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California Supreme Court Prohibits Waiver of PAGA Representative Claims

In Arbitration, Class Waiver, PAGA on June 23, 2014 at 1:44 pm

This morning, the California Supreme Court issued its long-awaited opinion in Iskanian v. CLS Transportation Los Angeles, LLC, No. S204032, __ Cal.4th __ (Jun. 23, 2014).

The Court held that the U.S. Supreme Court’s opinion in Concepcion abrogated Gentry v. Superior Court, 42 Cal. 4th 443 (2007).  The Court decided that class action waivers are enforceable.  But it also held that an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.  Id. at *2.

[W]e conclude that the FAA’s goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state’s behalf. Therefore, the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment contract.

Id. 

Facts

Plaintiff Iskanian worked as a driver for CLS.  Id. He signed an arbitration agreement providing that “any and all claims” arising out of his employment were to be submitted to binding arbitration.  Id.  The arbitration agreement also contained a class and representative waiver that said:

[E]xcept as otherwise required under applicable law, (1) EMPLOYEE and COMPANY expressly intend and agree that class action and representative action procedures shall not be asserted, nor will they apply, in any arbitration pursuant to this Policy/Agreement; (2) EMPLOYEE and COMPANY agree that each will not assert class action or representative action claims against the other in arbitration or otherwise; and (3) each of EMPLOYEE and COMPANY shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person.

Id. at *2-3.  After briefing on the motion to compel arbitration, the California Supreme Court decided the Gentry case, holding that a class action waiver may be unenforceable in some circumstances.  Id. at *5.  In April 2011, the U.S. Supreme Court issued AT&T Mobility LLC v. Concepcion, 563 U.S. __ (2011), invalidating the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), which had restricted consumer class action waivers in arbitration agreements.

Holdings

 The Court held that Gentry was preempted by the FAA under the rule in Concepcion.  Iskanian, supra, __ Cal. 4th at *7.

It is thus incorrect to say that the infirmity of Discover Bank was that it did not require a case-specific showing that the class waiver was exculpatory.  Concepcion holds that even if a class waiver is exculpatory in a particular case, it is nonetheless preempted by the FAA.  Under the logic of Concepcion, the FAA preempts Gentry’s rule against employment class waivers.

The Court also distinguished its recent holding in Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109 (Sonic II), which “established an unconscionability rule that considers whether arbitration is an effective dispute resolution mechanism for wage claimants without regard to any advantage inherent to a procedural device (a Berman hearing) that interferes with fundamental attributes of arbitration.”

By contrast, the Gentry rule considers whether individual arbitration is an effective dispute resolution mechanism for employees by direct comparison to the advantages of a procedural device (a class action) that interferes with fundamental attributes of arbitration.  Gentry, unlike Sonic II, cannot be squared with Concepcion.

Iskanian, supra, __ Cal. 4th at *10.

PAGA

The Court carved out an exception for PAGA claims:

In sum, the FAA aims to promote arbitration of claims belonging to the private parties to an arbitration agreement.  It does not aim to promote arbitration of claims belonging to a government agency, and that is no less true when such a claim is brought by a statutorily designated proxy for the agency as when the claim is brought by the agency itself.  The fundamental character of the claim as a public enforcement action is the same in both instances.  We conclude that California‘s public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the Labor and Workforce Development Agency‘s interest in enforcing the Labor Code, does not interfere with the FAA’s goal of promoting arbitration as a forum for private dispute resolution.

Id. at *43.

Attorneys

Glenn A. Danas of Capstone Law argued for Plaintiff and Appellant.

David F. Faustman of Fox Rothschild argued for Defendant and Respondent.

By CHARLES H. JUNG

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U.S. Supreme Court Upholds Class Waiver in Arbitration Agreement

In Arbitration, Class Waiver on June 20, 2013 at 5:56 pm
American Express Co. shipping receipt, New Yor...

American Express Co. shipping receipt, New York City to St. Louis, MO (August 6, 1853) (Photo credit: Wikipedia)

In a five-to-three decision today, the U.S. Supreme Court issued its opinion in American Express Co. v. Italian Colors Restaurant, No. 12-133, 570 U.S. __ (June 20, 2013).  At issue was whether a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act (“FAA”) when the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.  The Court held that it was.

