Landmark Supreme Court Decision Likely Permits Employers To Require Employees To Pursue Claims Individually And Not By Way Of Class Action Lawsuits

By Christopher S. Andre, and Scott K. Dauscher

As we previously reported here,  a report issued by the Judicial Council of California, Administrative Office of the Courts, Office of Court Research, shows that employment cases were the most frequently filed class actions, representing 29.3% of the class actions filed, and that over half of the employment cases filed alleged violations of Labor Code provisions governing payment of wages, rest and meal periods, and related claims.  This is consistent with our experience representing numerous employers against such class action lawsuits.

Many employers have attempted to require current and former employees to pursue claims individually and not by way of class action lawsuits by requiring employees to agree to arbitrate individually whatever claims they might have.  California courts repeatedly struck down such arbitration agreements in whole or in part by finding such agreements to be "unconscionable" or "contrary to public policy."  Those courts have declined to apply the Federal Arbitration Act ("FAA") to such arbitration agreements.  Among other things, the FAA states:  

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 

However, a recent decision by the Supreme Court of the United States has the real potential to change all that for many if not most California employers.  In AT&T Mobility LLC v. Vincent Concepcion, the Supreme Court  reversed a decision of the United States Court of Appeals for the Ninth Circuit holding (1) that an arbitration agreement between AT&T and its cell phone customers requiring customers to bring claims in their "'individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding'" is unconscionable and therefore unenforceable because,"AT&T had not shown that . . . arbitration adequately substituted for the deterrent effect of class actions" and (2) that the basis for the finding of unconscionability "was not preempted by the [FAA]."  In other words, the Supreme Court rejected lower courts' analyses of the issue and held that arbitration agreements are generally enforceable according to their terms under the FAA, and neither California courts nor other courts can evade the FAA merely by declaring an arbitration agreement to be "unconcionable" in whole or in part.  The Court explained "the judicial hostility towards arbitration that prompted the FAA had manifested itself in 'a great variety' of devices and formulas' declaring arbitration against public policy."

Although the Supreme Court's landmark ruling concerned an arbitration provision of a consumer contract and not an arbitration agreement between and employer and an employee, we think the holding and the reasoning of the decision applies with equal or nearly equal force to arbitration agreements between employers and employees. In Southland Corp., v. Keating, the Supreme Court held the FAA applies to state courts and is intended to preempt state anti-arbitration laws to the contrary, and in Circuit City Stores, Inc., v. Saint Clair Adams, the Supreme Court held the FAA generally applies to employment contracts. 

Unfortunately, not all employers will be able to take advantage of this landmark decision.  The FAA expressly exempts from its reach "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce," which the Supreme Court held in Circuit City Stores, Inc., v. Saint Clair Adams applies to and is limited to "transportation workers, defined, for instance, as those workers 'actually engaged in the movement of goods in interstate commerce," such as truck drivers.  In other words, the FAA cannot be used as a basis for requiring such employees to arbitrate employment claims on an individual basis and not by way of a class action lawsuit.

Also, and predictably, there are already moves afoot to unwind legislatively the effect of Supreme Court's ruling..  The day the decision came down, United States Senators Al Franken (D-Minn.), (of  Saturday Night Live fame) and Richard Blumenthal (D-Conn.), and Representative Hank Johnson (D-Ga.) announced they will introduce legislation called the "Arbitration Fairness Act," which would eliminate "forced arbitration clauses in employment, consumer, and civil rights cases. . . ."  Click here to see the press release.  Whether such moves will prove to be successful given the present constitution of the Congress and the present political and economic climate remain to be seen.  

In any event, based on this landmark ruling and its potential to effectively immunize many employers against class action lawsuits by current or former employees, we think employers should promptly consult competent employment law counsel about either revising existing employer-employee arbitration agreements to require arbitration of employment claims on an individual basis and not on a class basis or about requesting or requiring employees to now enter into such arbitration agreements.

We are continuing to study this important decision and what other impact it might have on California employers and will likely post further commentary.

California Supreme Court Finds Another Employment Arbitration Agreement Unenforceable As Drafted

By Yona Conzevoy and Christopher S. Andre 

Despite the Federal Arbitration Act and the California Arbitration Act, both of which provide essentially that arbitration agreements are valid and enforceable, it can scarcely be gainsaid that California courts will for the foreseeable future continue to closely scrutinize pre-dispute arbitration agreements between employers and employees.  Such arbitration agreements have frequently been struck down as contrary to public policy, unconscionable substantively, and/or unconscionable procedurally on account of various features of such agreements.

