Arbitration Class Action Waivers - Trouble Brewing?

There are pros and cons associated with mandatory arbitration agreements.  Yes, everybody knows that.  One of the biggest "pros" is that an employer can insist that employees arbitrate only individual claims, not class claims.  Or can it?  That's what may be under re-consideration...

The U.S. Supreme Court supposedly settled this issue some years ago in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 333, 131 S. Ct. 1740, 1742 (2011).  There, the Court, in a nutshell, held:

the overarching purpose of the FAA, evident in the text of §§ 2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.

The Supreme Court in Concepcion expressly invalidated a line of California precedent, in which the California courts had held that class action waivers in arbitration agreements were unconscionable and void against public policy.

The California Supreme Court recognized Concepcion's rule in its landmark Iskanian ruling:

Concepcion held that the FAA does prevent states from mandating or promoting procedures incompatible with arbitration. The Gentry rule runs afoul of this latter principle. We thus conclude in light of Concepcion that the FAA preempts the Gentry rule.

Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348, 366, 173 Cal. Rptr. 3d 289, 299, 327 P.3d 129, 137 (2014)

Why are we walking down memory lane?  Hang in there...

Because the National Labor Relations Board waded into this issue and decided in a case called D.R. Horton, 357 N.L.R.B. 2277 (2012), that class action waivers are unlawful under the National Labor Relations Act, even if the Federal Arbitration Act preempts state laws prohibiting them.  The Federal Arbitration Act, a federal law, does not preempt the National Labor Relations Act, a federal law.  The NLRB's rationale is that a class action is a form of "protected concerted activity" and that requiring employees to waive the right to sue as a class is an unlawful waiver.  

The Court of Appeals for the Fifth Circuit disagreed with the Board and did not enforce its opinion in D.R. Horton. That means the decision was not binding and could not be used as precedent.  The California Supreme Court also rejected the Board's rationale in Iskanian: 

We thus conclude, in light of the FAA's “‘liberal federal policy favoring arbitration’” (Concepcion, supra, 563 U.S. at p.___ [131 S. Ct. at p. 1745]), that sections 7 and 8 of the NLRA do not represent “ ‘a contrary congressional command’ ” overriding the FAA's mandate (CompuCredit Corp. v. Greenwood, supra, 565 U.S. at p. ___ [132 S. Ct. at p. 669]). This conclusion is consistent with the judgment of all the federal circuit courts and most of the federal district courts that have considered the issue.

So, the NLRB thing was a big yawn, and no one cares because everybody is non-union, right?  Well, no. The NLRB's rules apply to non-union employers too, but D.R. Horton wasn't getting a lot of play.  Until now.

The Seventh Circuit has just come down in favor of the NLRB's position, in a case involving a non-union employer's motion to compel arbitration in federal court.  In Lewis v. Epic Sys. Corp., No. 15-2997, 2016 U.S. App. LEXIS 9638, at *1 (7th Cir. May 26, 2016), the court of appeals refused to enforce Epic Systems's arbitration agreement because it contained a class action waiver.  

The court held that the waiver violated the National Labor Relations Act:

Epic's clause runs straight into the teeth of Section 7. The provision prohibits any collective, representative, [12] or class legal proceeding. Section 7 rovides that "[e]mployees 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. A collective, representative, or class legal proceeding is just such a "concerted activit[y]." See Eastex, 437 U.S. at 566; Brady, 644 F.3d at 673; D. R. Horton, 357 N.L.R.B. 2277, at 2278. Under Section 8, any employer action that "interfere[s] with, restrain[s], or coerce[s] employees in the exercise of the rights guaranteed in [Section 7]" constitutes an "unfair labor practice." 29 U.S.C. § 158(a)(1). Contracts that stipulate away employees' Section 7 rights or otherwise require actions unlawful under the NRLA are unenforceable.

Lewis v. Epic Sys. Corp., No. 15-2997, 2016 U.S. App. LEXIS 9638, at *11-12 (7th Cir. May 26, 2016)

The Seventh Circuit's decision sets up a circuit split and a chance for the U.S. Supreme Court to consider whether class action waivers violate the NLRA or not.  The Seventh Circuit's decision also gives the NLRB the impetus to bring unfair labor practice charges against employers that maintain class action waivers in their arbitration agreements, which could result in invalidation of those agreements down the road. 

