In a case between an on-line customer and Barnes & Noble, the Ninth Circuit recently refused to enforce the arbitration agreement found in the website’s “Terms of Use.” Nguyen v. Barnes & Noble Inc., __ F.3d__, 2014 WL 4056549 (9th Cir. Aug. 18, 2014). The decision further calls into question the validity of “browsewrap” agreements, which the consumer does not have to assent to or acknowledge before making a purchase.

The plaintiff’s case against B&N stemmed from his attempt to buy a Touchpad during a “fire sale” on those devices in 2011. The plaintiff purchased two Touchpads on the B&N website and received an email confirmation. But the next day, B&N cancelled his order due to high demand. Plaintiff then brought a putative class action for false advertising and deceptive business practices against B&N. In response, B&N moved to compel arbitration. Both the district court and the Ninth Circuit refused to compel arbitration.

The issue was whether the plaintiff had “assented” to the website’s “Terms of Use,” which provided for binding arbitration on an individual (not consolidated or class) basis, thereby making them part of his contract. The Terms of Use were available to visitors of the B&N website via a hyperlink in the bottom left-hand corner of every page, and the hyperlink was underlined and in green typeface. However, the plaintiff never had to click on a box indicating he agreed to the Terms of Use. Indeed, the plaintiff never did click on the Terms of Use or otherwise read them. That structure made the Terms of Use a “browsewrap agreement”, which is one where “the user can continue to use the website or its services without visiting the page hosting the browsewrap agreement or even knowing that such a webpage exists.” (A “clickwrap” agreement requires the user to “click” on a box indicating agreement with the terms.)

The court found that the website did not put a reasonably prudent user “on inquiry notice of the terms of the contract.” It explained that

in keeping with courts’ traditional reluctance to enforce browsewrap agreements against individual consumers, we therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on–without more–is insufficient to give rise to constructive notice.

This case should give pause to any on-line retailers that still use browsewrap agreements.  If they want their arbitration agreements (with those valuable waivers of class actions) to be enforceable, the customers should have to read and assent to those terms before making a purchase.

In a victory for advocates who worry that the odds are impossibly stacked against consumers in some arbitral fora, the Seventh Circuit found that a class of borrowers did not have to proceed with arbitration conducted by the Cheyenne River Sioux Tribe (“Tribe”) in South Dakota “because the arbitral mechanism specified in the agreement is illusory.” Jackson v. Payday Financial, LLC, __ F.3d __, 2014 WL 4116804 (7th Cir. Aug. 22, 2014).

The plaintiffs had each borrowed money through a website and agreed to pay 139% in interest each year. Their agreements provided that any disputes would be resolved by arbitration “conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules.” The arbitrator would be a Tribal Elder or members of the Tribal Council.   The agreement also provides it is governed by the laws of the Tribe.

The plaintiffs sued for violation of Illinois usury and consumer fraud statutes. The defendants moved to dismiss for improper venue, arguing that the claims had to be brought in arbitration. The district court granted the defendants’ motion. But before the Seventh Circuit would hear the appeal, it asked the district court to engage in fact finding about the Tribe’s arbitration rules and mechanisms. The district court found the Tribe had “virtually no experience in handling claims made against defendants through private arbitration” and that the Tribe appeared to have been selected in “an attempt to escape otherwise applicable limits on interest charges. As such, the promise of a meaningful and fairly conducted arbitration was a sham and an illusion.”

The Seventh Circuit reversed the district court, concluding that the plaintiffs’ claims should not have been dismissed. It reached that conclusion based on applying two different analyses.

First, it applied the rule that forum selection clauses (like the one here selecting arbitration by the Tribe) are enforceable unless “unreasonable under the circumstances.” Here, the court found the forum selection was illusory and therefore unreasonable because the Tribe “does not authorize Arbitration…does not involve itself in the hiring of …arbitrator[s], and [] does not have consumer dispute rules.”

