Class Action Waivers

Disputes over the enforceability of class action waivers are percolating in several forums. Most recently, the National Labor Relations Board has rejected federal courts of appeals rulings that upheld class action waivers against attacks that they violate the National Labor Relations Act. In Murphy Oil USA, Inc., Case No. 10-CA-038804 (Oct. 28, 2014), the Board ruled that extracting a class action waiver as a condition of employment and then enforcing it in a judicial forum violates employees' right under section 7 of the NLRA to engage in concerted activities. Because section 7 applies regardless of whether the workplace is unionized or not, all employers risk an enforcement action by the Board if they obtain class action waivers from their employees.

As the Murphy Oil opinion itself recognizes, judicial reception to the Board's position has been hostile. It originally announced that position in the D.R. Horton case. The Fifth Circuit declined to enforce that decision in D.R. Horton, Inc. v. NLRB, 737 F. 3d 344 (5th Cir. 2013). Two other circuits have refused enforcement of Board rulings based on the Board's rejection of class action waivers. See Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013) and  Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. 2013).

In the mean time, as mentioned in a previous post, California courts are dealing with the enforcement of arbitration agreements that do not include class claims. In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court ruled that an arbitration agreement with a class action waiver was enforceable, but that PAGA claims covered by the agreement could not be waived. A petition for certiorari is pending in the U.S. Supreme Court. There is a split in the courts of appeal about who decides whether an arbitration clause provides for arbitration of class claims. The Second District Court of Appeal in Los Angeles has ruled that the question is for the arbitrator. Sandquist v. Lebo Auto., Inc., 228 Cal. App. 4th 65 (2014). Division Three of the Fourth District Court of Appeal in Santa Ana has ruled that it is for the court. Network Capital Funding Corp. v. Papke, 2014 Cal. App. LEXIS 907(Cal. App. 4th Dist. Oct. 9, 2014)

Can California ban arbitration?

California and the U.S. Supreme Court have been engaged in a vigorous back and forth regarding arbitration for many years. In Southland Corp. v. Keating, 465 U.S. 1 (1984), the Supreme Court overturned a ban on arbitration imposed by the California Franchise Investment Law, because it violated the Federal Arbitration Act. That Act provides: "A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, 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. section 2.

The ensuing years have seen the Supreme Court rebuff various attempts to get around the Act's requirement that courts must enforce arbitration agreements. Perry v. Thomas, 482 U.S. 483 (1987) (California could not refuse to enforce arbitration of wage disputes); Preston v. Ferrer, 552 U.S. 346 (2008) (California Labor Commissioner's authority could not supplant that of the arbitrator); AT&T Mobility LL C v. Concepcion, 563 US 321 (2011) (California cannot refuse to enforce arbitration agreements that bar arbitration of class actions).

Two recent developments, one from the California Supreme Court and one from the California Legislature promise to keep the conflict alive:

In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court refused to enforce an arbitration clause that required the claimant to waive representative claims under the Private Attorneys General Act of 2004, because enforcement would violate public policy. CLS filed a petition for certiorari with the Supreme Court on September 22, 2014.

On September 30, 2014, Governor Brown signed Assembly Bill 2617, which bars enforcement of arbitration agreements that are extracted as a condition of entering into a contract for goods or services, to the extent that such an agreement purports to include claims based on the right to be free from any violence, or intimidation by threat of violence. It seems unlikely that the statute will survive a challenge under the Federal Arbitration Act.

Arbitration Agreement May Not Preclude PAGA Representative Actions

The Labor Code Private Attorneys General Act of 2004 (Labor Code sections 2698 - 2699.5) (PAGA) allows a aggrieved employee to recover civil penalties for violations of the California Labor Code on behalf of himself or herself and other employees. 75 percent of the amount recovered goes to the State and the balance to the aggrieved employees. The Federal Arbitration Act requires all courts in the United States to enforce arbitration agreements, "save upon such grounds as exist at law or in equity for the revocation of any contract." In AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the U.S. Supreme Court rejected a California Supreme Court ruling that class waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud. (See Discover Bank v. Superior Court, 36 Cal.4th 148 (2005).) The ruling stood as an obstacle to the accomplishment of the FAA's objectives.

The effect of the Concepcion case on class action waivers in the employment context is unsettled. The California Supreme Court has granted review in several cases that raise that issue. The lead case is Iskanian v. CLS Transportation of Los Angeles. Others include Franco v. Arakelian Enterprises and Flores v. West Covina Auto Group.

