Chipping Away at Arbitration: California Supreme Court Further Limits Arbitration Waivers

On April 6, 2017, the California Supreme Court held that an arbitration agreement waiving the right to public injunctive relief is contrary to California public policy and is unenforceable under California law.

In McGill v. Citibank, NA,Plaintiff Sharon McGill filed a class action lawsuit against Defendant Citibank arising from Citibank’s offering of a credit insurance plan that Ms. McGill bought to protect her credit card account. The Complaint alleged claims under the Unfair Competition Law (“UCL”), the Consumer Legal Remedies Act (“CLRA”), and the false advertising law, and, among other things, requested an injunction prohibiting Citibank from continuing to engage in allegedly illegal and deceptive practices.

Citibank filed a motion to force McGill to arbitrate her claims individually based on a pre-dispute arbitration provision in McGill’s account agreement. The trial court agreed that McGill should be required to arbitrate her claims for monetary damages, but denied the motion as to her claims for public injunctive relief. (“Public injunctive relief” means an injunctive remedy with the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public.) In so ruling, the trial court relied on the Broughton-Cruz rule established by the California Supreme Court, which holds that agreements to arbitrate claims for public injunctive relief under the CLRA, the UCL, or the false advertising law are not enforceable in California.

The Court of Appeal reversed, concluding that all of McGill’s claims should be sent to arbitration on the basis that the Federal Arbitration Act (“FAA”) as construed by the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, preempted the Broughton-Cruz rule.

McGill petitioned the California Supreme Court for review, asserting that (1) the Court of Appeal erred in finding FAA preemption of the Broughton-Cruz rule; and (2) the arbitration provision was invalid and unenforceable because it waived McGill’s right to seek public injunctive relief in any forum.

The California Supreme Court declined to address McGill’s first claim, but agreed with her second claim. Specifically, the Court held that because public injunctive relief was a remedy available to private plaintiffs under the CLRA, the UCL and the State’s false advertising law, any contractual provision the purported to waive statutory rights to seek public injunctive relief under State law is unenforceable. In doing so, the Court relied on language in the U.S. Supreme Court decision American Express Co. v. Italian Colors Restaurant, https://www.supremecourt.gov/opinions/12pdf/12-133_19m1.pdf, reasoning that “the high court has recently indicated that the FAA does not require enforcement of a provision in an arbitration agreement that ‘forbid[s] the assertion of certain statutory rights’ or that ‘eliminates [the] right to pursue [a] statutory remedy.”

Takeaways

For employers, as a practical matter, the fact that employees can pursue public injunctive relief outside arbitration may not be impactful (by contrast, the McGill case was a consumer class action). The real impact of this decision may be that it provides yet another basis for a court to determine that an arbitration agreement is “permeated by unconscionability” and is unenforceable (although the trial court in McGill did, in fact, enforce the agreement and sever the injunctive relief claims). Given the California Supreme Court’s continuing attempts to chip away at the U.S. Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, employers who use arbitration agreements should consult with employment counsel to ensure all language in such agreements is enforceable, including “carve-outs” for public injunctive relief.

Amy Durgan

Arbitration Agreements Front and Center: United States Supreme Court Set to Resolve Ongoing Row over Legality of Class Action Waivers

As readers of this blog will note, we have previously noted a split among the U.S. Circuit Courts on the issue of whether class action waivers in arbitration agreements are legal or not: the Second, Fifth (see here) and Eighth Circuits have held that such waivers are legal (relying upon the Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, among others), while others (including, most recently, the Ninth Circuit in Morris v. Ernst & Young, LLP), accepting the arguments of, notably, the National Labor Relations Board, have held that such waivers are not legal.  (In an opinion that is logically consistent with those of the other circuits that have held such waivers illegal, the Ninth Circuit in Morris held that Section 7 of the National Labor Relations Act (“NLRA”) and its promise of protected “collective action” renders class action waivers in arbitration unlawful—despite the lack of required “clear congressional intent” for the NLRA to trump the Federal Arbitration Act, as the Supreme Court discussed in AT&T Mobility and also in American Express Company v.Italian Colors Restaurant.)

