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. 

 

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.

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.