Second, the Seventh Circuit considered the enforceability of the arbitration agreement under Illinois law (which applied if the agreement’s choice of Tribal law was invalid). Under Illinois law, the court found that the arbitration agreement was unconscionable. It found it was procedurally unconscionable (despite the plaintiff’s having the right to opt out) because the plaintiffs could not have found out about the dispute resolution process and rules, since there were none. It was substantively unconscionable because the dispute resolution mechanism did not exist and any arbitrator was likely to be biased.

In response to an argument that such a finding of unconscionability was preempted under Concepcion, the court said “[i]t hardly frustrates FAA provisions to void an arbitration clause on the ground that it contemplates a proceeding for which the entity responsible for conducting the proceeding has no rules, guidelines, or guarantees of fairness.”

Finally, the Seventh Circuit rejected an argument that the dispute should at least be heard by the courts of the Tribe. (“There simply is no colorable claim that the courts of the [Tribe] can exercise jurisdiction over the plaintiffs.”) The dismissal was reversed and the case remanded to the district court for further proceedings.

In my view, the most interesting thing about this opinion is the way it differs from other opinions about arbitration agreements in payday loan documents. At least two state court decisions finding those arbitration agreements unconscionable were later reversed, based on the reasoning of Concepcion and federal preemption. That likely explains the Seventh Circuit’s focus on federal common law about forum selection clauses as an alternative basis to simple “unconscionability” under Illinois law.

I regularly receive questions about compelling arbitration under the Federal Arbitration Act.  In particular, people ask : (1) Can I file a motion to compel before any other “complaint” is filed; (2) What should I call my motion?; and (3) What is with this 5-day rule hidden inside Section 4 of the FAA?  Wanting to confirm the advice I give people, I asked our of our summer associates, Nicole Faulkner, to look into these arcane questions.  She did a great job, and here are her tips.

(1) First, it is perfectly fine to start an action with a petition to compel arbitration.  In fact, it is quite common. You will be hard pressed, however, to find a case or rule out there explicitly giving permission to do this. The best indicator that no classic “complaint” is necessary comes from dicta in Vaden v. Discovery Bank, 556 U.S. 49 (2009).  In that case, the Court is settling a jurisdiction issue but before reaching that question it held that courts should use a “look through” approach to assess the underlying claims. This “look through” approach, says the Court, “permits a § 4 petitioner to ask a federal court to compel arbitration without first taking the formal step of initiating or removing a federal question suit.” Voila! The dissent criticized the fact that the Court did not elaborate on what happens when the petition to compel IS a freestanding claim…what exactly do you “look through” to assess the jurisdiction when there is no Complaint? The Eleventh Circuit answered this question in Community State Bank v. Strong, 651 F.3d 1241 (11th Cir. 2011). In that scenario, the Court agreed with Vaden and stated that the “look through” approach gives the Court the ability to dive deep into the “full flavor” of the controversy and they are not limited to what is provided in the motion.

(2) As for your caption? Although you will see many examples titled “Motion to Compel Arbitration,” a true FAA aficionado should title her document “Petition to Compel Arbitration.” A plain read of the text in §§ 4 and 16 of the FAA gets you to this conclusion.

(3) As much as you may want to, you cannot pull in the standard response times under the Federal Rules of Civil Procedure when you’re dealing with petitions to compel arbitration. That twenty-day notice period does not apply here. Courts around the country have interpreted the 5-day rule in § 4 to mean just that—5 days. The FAA does not incorporate an additional response period and the reference to the Federal Rules of Civil Procedure applies only to the manner in which the notice is served. Unionmutual Stock Life Ins. Co. of Am. v. Beneficial Life Ins. Co., 774 F.2d 524, 526 (1st Cir. 1985). Federal district courts in California and Oregon have reached the same conclusion.  The respondent gets 5 days’ notice before the hearing. Guess what? That doesn’t mean 5 days from the time the hearing is scheduled. It means 5 days from the time you file your petition to compel arbitration. The Court in Unionmutual said that the original petition serves as notice that the hearing can be held at any time after 5 days has passed from the date the petition was served. So if the clerk notifies you ten days later that the hearing is on the eleventh day—the notice period was met.

