Usually the plaintiffs in a class action want to stay out of arbitration, but in the recent case of JPAY v. Kobel, 2018 WL 4472207 (11th Cir. Sept. 19, 2018), it was the class representatives who were fighting for arbitration.  In particular, they wanted the arbitrator to decide whether they could have a class action.  And they won.

In a case that reads as if it is charting significant new ground, even though the court reached almost the same conclusion just a few weeks ago, the Eleventh Circuit clarified a few holdings.  First, the availability of class arbitration is a “gateway issue” that is presumptively for courts to decide.  [To be fair, in the earlier decision, it had assumed that result without actually reaching that holding.]  Second, the availability of class arbitration can be delegated to arbitrators just as easily as other gateway questions.  In other words, the 11th Circuit reaffirmed its opposition to the rule adopted by three other circuits: that the question of class arbitrability takes special delegation language, and incorporating JAMS or AAA rules is not enough.

In this case, the court found that the parties had delegated the question of whether the action could proceed on a class basis in arbitration in two independent ways.  First, they had agreed to arbitrate under AAA rules (the agreement mentions both consumer and commercial rules).  Because the AAA rules authorize arbitrators to determine their own jurisdiction, the 11th Circuit found this was sufficient to authorize the arbitrator to decide whether a class action was available under the language of the parties’ arbitration agreement.  It disagreed that the parties needed to have adopted or referenced the AAA Supplementary Rules for Class Arbitrations.

Second, the parties had included this language in the arbitration clause: “the ability to arbitrate the dispute, claim or controversy shall likewise be determined in the arbitration.”  The court found that was sufficient, even without the incorporation of AAA rules, to take the class arbitrability decision out of the court’s ambit.

The court also took on some of the public policy arguments made in favor of keeping class arbitrability in the courts.  It said “[t]he arbitrator’s decision whether a class is available will be more efficient and more confidential than a court’s would be.  The determination of class availability has the same stakes and involves the same parties whether it is decided in a court or in arbitration.”  And while the arbitrator’s decision is “somewhat less reviewable than a court’s,….it will be no less reviewable than any other decision made in arbitration, and the law generally favors arbitration of many high-stakes questions.”  This is one of the most respectful, positive statements I have seen about arbitration in a court decision in a long time.  Curious though that the court did not address the frequent rebuttal to these arguments: that there could be financial incentive for an arbitrator or administrator to find a class can proceed.

The decision was not unanimous.  The lone dissenter from the panel wrote that “without a specific reference to class arbitration the court should presume that the parties did not intend to delegate to an arbitrator an issue of such great consequence.”

I am taking bets on how quickly SCOTUS grants cert to decide this circuit split.

I have been making my way through the rest of the May arbitration cases (the photo shows how high my stack got), and one thing that stands out is this: I was right.  Delegation clauses remain a hot topic in arbitration law.

Three recent cases demonstrate the power of having a delegation clause in an arbitration agreement.

The Fifth Circuit enforced a delegation clause in Edwards v. DoorDash, 2018 WL 1954090 (5th Cir. Apr. 25, 2018), a case involving a putative FLSA class action brought by “Dashers.”  Not to be confused with reindeers who pull Santa’s sleigh, these Dashers  deliver restaurant food to people’s homes.  And they all signed an Independent Contractor Agreement with an arbitration agreement.  That agreement called for AAA rules and waived class and collective actions.  In response to the filing of the class action, DoorDash successfully moved to compel individual arbitration. On appeal, the class representative argued the arbitration agreement was unconscionable.  But once the Fifth Circuit was satisfied that the independent contractor agreement was validly formed, it found the incorporation of AAA rules was a valid delegation clause that the plaintiffs had failed to challenge.  The case was sent to arbitration.