In Sonic-Calabasas, Inc. v. Moreno, the California Supreme Court again found an arbitration agreement to be unenforceable as written.  The court held arbitration agreement at issue in effect impermissibly required employees to waive their right to pursue claims for allegedly unpaid wages by submitting such claims to the California Labor Commissioner by a process sometimes referred to as a "Berman hearing" whereby claims are addressed at an informal hearing conducted by the Labor Commissioner.  That process permits either an employee or an employer dissatisfied with the results of the Berman hearing to "appeal" the result to the Superior Court for a new trial conducted by the court.

In finding the arbitration agreement unenforceable as written, the Supreme Court held that requiring employees to waive their statutory rights to pursue wage claims via a Berman hearing is contrary to public policy and conscionable and therefore unenforceable.  However, the Court held also that an employer can require employees to arbitrate such disputes after a Berman hearing has been conducted.  In other words, the Court held the arbitration agreement would be enforceable after a Berman hearing is conducted if either side is unsatisfied with the result of the Berman hearing.

Having an enforceable arbitration agreement can help make an individual discrimination, harassment, or retaliation case less attractive to a plaintiff's attorney.  Plaintiff's attorneys sometimes rely on the prospect of a jury trial to increase the value of such a case.  However, the law regarding what provisions of an employment arbitration agreement will be enforced and what provisions will not be enforced frequently changes as California appellate courts issue reported decisions regarding the enforceability of such arbitration agreements.  Employers therefore should have such agreements reviewed periodically by competent employment counsel.

Supreme Court Permits Arbitrator To Decide Whether Arbitration Agreement Is Enforceable

By:  Ronald W. Novotny

One issue that often arises in litigation over arbitration agreements is “Who gets to decide if the agreement to arbitrate is valid?”  This is usually a “gateway issue” for the courts to decide under both the federal and California arbitration statutes.  However, sometimes the parties specifically agree that the arbitrator can decide issues of contract validity and enforceability, in order to ensure that their entire dispute is resolved in arbitration.

 

In Rent-A-Center West, Inc. v. Jackson issued June 21, 2010, the U.S. Supreme Court decided that a party wishing to challenge such a provision delegating “gateway issues” to the arbitrator must do so by attacking the legality of the “delegation provision” itself and not the parties’ entire agreement.  The delegation clause in that case stated that “The Arbitrator, and not any federal, state, or local agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.”  An employee, Antonio Jackson, challenged the agreement “as a whole” because it required him to split the costs of arbitration and provided for only limited discovery.  But since he did not challenge the legality or enforceability of the “delegation clause,” the issue of the contract’s enforcement was referred to the arbitrator instead.

This is another decision in a recent line of cases favoring the enforcement of arbitration agreements under the Federal Arbitration Act (FAA).  Parties who wish to maximize the chances that their arbitration agreements will be enforced are wise to consider reference to the FAA’s governing law and procedures, and a “delegation clause” such as the one in Jackson, in their agreements.  Although such clauses can still be challenged on the grounds that they were fraudulently obtained or are otherwise somehow “unconscionable” in and of themselves, the Jackson case provides support for employers who are comfortable resolving such enforcement issues in the arbitral forum.

Court Refuses to Compel Arbitration by Third Parties Not Signed to Arbitration Agreement

By Ronald W. Novotny

On June 1, 2010, the California Court of Appeal refused to enforce an arbitration agreement to require the arbitration of claims asserted against third parties who did not agree to arbitration.  In Valencia v. Smyth, purchasers of real property sued their agent, the property owners and the owners’ broker and listing agent, and three additional parties (two title companies and the trustee of the deed of trust) for fraud, breach of fiduciary duty, negligence, and other claims arising out of the alleged misappropriation of the purchasers’ escrow funds.  The owners attempted to enforce an arbitration agreement entered into with the buyers in which they agreed to arbitrate “any dispute or claim in Law or Equity arising between them out of this Agreement or any resulting transaction,” which neither the title companies nor the trustee were parties to.  The trial court had refused to enforce the agreement, and required that all parties be joined in a consolidated judicial proceeding, because the claims against the third parties arose out of the same transaction or series of related transactions and there was a “possibility of conflicting rulings on a common issue of law or fact.”

The Court of Appeal affirmed this ruling based on the provisions of the California Arbitration Act, Code of Civil Proc. Section 1281.2, which permit a court to deny arbitration in a case involving third parties who have not agreed to arbitrate.  Although arbitration of the entire dispute could have been ordered if the parties had adopted the procedural provisions of the Federal Arbitration Act, the court found that they had not done so -- even though the Arbitration Agreement stated that “Interpretation  of this agreement to arbitrate shall be governed by” the FAA. 

