Arbitration, PAGA, Standard Of Review, FAA: Fourth District Division One Agrees Predispute Arbitration Clause Cannot Be Enforced With A PAGA Claim
The Employee Brought A Single Cause Of Action For PAGA Violations.
At first blush, Betancourt v. Prudential Overall Supply, E064326 (4/2 March 3, 2017) (Miller, Ramirez, McKinster), another opinion holding that PAGA claims cannot be arbitrated (more about the holding), is unremarkable. However, there are interesting points in the case that help explain why it was worthy for publication.
First, plaintiff/respondent Betancourt sued for a single cause of action: labor violations of the Private Attorneys General Act (PAGA). Betancourt's single shot approach is testimony to the recognition of plaintiffs' attorneys in employment cases that a carefully pleaded PAGA complaint is likely, for now, to avoid arbitration.
Second, Betancourt, in his single PAGA- cause complaint, sought remedies that did not fall within a PAGA cause of action. Therefore, the employer argued that the PAGA cause of action was an effort to end-run a standard wage and hour case around the arbitration requirement. This argument did not succeed, with the trial court and the Court of Appeal explaining that the proper procedural step was a motion to strike, not a motion to compel arbitration. Query: if the employer had filed a demurrer or a motion to strike to clarify the complaint, would the employee then have argued that the employer had delayed and waived the right to move to compel arbitration? Yet in proper circumstances, a motion to clarify the complaint would seem proper, and should not necessarily result in a waiver of the right to seek arbitration.
Third, the trial court did not issue a statement of decision. However, it did say that it was relying upon Iskanian when giving its tentative reasons for denying the motion. The Court of Appeal took this as an indication that the trial court based its ruling on a decision of law, and that therefore the de novo standard of review applied.
Fourth, the Court agreed that PAGA claims lie outside the Federal Arbitration Act's coverage, because the claim, like a qui tam claim, is essentially between the employer and the state, not between the employer and the employee.
Fifth, the Court of Appeal considered different interpretations of Iskanian. On the one hand, the employer argued that PAGA does not hold that PAGA claims are exempt from arbitration, only that predispute waivers of the right to bring a representative action are unenforceable, and presumably a representative PAGA action could be brought in arbitration or in court. But the Court interpreted Iskanian broadly to mean that a predispute waiver of the right to bring a representative action is unenforceable because the state cannot be bound by the predispute agreement.
Sixth, the Court held that FAA preemption did not apply, because it was not ruling that Iskanian required a blanket prohibition against arbitration in PAGA cases, only that "a defendant's reliance on a predispute arbitration agreement to compel arbitration when an employee becomes a type of qui tam plaintiff in a PAGA action" is prohibited. This part of the ruling seems a bit murky to me, because under Supreme Court cases such as Concepcion, it is not clear that a blanket prohibition of arbitration of all PAGA cases would need to occur for FAA preemption to apply – i.e., if a Court believed that arbitration was unduly burdened, that might satisfy one formulation of what FAA preemption requires.
However, the bottom line is that California state courts are strongly endorsing the view that PAGA claims are, like qui tam actions, really between the state and the employer, and that therefore, predispute arbitration clauses cannot bind the state and compel arbitration of PAGA claims.
NOTE: Efforts to compel arbitration are sometimes styled as "petitions" and sometimes as "motions." As the Court explains in footnote 2, "petition" is the proper terminology for a document commencing an independent action, whereas "motion" is the proper label for a document filed in an existing action.
Review: Edith Roberts Predicts In Scotusblog That Judge Gorsuch As Justice Gorsuch Will Support Supreme Court Trend Of Robustly Enforcing Arbitration Clauses.
Reaching A Result Justice Scalia Would Have Approved By Means He Would Not Have Approved?
Edith Roberts is the author of a very interesting March 6, 2017 post in Scotusblog about an otherwise bone dry topic, entitled, “Judge Gorsuch’s arbitration jurisprudence.” Our takeaway: “[A] look at the arbitration rulings Gorsuch has made [on the 10th Circuit] suggests that he is likely to continue the trend on the court in favor of FAA pre-emption.”