In another Fifth Circuit case, Arnold v. HomeAway, Inc., 2018 WL 2222661 (5th Cir. May 15, 2018), incorporation of AAA rules also served as the parties’ delegation clause.  In that case, consumers filed putative class action complaints against a company that facilitates short-term vacation rentals.  HomeAway argued that its 2016 terms and conditions applied, which contained an arbitration clause providing that arbitration would be governed by AAA rules and that awards would be “on an individual basis.”  The consumers argued that the 2015 terms and conditions applied, which lacked an arbitration agreement (and that any subsequent modification was invalid).  The district court denied the motion to compel arbitration, finding the arbitration agreement illusory.

On appeal, the Fifth Circuit faulted the district court for ignoring the delegation clause in the terms and conditions.  It found the incorporation of AAA rules was a clear and unmistakable delegation of questions relating to the validity of the arbitration agreement to an arbitrator.  Because the plaintiffs’ challenge to the arbitration agreement was not specific to the delegation clause, arbitration must be compelled.

Not far away, in the Supreme Court of Alabama, another delegation clause was enforced.  Eickhoff Corp. v. Warrior Met Coal, LLC, 2018 WL 2075985 (Alabama May 4, 2018), did not involve a putative class action, but something just as sexy: five agreements between the parties, only two of which had arbitration clauses (both calling for AAA rules).  When one party filed in court, the other moved to compel arbitration.  The party opposing arbitration claimed that its court claims were based on the three contracts without arbitration clauses and the trial court agreed.  The Supreme Court reversed, finding that the incorporation of AAA Rules was an enforceable delegation clause, delegating questions of scope to an arbitrator, and it should have resulted in an order compelling arbitration.

Today the Supreme Court of the United States granted certiorari in another case involving the Federal Arbitration Act.  The case, Lamps Plus, Inc. v. Varela, comes from the Ninth Circuit and raises a variation of the question from Sutter: how clear does an arbitration agreement need to be to show the parties authorized class arbitration?

My initial summary of the Ninth Circuit opinion is here.  It didn’t even merit an entire post of its own, but shared time with another circuit court opinion.  In my view, the issue of class arbitration has largely been hammered out.  SCOTUS ruled in Stolt-Nielsen that class arbitration is only allowed if the parties’ arbitration agreement authorizes it.  More recently, courts have generally concluded that courts, not arbitrators, should decide whether the parties’ arbitration agreement allows for class arbitration.  Finally, state law governs the question of how to interpret whether the parties’ arbitration agreement authorizes class arbitration.  Yet, now we will have a new decision on whether an interpretation of state law (interpreting ambiguity against a drafter to find class arbitration is authorized) should be preempted by the federal policy favoring arbitration (and particularly, favoring non-class arbitration).

In fact, the other two arbitration cases on SCOTUS’s docket also relate to class actions.  The NLRB case (whether forcing employees to waive their right to class actions in arbitration agreements is a violation of labor statutes) is still under consideration (it was argued last October).  And another upcoming case, New Prime, Inc. v. Oliveira, stems from a putative class action brought by independent contractors, even though the narrow issue before SCOTUS is whether an arbitrator or court should determine the applicability of the FAA.

If any Supreme Court clerk or justice had called me and asked “what are some of the really hot arbitration questions that this Court should resolve in order to ensure consistent decision-making around the country?,” class arbitration would not have been on my list.  I read every arbitration opinion that issues from the federal circuit courts and state high courts, and the issues I see courts struggling with most often include delegation clauses and issues relating to non-signatories.  Maybe I am not giving enough credit to the few class action opinions that come out (despite the fact that they impact many people), or alternatively maybe the Court’s emphasis on class arbitration highlights a political aspect of the cert process, or a particular interest of a majority of justices, or just the persuasiveness of this team.

 

Two different panels of the Second Circuit issued opinions about class arbitration on the same day last week.  One creates a circuit split over how specific parties must be to delegate the availability of class arbitration to arbitrators, and the second addresses when bankruptcy law can preempt the federal arbitration act.