Today, the Supreme Court granted a petition to consider, in a consolidated appeal, which Circuit’s position will prevail.

For employers, this decision to grant review, though not surprising, is absolutely critical.  If the Supreme Court agrees with the NLRB and invalidates such waivers, this would open up a window for class action litigation or class arbitration that had seemingly closed with AT&T Mobility.  This would clearly be a discouraging turn of events for employers.  Yet the current state of affairs is nearly as bad because of the degree of uncertainty regarding class action waivers: are they enforceable or unenforceable?  To say this lack of certainty makes managing employees and employment litigation difficult would be an understatement.

What comes next?  As Yogi Berra once said, “It’s tough to make predictions, especially about the future.”  This past election cycle has proven Mr. Berra correct. What we can say is that the current vacancy on the Supreme Court (and when it is filled, and who fills it) looms large for this decision.  Stay tuned.

Monte Grix

No Waiver Of PAGA Representative Claims (Yet)

This week, the U.S. Supreme Court denied certiorari in connection with the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angleles, LLC.  Had the Court heard the Iskanian case, it was expected to find that representative claims under California’s Private Attorney General Act (PAGA) could be waived by an arbitration agreement, as has been approved with class action claims.  The U.S. Supreme Court, however, decided that it would not hear the dispute, leaving the holding in Iskanian to be good law, at least for now. Continue reading

50 for 50: Five Decades of the Most Important Discrimination Law Developments

Number 31:  Discrimination Claims are Arbitrable

Arbitration agreements are a common feature of employment relationships today, widely used as a tool for avoiding jury trials of discrimination, harassment and other employment-related disputes.  But before 1991, when the U.S. Supreme Court decided Gilmer v. Interstate/Johnson Lane Corp., arbitration of discrimination and harassment claims was unheard of.  Before then, employment arbitration was limited to contract claims arising from collective bargaining agreements in unionized workplaces.   Continue reading

NLRA Does Not Prevent Class Action Waivers But Overbroad Agreements Will Not Be Enforced

The Fifth Circuit Court of Appeals refused to enforce critical portions of the NLRB’s decision in D.R. Horton, Inc., including its decision that class action waivers in arbitration agreements violated the National Labor Relations Act.  The Fifth Circuit joins the Second and Ninth Circuits and numerous federal district courts in finding that federal labor law does not prevent employers from imposing class action waivers.  However, employers should consider revising their arbitration agreements based on the Fifth Circuit’s holding that the specific wording used by D.R. Horton could be misinterpreted by employees to prevent them from filing NLRB charges. Continue reading

Sonic-Calabasas II: A New Wrinkle In Arbitration Law In California

The California Supreme Court’s decision in Sonic Calabassas A, Inc. v. Moreno has the potential to eliminate a powerful tool used by employers to avoid administrative hearings before the California Department of Labor, Division of Labor Standards Enforcement (DLSE).  Not only that, but the Court has made the already confusing body of law in Calfiornia concerning arbitration agreements even more confusing and it has thumbed its nose at U.S. Supreme Court decisions which command a different ruling.

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Ninth Circuit Enforces Arbitration Class Waiver

Since the 2011 United States Supreme Court decision in AT&T Mobility v. Concepcion, appellate courts have assessed whether arbitration clauses with class action waivers are enforceable.  Concepcion said yes and most courts have followed that precedent.  The Ninth Circuit in Richards v. Ernst & Young on August 21, 2013 also followed the majority of the case law and held that Ernst & Young’s arbitration agreement, which provided for a waiver of class action claims, was enforceable.  The Ninth Circuit held that the individual claims must be arbitrated and they vacated the district court’s order certifying a class of plaintiffs with Richards as the class representative.