Roberts points out that SCOTUS has agreed to review three consolidated cases asking “whether agreements to forgo class actions or collective proceedings and instead resolve employer-employee disputes through individual arbitration are enforceable under the FAA or whether, as the National Labor Relations Board has held, such agreements violate the National Labor Relations Act.” By the time the cases are heard, Judge Gorsuch will likely be Justice Gorsuch. Roberts suggests because Judge Gorsuch, unlike Justice Scalia, does not adhere to Chevron deference to agencies, a future Justice Gorsuch will not hesitate to swat down the NLRB if he believes it exceeds the authority under its enabling statute. The result will be SCOTUS enforcement of FAA preemption and ” a muscular interpretation of the FAA – through legal reasoning the late justice might not have endorsed.”
In an article entitled The Politics of Arbitration, I wrote in 2016: “Appointment of a ninth Justice to the Court remains undecided as of the writing of this article. When it is decided, the politics of the appointment process and the next Justice will inevitably impact the polarized politics of arbitration and the outcome of arbitration cases affecting the rights of business owners, consumers, and employees.” I also suggested that Morris v. Ernst & Young “could serve as a springboard for sending divergent opinions about the enforceability of arbitration provisions used to prevent ‘concerted activity’ by employees to the Supreme Court for review.” Morris v. Ernst & Young is one of the three consolidated cases that Roberts refers to, and that SCOTUS has agreed to hear. Roberts’ instructive post does not bode well for the 9th Circuit ruling in Morris.
Review: Article By Marc Is Entitled “Mediating Disputes Among Clients”
A Modest Proposal That Mediation May Be The Best Way To Tackle Disputes Among Clients Who Are Jointly Represented.
In the latest issue of Orange County Lawyer (March 2017, Vol. 59, No. 3, p. 46), the publication of the Orange County Bar Association, I have written an article entitled, "Mediating Disputes Among Clients." The article suggests that when jointly represented clients have disputes among themselves, mediation may sometimes offer the best solution.
The article, which is republished with the permission of the Orange County Lawyer, carries the usual disclaimer: "The views expressed herein are those of the author. They do not necessarily represent the views of the Orange County Lawyer magazine, the Orange County Bar Association, The Orange County Bar Association Charitable Fund, or their staffs, contributors, or advertisers. All legal and other issues must be independently researched."
You can read the article by clicking here.
Arbitration, Vacatur: $30 Million Arbitration Award Is Vacated Because Arbitrator Awarded Significant Punitive Damages Without Fair Notice
Case Is A Reminder That Ordinary Constitutional Guarantees Of Due Process Do Not Automatically Exist In Private Arbitration.
The Court of Appeal's summary of the facts in our next case provides a clear sign that it is headed towards a reversal – the interesting part is how it arrives at its destination.
Defendant/appellant Stephen Kaplan appealed a judgment confirming a $30 million arbitration award. A substantial portion of the award consisted of punitive damages. The award was 30 times larger than the original arbitration claim, and $20 million larger than the claim in plaintiffs' original complaint. The notice of change in the arbitration claim to $30M came by email one day before the telephonic arbitration default hearing. The defendant Kaplan did not attend the hearing, and was not represented by an attorney. However, Kaplan did seek, unsuccessfully, to vacate the award, and appealed from the judgment confirming the award. Emerald Aero, LLC v. Kaplan, D070579 (4/1 2/28/17) (Haller, McConnell, Huffman).
The most familiar obstacle to a reversal of a judgment confirming an arbitration award is that mistakes of law or fact are not a basis for reversal. Furthermore, "federal due process restrictions applicable to punitive damages imposed by a jury or trial court . . . do not apply to an arbitrator's punitive damages award. . . . The courts reason that the constitutional due process clause applies only to state action, and arbitration is 'a private proceeding, arranged by contract, without legal compulsion.'" Slip op. at 17-18.
However, an arbitrator's award may be overturned if the arbitrator exceeds the arbitrator's powers. Here, the Court of Appeal looked to the arbitrator's powers, as derived from applicable AAA rule 6 requiring written notice before a party could materially change its claim – and this is the rule that the Court believed had been violated, believing that attaching a brief to an email less than 24 hours before the merits hearing "did not constitute notice calculated to apprise the opposing party of a new and substantially increased monetary claim, nor did it provide the opposing party with a fair opportunity to assert a challenge to the new punitive damage claim."
The Court of Appeal also relied on case law recognizing "the fundamental requirement that arbitrations be conducted in a fair and neutral manner." Royal Alliance Associates, Inc. v. Liebhaber, 2 Cal.App.5th 1092, 1108 (2016).
COMMENT: An element of due process — meaningful notice and an opportunity to be heard — is imported into the arbitration proceeding here by the Court's recognition that an arbitrator exceeds his powers under Cal. Code of Civ. Proc. Section 1286.2(a)(4) by conducting an unfair proceeding that lacked sufficient notice.