So, employers with class action waivers, be aware that challenges to these agreements may come as a result of the NLRB's position in D.R. Horton, especially given the Seventh Circuit's recent endorsement.  We will have to see if the Seventh Circuit's decision is taken up for review by the U.S. Supreme Court.   The court already decided not to hear it en banc.

U.S. Supremes Enforce Arbitration Agreement, Reversing California Appellate Court

The U.S. Supreme Court in Direct TV Inc. v. Imburgia (opinion here) took on the California Court of Appeal in a test of the Federal Arbitration Act's preemptive force. Guess who won?

This case involves Direct TV's attempt to include a class-action waiver in an arbitration agreement as part of its service contract with customers.  Before the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011), ruled that such waivers were valid under the Federal Arbitration Act, state courts (like California's) could invalidate class actions waivers as "unconscionable" or invalid against public policy. See Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).

So, Direct TV inserted a provision in its arbitration agreement that hedged against the possibility of invalidation by a state court, as explained by the Supreme Court in its opinion:

if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable.” Id., at 129. Section 10 of the contract states that §9, the arbitration provision, “shall be governed by the Federal Arbitration Act.”

This way, if California held that a class waiver is invalid, the whole case (class action and all) would be heard in court. 

Then, of course, the U.S. Supreme Court decided a case that preempted California law invalidating class-action waivers.  Even the California Supreme Court had to agree that if the Federal Arbitration Act applies, class action waivers in arbitration agreements are OK.  Therefore, one might say, the "law of the state" about class-waivers was gone.  What happened to this clause then? Well that's what this case is about.

The Court of Appeal interpreted the above language to say that the "state law" would continue to apply without regard to federal preemption.  That is, the "law of your state" would continue to prohibit class action waivers under this agreement, despite the preemption of the law by the Supreme Court.  And, despite the arbitration agreement's specific provision that the Federal Arbitration Act applies. 

6-3, the Supreme Court rejected the Court of Appeal's decision.  The Court decided that for the Court of Appeal to be correct, the term "law of your state" had to include "invalid" state law.  The Court then decided that the Court of Appeal would never have interpreted the term "law of your state" to include "invalid" state law unless this contract were an arbitration agreement. Therefore, because the Court of Appeal disfavored arbitration agreements, its decision violated the Federal Arbitration Act. 

nothing in the Court of Appeal’s reasoning suggests that a California court would reach the same interpretation of “law of your state” in any context other than arbitration. The Court of Appeal did not explain why parties might generally intend the words “law of your state” to encompass “invalid law of your state.” To the contrary, the contract refers to “state law” that makes the waiver of class arbitration “unenforceable,” while an in- valid state law would not make a contractual provision unenforceable. Assuming—as we must—that the court’s reasoning is a correct statement as to the meaning of “law of your state” in this arbitration provision, we can find nothing in that opinion (nor in any other California case) suggesting that California would generally interpret words such as “law of your state” to include state laws held invalid because they conflict with, say, federal labor statutes, federal pension statutes, federal antidiscrimination laws, the Equal Protection Clause, or the like. 

And as for disfavoring arbitration:

The view that state law retains independent force even after it has been authoritatively invalidated by this Court is one courts are unlikely to accept as a general matter and to apply in other contexts.

Justice Thomas believes the Federal Arbitration Act does not preempt any case brought in state court and would have affirmed the court of appeal. So he dissented on that special ground. 

Justices Ginsburg (writing) joined by Justice Sotomayor dissented on the merits, arguing that  Direct TV should be held to its original intent: to enforce the agreement only if state law (without regard to federal preemption) would allow the class waiver. The agreement was written before the Supreme Court ruled class action waivers were allowed and state laws to the contrary were preempted; therefore, the agreement's intent was not to include federal law in the mix.  

