here.  Of course, it is also possible that the Petition for Review, which I have not seen, paints a decidedly different picture than the one presented by the Court of Appeal.

In an entertaining twist, Kirby, et al. v. Immoos Fire Protection, Inc. holds that nobody gets fees under 226.7

As a general rule, the law lacks a sense of humor.  Because of that substantial absence of levity, it is up to us to find amusement in unexpected places.  Sometimes a court authors a witty opinion that is entertaining as a form of sharp commentary.  Other times, the humor is relegated to commentary on current legal news.  But that doesn't exhaust our options.  Today, in Kirby, et al. v. Immoos Fire Protection, Inc. (April 20, 2012), the California Supreme Court demonstrated that humor exists in the law when a case outcome is contrary to all expectations.  When asked to decide whether the plaintiff alone, or any prevailling party, is entitled to attorney's fees for alleged violations of Labor Code § 226.7, the Court chose Answer C, none of the above.

The plaintiffs brought a wage & hour class action.  Certification was denied.  The plaintiffs dismissed the case with prejudice.  Defendant Immoos moved for fees as the prevailing party on claims for meal and rest break violations.  Plaintiffs argued that, because section 226.7 claims require payment of wages for the violation of the statute in a manner that is tantamount to a minimum wage obligation, the one-way fee-shifting statute applicable to section 1194 applies.  Defendant Immoos argued that the action was for the "non-payment of wages," thereby brining the action within the two-way fee provision of section 218.5.  Breaking its task down, the Supreme Court said:

In resolving the case before us, we must initially ask whether a section 226.7 claim is a claim for which attorney's fees could be awarded to a prevailing employee under section 1194. If so, then IFP may not be awarded fees under section 218.5 even though it prevailed on the rest period claim in this case. If not, then we must separately examine whether section 218.5 authorizes a fee award to IFP on plaintiffs' section 226.7 claim.

Slip op., at 6.  The Court immediately rejected the argument that any statutory or administrative compensation requirement is a "legal minimum wage."  Instead, the Court supplied a common sense reading to the meaning of section 1194, finding that it created a minimum hourly rate of pay, and not a one-way fee shifting provision for every form of statutory or administrative compensation.  Based on this construction, the Court concluded that section 226.7 claim is not a claim for which attorney's fees could be awarded to a prevailing employee under section 1194.

Nonpayment of wages is not the gravamen of a section 226.7 violation. Instead, subdivision (a) of section 226.7 defines a legal violation solely by reference to an employer's obligation to provide meal and rest breaks. (See § 226.7, subd. (a) [“No employer shall require any employee to work during any meal or rest period mandated by an applicable order of the Industrial Welfare Commision.”].) The “additional hour of pay” provided for in subdivision (b) is the legal remedy for a violation of subdivision (a), but whether or not it has been paid is irrelevant to whether section 226.7 was violated. In other words, section 226.7 does not give employers a lawful choice between providing either meal and rest breaks or an additional hour of pay. An employer's failure to provide an additional hour of pay does not form part of a section 226.7 violation, and an employer's provision of an additional hour of pay does not excuse a section 226.7 violation. The failure to provide required meal and rest breaks is what triggers a violation of section 226.7. Accordingly, a section 226.7 claim is not an action brought for nonpayment of wages; it is an action brought for non-provision of meal or rest breaks.

Slip op., at 13-14.  Thus, since section 226.7 is not an action for nonpayment of wages, section 218.5 does not apply either.  The Court followed with this observation:

It is no answer to say that a section 226.7 claim is properly characterized as an action brought for (i.e., on account of) nonpayment of wages because if a defendant employer had provided the additional hour of pay remedy, presumably the plaintiff would not have brought the action at all. Such a characterization is a departure from the way we conventionally distinguish between the legal basis for a lawsuit and the remedy sought. Consider a typical lawsuit that alleges unlawful injury and seeks compensatory damages. We may say that the suit is an action brought for violation of some legal duty. But we do not say that the suit is an action brought for nonpayment of damages — even though the action would not have been brought had the defendant paid the damages for the plaintiff's injury.

Slip op., at 14.  So that's that.  No fees for prevailing party under section 226.7 for either side.

Meanwhile, note again this little morsel:  "In other words, section 226.7 does not give employers a lawful choice between providing either meal and rest breaks or an additional hour of pay."  Oops.  Even if the employer pays the money, it isn't excused from the violation.  But, since attorney's fees aren't available directly, the chances of an action for injunctive relief are diminished.  That leaves 1021.5 or other fee-shifting bases, which are far from guaranteed.

Decision forthcoming in Kirby, et al. v. Immoos Fire Protection, Inc.

On Monday, April 30, 2012, the California Supreme Court will issue its decision in Kirby, et al. v. Immoos Fire Protection, Inc.  The Court of Appeal decision was discussed on this blog here.  The great question, of course, is whether the relatively employee-protective decision in Brinker will be tempered by prevailing party fee concerns.  The California Supreme Court describes the issues under review as follows:

The court limited review to the following issues: (1) Does Labor Code section 1194 apply to a cause of action alleging meal and rest period violations (Lab. Code, § 226.7) or may attorney’s fees be awarded under Labor Code section 218.5? (2) Is our analysis affected by whether the claims for meal and rest periods are brought alone or are accompanied by claims for minimum wage and overtime?