California Supreme Court Rejects Unconscionability Attack on Arbitration Agreement

In the latest of a series of decisions dealing with the enforceability of arbitration agreements, the California Supreme Court has rejected an attempt to invalidate an agreement based on its provision for applications to a court for preliminary injunctive relief while the arbitration is pending. The provision simply reiterated a right that is conferred by statute in the absence of such a provision.

Beginning with Armendariz v. Foundation Health Psychcare, 6 P. 3d 669 (Cal. 2000), the California Supreme Court has carefully policed the use of arbitration agreements imposed as a condition of employment. It has directed California courts to refuse enforcement of such agreements if they are procedurally and substantively unconscionable. Procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, substantive unconscionability on overly harsh or one-sided results. Since virtually all arbitration agreements in the employment context are procedurally unconscionable, the analysis usually focuses on substantive unconscionability. The Armendariz case held that arbitration agreements forced on employees as a condition of employment are not enforceable unless they assure neutrality of the arbitrator, the provision of adequate discovery, require a written decision that will permit a limited form of judicial review, limit costs to what an employee would face in a judicial forum, and make available all remedies that the employee could pursue in court. Since then the Court has:

• Invalidated a provision that allowed appeals to a second arbitrator of awards that exceeded $50,000. Little v. Auto Stiegler, Inc., 63 P.3d 979 (2003).
• Set aside an arbitrator's award that deprived an employee of a hearing on the merits of his unwaivable statutory employment claim based on a clear error of law. Pearson Dental Supplies, Inc. v. Superior Court, 229 P.3d 83 (2010).
• Invalidated an arbitration agreement that would have barred an employee from seeking relief in an administrative hearing before the Labor Commissioner. Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659, 121 Cal. Rptr. 3d 58, 247 P.3d 130 (2011). The Court later reversed itself after the U.S. Supreme Court directed it to reconsider. Sonic-Calabasas A, Inc. v. Moreno, 311 P.3d 184 (2013).
• Refused to enforce an arbitration agreement to the extent it would have required employees to submit PAGA claims to arbitration. Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348, 173 Cal. Rptr. 3d 289, 327 P.3d 129 (2014).

Its latest decision is Baltazar v. Forever 21, Inc., Case No. S208345 (Mar. 28, 2016). There, the employee had signed a take it or leave it arbitration agreement, which contained three provisions that she claimed were substantively unconscionable:

1. It allowed the parties to seek a temporary restraining order or preliminary injunctive relief in the superior court, which the employee argued the employer was more likely to take advantage of. That was not unconscionable, because it did no more than recite the procedural protections already available under Code of Civil Procedure section 1281.8(b).
2. It listed only employee claims as examples of the types of claims that were subject to arbitration. That was not unconscionable, because the agreement otherwise made clear that all employment claims were subject to arbitration.
3. It required that all necessary steps be taken to protect the employer's trade secrets and proprietary and confidential information from public disclosure. That was not unconscionable, because there was a legitimate commercial need for such protection, and the agreement did not preclude the employee from seeking similar protection for her own confidential information.

Management of PAGA Litigation after Iskanian

In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court ruled that claims to enforce civil penalties under the Private Attorneys General Act (PAGA), were not waivable, and refused to enforce a predispute agreement to arbitrate that purported to impose such a waiver. (Class action waivers must be enforced under AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).) In the wage of Iskanian, the trial courts have routinely severed and retained PAGA claims, while ordering non PAGA claims to arbitration.

In Williams v. Superior Court (Pinkerton), Case No. B261007 (Cal. Ct. App. June 9, 2015), the employee's complaint asserted a single representative PAGA claim. The trial court ordered the underlying dispute over whether there had been a Labor Code violation to arbitration. The Second District Court of Appeal reversed the order as contrary to Iskanian. "[W]e conclude that petitioner’s single cause of action under PAGA cannot be split into an arbitrable 'individual claim' and a nonarbitrable representative claim."

Hence, employees who are willing to forego any individual recovery and be content with a percentage of the civil penalties under PAGA may avoid arbitration.

Arbitration Update

The California Supreme Court continues to make law on enforcement of arbitration agreements. In Armendariz v. Foundation Health Psychcare, 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P. 3d 669 (2000), the Court ruled that an arbitration award on a claim under the Fair Employment and Housing Act (FEHA) is not enforceable unless the arbitrator issue a written arbitration decision that explains the essential findings and conclusions on which the award is based. The purpose of the requirement is to assure effective judicial review to ensure that the arbitrator has complied with the statutory requirements. The extend of such judicial review has not been clear.

In Pearson Dental Supplies, Inc. v. Superior Court, 48 Cal.4th 665 (2010), the Court affirmed a Court of Appeal decision vacating an award that deprived the employee plaintiff of a hearing on his FEHA claim by misinterpreting a relevant tolling statute, and then failing to explain in writing why the plaintiff would not benefit from the tolling statute.The Supreme Court explained that the challenged award had an employee subject to a mandatory arbitration agreement from obtaining a hearing on the merits of a claim, but cautioned that not all legal errors would necessarily be reviewable.

In the most recent case, Richey v. Autonation, Inc., Case No. S207536 (Jan. 29, 2015), the award in an FMLA/CFRA case denied relief to the employee based on application of an "honest belief" standard applied by some federal courts, but not yet adopted in California. Although the Court had the opportunity to determine whether that was an error, and whether such an error was grounds for vacating an arbitration award, it passed. Instead, the Court ruled that, even if there had been an error, it was harmless. The evidence that the employer had fired the employee for a knowing violation of company policy was overwhelming. Articulation of the correct standard for review must await another case.