So, another anti-arbitration case goes by the wayside. But California's anti-arbitration case law remains on the books and strong because Armendariz and its progeny are still in force.  Therefore, it remains important to draft arbitration agreements in employment settings carefully. 

Court of Appeal: Arbitrator Can Decide Unconscionability

Here's a case that could favor employment arbitration in California.  If it stays on the books.  The Court of Appeal held that an arbitration agreement lawfully delegated to the arbitrator the responsibility to determine if the arbitration agreement was enforceable.  That is, the arbitrator, not the court, would decide if the agreement is unconscionable.

In a nutshell, as stated by the Court:

Several years after she was hired, Lourdes Tiri signed an agreement with her employer, Lucky Chances, Inc., requiring disputes between them to be resolved by arbitration. In one of the provisions, the parties agreed to delegate questions about the enforceability of the agreement to the arbitrator, instead of a court. Tiri was subsequently fired, and she filed a complaint in superior court for wrongful discharge. Lucky Chances petitioned to compel arbitration, but the trial court denied the petition on the basis that the arbitration agreement was unconscionable and therefore unenforceable.

Lucky Chances appeals the court’s order denying arbitration. We hold that the trial court lacked the authority to rule on the enforceability of the agreement because the parties’ delegation of this authority to the arbitrator was clear and is not revocable under state law. Accordingly, we reverse.

What-what-what?  Read on.

The arbitration agreement contained this language:

The agreement also includes an explicit provision that delegates to the arbitrator issues regarding the agreement’s enforceability: “The Arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.” 

As the court noted, that is a delegation clause, which grants the arbitrator the jurisdiction to determine  whether the arbitration agreement is enforceable.  In the absence of that sort of clause, a court determines whether there is a valid agreement, including whether the agreement is "unconscionable."
As you know if you're reading this, in California, there is a lot of litigation in court over that issue.

Here's why the delegation clause is important. The trial court denied the employer's motion to compel arbitration?  Why?  1) the agreement was "take it or leave it," i.e., procedurally unconscionable and 2) the employer did not attach the AAA arbitration rules, even though it cited the website where they must be found.  Those two facts rendered the agreement "unconscionable," a word that has been stretched into meaninglessness.  It used to mean something like "so one-sided as to shock the judicial consciousness," but now it simply means "not exactly perfect."

The court of appeal made some important rulings. First, the court recognized its decision would be the same under California's or the federal arbitration acts.  Second, the court explained that the court may consider challenges to the delegation clause itself, but not to the enforceability of the agreement to arbitrate as a whole.

Third, the court explained that a delegation clause is enforceable if (1) it is clear and unmistakable (2) if the clause itself is not void because of some defense applicable to any contract (fraud, duress, unconscionability).

The court found the language above was clear and unmistakable.  The employee argued that the clause was unconscionable.  The court of appeal found it was procedurally unconscionable (because it was "take it or leave it.").  But the court also found no reason that a delegation clause automatically is substantively unconscionable.  And there was nothing about this delegation clause that rendered it one-sided or non-mutual. Therefore, it was not unconscionable as a whole.

Of course, the arbitrator is free to rule on whether the agreement as a whole is unconscionable. So, there may still be litigation over such agreements. But they will be in arbitration.  If this ruling stands, it will certainly make arbitration agreements easier to enforce without court litigation.

This case is Tiri v. Lucky Chances, Inc. and the opinion is here.

Ninth Circuit Issues Two More Arbitration Rulings

The Ninth Circuit issued two arbitration decisions a day apart. Both opinions were written by Circuit Judge Richard Clifton.  But the court came down in favor of arbitration in one and against in the other.

Ferguson
Kevin Ferguson sued Corinthian Colleges, Inc. claiming he was deceived by the college's methods of recruiting students to apply.  He signed an arbitration agreement.  The district court refused to enforce it in part, because Ferguson's claims included "public injunctive" relief.  California law held that it was unconscionable to require arbitration of these claims.  Corinthian argued that California's rule precluding arbitration of "public" injunctive relief claims (such as under the Unfair Competition Law and Consumer Legal Remedies Act) was preempted by the Federal Arbitration Act.