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Ninth Circuit Follows Concepcion and Allows the FAA to Preempt State Law and Permit Arbitration

That bastion of unpredictable decisions, the Ninth Circuit Court of Appeals, followed a somewhat predictable path and recently held that the Federal Arbitration Act preempted a state law that disfavored arbitration.  This is another decision that reinforces the power of Concepcion and the favored status of arbitration, while ruling against the consumer (in this case).

Mortensen v. Bresnan Communications involved a consumer class action brought against an Internet provider for violation of privacy rights due to ad placement, among other causes of action.  The District Court in Montana denied a motion to compel arbitration by Bresnan (under the Internet subscriber agreement) saying the contract of adhesion violated the reasonable expectations/fundamental rights rule in Montana.  The Ninth Circuit overturned the Montana District Court.  The Ninth Circuit looked to the U.S. Supreme Court decision in AT&T Mobility v. Concepcion and held that the Federal Arbitration Act preempted state law, specifically a state law that disproportionately applies to arbitration agreements.  In essence, the parties will be required to use arbitration.

Although this is a consumer class action and not an employment case, the Mortensen decision follows the trend to defer to arbitration and Concepcion.

- John Baum

The United States Supreme Court Again Supports the Class Action Waiver in Arbitration

No surprise here.  The United States Supreme Court continued on a consistent path and found that a waiver for class actions in an arbitration agreement was enforceable.  In American Express Co. v. Italian Colors Restaurant, two businesses challenged the waiver of a class action in the arbitration agreement it had with American Express by pursuing federal anti-trust claims.  The Supreme Court, in a decision that was consistent with AT&T Mobility v. Concepcion (2011), found that such class waivers were enforceable under federal law, as they are under state law (Concepcion).

Although these are consumer class actions, the rulings are applicable in the employment context.  The recent activity at the Supreme Court highlights the ability of an employer to enforce an arbitration agreement that precludes class actions, including wage and hour matters.

In California, there has been a split in the state Courts of Appeal as to whether Concepcion precluded class action waivers of employment claims, including wage and hour claims, in light of a prior California Supreme Court case, Gentry v. Superior Court (2007).   Gentry focused on four factors in determining that a class action waiver would not be found valid in a wage and hour case:  the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.  The split among the Courts of Appeal has resulted in the California Supreme Court agreeing to resolve the issue in Iskanian v. CLS Transportation.  This recent decision in American Express provides substantial support for validating a class action waiver and not employing a multi-factor test, as set forth by Gentry.  Justice Scalia, writing for the majority, specifically rejected this “effective vindication”  argument and the notion that class action waivers are invalid because there is no economic incentive to pursue particular claims individually in arbitration.

Employers with arbitration agreements should revisit the language to ensure the appropriate waiver is included.

- John Baum

A Busy Day In The World of Employment Law

In case you slept late this morning, you missed a flurry of activity in the world of employment law.  The U.S. Supreme Court issued a trio of decisions which affect workplace relations.  In Vance v. Ball State University, the Court held that a supervisor for purposes of vicarious liability under Title VII is a someone whom the employer empowers to take tangible employment actions against the victim.  In University of Texas Southwestern Medical Center v. Nassar, the Court found that retaliation claims under Title VII require proof of “but for” causation, rather than the lower standard of proof the plaintiff’s bar offered.  Finally, in Fisher v. University of Texas At Austin, the Court found that affirmative action in education was still permissible, but nonetheless remanded the case to the Fifth Circuit because the appeals court did not apply the appropriate test for strict scrutiny of race-based decisions.

In other significant news, the U.S. Supreme Court agreed to hear the Noel Canning decision from the D.C. Circuit which had found that the President’s recess appointments to the NLRB were invalid and that the Board did not have a proper quorum.   And, last week, the Court continued its assault against class actions in American Express Co. v. Italian Colors Restaurant, finding that contractual waivers of class arbitration continue to be enforceable, even if the plaintiff’s cost of litigation exceed her potential recovery.

Stay tuned to the blog for updates on these recent developments in the upcoming days.

- Dan Handman