Have any other burning procedural questions about compelling arbitration (or any other FAA-related process)?  Send them my way!  I might even address them before we get a new crop of summer associates…

This week marks the third anniversary of this blog devoted to interpretations of the Federal Arbitration Act.  (Here’s the first post.)  After 155 posts, can there possibly be more to say?  Yes, indeed.  Three new opinions from federal courts of appeals demonstrate how new issues keep “cropping” up in arbitration law each week.

The first case has to do with crop insurance and whether an arbitrator exceeded his power.  In Davis v. Producers Agricultural Ins. Co., __ F.3d__ 2014 WL3844815 (11th Cir. Aug. 6, 2014), the district court vacated the arbitrator’s award and the Eleventh Circuit reversed.  The decision revolved around two legal issues.  One is not likely to come up for many of us (whether the arbitrator exceeded his authority by interpreting an aspect of a crop reinsurance policy that is reserved to the Federal Crop Insurance Corporation; he didn’t because the FCIC had already approved the arbitrator’s interpretation).  But the second is a harsh result that could impact many parties in arbitration.  The applicable AAA rules provided that the arbitrator must issue his opinion within 30 days of closing the proceeding, but the arbitrator did not issue the award until the 33rd day.  The losing party argued that by issuing the award late, the arbitrator had exceeded his power under Section 10, and the award should be vacated.  The Eleventh Circuit relied on a 1969 case from the 5th Circuit to find that the losing party had waived his right to argue timeliness by failing to “object at the expiration of the thirty-day period.”  This strikes me as an unrealistic standard.  What party in their right mind would aggravate an arbitrator who is about to issue an award by complaining that the decision is tardy?  None, unless that party already knew it was going to lose.

The second case is about whether an arbitration clause in a non-compete agreement is broad enough to require arbitration of claims under the Fair Labor Standards Act.  In Sanchez v. Nitro-Lift Technologies, LLC, __ F.3d__, 2014 WL 3882543 (10th Cir. Aug. 8, 2014), employees sued Nitro-Lift for violating the FLSA by not paying overtime wages.  Those employees had each signed a “Confidentiality/Non-Compete Agreement” with an arbitration clause calling for arbitration of “any dispute, difference or unresolved question” between the parties.  The district court denied Nitro-Lift’s motion to compel arbitration, finding that an arbitration clause in a non-compete can only cover issues of competition, not overtime wages.  The Tenth Circuit disagreed, finding that the arbitration clause was as broad as possible and its placement within a non-compete agreement only made it ambiguous whether the arbitration clause was intended to cover broader disputes.  Because federal law requires all ambiguities about scope to be resolved in favor of arbitration, the dispute had to be arbitrated.  The court did, however, remand the issue to the district court to determine whether the fees of arbitration precluded the plaintiffs from effectively vindicating their federal statutory rights.  (Does Nitro-Lift ring a bell?  It could be because of another time the company had its arbitration clause saved by an appellate court.)

Finally, the third case for today is about non-signatories.  In Griswold v. Coventry First LLC, __ F.3d__, 2014 WL3892995 (3d Cir. Aug. 11, 2014), Mr. Griswold bought a large life insurance policy on himself. He set up a trust to own the policy and set up Griswold LLP as the beneficiary of the trust.  About two years after purchasing the policy, Mr. Griswold used a broker to sell the policy to Coventry.  That purchase agreement between the trust and Coventry had an arbitration clause.  After disbursing the funds, Griswold LLP dissolved.  Later, Mr. Griswold sued Coventry alleging that it colluded with the broker to be the sole bidder on his policy (getting it cheap).  Coventry moved to compel arbitration, but the district court denied its motion because Mr. Griswold was not a signatory to the purchase agreement.  The Third Circuit agreed. It found that equitable estoppel did not apply to bind Mr. Griswold to the arbitration agreement in the purchase agreement because his complaint did not mention or rely on the purchase agreement.  In fact, the fraud and collusion he alleged took place before the purchase agreement was executed.  That result was particularly important in this case, because Mr. Griswold wanted to proceed as a class action, which was unavailable in arbitration.

I look forward to another year of analyzing the evolving jurisprudence under the FAA!  Thanks for joining me on the journey.