The court of appeals held that the FAA indeed preempts California law on this point.  The court held that exempting UCL or CLRA injunction claims from arbitration was inconsistent with U.S. Supreme Court decisions.  Therefore, the Ninth Circuit held that two California Supreme Court decisions exempting from arbitration claims seeking public injunctions are preempted. (Broughton v. Cigna Healthplans of California, 988 P.2d 67 (Cal. 1999). Cruz v. PacifiCare Health Systems, Inc., 66 P.3d 1157, 1164–65 (Cal. 2003).

The significance of this decision to employment law is that this case will affect the analysis of claims brought under the Private Attorney Generals Act or PAGA.  For example in Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (Cal. App. 2d Dist. 2011), the Court of Appeal held that the FAA did not require employees to arbitrate PAGA claims. The Court in part relied on Broughton. This case calls into question the Brown court's analysis. The California Supreme Court is considering a host of arbitration law issues, likely including whether PAGA claims are preempted.

This case is Ferguson v. Corinthian Colleges, Inc. and the opinion is here.

Chavarria

Zenia Chavarria was a Ralphs Grocery deli clerk for a short time. She brought a wage-hour class action.

Chavarria had signed the employment application, in which she acknowledged she would be bound by Ralphs arbitration agreement.  The district court held the agreement was unenforceable. The Ninth Circuit agreed.

First, the court of appeals decided that the agreement was unconscionable under California law.  Second, the court held that federal law did not preempt California's unconscionability analysis.

Here are the main provisions:

The arbitration agreement

• - required the parties to use a retired judge 
• - expressly excluded JAMS and AAA from the administration of the arbitration
• - provided that if the parties did not agree on an arbitrator, each side would submit three arbitrators and alternate striking names.  The first "strike" would be by the party that did not demand arbitration (almost always the employer)

The last point factored into the court's decision that Ralphs agreement was unconscionable. The court remarked: "In practice, the arbitrator selected through this process will invariably be one of the three candidates nominated by the party that did not demand arbitration."  Although Ralphs did not make the argument, this statement would not be true if either party did not strike one of the other party's arbitrators.  (For example, the employer picks a retired judge that the employee prefers over the three retired judges she proposed).

The court merely assumed that each side would always pick three arbitrators unacceptable to the other side, and that each side would automatically strike the other side's judges. That is not always the case in my experience.  In any event, the court held this scheme was unconscionable.  Perhaps if Ralphs had provided for a coin-flip for deciding who makes the first strike, it would have passed muster.

Ralphs apparently excluded JAMS and AAA because of their employee-friendly arbitration rules, designed to comply with California law.  In particular, the agreement gave the arbitrator the power to apportion the arbitration costs up front, contrary to California's arbitration jurisprudence and the above rules. To remove the issue from a judge's review, the agreement provided the arbitrator must decide disputes over the arbitrator fees.  And the agreement provided that the arbitrator could consider only U.S. Supreme Court authority in deciding how to apportion the fees (thereby ignoring California law and lower federal court decisions).  The court of appeals held that provision was illegal too.

The agreement also expressly said that it could be modified by Ralphs and that no signature would be required to accept a change. Rather, the employee's continued employment would be acceptance.  The court did not reach this issue, as it found that the above terms, plus procedural unconscionability (because it was take-it-or-leave-it), invalidated the agreement under California law.

Ralphs was trying to avoid California arbitration case law, because California courts find arbitration agreements unconscionable for many reasons that seem unique to arbitration agreements.  That being the case, Ralphs argued that the Federal Arbitration Act preempts California's arbitration jurisprudence.

No sale, said the court of appeals.  The court held that the FAA did not preempt the court's holding that Ralphs' cost allocation provision was unconscionable.  The Supreme Court's recent Italian Colors decision was inapplicable, the court found, because that decision said that the high cost of proving the claim did not preclude a class-action waiver.  This case, on the other hand, involved the high cost of arbitration itself.