The case demonstrates the importance of the wording of arbitration agreements to determining how they will be enforced.  It is particularly important for employers who seek to enforce their agreements to arbitrate claims brought by former employees to properly reference the Federal Arbitration Act int heir agreements, if they want to compel arbitration of their disputes against third parties who have not signed the arbitration agreement.  

California Supreme Court Strikes Another Blow To Arbitration Of Employment Claims

By Christopher S. Andre

Ordinarily, a decision by an arbitrator is not subject to being reversed by a court based on a legal error by the arbitrator. Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 25. In other words, unlike a decision by a court, a decision by an arbitrator generally cannot be "appealed."

In an April 26, 2010 decision signaling continued judicial antagonism to arbitration of employment claims, the California Supreme Court held in Pearson Dental Supplies, Inc. v. Superior Court that an arbitration decision in favor of an employer is subject to judicial review and to being vacated by a court if a legal error by the arbitrator would deprive a plaintiff employee of a hearing on the merits of a claim for alleged violation of the Fair Employment and Housing Act or, tellingly, a claim based on "other unwaivable statutory rights."

Luis Turcios was employed by Pearson Dental Supplies, Inc., as a janitor. After Pearson Dental Supplies terminated his employment, Turcios submitted to the Department of Fair Employment and Housing ("DFEH") a complaint alleging Pearson Dental Supplies violated the Fair Employment and Housing Act ("FEHA") by discriminating against him based on his age and related claims. After receiving from the DFEH a "right-to-sue" notice, Turcios filed suit against Pearson Dental Supplies.

Approximately five months after Turciou filed suit, Pearson Dental Supplies filed a motion to compel Turcios to arbitrate his claims based on an arbitration agreement Pearson Dental required Turcios to sign as a condition of employment. The trial court granted that motion, and the parties selected an arbitrator.

The arbitrator decided in favor of Pearson Dental Supplies, finding that Turcios' claims were time-barred by a provision of the arbitration agreement requiring Turcios to initiate arbitration of any claims arising out of his employment within one year because Turcios did not submit his claims to arbitration within one year of the date Pearson Dental Supplies terminated his employment.

Turcios then challenged the arbitrator's decision in the trial court. The trial court agreed with Turcios that the arbitrator made a legal error when the arbitrator decided that Turcios' claims were time-barred and vacated the arbitrator's decision.

Pearson Dental then sought appellate review of the trial court's decision vacating the arbitrator's decision. The Court of Appeal agreed Turcios' claims were in fact not time-barred, but the Court of Appeal agreed with Pearson Dental Supplies that the arbitrator's decision was not subject to review based on a legal error by the arbitrator and reversed the trial court's decision to vacate the arbitrator's decision.

Turcios then petitioned the California Supreme Court to review the Court of Appeal's decision. The California Supreme Court agreed with Turcios and with the trial court and held that arbitration decisions based on arbitration agreements entered into as a condition of employment are subject to a greater scope of review than other types of arbitration agreements. The Court held also that a court can vacate an arbitrator's decision if the decision is based on a legal error that effectively bar an employee from having claims for alleged violation of the FEHA or for "other unwaivable statutory rights" decided on the merits. The Court held also that the arbitrator failed to properly apply a provision of the Code of Civil Procedure providing that an arbitration filing deadline is tolled while a related civil action for the same claim(es) is pending.

In one bright spot in the decision, the Court declined to hold that a provision of the arbitration agreement arguably waiving Turcios' right to submit claims to administrative agencies, such as the DFEH, is unconscionable. The Court explained: "[A]s the United States Supreme Court recently recognized [citation], an arbitration agreement could, under federal law, [such as the Federal Arbitration Act,] validly limit the resort of an employee to an administrative agency that acts as an adjudicator, rather than as a prosecutor, of employment claims, such as the Labor Commissioner in this state."

Click here to download and to read the Court's opinion.

The California Supreme Court's decision in this case is a further development in a long line of cases finding various provisions of arbitration agreements between employers and employees unenforceable or otherwise limiting the usefulness of such agreements to employers. In addition, lower appellate courts frequently address employment arbitration agreements in reported opinions. An employment arbitration agreement previously believed to be enforceable might not withstand judicial scrutiny today or in the future. Employers should therefore consider having such agreements reviewed periodically by experienced counsel.