 

In a footnote in Sutter, SCOTUS hinted that the question of whether an arbitration agreement allowed for class arbitration may be one of the “gateway” questions of arbitrability that are presumptively for courts to decide. Last year, the Sixth Circuit went one step further, finding that the availability of class arbitration defaults to the courts. And this week, the Third Circuit agreed.

In Opalinksi v. Robert Half Int’l, Inc., __ F.3d __, 2014 WL 3733685 (3d Cir. July 30, 2014), a putative class of plaintiffs sued their employer. Their employment agreements called for arbitration, but said nothing about whether classwide arbitration was permitted. The employer moved to compel arbitration and the district court granted that motion, finding that the arbitrator should determine whether class arbitration was available.

The appellate court disagreed. It held that “whether an agreement provides for classwide arbitration is a ‘question of arbitrability’ to be decided by the District Court.” In support of its holding, the Third Circuit likened the decision about whether a class can go forward in arbitration to other arbitrability decisions that default to judges, like whether non-signatories are bound to arbitrate. The Third Circuit also noted that while procedural questions are generally for arbitrators, the availability of class arbitration has been construed by the Supreme Court as “not solely [] a question of procedure” but instead a “substantive gateway dispute.”

I predict there will be more circuit court cases finding that judges are the presumptive decisionmakers about class arbitration in the months to come.

p.s. There is only one week left to make sure ArbitrationNation stays in the ABA Blawg 100… Here is the link to use: http://www.abajournal.com/blawgs/blawg100_submit/ .

Two posts ago, I reviewed four recent cases in which appellate courts enforced arbitration awards that district courts had refused to enforce.  Today I review two more appellate courts coming to the rescue of arbitration, this time by confirming arbitration awards that had been vacated by lower courts.

In SPX Corp. v. Garda USA, Inc., __A.3d__, 2014 WL 2708631 (Del. June 16, 2014), the Delaware Court of Chancery vacated an arbitration award (under its state arbitration act) after concluding the arbitrator manifestly disregarded the terms of the parties’ agreement. That court found that a section of the parties’ agreement unambiguously required the company’s working capital to reflect liabilities associated with workers compensation claims and the arbitrator manifestly disregarded that contractual requirement in issuing its award. The Supreme Court of Delaware reversed that decision. It found that there were two “colorable” interpretations of the contract, and that even if the arbitrator’s interpretation was wrong, it did not constitute manifest disregard because the arbitrator did not consciously choose to ignore a contract term that is not subject to reasonable debate.

In American Postal Workers Union, AFL-CIO v. U.S. Postal Service, __F.3d__, 2014 WL 2535249 (2d Cir. June 6, 2014), the district court had vacated an award in favor of the Postal Service after finding the arbitrator exceeded his powers. The district court found the arbitrator exceeded his power when he found the worker’s claims were barred based on the doctrine of collateral estoppel, because the collective bargaining agreement (CBA) did not explicitly provide for collateral estoppel. The Second Circuit reversed, finding that even if the CBA did not specifically allow collateral estoppel, it did not explicitly preclude it either, and case law allows arbitrators to apply collateral estoppel under broad arbitration agreements. Because of that, the arbitrator was arguably construing the contract (within the meaning of Sutter) and the award must be confirmed.

**Have any of the 154 posts on Arbitration Nation helped you brief a motion, draft an arbitration clause, or advise a client?  If so (or even if you just come for the photos and pop culture references), please consider nominating Arbitration Nation for the next ABA Blawg 100 here: http://www.abajournal.com/blawgs/blawg100_submit/ . Fingers crossed for making the list for a third year! **

Although we usually expect arbitrators to be impartial, the Supreme Court of Texas vacated an arbitration award because the chosen arbitrators were too impartial. Americo Life, Inc. v. Myer, __S.W.3d__, 2014 WL 2789429 (Tex. June 20, 2014). Because the court found the parties’ agreement allowed each side to choose an arbitrator who was partial to it, but the AAA had disqualified the selected advocate-arbitrators, the award was vacated.

