Miscellaneous: “Stuck in Arbitration” – Op-Ed Contribution of Prof. Amalia Kessler in the New York Times
Historical Perspective for the Privatization of Dispute Resolution
Last night we posted on Kilgore v. KeyBank, a March 7, 2012 Ninth Circuit opinion concerning the enforcement of an arbitration clause. Kilgore is part of the post-Concepcion trend (more like a juggernaut) to apply the Federal Arbitration Act and the Supremacy Clause so as to preempt state court efforts, grounded in public policy considerations, that would otherwise avoid enforcing arbitration clauses. This morning we read Prof. Amalia Kessler’s op-ed contribution to the March 6, 2012, NYT on-line edition, “Stuck in Arbitration.” Prof. Kessler’s contribution offers historical perspective to the use of private dispute resolution in the United States. Her contribution is also a pitch for proposed legislation, the Arbitration Fairness Act. Prof. Kessler is a professor of law and legal history at Stanford, working on a book about the origins of American adversarial legal culture.
Ninth Circuit Holds California Broughton-Cruz Rule That Claims For Public Injunctive Relief Cannot Be Arbitrated Is Preempted By Federal Arbitration Act
Court Also Lays Bare The Policy Consequences For The Privatization Of Consumer Justice
In Kilgore v. KeyBank, No. 09-16703 & No. 10-15934 (9th Cir. March 7, 2012) (authored by Judge Trott) (for publication), the Ninth Circuit resolves an FAA preemption issue dividing the district courts, lays bare the policy consequences for consumer justice, and provides a roadmap for drafting an arbitration clause that will survive claims of procedural unconscionability.
The named plaintiffs, who had been students of a private helicopter vocational school, sued the school on behalf of themselves and others similarly situated. Plaintiffs claimed that the school was a “sham aviation school” targeting limited-income individuals unable to pay for their training without student loans; that the school’s “preferred lender” provided the loans; that the school obtained the loan proceeds; that the school failed before the students could complete their training; and that the lender purportedly knew that aviation schools were “a slowly unfolding disaster”, yet continued to loan money to students. Because of a bankruptcy stay, the students could not prosecute their claims against the school, and so turned their attention to the lender.
Each of the lender’s Notes, however, contained an arbitration clause that the district court declined to enforce. In one interlocutory appeal (the second appeal was dismissed as moot), the Kilgore court considered whether, in light of AT&T Mobility, Inc. v. Concepcion, __ U.S. __ 131 S.Ct. 1740 (2011), the FAA “preempts California’s state law rule prohibiting the arbitration of claims for broad, public injunctive relief – a rule established in Broughton v. Cigna Health-Plans of California, 988 P.2d 67 (Cal. 1999), and Cruz v. Pacificare Health Systems, Inc., 66 P.3d 1157 (Cal. 2003).” Kilgore holds that the FAA does preempt the Broughton-Cruz rule.
What are the policy consequences of federal preemption of the Broughton-Cruz rule? Well, what did the rule protect? In Broughton, the California Supreme Court concluded that an agreement to arbitrate could not be enforced in a case where the plaintiff is “functioning as a private attorney general, enjoining future deceptive practices on behalf of the general public” to enforce the Consumers Legal Remedies Act (CLRA). The California court “noted that enforcement of an arbitrator’s injunction would require a new arbitration proceeding, but that a court retains jurisdiction and could more easily handled the ‘considerable complexity’ involved in supervising injunctions. . . . Further, judges ‘are accountable to the public in ways arbitrators are not.’”
In other words, Broughton found that there is a public benefit to not privatizing consumer justice in cases where a public injunction is sought under the CLRA. In Cruz, the California Supreme Court extended the Broughton rule to claims for public injunctive relief under the UCL. The court found that the “request for injunctive relief is clearly for the benefit of health care consumers and the general public . . . .” Hence, the “Broughton-Cruz rule.” That rule is what is lost through federal preemption.
We note the Kilgore court seems to be very aware of the cognitive dissonance that results when consumer claims affecting the public are dispatched to arbitration, for it cites Judge Carter’s statement in Ferguson v. Corinthian Colleges, ___ F.Supp.2d ___, No. 08:11-cv-00127-DOC-AJW, Dkt. 56, 2011 WL 4852339 (C.D. Cal. Oct. 6, 2011): “[b]ecause Plaintiffs’ injunctive relief claims seek to enforce a public right, there is an inherent conflict with sending these claims to an arbitrator.” But Kilgore holds that the Broughton-Cruz rule does not survive Concepcion because the rule “’prohibits outright the arbitration of a particular type of claim’ – claims for broad public injunctive relief. Concepcion, 131 S.Ct. at 1747.”
