Arbitration, Delegation, AAA Rules, Gateway Issues: Agreement To Conduct Arbitration Under AAA Rules Constitutes Clear And Unmistakable Evidence of Intent That Arbitrator Decides Whether To Permit Arbitration Of Class Claims
Incorporation By Reference Of AAA Rules Is The Key Here.
Plaintiffs, who worked as armed security guards, brought an employment class action against their employers Universal Protection Service, LP and Universal Services of America, Inc. (UPS). After the trial court denied UPS’ motion to compel individual arbitration, while staying the suit pending arbitration, UPS sought a writ of mandamus in order to compel individual arbitration. As the Court of Appeal framed the issue, “We agree with UPS that the issue to be decided is whether the arbitration agreement in this case clearly and unmistakably vested the arbitrator with the power to decide whether the agreement authorizes class arbitration.” Universal Protection Services, LP v. Superior Court of Yolo County (Michael Parnow, et al., Real Parties in Interest), C078557 (3d Dist. August 18, 2015) (Duarte, Raye, Robie) (published).
The arbitration agreement was broadly written, requiring arbitration of most disputes, including this one, before the AAA. The key to an answer about individual arbitration here is that the arbitration agreement incorporated by reference the Rules of the AAA, and the AAA Supplementary Rules for Class Arbitration apply “to any dispute arising out of an agreement that provides for arbitration pursuant to any of the rules of the [AAA] where a party submits a dispute to arbitration on behalf of or against a class or purported class, and shall supplement any other applicable AAA rules.” The Rules further delegate to the arbitrator the task of deciding whether a class arbitration can proceed.
Bottom line: the parties’ “agreement to conduct their arbitration under the AAA Rules constitutes clear and unmistakable evidence of their shared intent that the arbitrator decide whether it permits arbitration of class claims.” Therefore, the Court of Appeal denied the employers’ writ petition.
COMMENT: The case neatly analyzes how other cases are either in agreement, or have missed the target regarding the effect of incorporation by reference. The battle in this case may be far from over, because the AAA Rules also require that “the arbitrator shall determine as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class. . . “ Under the Rules, the arbitrator must then stay proceedings for a period of at least 30 days to permit any party to move a court to confirm or vacate the “Clause Construction Award.”
Unconscionability, Standard of Review, Employment: On Grounds Of Unconscionability, First District, Div. 4 Affirms Order Denying Employer’s Motion To Compel Arbitration
State Law Unconscionability Principles Are Not Preempted By The Federal Arbitration Act – So Long As They Do Not Uniquely Target Arbitration Agreements.
Carlson v. Home Team Pest Defense, Inc., A142219 (1/4 Aug. 17, 2015) (Ruvolo, Reardon, Streeter) (certified for publication) affirms an order denying an employer’s motion to compel arbitration, on grounds that the arbitration provisions are procedurally and substantively unconscionable. Finding the agreement permeated with unconscionability, the Court agrees that it would be improper to rewrite the agreement and sever unconscionable provisions. The analysis seems conventional and thorough, aided by a “substantial evidence” standard of review, because “[i]n this case the trial court made factual findings based on at least some material disputed evidence.”
NOTE: The California Supreme Court recently addressed the test for unconscionability in Sanchez v. Valencia Holding Co., LLC (See my August 4, 2015 post.) The Sanchez Court did not find the automobile sales arbitration provision to be unconscionable in Sanchez. However, the Court in Carlson does find the employment agreement provision to be unconscionable, while relying on the Sanchez test “which stated that all of these formulations essentially embrace a central idea requiring a degree of unfairness, beyond ‘a simple old-fashioned bad bargain.’”
Though the same legal test is applied, there is, perhaps, one high-level factual difference between Sanchez and Carlson. Sanchez was the purchaser of a two-year old pre-owned Mercedes Benz, with a sales price of $53,498.60. Perhaps that influenced the way the Supreme Court viewed unconscionability, because it did not view the transaction as an ordinary consumer purchase, in which, for example, affordability of arbitration could be a significant factor in the unconscionability analysis. By way of contrast, Carlson was an employee, not the purchaser of a high-end automobile. Among other things, the Carlson Court noted that requiring the employee to pay a $120 filing fee within 90 days after making an initial Request for Dispute Resolution, after which all fees and expenses incurred in connection with the arbitration are to be split between the parties, puts arbitration and litigation on an unequal footing, and becomes a factor in the unconscionability analysis.