In Wells Fargo Advisors, LLC v. Sappington, 2018 WL 1177230 (2d Cir. March 7, 2018), a putative class of former Wells Fargo employees brought suit for unpaid overtime (FLSA).  Wells Fargo moved to compel “bilateral” (individual) arbitration.  The district court denied the motion, finding that the arbitrator was authorized to decide whether class arbitration was available.   The Second Circuit affirmed.

As you may recall from this blog, at least four federal circuit courts have found that whether class arbitration is available is a gateway issue of arbitrability, meaning that it is presumptively for the courts to determine.  (The 8th, 6th, 4th, and 3d.)  And, while parties can delegate gateway issues to the arbitrator if they do so clearly and unmistakably, at least three of those circuits have held that a higher standard applies to the class arbitration issue.  (For example, the Eighth Circuit found that incorporating AAA rules was not sufficient to delegate class arbitrability, while it is sufficient to delegate other gateway issues.)

In the Wells Fargo matter, the Second Circuit “assume[d] without deciding” that the availability of class arbitration is a gateway question.  (Wimps.  Just decide.)  It then considered whether the delegation of that issue to an arbitrator was clear and unmistakable under Missouri law.  One set of plaintiffs had an agreement stating that “any controversy relating to your duty to arbitrate hereunder, or to the validity or enforceability of this arbitration clause, or to any defense to arbitration, shall also be arbitrated.”    The court found that was clear and unmistakable delegation of the class arbitration issue to an arbitrator.

More surprisingly, the court found that a second set of plaintiffs had also clearly and unmistakable delegated class arbitration to an arbitrator, even though their agreement only agreed to arbitrate “any dispute” and adopted either FINRA rules or alternatively 1993 Securities Arbitration Rules of the AAA.  In its analysis, the court noted that because some types of disputes were excluded from arbitration (unemployment), but class arbitration was not excluded, Missouri law would consider it included.  And the court found that more recent iterations of the AAA rules applied, which allow an arbitrator to determine whether a class can proceed.  This decision creates a circuit split on the issue of whether class arbitration is special enough to deserve its own rules for delegation.

As if creating a circuit split on class arbitrability wasn’t exciting enough, the Second Circuit also allowed another putative class action to go forward, despite an arbitration clause.  In In re Anderson, 2018 WL 1177227 (2d Cir. March 7, 2018), Mr. Anderson went through Chapter 7 bankruptcy and his debts were released.  One of those debts was to his credit card company.  However, Mr. Anderson alleged that the credit card company refused to update his credit reports after the bankruptcy.  So, he filed a putative class action.  The credit card moved to compel arbitration under the cardholder agreement, but the bankruptcy court found it was non-arbitrable because it “was a core bankruptcy proceeding that went to the heart of the ‘fresh start’ guaranteed to debtors.”  On appeal, the Second Circuit agreed.

Class action arbitration continues to be a hot topic among the federal appellate courts this summer.

The 8th Circuit followed the lead of other circuit courts, finding that courts, not arbitrators, presumptively decide whether the parties’ arbitration agreement allows for class arbitration. Catamaran Corporation v. Towncrest Pharmacy, 2017 WL 3197622 (July 28, 2017).   In support of its decision, the court raised concerns about class arbitration, including loss of confidentiality, due process concerns for absent parties, and a concern about the lack of appellate review.  [Interesting that it didn’t cite any of CFPB’s report on this, but just cited other case law… ] Therefore, unless the parties have “clearly and unmistakably delegated” the class arbitration issue to the arbitrator, a court will decide the issue.  Furthermore, the court said that incorporating the AAA rules is not a clear and unmistakable delegation of the class arbitration decision, even though citing the AAA rules is sufficiently clear in analogous issues in regular “bilateral arbitration.”  The court remanded to the district court to determine whether there was a contractual basis for class arbitration.

Halfway across the country, the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration.  Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017).  The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration.  The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived.  Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration.  On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group.  One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen

Lots of interesting arbitration law has been made already in 2016, so here is a roundup from the first four weeks of the year. As a teaser, courts have breathed life into the effective vindication doctrine, found arbitrators cannot determine the availability of class actions, and found state laws not preempted.  More surprisingly, state courts are following SCOTUS’s interpretations of the FAA.

