Court of Appeal: Incorporation of AAA Rules = Delegation to Arbitrator

In many employment arbitration agreements, the employer provides that the arbitration will be conducted under the employment dispute rules of the American Arbitration Association or AAA.  (The formal name of these rules is the National Rules for Resolution of Employment Disputes.)  Why?  These rules have been upheld as sufficiently benign to employee rights such that arbitration under those rules will be compelled.  And sometimes they're probably just included by default.

The Court of Appeal in Universal Protection Service LP v. Superior Court (opinion here) decided that the parties' arbitration agreement incorporating these rules meant that the arbitrator, rather than the court, had the power to decide whether class-wide arbitration was available.

UP employees sued the company based on wage-hour claims and termination-based claims in a purported class action. The employees sought to arbitrate the class action. UP sought to compel individual claims to arbitration. The trial court ordered the entire claim, class and all to arbitration and stayed the lawsuit, thereby leaving the decision on whether the class was arbitrable to the arbitrator.   UP sought relief from the Court of Appeal via writ of mandate.  UP wanted the appellate court to rule that only individual claims were arbitrable.

Here's what the arbitration clause said:

“I further expressly acknowledge and agree that, to the fullest extent allowed by law, any controversy, claim or dispute between me and the Company . . . relating to or arising out of my employment or the cessation of that employment will be submitted to final and binding arbitration before a neutral arbitrator . . . for determination in accordance with the American Arbitration Association’s [AAA] National Rules for the Resolution of Employment Disputes as the exclusive remedy for such controversy, claim or dispute.”

Given that incorporation of AAA rules, the Court of Appeal noted that the AAA employment dispute rules authorize the arbitrator to rule on the scope of the arbitration agreement:

Paragraph No. 6(a) of those rules provides: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement.”

The Court also noted that the AAA rules include supplemental rules governing purported classwide claims.

“Upon appointment, the arbitrator shall determine as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class (the ‘Clause Construction Award’). The arbitrator shall stay all proceedings following the issuance of the Clause Construction Award for a period of at least 30 days to permit any party to move a court of competent jurisdiction to confirm or to vacate the Clause Construction Award.”

Having found these provisions were included in the parties' agreement to arbitrate, the Court decided that the Arbitrator had the power to rule on whether the arbitration would include class-based claims.

Employers of course may mandate individual employees to arbitrate their individual claims (excluding PAGA claims).  Employers also may exclude class-based claims from arbitration.   Employers may do so expressly, which is legal.

The parties to an arbitration agreement may agree to have courts rule on arbitrability of class claims or may agree on having an arbitrator do so.  This decision simply says that incorporating the AAA employment rules means that the parties elected the arbitrator as the decider of this critical issue.  Not that there's anything wrong with that.

NLRB Doubles Down: Again Holds Waivers of Class Actions in Arbitration Agreements Illegal

It's election time. So here's a short political rant:  The National Labor Relations Board is one of the administrative agencies that prove the cliche: elections have consequences.  (The President nominates the Board's members, each of whom is confirmed by the Senate to a five-year term.)  The President packed the Board with "recess appointments" after the Senate would not confirm his nominees. The Supreme Court voided those recess appointments. And then the Senate confirmed a slate of 5 nominees in a political compromise over filibusters and such.  Because advice and consent on the merits. End rant.

Whether you agree or disagree with the administration's politics, it's no secret that the NLRB has set about expanding the reach of the National Labor Relations Act, into non-union settings (like social media policies; handbook policies against insubordination, disloyalty, etc.; confidentiality agreements; and more).  It is not an exaggeration to say that non-union employers face more scrutiny by the National Labor Relations Board than they ever have in the past.

The Board also has weighed in on private agreements to arbitrate. The Board made news a couple of years ago when it held that an employer's requiring employees to waive the right to pursue class relief in mandatory arbitration agreements violated the National Labor Relations Act.  That was the "DR Horton" decision here.  The essence of DR Horton is that class action waivers violate the National Labor Relations Act by requiring employees to give up the right to act in a group (class) concerning wages, hours, or other terms and conditions of employment.

But the Fifth Circuit Court of Appeals refused to enforce DR Horton, meaning it could not be enforced against DR Horton in court, or against other employers as precedent.  Other courts also declined to follow DR Horton in part because it has nothing to do with the National Labor Relations Act, and in part because the U.S. Supreme Court has found class waivers to be fine under the Federal Arbitration Act.  Even the California courts of appeal have refused to hold class waivers unenforceable under DR Horton.