The court of appeals also rejected Ralphs argument that special unconscionability rules that could apply only to arbitration contracts -- such as the finding that the arbitrator selection procedures were unconscionable --  were preempted. The court held

The Supreme Court’s holding that the FAA preempts state laws having a “disproportionate impact” on arbitration cannot be read to immunize all arbitration agreements from invalidation no matter how unconscionable they may be, so long as they invoke the shield of arbitration. Our court has recently explained the nuance: “Concepcion outlaws discrimination in state policy that is unfavorable to
arbitration.” Mortensen v. Bresnan Commc’ns, LLC, 722 F.3d 1151, 1160 (9th Cir. 2013) (emphasis added). We think this is a sensible reading of Concepcion.

The panel did not believe that the arbitration selection issue was "unfavorable" to arbitration.  Therefore, it would not be preempted.

The Supreme Court one day will resolve the tension between Concepcion and Armendariz once and for all. Until then, it will be difficult to implement arbitration agreements in California that will pass judicial review for unconscionability.  Not impossible - just difficult.  

That said, it's still legal to include class action waivers in arbitration agreements. That could make arbitration worthwhile, assuming the employer is ready to bear the costs / arbitrator fees for individual claims.

This case is Chavarria v. Ralphs Grocery Company and the opinion is here.

California Supreme Court: Arbitration Agreement Can Waive Labor Commissioner Hearings. I think.

We posted about the California Supreme Court's decision in Sonic-Calabassas A, Inc. v. Moreno (2011) 51 Cal.4th 659  here.  In that case, the California Supreme Court decided that an employer cannot make an employee skip a labor commissioner hearing in favor of arbitration.

The U.S. Supreme Court then issued its opinion in AT&T Mobility v. Concepcion (discussed here).  The California Supreme Court agreed to reconsider Moreno in light of Concepcion.  In the meantime, Moreno's author, Justice Moreno (no relation) and Chief Justice Ronald George retired.  Justice Goodwin Liu and Chief Justice Tani Cantil-Sakauye joined the Court.

Many thought the Court would re-examine its arbitration / unconscionability case law and come up with some clear standard for what is "unconscionable."  Because the California Supreme Court's jurisprudence on arbitration agreements plainly is inconsistent with the U.S. Supreme Court's interpretation of the Federal Arbitration Act. (Don't take it just from me.  Justices Chin and Baxter in their dissent in this case say the same thing.)

Well, if you were one of those people, you were half right.  The Court indeed re-examined its jurisprudence in a long, scholarly opinion.  And the Court decided (5-2) that Concepcion indeed overruled Moreno I.  Therefore, we know after this opinion that employers are not absolutely required to allow employees to go to the Labor Commissioner before arbitrating wage claims if they so choose.

But the Court also held that state courts can continue to invalidate arbitration agreements as "unconscionable" under the case law that has developed in California over several years.  "Scholarly" does not mean "clear."  After this case,  we know precious little about how to draft an enforceable arbitration agreement.  In fact, I am more confused than ever after reading this opinion.  I will read it again to see if I can come up with some rules.

I remain confused because the Court does not explain well what is "unconscionable" in an arbitration agreement. The Court does not draw a clear rule for how a court decides if it must defer to the agreement to arbitrate under the Federal Arbitration Act, or apply the California courts' maze of rules that the courts have developed following the Armendariz case.

The California Supreme Court is considering arbitration in several pending cases that have been briefed but not yet heard.  We will have to wait a bit longer for some clearer guidance, or wait for the U.S. Supreme Court to review Armendariz or one of its progeny. In the meantime, if you have an hour or so,  there are about 95 pages of majority and dissent opinion to read here.

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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.

California Supreme Court Takes Up Arbitration Again

I posted in detail about Iskanian v. CLS Transportation here.  (This is one of the post-Concepcion cases that address arbitration. )  The California Supreme Court just granted review here.  The Court eventually will explain how Concepcion affects California arbitration law.  But that could take some time... Unfortunately for employers, the Court's grant of review means the Iskanian decision is uncitable going forward.
DGV

Court of Appeal: No Waiver of Arbitration and No Class Action Either

The Court of Appeal overturned a trial court's denial of the employer's motion to compel arbitration.  Here are some key points:

1.  The Court of Appeal expressly recognized that an arbitration agreement that is silent regarding class actions cannot be read to require classwide arbitration.