“Respondents argue that requiring them to litigate their claims individually—as they contracted to do—would contravene the policies of the antitrust laws. But the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”  Slip Op. at 4.

Nor does congressional approval of Rule 23 establish an entitlement to class proceedings for the vindication of statutory rights. . . . One might respond, perhaps, that federal law secures a nonwaivable opportunity to vindicate federal policies by satisfying the procedural strictures of Rule 23 or invoking some other informal class mechanism in arbitration. But we have already rejected that proposition in AT&T Mobility, 563 U. S., at ___ (slip op., at 9).

Slip Op. at 5.

Justice Scalia, writing for the majority, also rejected the argument that “Enforcing the waiver of class arbitration bars effective vindication, respondents contend, because they have no economic incentive to pursue their antitrust claims individually in arbitration.”  Id.

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

Id. at 7.

By CHARLES JUNG

U.S. Supreme Court Unanimously Upholds Arbitrator’s Finding of Agreement to Class Arbitration

In Arbitrability, Arbitration, Class-wide Arbitration on June 10, 2013 at 6:27 pm
U.S. Supreme Court building.

U.S. Supreme Court building. (Photo credit: Wikipedia)

In a ruling today with implications for wage & hour class actions, the U.S. Supreme Court affirmed an arbitrator’s interpretation of an arbitration clause to permit class proceedings.  Oxford Health Plans LLC v. Sutter, No. 12-135, 569 U.S. __ (June 10, 2013).  The Court considered whether an arbitrator, who found that the parties’ contract provided for class arbitration, “exceeded [his] powers” under §10(a)(4) of the Federal Arbitration Act, 9 U. S. C. §1 et seq.  Delivering the unanimous opinion of the Court and citing Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662, 684 (2010), Justice Kagan concluded that the arbitrator’s decision survives the limited judicial review §10(a)(4) allows.  Slip Op. at 1-2.

The Court decided that Oxford must live with its choice of arbitral forum and the arbitrator’s construction of the contract, “however good, bad, or ugly”:

So long as the arbitrator was “arguably construing” the contract—which this one was—a court may not correct his mistakes under §10(a)(4). Eastern Associated Coal, 531 U. S., at 62 (internal quotation marks omitted). The potential for those mistakes is the price of agreeing to arbitration. As we have held before, we hold again: “It is the arbitrator’s construction [of the contract] which was bargained for; and so far as the arbitrator’s decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his.” Enterprise Wheel, 363 U. S. at 599. The arbitrator’s construction holds, however good, bad, or ugly.

Id. at 8 (emphasis supplied).

In sum, Oxford chose arbitration, and it must now live with that choice. Oxford agreed with Sutter that an arbitrator should determine what their contract meant, including whether its terms approved class arbitration. The arbitrator did what the parties requested: He provided an interpretation of the contract resolving that disputed issue. His interpretation went against Oxford, maybe mistakenly so. But still, Oxford does not get to rerun the matter in a court. Under §10(a)(4), the question for a judge is not whether the arbitrator construed the parties’contract correctly, but whether he construed it at all.Because he did, and therefore did not “exceed his powers,”we cannot give Oxford the relief it wants. We accordingly affirm the judgment of the Court of Appeals.

Id. at 8-9.

By CHARLES H. JUNG

Sixth District Holds Arbitration Agreement Unenforceable as Applied to PAGA Claims

In Arbitration, Class Waiver, PAGA on June 5, 2013 at 5:23 pm
you are the only exception

you are the only exception (Photo credit: heatherknitz)

In a preview of a question currently before the California Supreme Court in Iskanian v. CLS Transportation of Los Angeles, the Sixth District held that “When applied to the PAGA, a private agreement purporting to waive the right to take representative action is unenforceable because it wholly precludes the exercise of this unwaivable statutory right.”  Brown v. Superior Court (Morgan Tire & Auto, LLC), No. H037271, __ Cal. App. 4th __ (6th Dist. June 4, 2013).