Now all the lender needed in Kilgore was a well-drafted arbitration clause that would withstand allegations that it was “unconscionable.” And the lender had such an arbitration clause: the clause was not buried in the document; it was conspicuous in bold, large font; it appeared in its own section of the Note; plain language in more than one place explained the consequences of not opting out of arbitration; the potentially higher costs of arbitration were pointed out; the borrower was given 60 days to opt out; the contract was clear and signed; and above the Plaintiff’s signature was a warning to read the contract before signing, “as well as a promise from the student that he would do so ‘even if otherwise advised’”. Thus, Kilgore provides a roadmap for drafting an arbitration clause.
Absent an unforeseeable interpretive tour de force, or unforeseeable legislative changes, a well-honed arbitration clause will increasingly be found in the legal arsenals of corporations that battle consumer, CLRA, and UCL claims in California. That’s bad news, or good news, depending on where you stand.
In the News: Los Altos School District Cancels Closed-Session Mediation With Charter School Because of Brown Act Considerations
Collision Between Mediation and Open Meeting Requirements
L.A. Chung reports in the Los Altos Patch March 6, 2012 edition that the Los Altos School District abruptly cancelled a closed-door mediation with the Bullis Charter School 90 minutes before the session was to occur because of concerns about the Ralph M. Brown Act (Gov. Code sections 54950.5 et seq).
The facts of the dispute involving the charter school are somewhat obscure, at least to an outsider. What caught our attention is the inherent conflict between the confidentiality demands of mediation and the Brown Act requirement of open meetings of local government bodies. As Justice Louis Brandeis famously said, “sunlight is the best disinfectant.”
For those of our readers who are interested, there actually is plenty of law on about local government bodies in California meeting to settle lawsuits with litigants, and whether such meetings have been conducted in such circumstances as would constitute a violation of the Brown Act. See Page v. MiraCosta Community College Dist., 180 Cal. App. 4th 471 (2009) (holding public is entitled to monitor and provide input on the Board’s collective acquisition and exchange of facts in furtherance of a mediation or resolution of a litigant’s claims).
There is an important exception to the open meeting requirement: local government bodies can meet with their counsel concerning litigation. But it becomes a problem when local bodies meet in closed session and intermediaries start conducting shuttle diplomacy outside the room – which of course is typical of mediation.
In Page, the court explained that the Brown Act:
“prohibits a legislative body from using "`personal intermediaries’" to exchange facts so as to reach a "`collective concurrence’" outside the public forum. (Wolfe v. City of Fremont, 144 Cal.App.4th 533, 544-547 (2006); see also 84 Cal.Ops.Atty.Gen. 30, 31, 32 (2001) [use of e-mails by a majority of board members to "`"exchange . . . facts,"’" "`advance or clarify a member’s understanding of an issue,’" or "`advance the ultimate resolution of an issue’" regarding an agenda item violates § 54952.2].) "To prevent evasion of the Brown Act, a series of private meetings (known as serial meetings) by which a majority of the members of a legislative body commit themselves to a decision concerning public business or engage in collective deliberation on public business would violate the open meeting requirement." (216 Sutter Bay Associates v. County of Sutter, 58 Cal.App.4th 860, 877 (1997)).”
Based on Brown Act considerations, the Los Altos School District acted with prudence.
Slate Magazine Offers "Negotiation Academy" – Ten Podcasts About the Art of Negotiation
Entertaining, Instructive, and Free
Slate, the online magazine, introduces a series of 10 entertaining and free podcasts about the art of negotiating, You can download these podcasts to your iPod, iPad, iTouch, iPhone, or PC, from iTunes where they are found under the rubric "Negotiation Academy." The series is presented by journalists Jill Barshay and Seth Stevenson. Thus far, topics include: (1) negotiating the price; (2) schmoozing and other starting tricks; (3) the art of persuasion; (4) the ticking clock; (5) dealing with jerks; (6) closing the deal; (7) the gender divide; (8) haggling over real estate; (9) negotiating with kids; and (10) negotiating your salary.