[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. . . . As the Arbitration Agreement explicitly covers the type of claims that are the subject of Reyes‘s lawsuit and provides only for bilateral arbitration, there is no contractual basis for concluding the parties agreed to submit to class arbitration. Therefore, we conclude that the Arbitration Agreement does not authorize class arbitration.

2. The court held that the employer did not waive the right to arbitrate, even though it did not cite the arbitration agreement in the answer, and though it conducted lots of discovery in court.  The reason is that the employer likely would not have prevailed on a motion to compel arbitration until the U.S. Supreme Court issued its decision in AT&T Mobility v. Concepcion  (2011) 563 U.S. ___ [131 S.Ct. 1740, 179 L.Ed.2d 742].  Therefore, the employer did not "waive" the right to arbitrate, when seeking arbitration would have been futile.

3.  Like pretty much every other court, the court here refused to follow the National Labor Relations Board's decision in DR Horton (holding that arbitration agreements cannot require class action waivers unless the employee can bring a class action in court). 

The decision is Reyes v. Liberman Broadcasting and the opinion is here.

DGV

Court of Appeal Upholds Arbitration Agreement

Nelsen v. Legacy Partners (opinion here) is the latest decision from the court of appeal to address the validity of arbitration agreements in California, after recent federal developments (Concepcion, DR Horton, etc.). 

The issues, as usual, are whether the arbitration agreement is "unconscionable," or violates public policy, and therefore is unenforceable as a contract.

The arbitration agreement was located at the end of a long handbook. Not surprisingly, the court first found that the agreement was "procedurally unconscionable,"  because

It was part of a preprinted form agreement drafted by LPI that all of LPI‘s California property managers were required to sign on a take-it-or-leave-it basis. The arbitration clause was located on the last two pages of a 43-page handbook. While the top of page 42 contains a highlighted prominent title ―TEAM MEMBER ACKNOWLEDGMENT AND AGREEMENT,‖ the title makes no reference to arbitration and the arbitration language itself appears in a small font not set off in any way to stand out from the rest of the agreement or handbook. Moreover, unless Nelsen happened to be conversant with the rules of pleading in the Code of Civil Procedure, the law and procedure applicable to appellate review, and the rules for the disqualification of superior court judges, the terms and rules of the arbitration referenced in the clause would have been beyond her comprehension.

So, now the courts say that failing to attach the Code of Civil Procedure makes an agreement procedurally unconscionable.  What happened to "everyone is bound to know the law?" or "ignorance is no excuse?"  Also, by saying that the agreement is not in a different font, the court is imposing a requirement that does not apply to other contracts.  That's not supposed to be allowed, demonstrating once again that the unconscionability doctrine is just an end run around Federal Arbitration Act preemption.

However, the court then turned to "substantive" unconscionability, which must also exist for an arbitration agreement to be invalidated.  In this case, though, the arbitration agreement was pretty much lifted verbatim from a California Supreme Court decision. (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064.)  So, the Court did not find substantive unconscionability.

But Nelsen then argued that, regardless of unconcsionability, the arbitration agreement violated "public policy" under the California Supreme Court's decision in  Gentry v. Superior Court (2007) 42 Cal.4th 443.  In particular, Nelsen argued that the arbitration agreement barred her from bringing a class claim in arbitration because the agreement was silent as to class claims.

The court of appeal held that, indeed, the silent agreement did not encompass class-based claims.
However, the court then decided that Gentry did not invalidate the arbitration agreement because Nelsen did not adequately support the argument to the trial court.  That is, Gentry does not invalidate "all" class action waivers, so you have to establish the Gentry "factors," which Nelsen did not do.  In ruling this way, the court sidestepped whether Gentry remains good law.

Finally, the court decided that the National Labor Relations Board's decision in DR Horton was not binding and that the court would not follow it. The court noted that the decision was issued by just 2 Board members and that the issue of whether class action waivers are enforceable are beyond the Board's normal expertise.

So, another arbitration agreement survives. 