Effective Vindication Lives On

Although I thought Italian Colors was an “effective elimination” of the effective vindication doctrine, the Tenth Circuit affirmed its use as a defense to a motion to compel arbitration this month in Nesbitt v. FCNH, Inc., 2016 WL 53816 (10th Cir. Jan. 5, 2016).  [Side note to WestLaw: can there really have been 53,816 cases by January 5th of the year??  Or do I misunderstand the numbering system?]  In that case, class action plaintiffs in a Fair Labor Standards Act case defeated a motion to compel individual arbitrations by asserting that under the AAA Commercial Rules, each plaintiff would have to pay between $2,300 and $12,500 in arbitrator fees and could not recover attorneys’ fees.  The appellate court affirmed.

Incorporation of AAA Rules Can “Unmistakably” Delegate Some Gateway Issues, But Maybe Not the Availability of Class Actions

The Third Circuit drew what seems to me a questionable distinction between parties’ ability to delegate some substantive issues of arbitrability from others. Despite acknowledging that federal courts of appeals have universally found that when parties agree to be bound by the AAA rules, they delegate substantive arbitrability to arbitrators, the Third Circuit found that does not extend to the availability of class arbitration. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 2016 WL 53806 (3d Cir. Jan. 5, 2015).  Recall that in general, courts are presumed to have authority to determine whether an arbitration exists, whether it is valid, and whether it covers the scope of the parties’ dispute.  But, under First Options of Chicago, a SCOTUS opinion, parties can delegate even those issues to arbitrators as long as their intent to do so is “clear and unmistakable.”  In Chesapeake Appalachia, the court repeats its pronouncement from Opalinski that the “availability of classwide arbitration” is one of those substantive questions of arbitrability that courts presumptively decide, unless parties clearly and unmistakably state otherwise.  And then it further protects courts’ ability to make that determination by holding that the parties’ incorporation of AAA rules, which explicitly allow arbitrators to determine their own jurisdiction and contain supplementary rules about class arbitration, is not sufficient to delegate the availability of classwide arbitration to arbitrators.  Drawing on statements from Sutter, the court leaned on the “great” procedural differences between bilateral and class-action arbitration to support its distinction.

Waiver of the Right to Arbitrate is an Issue Presumptively for Courts

Maybe Bryan Garner can come up with a new term for “waiving” the right to arbitrate, so that it is not the same verb as waiving the substantive claim being arbitrated. If so, that would alleviate the problem that the Supreme Court of Nevada addressed in Principal Investments, Inc. v. Harrison, 2016 WL 166011 (Nev. Jan. 14, 2016).  That court wrestled with the issue of whether a court or an arbitrator should decide if a party has waived its right to arbitrate by participating in litigation.  In other words, is that type of waiver a substantive question of arbitrability (like whether there is a valid arbitration agreement) that is presumptively for courts, or a procedural question of arbitrability that is presumptively for arbitrators?  Adding to the confusion is language from Howsam and BG Group characterizing “waiver” as an issue presumptively for arbitrators.  After canvassing other courts and finding the majority have concluded that waiver-by-litigation is presumptively for courts, the Nevada Supreme Court followed the herd.

Missouri Enforces Prima Paint’s Severability Doctrine

As I have picked on Missouri for bucking federal arbitration law, I owe it to the Show-Me State to point out that it recently (but reluctantly) followed federal precedent on severability. In Ellis v. JF Enterprises, LLC, 2016 143281 (Mo. Jan. 12, 2016), the Supreme Court of Missouri recognized that under federal precedent, a plaintiff cannot avoid an arbitration agreement by asserting the contract as a whole is void, it must point to a deficiency with the arbitration clause specifically.  As a result, the court held that “no matter what logic or fairness” undergirded the plaintiff’s argument that her auto sale was invalid, she had to arbitrate that claim.