The question presented in this case is whether the Federal Arbitration Act (9 U.S.C. §§ 1-16) (FAA) permits arbitration agreements to override the statutory right to bring representative claims under the Labor Code Private Attorneys General Act of 2004 (PAGA). (Lab. Code, § 2698 et seq.) We conclude that the FAA does not demand enforcement of such an agreement. A plaintiff suing for PAGA civil penalties is suing as a proxy for the State. A PAGA claim is necessarily a representative action intended to advance a predominately public purpose. When applied to the PAGA, a private agreement purporting to waive the right to take representative action is unenforceable because it wholly precludes the exercise of this unwaivable statutory right. AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740 (Concepcion) does not require otherwise.

Slip Op. at 1-2.

Judges & Attorneys

Associate Justice Eugene M. Premo delivered the opinion for the court, with Presiding Justice Conrad L. Rushing and Associate Justice Franklin D. Elia concurring.

Appeal from Santa Clara County Superior Court, Judge Peter H. Kirwan.

Counsel for Petitioners, Milton Brown and Lee Moncada: Initiative Legal Group, Melissa Grant, Glenn A. Danas, Katherine W. Kehr.

Counsel for Real Parties in Interest, Morgan Tire & Auto: Klatte, Budensiek & Young-Agriesti, E.W. Klatte, III, Summer Young Agriesti;  Heikaus Weaver,  Christopher Michael HeikausWeaver

By CHARLES H. JUNG

Second District Invalidates Form Arbitration Clause Pre-Printed on Back Page of Auto Sale Contract

In Arbitration, Concepcion on June 5, 2013 at 4:47 pm
Lone Star Auto Sales

Lone Star Auto Sales (Photo credit: jamesmixon84)

The Second District yesterday invalided an arbitration clause pre-printed on the back of an auto sales contract.  Vargas v. SAI Monrovia B, Inc., No. B237257, __ Cal. App. 4th __ (2d Dist. June 4, 2013).  The court revisited its holding in Sanchez v. Valencia Holding Co., LLC, 201 Cal. App .4th 74 (2012), review granted March 21, 2012, S199119.  In Sanchez the court held that a “Retail Installment Sale Contract” used to purchase an automobile is unconscionable and unenforceable.  In Vargas, the court again concluded that the identical sale contract does not require the arbitration of disputes between a purchaser and a car dealer because it is permeated by unconscionability.  You can read more here.

By CHARLES H. JUNG

Non-Mutual Arbitration Agreement Saved by Reference to Mutual Agreement to Arbitrate in Employee Handbook

In Arbitration, Employee Handbook, Mutuality on April 19, 2013 at 4:41 pm
Handbook

Handbook (Photo credit: Jeff Hester)

The Second District ordered published today an opinion reversing the denial of a motion to compel arbitration. Serpa v. California Surety Investigations, Inc., et al., No. B237363, __ Cal. App. 4th __ (filed Mar. 21, 2013, modified Apr. 19, 2013).  The case involved an agreement to arbitrate that was non-mutual, but which referenced an employee handbook’s arbitration clause.

At the trial court level, the court denied defendants’  motion to compel arbitration, finding the agreement to arbitrate lacked mutuality.  Defendants argued that the requisite mutuality was provided by the bilateral arbitration provisions in the employee handbook, incorporated by reference into the arbitration agreement.  The trial court rejected this argument because defendant could change the handbook at its sole discretion and without notice.  The Second District reversed.

Because the agreement incorporated the arbitration policy in the employee handbook, the Court concluded that this “salvages the agreement by establishing an unmistakable mutual obligation on the part of [employer and plaintiff] to arbitrate ‘any dispute’ arising out of her employment.”  Plaintiff argued that the while the arbitration policy in the handbook establishes a bilateral obligation to arbitrate, she insisted that the mutual obligation is illusory because, the employer is authorized to alter the terms of any policy contained in the handbook at its sole discretion and without notice.  The Court disagreed, reasoning that the right to alter the terms was limited by the covenant of good faith and fair dealing implied in every contract.