So, given that courts, which interpret the law that Congress enacts, universally rejected DR Horton, the NLRB's decision is probably relegated to the dust-bin of blips in the employment law radar, never to be heard from again, right?

Political rant redux: Nah, this is the 2014 National Labor Relations Board. They are not constrained by silly federal and state judges and stuff!  Ok, I'm done.

The Board's new decision, Murphy Oil (opinion here) gives new life to DR Horton.  Based primarily on encouraging law review articles written by law school professors, 3 of 5 members decided to re-affirm DR Horton and declare once again that class action waivers in arbitration agreements violate the NLRA, and will maintain this position until the U.S. Supreme Court says otherwise.  Given it will take the federal courts and Supreme Court a few years to take up the issue, this will be the Board's position for a while.

So, in this new case,  Sheila Hobson worked for a Murphy Oil facility and signed an arbitration agreement containing this language:

INDIVIDUAL AND COMPANY UNDERSTAND THAT, ABSENT THIS AGREEMENT, THEY WOULD HAVE THE RIGHT TO SUE EACH OTHER IN COURT, TO INITIATE OR BE A PARTY TO A GROUP OR CLASS ACTION CLAIM, AND THE RIGHT TO A JURY TRIAL, BUT, BY EXECUTING THIS AGREEMENT, BOTH PARTIES GIVE UP THOSE RIGHTS AND AGREE TO HAVE ALL EMPLOYMENT DISPUTES BETWEEN THEM RESOLVED BY MANDATORY,
FINAL AND BINDING ARBITRATION. ANY EMPLOYMENT RELATIONSHIP BETWEEN INDIVIDUAL AND COMPANY IS TERMINABLE AT-WILL, AND NO OTHER INFERENCE IS TO BE DRAWN FROM THIS AGREEMENT.

Hobson later sued Murphy under the Fair Labor Standards Act, asserting a collective action along with three other employees.  The federal district court ordered Hobson to individual arbitration.   But Hobson filed a complaint (charge) with the NLRB and the NLRB's General Counsel charged Murphy with an unfair labor practice (forcing Hobson to give up the right to collectively pursue her wage claims).

The NLRB decided 3-2 that Murphy violated the NLRA, that DR Horton was correctly decided and valid, that the circuit courts that rejected it were wrong, and that the 2 dissenting Board members were also wrong.

What is the upshot?

1. Class action waivers in arbitration agreements remain enforceable in court.

2. Employers maintaining class arbitration waivers may expect unfair labor practice charges before the NLRB, including non-union employers.

3.  NLRB orders are not enforceable by themselves, in that the NLRB has to go to a federal court of appeals to obtain a judgment. So, unless a circuit court of appeals enforces the Board's order, the legal effect of an unfair labor practice finding is limited to whatever sanctions the Administration can levy on employers who are federal contractors found to violate the NLRA, and to whatever retribution the NLRB may bring against the employer for refusing to comply with its unenforceable order.

4. If a circuit court does choose to enforce the order, it could create a circuit split, providing some incentive for the U.S. Supreme Court to take up the case.

Be careful out there.

CA Supreme Court: Class Action Waivers in Arbitration Are Valid; Overrules Gentry; But...

... not all good news for employers or arbitration fans.

The California Supreme Court ruled that the Federal Arbitration Act preempts its previous decision in Gentry v. Superior Court (2007) 42 Cal.4th 443, which invalidated class action waivers in most wage-hour matters.

Here are the facts per the Court:

Plaintiff Arshavir Iskanian worked as a driver for defendant CLS Transportation Los Angeles, LLC (CLS) from March 2004 to August 2005. In December 2004, Iskanian signed a “Proprietary Information and Arbitration Policy/Agreement” providing that “any and all claims” arising out of his employment were to be submitted to binding arbitration before a neutral arbitrator. The arbitration agreement provided for reasonable discovery, a written award, and judicial review of the award; costs unique to arbitration, such as the arbitrator’s fee, would be paid by CLS. The arbitration agreement also contained a class and representative action 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.”

The Supreme Court previously held in Gentry, cited above, that most of these class action waivers would be void and contrary to public policy. As a result, courts invalidated many class action waivers, despite the U.S. Supreme Court's ruling in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __. In Concepcion, the U.S. Supremes held that the Federal Arbitration Act preempts state law rules that invalidate class action waivers.