The case stemmed from Myer’s sale of a collection of businesses to Americo in 1998. The arbitration agreement in the sale document stated that any disputes should be decided by three arbitrators, with each party appointing one arbitrator and those two selecting the third. The arbitration would be governed by AAA’s commercial rules. Critically, “[e]ach arbitrator shall be a knowledgeable, independent business person or professional.” A dispute about the meaning of that sentence caused the arbitration and its appeals to last nine years.

In 2005, Americo demanded arbitration. At that time, the AAA rules explicitly required arbitrators to be “impartial and independent.” Therefore, when Americo (twice) chose an arbitrator that was partial towards it, the AAA disqualified those arbitrators. After a panel of three impartial arbitrators heard the evidence, they awarded Myer over $26 million in damages.

Americo moved to vacate the award, arguing that the arbitrators were not selected in accordance with the parties’ agreement. The trial court vacated the award, the court of appeals un-vacated it, and a majority of the Texas Supreme Court re-vacated it.

The high court’s analysis emphasized the fact that “arbitrators must be selected pursuant to the method specified in the parties’ agreement.” Because the touchstone is the agreement, the court had to interpret whether the contractual requirement that the arbitrator be “independent” meant that he or she be impartial. The court concluded it did not. The 1998 AAA rules allowed parties to appoint arbitrators that would serve as their advocates. Therefore, the court interpreted “independent” to mean only that the arbitrators would not actually be employed by a party or under its control. (It also found that the modified AAA rules could not trump terms in the agreement itself.)

Once the court concluded that the agreement allowed arbitrators to be biased toward the party that selected them, but the AAA had disqualified arbitrators for being biased, its decision to vacate became unavoidable. “[T]he arbitration panel was formed contrary to the express terms of the arbitration agreement. The panel therefore, exceeded its authority when it resolved the parties’ dispute.” Four justices dissented from the opinion, arguing that the AAA rules in effect in 2005 demanded impartial arbitrators unless the parties specifically agreed otherwise and the language of the parties’ agreement did not specifically allow non-neutral arbitrators.

This case shows why arbitration law is so hard for people to grasp. Essentially, this case says that an award reached by three impartial arbitrators has to be reversed, because two of those arbitrators should have been biased. That is a head-scratcher.  Only when you understand that the FAA emphasizes the parties’ agreement over almost everything else does that result make any sense at all. This case may become Exhibit B for me when I explain that case law under the FAA is not intuitive, even for lawyers (Exhibit A is Buckeye Check Cashing, which never fails to elicit a strong reaction from the uninitiated).

**If you appreciate receiving current information about decisions and trends in interpreting the Federal Arbitration Act, please consider nominating Arbitration Nation for the Blawg 100 here: http://www.abajournal.com/blawgs/blawg100_submit/ .  Thank you in advance! **

In recent weeks, four federal and state appellate courts have vacated district court decisions that denied motions to compel arbitration.  The courts seem to be saying to defendants with arbitration agreements: don’t worry if you lose in the trial court, we will be your Tim Howard and save you from the gaping jaws of litigation.  (I have watched *a lot* of World Cup soccer in recent weeks, folks.  That is partly to blame for the huge stack of arbitration cases waiting for me to write about them.  Well, that and the fact that judges all over the nation appear to be churning out opinions at record speed before their law clerks turn into pumpkins in August.)

These are not just run of the mill reversals, either.  One dealt with an issue of first impression and another with a wholesale gutting of twenty years of case law.

In Al Rushaid v. Nat’l Oilwell Varco, Inc., __ F.3d__, 2014 WL 2971701 (5th Cir. July 2, 2014), the plaintiff filed suit against six defendants in August 2011, but could not serve one of them, NOV Norway, until August of 2012, after the other parties had engaged in significant discovery.  NOV Norway moved to compel arbitration within three months of being served the complaint.  The district court denied the motion because a) it found the price quote did not effectively incorporate the terms containing the arbitration agreement, and b) it found NOV Norway waived its right to arbitrate by invoking the judicial process.  On appeal, the Fifth Circuit reversed on both those grounds.  It found the plain language of the price quote did incorporate a general terms and conditions document with an arbitration agreement.  And, as a matter of first impression, it found that even though all the defendants were jointly owned and controlled and represented by the same counsel, the litigation activity of its codefendants could not be imputed to NOV Norway for the purpose of determining waiver.  (The court said the outcome would change if there were a basis to pierce the defendants’ corporate veil or an alter ego situation.)