Arbitration/FAA: 9th Circuit Affirms District Court’s Order Affirming Arbitration Award and Permanent Injunction Against Employer and In Favor of Employer
Court Highlights Limited Scope of Review of the Final Award Under the FAA – As Compared to Under California Law
Appellant Biller worked as an in-house attorney for Toyota Motor Sales (TMS). In 2007, Biller presented TMS with a claim of constructive wrongful discharge related to TMS’s alleged unethical discovery practices. The dispute resulted in a settlement and a Severance Agreement requiring Biller to release claims and to protect Toyota’s “Confidential Information.” The Severance Agreement provided for Dispute Resolution in the form of arbitration of “all known and unknown” claims relating to the interpretation, application, or alleged breach of the Severance Agreement. Biller v. Toyota Motor Corporation, et al., No. 11-55587 (9th Cir. Feb. 3, 2012) (opinion by Judge Gould). You probably know where this is going.
Biller set up his own consulting business. TMS sued, claiming that he had misappropriated Confidential Information. Various claims and cross-claims were filed, and the parties ended up in arbitration before the Hon. Gary L. Taylor (ret.), himself a former federal judge. The arbitration provision was governed by the Federal Arbitration Act (FAA).
“The Arbitrator awarded TMS $2.5 million in liquidated damages and $100,000 in punitive damages.” TMS was also awarded injunctive relief. The Arbitrator concluded Biller’s “unprecedented ethical violations” were unjustified. Ouch.
The opinion holds an important lesson for practitioners. The FAA offers very limited review of the final award. Because the grounds on which a federal court may vacate, modify, or correct an arbitral award are very limited under the FAA, the parties do not have the ability, under the FAA, to contract to a broader scope of judicial review on the merits.
And that is different from California law. Cable Connection, Inc. v. DirectTV, Inc., 44 Cal.4th 1334 (2008). In Cable Connection, the California Supreme Court considered an arbitration agreement under the California Arbitration Act (CAA), and concluded that under the CAA, the parties may contract in the arbitration agreement for review of the merits of the final award. Id., 44 Cal.4th at 1364. While the parties may choose to have review of the final award governed by the CAA rather than the FAA, if they chose the latter, they cannot then contractually enlarge the scope of review. That’s something to ponder when drafting arbitration clauses.
Given the very limited scope of review under the FAA, the result was perhaps ordained: affirmance of the district court’s order affirming the arbitration award and permanent injunction against appellant Biller.
Arbitration: 1st District, Div. 5, Finds No Error In Trial Court’s Decision Invalidating One-Sided Arbitration Clause in Employment Agreement
Delegation to the Arbitrator of the Power to Decide Whether the Arbitration Clause is Unconscionable Is “Horse of a Different Color” That Must Satisfy High Evidentiary Standard
The employer, CantorCo2e, L.P., and an executive, appealed from an order denying their petition to compel arbitration of the claims under the Federal Arbitration Act (FAA) brought by an employee who was a broker. The FAA can give some advantage to the employer seeking to compel arbitration, because arbitration provisions will be subject to invalidation only for the same grounds applicable to contractual provisions – e.g., unconscionability. Furthermore, here, the employer, who of course drafted the arbitration provision, had the beginning advantage of a broadly worded arbitration provision indicating that arbitration might be conducted under the rules of an arbitration service (AAA) giving arbitrators the power to decide the validity of arbitration agreements.
However, under all the circumstances here, that was not enough to satisfy the trial court or the Court of Appeal that the parties intended to delegate authority to the arbitrator to decide the threshold issue of whether the arbitration provision was conscionable. Ajamian v. CantorCO2e , L.P., Case No. A131025 (1st Dist. Div. 5 Feb. 16, 2012) (certified for publication).
Given the broadly worded arbitration provision, why couldn’t the arbitrator, rather than the trial court, decide whether the employment dispute had to be arbitrated? The chief reason is that ordinarily it is the expectation of the parties that a court, rather than an arbitrator, will decide whether the arbitration provision is unconscionable. Therefore, delegation of that decision – contrary to what is typically the expectation of the parties – requires “clear and convincing evidence.”
The Court of Appeal drew a distinction between the power of an arbitrator to decide substantive claims, and the power of the arbitrator to decide whether the arbitration clause itself is unconscionable. “Language such as ‘any disputes, differences or controversies’ may well be adequate and necessary for the parties to express their intention to arbitrate all substantive claims, since the number and diversity of potential future substantive claims is so great as to defy a specific enumeration of each type. But the issue of who would decide the enforceability of the arbitration clause itself is a horse of a different color.”