California Court of Appeal Drives a Truck Through Federal Arbitration Act's Class Action Waiver Rule

If the Federal Arbitration Act applies, and it does to most employer-employee relationships, then it's settled that arbitration agreements may be limited to individual claims only.  That is, a class action waiver is enforceable under the Federal Arbitration Act.  And a silent agreement is considered to be limited to individual claims only.

What if the Federal Arbitration Act doesn't apply?  Then California law takes over.  And when California law applies, then California courts' deep abiding love for arbitration comes into play.
I kid.

The question then, is when the Federal Arbitration Act does not apply. One example is that the Act itself exempts:  “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”  At the turn of the century, the U.S. Supreme Court held that "workers engaged in commerce" was limited to transportation-type workers, not everyone in business. 

The U.S. Supremes have not yet decided what is a transportation-type worker.  Is it anyone who drives a truck  or vehicle across state lines as part of the job?  Or is it someone who is in the trucking business like a mover, bus driver, UPS, etc.?   

Well, that's what the Court of Appeal decided in Garrido v. Air Liquide Industrial U.S. LP.  

It seems Garrido filed a class action in state court, but signed an arbitration agreement containing a class action waiver. The agreement stated that the Federal Arbitration Act applied. But the superior court refused to enforce the class action waiver, even so.  That is because the trial court decided that even under the FAA the agreement would be invalid.  Of course, the trial court was wrong. if the FAA applied, the U.S. Supreme Court and the California Supreme Court both have held that a class action waiver is valid and enforceable. 

But the Court of Appeal decided that the FAA did not apply because Garrido's arbitration agreement was not covered by the FAA, as he was a "worker engaged in interstate commerce" by virtue of his job as a truck driver.    

Garrido’ s duty as a truck driver was the transportation of goods. Air Liquide cites to no authority holding that a truck driver whose responsibility is to move products across state lines does not fall under section 1 of the FAA. The fact that Garrido transported Air Liquide’s own products (rather than those of an Air Liquide client) is of little consequence: “a trucker is a transportation worker regardless of whether he transports his employer’s goods or the goods of a third party; if he crosses state lines he is ‘actually engaged in the movement of goods in interstate commerce.’” (International Brotherhood of Teamsters Local Union No. 50 v. Kienstra Precast, LLC (7th Cir. 2012) 702 F.3d 954, 957.)

Thus, because Garrido was a transportation worker, the FAA does not apply to the ADR agreement.

Once the FAA did not apply, then the issue was whether the class waiver was enforceable.  Without FAA preemption, the California case law is anti-class action waivers. The courts will invalidate class action waivers under Gentry v. Superior Court by applying a four-factor test:

In finding the ADR agreement’s class waiver provision unenforceable, the trial court applied Gentry’s four-factor test. As noted above, these four factors are: “[1] the modest size of the potential individual recovery, [2] the potential for retaliation against members of the class, [3] the fact that absent members of the class may be ill informed about their rights, and [4] other real world obstacles to the vindication of class members’ rights to overtime pay through individual arbitration.” (Gentry, supra, 42 Cal.4th at pp. 453, 463.) Under Gentry, if the trial court “concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘vindicate [their] unwaivable rights in an arbitration forum.’” (Ibid.)

The Court of Appeal held that the trial court properly applied that standard to hold that Garrido could maintain his class action in court because his class action waiver was unenforceable under California law. 

In this trucking case, there's little the employer could do. But if you are drafting an arbitration agreement or compelling arbitration, do your best to make sure the FAA applies.... or this could happen to you.

This opinion in Garrido is here. 

 

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.