Dean v. Heritage Healthcare of Ridgeway, LLC, __S.E.2d__, 2014 WL 2771300 (S.C. June 18, 2014), involved wrongful death claims against a nursing home, and the relevant arbitration agreement said that “any arbitration proceeding that takes place under this [] Agreement shall follow the rules of the [AAA]”.  However, the AAA stopped accepting personal injury disputes based on pre-injury arbitration agreements in 2003.  The nursing home moved to compel arbitration and the trial court denied the motion.  It found that the language about the AAA rules meant that the dispute should be heard by the AAA and since the AAA was not available, the arbitration agreement was invalid.  The Supreme Court of South Carolina reversed.  But before the supremes could get to the merits, they had to overrule their own 1993 decision, which held that nursing home contracts did not involve interstate commerce.  After reviewing the intervening cases from SCOTUS, the court found the nursing home agreement does involve interstate commerce and is governed by the FAA.  On the merits, the court found that the availability of the AAA to administer the arbitration was not a material term and instead the parties’ agreement simply calls for the arbitration to be governed by the AAA rules, regardless of what entity administers the proceeding.

In a Texas case, the defendant’s motion to compel arbitration was denied after the trial court found the arbitration agreement was unconscionable because it limited the plaintiffs’ statutory remedies and had a unilateral attorneys fees provision.  While the court of appeals affirmed that result, the Supreme Court of Texas reversed.  Venture Cotton Cooperative v. Freeman, __S.W.3d__, 2014 WL 2619535 (Tex. June 13, 2014).  Importantly, the court held that the agreement’s waiver of aspects of state law was invalid, but that was insufficient to invalidate the entire arbitration agreement.  Instead, it found the “objectionable limitation on the farmers’ statutory rights” should have been severed.  (And the attorneys’ fees provision also was insufficient to invalidate the arbitration agreement.)

Finally, the Third Circuit also just vacated a district court’s decision to deny a motion to compel arbitration in Ross Dress for Less, Inc. v. VIWY, L.P., 2014 WL 2937031 (3d Cir. July 1, 2014).  In that dispute over lease payments, the lease provided (confusingly) that disputes worth less than $50,000 should be arbitrated and those worth more than $50,000 can be litigated or arbitrated at the option of either party.  However, if the tenant withheld rent and the landlord disagreed, the dispute must be determined by an arbitrator.  In this case, their were claims relating to tenant withholding along with other claims worth more than $50,000 and the parties disagreed as to whether they had to arbitrate.  The district court found that the claims were outside the scope of the arbitration clause.  But the Third Circuit looked at the “conflicting lease provisions” and relied heavily on the federal presumption in favor of arbitrability to hold that all issues in the case must be arbitrated.

The primary lesson that can be drawn from these four cases is this: if you have a colorable argument for compelling arbitration, don’t give up if you lose at the trial court level.

In a short and sweet opinion issued just six weeks after argument, the Eighth Circuit yesterday held that an arbitrator was authorized to decide whether a non-signatory was able to arbitrate a dispute.  Eckert/Wordell Architects, Inc. v. FJM Props. of Willmar, LLC, __ F.3d __, 2014 WL 2922343 (8th Cir. June 30, 2014).

The dispute was over the design and construction of a laser eye clinic in Minnesota.  The contract containing the arbitration agreement was between the architects and Fischer Laser Eye Center, the owner of the property where the clinic would be.  The shareholders of Fischer later formed a separate company to own and develop the land for the clinic, and that second company then changed its name to FJM Properties.  When it discovered problems with ventilation, FJM Properties demanded arbitration with the architects.  That arbitration proceeding went on for more than a year.  Just a month before the evidentiary hearing, the architects objected to participating further, based on their assertion that they had no arbitration agreement with FJM Properties.  The arbitrator found he had power to determine whether the parties had an arbitration agreement and invited briefing.