Court of Appeal: Concepcion Kills Gentry

It's hard to keep up with arbitration law in California.  Can you waive class actions? Must you attach the entire rule set to the arbitration agreement?  Must you serve a nutritious meal when you provide the arbitration agreement?  It never ends. 

The tension between California case law and case law interpreting the Federal Arbitration Act causes these problems. Last year the U.S. Supreme Court decided in ATT Mobility v. Concepcion that the Federal Arbitration Act allows parties to limit arbitration agreements to single-plaintiff claims.  The Court overruled the Califoria Supreme Court's decision in Discover Bank v. Superior Court.  We posted about that here.

Discover Bank was about a consumer class action for small dollars / cents per claim. In Gentry v. Superior Court (2007) 42 Cal.4th 443, the California Supreme Court extended Discover Bank  to wage-hour class actions. The Court held that a class waiver should not be enforced if "class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration."

The U.S. Supremes never mentioned Gentry. So what happened to it after Concepcion?

GENTRY

The Court of Appeal in Iskanian v. CLS Transportation- Los Angeles  (opinion here) decided that Gentry is no more. The real news here, though, is that this decision may dispose of - or severely restrict -- the entire body of anti-arbitration case law that has been developed over the past 10 years in California.  The language I've quoted below seems to sound the death knell to California courts' hostility to arbitration on "public policy" grounds (assuming this case remains on the books):

Now, we find that the Concepcion decision conclusively invalidates the Gentry test.  . . . Concepcion thoroughly rejected the concept that class arbitration procedures should be imposed on a party who never agreed to them. ... This unequivocal rejection of court-imposed class arbitration applies just as squarely to the Gentry test as it did to the Discover Bank rule. 

Second, Iskanian argues that the Gentry rule rested primarily on a public policy rationale, and not on Discover Bank‟s unconscionability rationale. While this point is basically correct, it does not mean that Gentry falls outside the reach of the Concepcion decision. ....

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.) ....

PAGA
 This Court then decided that Concepcion applies to PAGA claims too. The Court disagreed with
Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489. "Brown held that the Concepcion holding does not apply to representative actions under the PAGA, and therefore a waiver of PAGA representative actions is unenforceable under California law."
This Court disagreed and held that Concepcion would not allow courts to invalidate arbitration agreements merely because they preclude PAGA claims:

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.

HORTON

The Court then went for the Tri-Fecta and disagreed with the National Labor Relations Board's decision in DR Horton, too. D. R. Horton  (2012) 357 NLRB No. 184

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 National Labor Relations Act (NLRA) because it prohibited the exercise of substantive rights protected by section 7 of the NLRA.

 The Court decided that it was not bound to follow DR Horton:

We decline to follow D.R. Horton. In reiterating the general rule that arbitration agreements must be enforced according to their terms, Concepcion (which is binding authority) made no exception for employment-related disputes. Furthermore, the NLRB‟s attempt to read into the NLRA a prohibition of class waivers is contrary to another recent United States Supreme Court decision. In CompuCredit Corp. v. Greenwood (2012) __ U.S. __, __ [132 S.Ct. 665, 668] (CompuCredit), plaintiff consumers filed suit against a credit corporation and a bank, contending that they had violated the Credit Repair Organizations Act (CROA) (15 U.S.C. § 1679 et seq.).5 The plaintiffs brought the matter as a class action, despite having previously agreed to resolve all disputes by binding arbitration. The Supreme Court rejected their efforts to avoid arbitration, finding that unless the FAA‟s mandate has been "„overridden by a contrary congressional command,‟" agreements to arbitrate must be enforced according to their terms, even when federal statutory claims are at issue. (CompuCredit, at p. 669, citing (1987) 482 U.S. 220, 226.) The Supreme Court held: "Because the CROA is silent on whether claims under the Act can proceed in an arbitrable forum, the FAA requires the arbitration agreement to be enforced according to its terms." (CompuCredit, at p. 673.)

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.

ARMENDARIZ?

Well, all that is left is Armendariz.  This Court did not touch it expressly. So, stay tuned.... The California Supreme Court is considering related issues. My bet is that the Court will take this case up as well if the parties seek review.

DGV