Kentucky’s Precedent on Wrongful Death Actions is not Preempted by FAA

In Richmond Health Facilities v. Nichols, 2016 WL 192004 (6th Cir. Jan. 15, 2016), the Sixth Circuit analyzed Kentucky’s state law rule, which holds that wrongful-death claims belong only to beneficiaries, and therefore any arbitration agreement signed by a decedent cannot bind a beneficiary bringing a wrongful death claim.  The Sixth Circuit found that state law rule does not stand as an obstacle to the FAA, because it does not categorically prohibit arbitration of wrongful death claims, so was not preempted.

Lots of Action on Attorneys’ Fees

The Supreme Court of Utah held that an arbitrator cannot award attorneys’ fees incurred in confirming the arbitration award, under the Uniform Arbitration Act. Westgate Resorts, Ltd. V. Adel, 2016 WL 67717 (Utah Jan. 5, 2016).

Massachusetts’ highest court also found an arbitrator is not authorized to award attorneys’ fees due to one party’s assertion of frivolous defenses (unless the parties specifically granted the arbitrator that authority). Beacon Towers Condominium Trust v. Alex, 2015 WL 9646024 (Mass. January 7, 2016).

Similarly, the Second Circuit held that a federal district court erred in awarding attorneys’ fees and costs to the party that successfully confirmed its arbitration award. Zurich Am. Ins. Co. v. Team Tankers (2d Cir. Jan. 28, 2016).  As part of its contractual analysis, the court repeated that parties may not contract around Section Ten of the FAA.  In other words, it would not read the parties’ contract as precluding an attempt to vacate the award.

PHEW. I have now alleviated the guilt that has been weighing on me for not blogging about these cases yet.  Hope February brings a more reasonable stream of opinions!

The Consumer Financial Protection Bureau released an “Arbitration Study” exceeding 700 pages to Congress this week.  You have likely heard the headlines – most commentators assume that the CFPB will use the study to support an effort to restrict or regulate the use of “pre-dispute” arbitration in financial transactions.  But, let’s not get ahead of ourselves.  The study itself is worth digging into; the CFPB was able to access lots of information that us regular folks cannot.  Indeed, one complaint about arbitration is that it happens inside a black box, out of reach of statistical analysis or scholarly study, and precluding development of legal precedent. Here’s part one of my peek inside that black box, courtesy of the CFPB.

What the Cool Kids Are Putting in Their Arbitration Clauses

About a year ago, CFPB published its findings on the frequency of arbitration agreements in financial agreements.  This report does not add much in that area.  But, it has new information on the features of arbitration clauses that are prevalent in contracts in the industries studied (credit cards, checking accounts, general purpose reloadable prepaid accounts, private student loans, payday loans, and mobile wireless third-party billing).

  • Would you guess that 50% of payday loan agreements and 83% of private student loan agreements allowed their customers to opt out of arbitration? I was surprised. More than a quarter of credit cards and checking account agreements did also.
  • A majority of all types of financial agreements carved out small claims from their arbitration agreements.
  • The AAA is king. It is listed as either the sole provider or an arbitral option in about 9 out of 10 financial agreements (other than student loans). By comparison, JAMS is an option for about half of the agreements (but only 14% of mobile).
  • Roughly 9 of 10 arbitration clauses in these industries preclude class actions in arbitration. Most also stated that if the class waiver is unenforceable, the entire arbitration clause is unenforceable as well. (CFPB calls it the “anti-severability provision.”)
  • What are financial institutions not putting in the agreement? They are not shortening statutes of limitations often, they are not limiting damages very often, they are not authorizing the arbitrator to award attorneys’ fees to the prevailing party often, and they are generally not addressing confidentiality.

What the Public Understands About those Arbitration Clauses

The CFPB surveyed 1007 people about their dispute rights with respect to their credit cards, and found they know *nothing.*  And this should surprise no one.  (I am not pointing fingers.  If you asked me whether I could sue one of my credit card issuers in court, I would not know either.)  The study explains partly why that is: dispute resolution clauses do not factor into a consumer’s choice of credit card.  When all 1007 people were asked what features they considered in acquiring their credit cards, literally no one mentioned the ADR clause.