So, in this case, Iskanian v. CLS Transportation Los Angeles, opinion here, the Court recognized that Gentry could not survive Concepcion.

The high court in Concepcion made clear that even if a state law rule against consumer class waivers were limited to “class proceedings [that] are necessary to prosecute small-dollar claims that might otherwise slip through the legal system,” it would still be preempted because states cannot require a procedure that interferes with fundamental attributes of arbitration “even if it is desirable for unrelated reasons.”

The California Supreme Court also rejected Iskanian's argument that class action waivers are illegal under the National Labor Relations Act.  The National Labor Relations Board so held in D.R. Horton Inc. & Cuda (2012) 357 NLRB No. 184.  But the courts have not agreed. In fact, the Court of Appeals for the Fifth Circuit refused to enforce the decision.  The Supreme Court joined the other courts in rejecting the NLRB's rule:

We agree with the Fifth Circuit that, in light of Concepcion, the Board’s rule is not covered by the FAA’s savings clause. Concepcion makes clear that even if a rule against class waivers applies equally to arbitration and nonarbitration agreements, it nonetheless interferes with fundamental attributes of arbitration and, for that reason, disfavors arbitration in practice. (Concepcion, supra, 563 U.S. at pp. __–__ [131 S.Ct. at pp. 1750–1752].) Thus, if the Board’s rule is not precluded by the FAA, it must be because the NLRA conflicts with and takes precedence over the FAA with respect to the enforceability of class action waivers in employment arbitration agreements. As the Fifth Circuit explained, neither the NLRA’s text nor its legislative history contains a congressional command prohibiting such waivers. (Horton II, supra, 737 F.3d at pp. 360–361.)

The news was not all good for arbitration, however.

The Court maintained its rule in Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109 (Sonic II)," such that courts may find arbitration agreements unconscionable if they do not provide protections similar to the wage claim statute.   That means the court is leaving open the door to invalidation of arbitration agreements under state law for a variety of reasons that courts have come up with over the years.  Only the U.S. Supreme Court will be able to fix this ongoing situation, if the Court is so inclined.

The Court also held that employers may not require waiver of "representative" actions in arbitration.  Therefore, employees who cannot maintain class actions in arbitration can pursue claims under the Private Attorney General Act, or PAGA.

What is a PAGA representative action?  The Court explained, quoting from a prior decision:

An employee plaintiff suing . . . under the [PAGA] does so as the proxy or agent of the state’s labor law enforcement agencies. . . . In a lawsuit brought under the act, the employee plaintiff represents the same legal right and interest as state labor law enforcement agencies — namely, recovery of civil penalties that otherwise would have been assessed and collected by the Labor Workforce Development Agency. [Citations.] . . . . Because collateral estoppel applies not only against a party to the prior action in which the issue was determined, but also against those for whom the party acted as an agent or proxy [citations], a judgment in an employee’s action under the act binds not only that employee but also the state labor law enforcement agencies.

“Because an aggrieved employee’s action under the [PAGA] functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. The act authorizes a representative action only for the purpose of seeking statutory penalties for Labor Code violations (Lab. Code, § 2699, subds. (a), (g)), and an action to recover civil penalties ‘is fundamentally a law enforcement action designed to protect the

Also, the plaintiff keeps just 25% of the penalties recovered, the rest go to the state.

Iskanian's arbitration agreement waived "representative" claims as well as class claims. Therefore, because he had to arbitrate all claims, and could not arbitrate representative claims at all, the question was whether the agreement was enforceable.

The Supreme Court said, "no."

a prohibition of representative claims frustrates the PAGA’s objectives. As one Court of Appeal has observed: “[A]ssuming it is authorized, a single-claimant arbitration under the PAGA for individual penalties will not result in the penalties contemplated under the PAGA to punish and deter employer practices that violate the rights of numerous employees under the Labor Code. That plaintiff and other employees might be able to bring individual claims for Labor Code violations in separate arbitrations does not serve the purpose of the PAGA, even if an individual claim has collateral estoppel effects. (Arias, supra, 46 Cal.4th at pp. 985–987.) Other employees would still have to assert their claims in individual proceedings.” (Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489, 502, fn. omitted.)

The Court then addressed whether the Federal Arbitration Act would require the courts to allow waiver of representative claims.  Again, the California Supreme Court said "no."