The architects went to federal district court and asked the judge to stop the arbitration.  But the court agreed that the arbitrator had the power to decide whether FJM could enforce the arbitration agreement between Fischer and the architects.  In a single paragraph of analysis, the Eighth Circuit affirmed.  It reminds us that “threshold questions of arbitrability are for a court to decide, unless there is clear and unmistakable evidence the parties intended to commit questions of arbitrability to an arbitrator.”  In this case, the parties’ incorporation of the AAA’s Construction Industry Arbitration Rules (which allow arbitrators to rule on their own jurisdiction) served as “a clear and unmistakable indication the parties intended for the arbitrator to decide threshold questions of arbitrability.”  Reading between the lines, the fact that the architects drafted the contract and then tried to design an escape hatch from arbitration after the proceeding was nearly concluded did not help their cause.

 

This week the Supreme Court of California held that the FAA preempts California’s 2007 Gentry ruling, one that protected employees from nearly all class action waivers in arbitration agreements.  Iskanian v. CLS Transp. Los Angeles, LLC, __ P.3d__, 2014 WL 2808963 (Cal. June 23, 2014).  However, asserting its Californian-ness, the court found an clever way of ruling that arbitration agreements in employment contracts may still not waive a particular type of joint action: representative actions brought under California’s Private Attorneys General Act.

The decision reads like a Greatest Hits of Arbitration Law – 2014 edition.  It touches on almost every hot issue in arbitration law in recent years: Concepcion and FAA preemption; vindication of statutory rights; waiver of the right to arbitrate; and the fight over whether federal labor laws can trump the Federal Arbitration Act (the D.R. Horton issue).  (Are the 14 different groups of amici in the case to blame for the plethora of issues?!  Or is that what drew them there??)  The holdings on those issues track what courts around the country have done:

  • California found that “[u]nder the logic of Concepcion, the FAA preempts Gentry’s rule against employment class waivers.  (Gentry made it possible to invalidate a class action waiver if class arbitration will be “a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”)
  • California agreed with other federal courts that Sections 7 and 8 of the National Labor Relations Act do not override the FAA’s mandate to enforce arbitration agreements, even those agreements with class action waivers.
  • California recognized that a party who gives up on compelling arbitration in light of a precedential decision that makes enforcing the arbitration clause futile (in this case, Gentry), does not thereby waive its right to arbitrate.

But on one issue, the Iskanian decision ventured into uncharted territory.  The issue was what the court should do with the employee’s claim, in a representative capacity, under California’s Private Attorneys General Act for Labor Code violations by his employer.  The arbitration agreement stated “that class action and representative action procedures shall not be asserted” in arbitration.  The court found that an employee’s right to bring a PAGA representative action is not waivable under California law.  That holding was grounded in two California statutes that prohibit parties from using their contract to avoid responsibility for violations of statutes.  While the employer argued that the employee could bring his PAGA claim on an individual basis, the court found that would frustrate the objective of the act: “to punish and deter employer practices that violate the rights of numerous employees.”

The court then had to analyze whether its new holding (that the ability to bring a PAGA claim on a representative basis cannot be waived) was preempted by the FAA.  It held it was not.  The court found that the PAGA claims fall outside the ambit of the FAA, because the FAA is concerned with disputes between private parties, while PAGA actions are really state enforcement proceedings against an employer.  The court found support for its holding in the legislative history of the FAA, and especially the lack of any mention of qui tam actions becoming arbitrable as a result of the legislation.  The court also noted that enforcement of wage and hour laws are well within the state’s historic police powers.

“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…that the employer has violated the Labor Code.”

This is the first time I have seen a state court find that their arbitration case law is not preempted because the FAA did not even apply to it.  The distinction that California draws makes logical sense.  But I can’t imagine SCOTUS ignoring California’s attempt to define some of its arbitration precedent as outside the scope of the FAA.  I predict this case will end up on SCOTUS’ docket.