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.

Private Attorney General and Class Action Waivers

A recent case alleging Labor Code violations by Ralphs Grocery Co. discusses the current state of the law regarding waivers of the right to pursue class actions and private attorney general claims. The arbitration policy at issue in Brown v. Ralphs Grocery Co., Case No. B222689 (2nd Dist. Ct. App. Jul. 12, 2011) provided for arbitration of all employment-related disputes. It also stated that there was no right for such disputes "to be heard or arbitrated on a class action basis, as a private attorney general, or on bases involving claims or disputes brought in a representative capacity on behalf of the general public, of other Ralphs employees (or any of them), or of other persons alleged to be similarly situated. . . . [T]here are no judge or jury trials and there are no class actions or Representative Actions permitted under this Arbitration Policy."

The California Supreme Court has frequently refused to enforce arbitration clauses that are invoked to interfere with rights for the benefit of individual citizens. See, e.g., Armendariz v. Foundation Health Psychcare, 24 Cal.4th 83 99 Cal.Rptr.2d 745, 6 P. 3d 669 (2000) (refusing to require arbitration of FEHA claims because arbitration procedure interfered with public interest). Just about as frequently, the United States Supreme Court has overturned such decisions for violating the Federal Arbitration Act. See Southland Corp. v. Keating, 465 U.S. 1 (1984) (California could not bar arbitration of claims under the Franchise Investment Law); 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). Most recently, in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Court overturned the Discover Bank rule, which had called class action waivers in consumer arbitration agreements into question.

In Brown, the Second District Court of Appeal enforced the class action waiver, but ruled that the attempted private attorney general waiver was invalid. The plaintiff had asserted a claim under the Private Attorney General Act of 2004, which allows actions to recover civil penalties brought by employees on his or her own behalf and on behalf of current or former employees. According to the Court of Appeal, AT&T Mobility did not apply because an employee brings a PAGA action as a proxy for the state.

In dissent, Justice Kriegler opined that AT&T Mobility required the court to uphold the entirety of the arbitration agreement.

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.

Employment Cases on US Supreme Court Docket

The 2008-09 term of the United States Supreme Court will bring decisions in the following cases that involve employment law issues. We will report on the decisions themselves when they are handed down.

Locke v. Karass, Case No. 07-610. Question Presented: "In Ellis v. Railway Clerks, this Court unanimously “determined that the [Railway Labor Act], as informed by the First Amendment, prohibits the use of dissenters’ [union] fees for extraunit litigation.” Lehnert v. Ferris Faculty Ass’n, 500 U.S. 507, 528 (1991) (opinion of Blackmun, J., citing Ellis, 466 U.S. 435, 453 (1984)). In Lehnert, a four-member plurality therefore held “that the Amendment proscribes such assessments in the public sector.” Id. Moreover, Justice Scalia’s separate opinion, concurring in part in the judgment announced by Justice Blackmun, reasoned that “there is good reason to treat [Ellis and the Court’s other statutory cases] as merely reflecting the constitutional rule.” Id. at 555. May a State, nonetheless, consistent with the First and Fourteenth Amendments, condition continued public employment on the payment of agency fees for purposes of financing a monopoly bargaining agent’s affiliates’ litigation outside of a nonunion employee’s bargaining unit? Oral Argument: 10/06/2008. Merits Briefs

A unanimous Court answered "yes" in a decision issued on January 21, 2009. A local may charge for its national's litigation expenses so long as (1) the subject matter of the national litigation bears an appropriate relation to collective bargaining and (2) the arrangement is reciprocal—that is, the local’s payment to the national affiliate is for "services that may ultimately inure to thebenefit of the members of the local union by virtue of their membership in the parent organization."

Crawford v. Metro. Gov't of Nashville & Davidson County, Case No. 06-1595. Question Presented: "Does the anti-retaliation provision of section 704(a) of Title VII of the 1964 Civil Rights Act protect a worker from being dismissed because she cooperated with her employer's internal investigation of sexual harassment? Oral Argument: 10/08/2008. Merits Briefs

The Court answered "yes" in a decision issued on January 26, 2009. Justices Alito and Thomas concurred, but wrote separately to emphasize that the Court was not adopting a broad definition of "oppose" that might encompass non-purposive conduct.

AT&T Corp. v. Hulteen, Case No. 07-543. Questions Presented: "Before the passage of the Pregnancy Discrimination Act of 1978 (PDA), it was lawful to award less service credit for pregnancy leaves than for other temporary disability leaves. Gilbert v. Gen. Elec. Co., 429 U.S. 125 (1976). Accordingly, the questions presented are: 1. Whether an employer engages in a current violation of Title VII when, in making post-PDA eligibility determinations for pension and other benefits, the employer fails to restore service credit that female employees lost when they took pregnancy leaves under lawful pre-PDA leave policies. 2. Whether the Ninth Circuit’s finding of a current violation of Title VII in such circumstances gives impermissible retroactive effect to the PDA. Oral Argument: 12/10/2008. Merits Briefs

14 Penn Plaza LLC v. Pyett, Case No. 07-581. Question Presented: " Is an arbitration clause contained in a collective bargaining agreement, freely negotiated by a union and an employer, which clearly and unmistakably waives the union members’ right to a judicial forum for their statutory discrimination claims, enforceable?" Oral Argument: 12/01/2008. Merits Briefs

Resources for Following the Court

United States Supreme Court (official site)
FindLaw US Supreme Court Center
LII Supreme Court Collection
A-Z Merit Briefs for Supreme Court (from ABA)