The 1007 people were asked what credit cards they had, and whether they could sue the company if there was a dispute.  The people who thought they could sue their credit card issuer in court were wrong 80% of the time.

The most surprising thing about the survey results to me were just how passive people are about disputes.  When confronted with a hypothetical example of a credit card refusing to correct a billing mistake, most people would cancel their cards and take no further action. Only 2% of people would consider going to court or talking to an attorney.

In the next post (part two), I will highlight statistics and findings from the CFPB’s comparison of how consumer disputes are resolved in arbitration and how they are resolved in court.

Two state supreme courts found consumer arbitration agreements unenforceable in the past week: Arkansas and New Jersey. Arkansas grounded its decision on the lack of mutuality in the consumer arbitration agreement (similar to Missouri’s recent ruling). Alltel Corp. v. Rosenow, 2014 WL 4656609 (Ark. Sept. 18, 2014). New Jersey grounded its decision on the arbitration agreement’s failure to clarify that the consumer was giving up its right to a court trial. Atalese v. U.S. Legal Servs. Group, __ A.3d __, 2014 WL 4689318 (N.J. Sept. 23, 2014).

Alltel is a consumer class action alleging that a cell phone provider engaged in a deceptive trade practice when it charged early termination fees. The company moved to limit the class to exclude customers with arbitration provisions, and later to compel arbitration with those customers, and the trial court denied those motions. On appeal, the Supreme Court of Arkansas affirmed the lower court’s finding that the arbitration agreement was unenforceable.

Critically, the Alltel arbitration agreement was preceded by this clause “If we do not enforce any right or remedy available under this Agreement, that failure is not a waiver.” The court construed that clause as “Alltel clearly reserv[ing] to itself the option of pursuing remedies other than arbitration, without the consequence of waiver. Moreover that reservation and protection was limited solely to Alltel and was not extended to the customer.” Therefore, the court found the arbitration agreement was invalid because it lacked mutuality. The court also found that its result was not preempted by the FAA, because Arkansas considers “the doctrine of mutuality” when analyzing all contracts. However, the opinion does not appear to cite any case outside the arbitration context to support that statement. (That’s Problem Number One with this decision, ie. preemption and Concepcion. Problem Number Two is that the court ignores the Prima Paint doctrine by looking outside the arbitration agreement to find the lack of mutuality. )

Atalese is an individual claim by a consumer who contracted with a debt-adjustment company, and then sued for violations of the consumer fraud act, among other claims. The contract stated that “any claim or dispute” related to the agreement “shall be submitted to binding arbitration” and that “any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction.” The company moved to compel arbitration. The trial court granted that motion and the intermediate appellate court affirmed.

The New Jersey Supreme Court reversed, largely by characterizing arbitration as a waiver of a citizen’s right under the New Jersey Constitution to a trial by jury and assuming that “an average member of the public may not know…that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Given that framing of the issue, the court found the arbitration clause lacked “clear and unambiguous language that the plaintiff is waiving her right to sue or go to court to secure relief,” and therefore was unenforceable. Like the Arkansas court, New Jersey tried to shield itself from Concepcion by positioning its decision as a general application of New Jersey contract law. The opinion has a string cite that continues for half a page, in which all the opinions cited relate to waivers of statutory rights. Notably, though, the court does not address the fact that SCOTUS has not found the Sixth Amendment right to a jury trial an impediment to enforcing arbitration agreements.

What can we say about these two cases and last post’s Missouri case? I can find ways that each of them contravene federal case law, but it is unlikely that SCOTUS will take the time to correct them. However, these cases do point to a real need to clarify the Concepcion decision. If the intent of the Concepcion decision was to tamp down on state courts’ creativity in developing “general state law doctrines” that invalidate arbitration, it is simply not doing its job.

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/ .

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.