You can read more here.

By CHARLES H. JUNG

Second District Affirms Denial of Arbitration, Drawing Distinction Between Allegations and Judicial Admissions

In Arbitration on April 17, 2013 at 10:21 pm
English: Admission of the Senior Wrangler in 1842

English: Admission of the Senior Wrangler in 1842 (Photo credit: Wikipedia)

The Court of Appeal for the Second District affirmed on Monday a trial court’s denial of a motion to compel arbitration.  Barsegian v. Kessler & Kessler, et al., No. B237044, __ Cal.App.4th __ (2d Dist. Apr. 15, 2013), where some defendants moved to compel arbitration, but the remaining defendants did not.  Slip Op. at 2.  The trial court denied on the grounds of waiver and the possibility of inconsistent rulings.

Moving defendants sought a reversal, arguing that plaintiff’s complaint alleged that all defendants are agents of one another, and that allegation is a binding judicial admission that gives the non-moving defendants the right to enforce the arbitration agreement.  The court disagreed, noting that:

[N]ot every factual allegation in a complaint automatically constitutes a judicial admission.  Otherwise, a plaintiff would conclusively establish the facts of the case by merely alleging them, and there would never be any disputed facts to be tried. . . . A judicial admission is therefore conclusive both as to the admitting party and as to that party’s opponent. (4 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 454, p. 587.) Thus, if a factual allegation is treated as a judicial admission, then neither party may attempt to contradict it—the admitted fact is effectively conceded by both sides.

Here, the moving defendants sought to reserve the right to argue at arbitration that the allegation of mutual agency was false, and thus it was not conceded by both sides.

Although the Kessler defendants frame their argument using the term “judicial admission” and rely on case law concerning judicial admissions, their counsel confirmed at oral argument that they do not in fact wish to treat Barsegian‟s allegation of mutual agency as a judicial admission, because the Kessler defendants do wish to be able to contest the truth of that allegation, either in court or before an arbitrator. That is, the Kessler defendants wish to hold Barsegian to the mutual agency allegation only for purposes of the motion to compel arbitration, but, should they succeed in compelling arbitration on the basis of that allegation, they wish to retain the right to prove to the arbitrator that the allegation is false. That is not how judicial admissions operate.

You can read more here.

By CHARLES H. JUNG

Press Quotes About Analysis of Ninth Circuit’s Kilgore v. KeyBank, N.A. Case

In Arbitration, Injunctive Relief, Press Quotes, Public Claims on April 15, 2013 at 9:15 am
ProfWhiteboard_Injunctions

ProfWhiteboard_Injunctions (Photo credit: cali.org)

Abigail Rubenstein of Law360 published an article Friday quoting the blog author’s analysis of the Ninth Circuit’s recent en banc ruling in Kilgore v. KeyBank, N.A.  Kilgore v. Keybank, N.A., No. 09-16703, __ F.3d __ (9th Cir. Apr. 11, 2013) (en banc):

Employers who were hoping that the full court would adopt the original appellate panel in the case’s flat-out rejection of the Broughton-Cruz rule may be disappointed, but the narrower en banc decision will still likely prove useful to businesses trying to enforce their arbitration agreements in employment disputes, lawyers told Law360.

“The decision left open the question of the viability of the Broughton-Cruz rule, but the reasoning of the court at the end of the day might please the defense bar more than the plaintiffs bar because although the Ninth Circuit sidestepped the continued viability of the rule, what it did say was that to extent that an exception [to the FAA] for public injunctive relief exists, it is quite a narrow one,” Charles Jung of Nassiri & Jung LLP said.

And employers facing Private Attorney General Act claims, which plaintiffs often argue fit into that exception, can seize on the appeals court’s narrow construction to make the case that the claims should be sent to an arbitrator, employment defense lawyers said.