In Brown v. Superior Court, Case No. H037271 (Jun. 4, 2013), the Sixth District Court of Appeal has ruled that, when applied to the PAGA, an arbitration agreement that purports to waive the right to take representative action is unenforceable because it wholly precludes the exercise of this unwaivable statutory right. Concepcion does not require a different result, because a PAGA claim is asserted on behalf of the State and does not belong to the individual employee.

Arbitration Of Unpaid Wage Claims

Many employers prefer arbitration to lawsuits and administrative hearings. Although the law permits employers to require arbitration of employment disputes, California courts have imposed some restrictions. See, for example, Armendariz v. Foundation Health Psychcare Services, Inc., 4 Cal.4th 83, 6 P.3d 669, 99 Cal.Rptr.2d 745 (2000) (requiring an arbitration agreement to include certain procedural protections for employment claims under anti-discrimination laws).

In Sonic-Calabasas, Inc. v. Moreno, Case No. S174475 (Cal. Sup. Ct. Feb. 24, 2011), the California Supreme Court delineated the role of arbitration in unpaid wage claims filed with the California Labor Commissioner. The California Labor Code gives employees with unpaid wage claims a choice -- they may go directly to court with an ordinary civil action, or they may seek administrative relief by filing a wage claim with the Labor Commissioner (a process called a "Berman" hearing). In a Berman hearing, the Labor Commissioner's staff assists the employee in putting on the wage case. To obtain de novo review in court (where the Labor Commissioner may represent the employee), the employer must post a bond for the full amount of any award. If it loses the appeal, it must pay the employee's attorney fees. If the employer wins its appeal, it can not recover its own attorney fees.

The Sonic-Calabasas employer argued that its arbitration agreement with its employees waived the Berman hearing process, but the Supreme Court ruled that such a waiver was unconscionable and against public policy. However, the employer may invoke the arbitration agreement to have its appeal from any award following a Berman hearing determined by an arbitrator. In light of Armendariz, the employee would presumably retain the procedural advantages of the bond requirement and the fee-shifting provision in arbitration.

If you are interested in adopting arbitration procedures for your employees, the American Arbitration Association provides rules and other materials for prompt and effective resolution of workplace disputes through arbitration.

California Supreme Court Alters Standard for Review of Employment Arbitration Awards

The California Supreme Court has ruled that trial courts may review the legal correctness of arbitration decisions involving employment claims based on statutory rights. This marks another swing in the pendulum marking judicial attitudes toward arbitration.

Until the enactment of the Federal Arbitration Act in 1925 American courts were hostile to the ouster of judicial jurisdiction through the use of arbitration agreements -- an attitude imported from English common law. The FAA requires American courts generally to enforce arbitration agreements and arbitration awards.

Over the ensuing years, American courts gave broad deference to arbitration proceedings. In California, that deference reached its zenith in Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992), where the California Supreme Court, applying the California arbitration statute, ruled that the merits of an arbitration award were not subject to judicial review, except on the grounds that (a) the award was procured by corruption, fraud or other undue means, (b) corruption in any of the arbitrators, (c) the rights of a party were substantially prejudiced by misconduct of the arbitrator, (d) the arbitrators exceeded their powers, or (e) the rights of a party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing. The Moncharsh Court also made clear that arbitrators do not exceed their powers by making errors of law.

With the California Supreme Court's decision in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000), the pendulum began swinging back toward judicial skepticism toward arbitration. In that case, the Court ruled that employees' statutory claims against their employers could the subject of arbitration agreements, so long as those agreements meant certain procedural standards, including the preparation of a written decision by the arbitrator.

On April 26, 2010, the pendulum swung further in the same direction with the Supreme Court's decision in Pearson Dental Supplies, Inc. v. Superior Court, Case No. S167169 (Apr. 26, 2010). In that case, an arbitrator ruled that an employee's age discrimination claim was barred by his failure to file it within the year permitted under the arbitration agreement. In doing so, he made a clear error of law by not applying the tolling provision of California Code of Civil Procedure section 1281.12, which provides that any limitations period established by an arbitration agreement is tolled by the filing of a civil action. The Court determined that this error exceeded the arbitrator's powers, because it impermissibly prevented the employee from pursuing his statutory rights under the Fair Employment and Housing Act.