Automobiles, Waiver, FAA, Class: Federal Arbitration Act Preempts Application Of Consumers Legal Remedies Act
Court Distinguishes Imburgia v. DIRECTV, Inc., Case Pending Before SCOTUS.
Automobile purchases and leases have generated quite a few disputes about the enforcement of arbitration clauses. Exhibit 1: The Sanchez case decided by the California Supreme Court on August 3, about which I posted on August 4, 2015. We have a sidebar category for Arbitration: Automobiles.
Now we have yet another automobile case – coincidentally as with Sanchez, involving a Mercedes Benz. Plaintiff Kaghazchi sued Mercedes-Benz Financial Services USA LLC in connection with his lease of a Mercedez-Benz. The key issue in the appeal is whether “the FAA preempts application of the CLRA’s [California Legal Remedies Act] rule prohibiting a waiver of class actions.” In Kaghazchi v. Mercedes-Benz Financial Services USA LLC, G049981 (4/3 Aug. 10, 2015) (Thompson, O’Leary, Rylaarsdam) (unpublished), the Court of Appeal answers: Yes. Perhaps not without qualms, for the Court “acknowledge[s] the CLRA’s antiwaiver section serves an important purpose of protecting California’s consumers.” But the Court concludes, relying on Concepcion, that “[s]tates cannot require a procedure that is consistent with the FAA, even if it is desirable for unrelated reasons.”
NOTE: The Court is at pains to distinguish Imburgia v. DIRECTV, Inc., 225 Cal.App.4th 338 (2014), certiorari granted sub nom. DIRECTV, Inc. v. Imburgia (Mar. 23, 2015) ___ U.S. __ [135 S.Ct. 1547] (Imburgia). As posted on SCOTUSblog, the issue in Imburgia is: “Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.”
The contract in Imburgia contained a reference to the “law of your state,” interpreted by the California Court of Appeal to operate as “a specific exception to the arbitration agreement’s general adoption of the FAA.” Therefore, in Imburgia, the FAA did not trump the application of California law. However, in Kaghazchi, the Court of Appeal explains that while the automobile lease stated it was “subject to” California law, arbitration under the lease was to be governed by the FAA. Thus, unlike Imburgia, there was no “specific exception” to FAA governance of arbitration. In other words, the parties in Imburgia and in Kaghazchi struck different deals as to choice of law for purposes of arbitration. Far from impairing the deal parties strike, according to Concepcion, the FAA ensures private arbitration agreements are enforced according to their terms.
Regardless of what SCOTUS does in Imburgia, we predict that automobile dealers, lessors, and financing parties will draft documents that follow the Kaghazchi model – i.e., they will preemptively make it clear that whatever substantive law applies to the contract, the FAA applies to arbitration procedure. To steal a line from one of our local judges, “that’s the way the cow chews its cud.”
Arbitration, Nonsignatories: Arbitration Agreement Between Purchasers And Seller Did Not Compel Purchasers And Nonsignatory Assignees Of Purchasers To Arbitrate Their Own Dispute
Judgment Confirming Arbitration Award And Postjudgment Order Awarding Attorney Fees Are Reversed.
One of this blog’s sidebar categories is “Nonsignatories,” because many cases address whether nonsignatories to arbitration agreements can nevertheless be compelled to arbitrate either because they are third-party beneficiaries of the agreement, or because they have a special relationship with a party to the agreement – e.g., agency. The issue in Ahern et al. v. Asset Management Consultants Inc., B253974 and B257684 (2/7 August 11, 2015) (Perluss, Zelon, Segal) (unpublished) was whether the Ahern plaintiffs could be compelled to arbitrate by the defendants, despite the fact that the Ahern plaintiffs were not signatories to the arbitration agreement.