Ninth Circuit Avoids Broad Ruling, Leaving Question of Viability of Broughton-Cruz to Another Day

In Arbitration, Class Waiver, Concepcion, Public Claims on April 12, 2013 at 11:09 am
U.S. Court of Appeals for the Ninth Circuit

U.S. Court of Appeals for the Ninth Circuit (Photo credit: Wikipedia)

The Ninth Circuit’s en banc ruling yesterday in Kilgore v.Keybank, N.A. (you can read more here) was a decidedly restrained opinion.  The court could certainly have held, as many expected, that the Broughton-Cruz public injunction exception to the general rule that the “FAA requires state courts to honor arbitration agreements” does not stand in light of Concepcion, particularly in light of the Supreme Court’s reaction to state courts taking a narrow read of Concepcion.

But while some reports justifiably see Kilgore as a narrow victory for the plaintiff’s bar, the Ninth Circuit arguably took a narrow read of the public injunction exception.  The court held that the claim for injunctive relief fell outside Broughton-Cruz because the “requested prohibitions against reporting defaults on the Note and seeking enforcement of the Note plainly would benefit only the approximately 120 putative class members.”  Slip op. at 17 (emphasis supplied).

In Kilgore, defendant withdrew from the private school loan business, and accordingly the court concluded that the “injunctive relief sought thus, for all practical purposes, relates only to past harms suffered by the members of the limited putative class.”

The central premise of Broughton-Cruz is that “the judicial forum has significant institutional advantages over arbitration in administering a public injunctive remedy, which as a consequence will likely lead to the diminution or frustration of the public benefit if the remedy is entrusted to arbitrators.” Broughton, 988 P.2d at 78. That concern is absent here, where Defendants’ alleged statutory violations have, by Plaintiffs’ own admission, already ceased, where the class affected by the alleged practices is small, and where there is no real prospective benefit to the public at large from the relief sought.

This suggests an argument for defendants in class action cases where there is a mandatory arbitration agreement: where the company has stopped an alleged unlawful practice, and the proposed private attorney general action affects only the class members, then a defendant might argue that the Broughton-Cruz rule does not apply.  It’s worth noting that 120 putative class members is not an unusually small class in an employment case, and if the Ninth Circuit sees a class of that size as only a “limited putative class”, then it might arguably see many wage and hour cases as affecting only a limited portion of the public.

If this is a victory for the plaintiff’s bar, it is indeed a very narrow one.  And it highlights the importance of the California Supreme Court’s upcoming decision in Iskanian.

By CHARLES H. JUNG

Ninth Circuit Avoids Broad Ruling in Kilgore v. KeyBank

In Arbitration, Class Waiver, Concepcion, Public Claims, Unfair Competition Law on April 11, 2013 at 5:49 pm
Wright brothers flying over the Kohn plantatio...

Wright brothers flying over the Kohn plantation in Montgomery, Alabama, where they set up a flying school. Maxwell Air Force Base was later built on the site. (Photo credit: Wikipedia)

The Ninth Circuit took a narrow approach in a ruling which had been expected to  have implications for wage & hour class actions.  The en banc court today compelled arbitration in Kilgore v. Keybank, National Association, but declined to issue a broad holding vitiating the Broughton-Cruz rule.  Kilgore v. Keybank, National Association, No. 09-16703, __ F.3d __ (9th Cir. Apr. 11, 2013) (en banc).  The appeal involved a putative class action by former students of a failed flight-training school who seek broad injunctive relief against the bank that originated their student loans among others.  The en banc court held that the arbitration agreement was not unconscionable under California law and reversed and remanded with instructions to compel arbitration.

The court concluded that the injunctive relief claim at issue fell outside Broughton-Cruz’s “narrow exception to the rule that the FAA requires state courts to honor arbitration agreements.”

The central premise of Broughton-Cruz is that “the judicial forum has significant institutional advantages over arbitration in administering a public injunctive remedy, which as a consequence will likely lead to the diminution or frustration of the public benefit if the remedy is entrusted to arbitrators.” Broughton, 988 P.2d at 78. That concern is absent here, where Defendants’ alleged statutory violations have, by Plaintiffs’ own admission, already ceased, where the class affected by the alleged practices is small, and where there is no real prospective benefit to the public at large from the relief sought.

You can read more about today’s ruling here.

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