We conclude that the rule against PAGA waivers does not frustrate the FAA’s objectives because, as explained below, the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency.

* * *

Simply put, a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents — either the Labor and Workforce Development Agency or aggrieved employees — that the employer has violated the Labor Code. Through his PAGA claim, Iskanian is seeking to recover civil penalties, 75 percent of which will go to the state’s coffers.

So, where does this leave us with respect to arbitration:

1.  Class action waivers are enforceable. Employers may implement valid arbitration agreements with class action waivers and foreclose employees from bringing class actions in court or arbitration.  That will change only if the U.S. Supreme Court overrules itself, or if Congress amends the FAA.  Given the ease with which courts are granting class certification, a properly managed and implemented arbitration program may be a wise decision for employers exposed to wage hour class actions.

2. Arbitration agreements cannot validly waive "representative" actions. Therefore employees proceeding under PAGA may pursue those Labor Code penalties  authorized by PAGA, whether in arbitration or court.  However, employees cannot use PAGA to bring claims for, damages, such as meal and break premiums, overtime,  etc.  Only penalties.  This may change if the U.S. Supreme Court takes up this case.

3.  Employers still must draft arbitration agreements to comply with the courts' notions of what is "unconscionable."  This case does nothing to affect the unconscionabilty jurisprudence that the California courts have developed. That means arbitration will be remain expensive, and employers will not be able to use arbitration agreements to unfairly limit claims, statutes of limitations, or remedies. This will not change unless the U.S. Supreme Court decides that the FAA overruled the California courts' unconscionability jurisprudence.

4.  The California Supreme Court's interpretation of the FAA and the NLRA provide a means for the U.S. Supreme Court to review this case, because of the federal laws involved.  Let's see if the high Court takes the opportunity to clarify when state law "unconscionability" or "public policy" doctrine  conflicts with the FAA.

Supreme Court Upholds Express Class Action Waivers Regardless of Individual Claim's Value

Italian Colors restaurant challenged American Express's fees as violating anti-trust laws by filing a class action. But Colors signed an arbitration clause excluding class claims.   Colors argued that the cost of proving its case would be multiples of whatever it might recover.  Therefore, Colors contended, the class waiver impermissibly interfered with its ability to sue under federal law.  The Second Circuit court of appeals agreed with this premise, citing what is known as the "effective vindication" rule.  Under that rule, courts have held that arbitration agreements are invalid under the Federal Arbitration Act unless they permit "effective vindication" of federal statutory rights.

The Supreme Court, 5-3 with Justice Sotomayor recused, held that Colors is bound by its agreement to arbitrate, regardless of whether it is economically feasible to arbitrate its individual claim.  The majority's point is that Congress did not say in the anti-trust laws that a litigant must be able to bring a class action, or that litigation must be economically feasible.  Nothing in the arbitration agreement precluded or limited Colors' rights under the anti-trust law.  Further, anti-trust lawsuits and the Sherman Act predated the class action device.

The Court wrote:

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.

The dissent (penned by Justice Kagan, with Ginsburg and Breyer concurring) essentially wrote that when the cost of bringing a claim under a federal statute significantly outweighs the potential recovery, then a class action right must be preserved as well.  The dissent stated that the majority opinion all but doomed Colors' case by rendering it prohibitively expensive to arbitrate.  Justice Kagan characterized the majority's response to that contention as, "Too darn bad."

This decision addresses class action waivers under federal law, not state law.  However, the majority does not appear to consider it a big difference whether the issue is if the FAA preempts state law or conflicts with federal law:

In dismissing AT&T Mobility [v. Concepcion] as a case involving pre-emption and not the effective-vindication exception, the dissent ignores what that case established—that the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low value claims. The latter interest, we said, is “unrelated” to the FAA. 563 U. S., at ___ (slip op., at 17). Accordingly, the FAA does, contrary to the dissent’s assertion, see post, at 5, favor the absence of litigation when that is the consequence of a class-action waiver, since its “ ‘principal purpose’ ” is the enforcement of arbitration agreements according to their terms.

This last point undermines the California Supreme Court's focus on "low value" claims (like wage-hour matters) as a factor in determining if a class action waiver is valid.   We are waiting to see what the California high court plans to do with its decision in Gentry v. Superior Court, which the court is reconsidering.

This decision is American Express Co. v. Italian Colors Rest.  and the opinion is here.