Federal Arbitration Act/Pending Cases: SCOTUS Hears Argument In Kindred Nursing Centers Limited Partnership v. Clark
Argument Is Summarized In SCOTUSblog.
On February 23, 2017, Professor Ronald Mann of Columbia Law School provided argument analysis in SCOTUSblog of yesterday's oral argument in Kindred Nursing Centers Limited Partnership v. Clark. By the tenor of the argument, which appears to have been hostile to Kentucky's position that the right to try personal injury cases against nursing homes was not preempted by the FAA, Professor Mann pretty much predicts a reversal by the Supreme Court of the State of Kentucky Supreme Court ruling. The State of Kentucky had argued that nursing home powers of attorney needed to be specifically drafted to confer the power to give up the right to a jury trial in arbitration, an argument that runs up against the objection that it discriminates against arbitration.
COMMENT: On February 19, 2014, I reviewed Professor Imre Szalai's Outsourcing Justice, a fascinating history of arbitration in the United States. Professor Szalai argued that the creators of the Federal Arbitration Act conceived it primarily as a means to achieve a speedy and efficient resolution of business disputes. Professor Szalai has filed an amicus brief in Kindred Nursing Centers, in which he concludes, based on his reading of, "[t]he text of the FAA, its legislative history, and the historical background of the FAA's enactment demonstrate that the FAA was never intended to govern personal-injury claims." Thus, he reframes the argument as one of coverage by the FAA, rather than preemption, based on his reading that section 2 of the FAA limits coverage to disputes arising out of contracts and interstate commerce. He argues that personal injury disputes are altogether different, as they arise out of tort law. While there may be some real merit to the historical argument that the FAA was intended to serve merchants with commercial sophistication in business disputes among themselves, and that this is something quite different from a personal injury claim arising out of tort law, a lot of water (i.e., case law), has flowed under the bridge since the Federal Arbitration Act was enacted in 1925, so that one would be hard-pressed to declare Professor's Szalai's argument to be a dead bang winner in 2017.
Arbitrability: Court, Rather Than Arbitrator, Gets To Decide Whether There Was Fraud In The Inducement To Enter Into Arbitration
The Important Distinction Is Whether Fraud In The Inducement Applies To The Contract Or To The Arbitration Clause.
Though unpublished, Milder v. Holley, B267974 (2/5 1/31/17) (Kumar, Kriegler, Baker) has facts that neatly clarify an important gateway issue: does a judge or an arbitrator get to decide whether there was fraud in the inducement in entering to an arbitration agreement in California? Whether there was fraud in the inducement affects whether a dispute is arbitrable, making it a “gateway issue.”
The key facts are these: Milder sued his former attorney Holley and Holley’s law firm in connection with legal representation. Defendants successfully demurred because Milder had previously initiated arbitration of the dispute pursuant to the parties’ retainer agreement, and therefore there was another action pending (assuming arbitration is an “action” – an issue that the Court of Appeal did not even have to address, as we shall see). Furthermore, the trial court ruled that it was for the arbitrator, not the judge, to decide Milder’s claim that defendants fraudulently induced him to agree to the arbitration provision. Milder appealed.
Milder’s complaint alleged he had been fraudulently induced into entering into the arbitration agreement, and he argued that the issue of fraudulent inducement was a gateway issue that the court, rather than the arbitrator must decide. The superior court had disagreed, because case law is clear that fraudulent inducement to enter into a contract, which happens to contain an arbitration clause, is decided by the arbitrator in California. Ericksen, Arbuthnot, McCarthy, Kearney & Walsh Inc. v. 100 Oak Street, 35 Cal.3d 312, 323 (1983). The important distinction, however, is that when the claim of fraud in the inducement is directed to the arbitration clause itself, rather than to the whole contract– and Milder had pleaded his claim as fraudulent inducement to enter into arbitration – then the claim must be decided by the judge. Id. The Court of Appeal reversed the judgment, and at the same time reversed an award of attorney’s fees against Milder in another appeal, because defendants were no longer prevailing parties entitled to attorney fees. Milder v. Holley, B270385 (2/5 1/31/17) (unpublished).
HAT TIP to my friend and colleague Mike Hensley for bringing the Milder v. Holley cases to my attention. Mike and I co-contribute to the California Attorney’s Fees blawg, and Mike is an avid reader of slip opinions.