The arbitration agreement applied to the Seller (iStar CTL I, L.P.) and to the Purchasers of real property (Hopper parties). The Purchasers assigned and sold their interests in the property to the Ahern plaintiffs and others. The Ahern parties sued the Purchasers for fraudulent inducement and other causes of action, and the Purchasers successfully moved to compel arbitration, obtained favorable results in arbitration, and confirmed the arbitration award as a judgment.
The Court of Appeal explained that iStart CTL, the Seller, “would most likely have been entitled to require the Ahern parties to arbitrate disputes regarding their respective rights and obligations regarding the sale [to the Ahern parties].” The problem, however, was that the real dispute was not between the Purchasers and the Seller, but rather between the Purchaser and the Ahern parties who “were fully aligned with the purchaser side of the transaction only. . ..” Thus, the arbitration agreement between the Purchasers and the Seller did not apply to disputes between the Purchasers and the Purchaser’s buyers and assignees.
Because the judgment confirming the arbitration award was reversed, the attorney’s fee award was also reversed.
Greetings to my former colleague at Jackson, DeMarco, Tidus & Peckenpaugh, M. Alim Malik, lead counsel for defendants and respondents.
Class Actions, Unconscionability, Automobiles: California Supreme Court Reverses Court of Appeal, Enforces Class Action Waiver, Holds Automobile Sales Contract Is Not Unconscionable
Application of Concepcion Is Decisive.
At last, the California Supreme Court has decided Sanchez v. Valencia Holding Company, LLC, S199119 (Cal. Sup. Ct. Aug. 3, 2015) (Liu, J., author). The case has been pending since Defendant and Appellant Valencia filed its petition for review on January 4, 2012. The majority opinion, authored by Justice Liu, holds: “Concepcion requires enforcement of the class waiver but does not limit the unconscionability rules applicable to other provision of the arbitration agreement. Applying those rules, we agree with Valencia that the Court of Appeal erred as a matter of state law in finding the agreement unconscionable.”
Sanchez’ lawsuit alleged Valencia violated the Consumer Legal Remedies Act by making false representations about the condition of the automobile he purchased.
The automobile sales contract at issue contained four arbitration provisions that some Courts of Appeal have found to be unfairly one-sided: (1) an award could be appealed to a panel of three arbitrators if the award was $0 or over $100,000; (2) an award of injunctive relief could be appealed; (3) the appealing party had to pay in advance the filing fee and other arbitration, through the arbitrators could later apportion costs; (4) repossession is exempted from arbitration. Because the California Supreme Court finds that none of those provisions is unconscionable, and because those provisions are common in automobile sales contracts, automobile dealers will breathe a collective sigh of relief.
Justice Chin, concurring and dissenting in part, agrees that the class arbitration waiver is enforceable and that Sanchez fails to carry his burden of establishing that the contract is unconscionable. However, Justice Chin disagrees with some of the majority’s analysis. He questions whether an adhesive contract is necessarily procedurally unconscionable, and states that the majority does not need to reach the issue of procedural unconscionability, because it holds that the arbitration provisions are not substantively unconscionable. He also argues in favor of a single substantive unconscionablility “shocks the conscience” test, rather than a smorgasbord of legal formulations.
COMMENT: The opinion also contains an interesting discussion of Cal. Code Civ. Proc. section 1284.3, concerning responsibility for fees in consumer arbitrations. While the Court agrees that a requirement that a consumer front appellate filing fees or other arbitration costs “has the potential to deter the consumer from using the appeal process”, the Court applies a case-by-case “affordability of arbitration” analysis to determine whether fees and costs would make arbitration unaffordable. Here, the dispute involved “a high-end luxury item” – a “preowned” Mercedes-Benz S500V. Sanchez simply failed to claim or show that appellate arbitration filing fees were unaffordable to him.
Unconscionability and the “affordability of arbitration” will have to be left for another day.
My Article In California Litigation: Can Private Attorney General Actions Be Forced Into Arbitration?
An Uncertain Future In California: The Arbitrability Of Statutory Representative Actions Brought For The Benefit Of The Public.
Thanks to the generous permission of California Litigation, The Journal of The Litigation Section, State Bar of California, my article “Can Private Attorney General Actions Be Forced Into Arbitration?” is now available on my website by clicking here. The article appeared in the latest issue of California Litigation, Vol. 28, No. 2, 2015.