Arbitration, Waiver: Waiver Of The Right To Arbitrate Requires A Showing Of Prejudice Under California Law
The California Supreme Court And SCOTUS Disagree About Waiver Of The Right To Arbitrate.
In Quach v. Cal. Commerce Club, B310458 (2/1 5/10/22 ) (Bendix, Rothschild; Crandall sitting by designation, conc. and dsst.), Justice Bendix, writing the majority opinion, explained that California Commerce Club had not waived its right to arbitrate, despite the fact that it knew from the time it filed its answer of its right to arbitrate, despite substantial delay, and despite engaging in litigation conduct inconsistent with arbitrate. Because? Because Plaintiff failed to demonstrate prejudice, having admitted he expended no costs in litigation he would not have expended had the case gone to arbitration earlier. Under St. Agnes Medical Center v. PacifiCare of California, 31 Cal.4th 1187, 1203 (2003) (St. Agnes Medical Center), prejudice is part of a multi-factor test used to establish waiver of the right to arbitrate, and spending money in litigation is not enough to establish prejudice.
Superior Court Judge Crandall concurred in part, agreeing that the arbitration agreement was not unconscionable, but he would have found prejudice based on the defendant's litigation conduct inconsistent with the right to arbitrate, knowledge of its right to arbitrate, and delay. He also pointed out that California courts have not applied a mechanical test to waiver, and have sometimes found great delay to result in prejudice. He did not believe that, under the circumstances, the plaintiff had to explain prejudice, and yet Crandall's dissent seems somewhat caught up in the straightjacket of having to rely on the finding of prejudice, based on California case law, in order to establish waiver. As my comment below explains, SCOTUS has now rejected a finding of prejudice as a necessary element in a waiver of the right to arbitrate.
"The unfairness of compelling non-unionized employees to forfeit their access to the civil justice system in favor of private arbitration is well recognized," write Crandall. He considers this "water under the bridge", but he would not extend mandatory arbitration for the benefit of the employer in a situation where he believes there has been a clear waiver of the right to arbitrate.
COMMENT: In St. Agnes Medical Center, the California Supreme Court wrote: "More than two decades ago, we observed that '[u]nder federal law, it is clear that the mere filing of a lawsuit does not waive contractual arbitration rights. The presence or absence of prejudice from the litigation of the dispute is the determinative issue under federal law.'" That was then; this is now. Under Morgan v. Sundance [see my 5/24/22 post], decided this year, SCOTUS does not require a showing of prejudice to establish waiver of the right to arbitrate. Instead, SCOTUS places arbitration contracts on the same footing as other contracts. And the traditional test for waiver of a contractual right is intentional relinquishment of a known right. Presumably this could be established by showing that a party knew it had a right to arbitrate and acted inconsistently with its right to arbitrate by engaging in litigation. Adding "prejudice" as an element of waiver places arbitration agreements on a different footing than other contracts. Why should the rule in California be different than the rule established by SCOTUS? Of course, where California law applies, our appellate courts follow the California Supreme Court. But why should California's rule be different than SCOTUS's rule?
One might argue that adding the element of prejudice makes it harder to establish waiver, and thus harder to lose the right to arbitrate, and California wishes to encourage arbitration. But SCOTUS addressed this type of argument, and in the context of the Federal Arbitration Act, determined in an 9-0 decision penned by Justice Kagan, that the desire to promote arbitration should not trump the fundamental rule that arbitration agreements should be put on the same footing as other contracts. Perhaps it is time for the California Supreme Court to reconsider the rules governing waiver of the right to arbitrate.
UPDATE: We have an article in the June 10, 2022 online edition of the Daily Journal entitled, "The United States and the California Supreme Courts are not on the same page." The article is about waiver of the right to arbitrate.
Settlements: Lawyer’s Alleged Duress Doesn’t Void Settlement Agreement With Defendant Who Didn’t Know About Duress
“'Duress by a third person' is the legal label for this contract case."
Plaintiff Laura Fettig entered into a settlement agreement, on the record, of her personal injury case. Later, she tried to set aside the settlement agreement, arguing she had only settled under duress caused by her attorney who threatened to abandon her case if she refused the settlement. Defendants did not know about the duress, and entered into the settlement in good faith. "But duress by a third person [i.e., by her lawyer] cannot void a contract when the other contracting party did not know about the duress and relied in good faith." Affirmed. "The court rightly refused to rescind the contract." Fettig v. Hilton Garden Inns Management LLC, No. 307348 (2/8 5/4/22) (Wiley, Grimes, Harutunian).
Arbitration, PAGA: For Now PAGA Still Provides Exception To Mandatory Arbitration
Two Recent California Cases Uphold The Rule In Iskanian.
California courts have repeatedly ruled, following Iskanian, that employees cannot be forced to arbitrate PAGA representative claims. Two recent published opinions follow the Iskanian rule. Wing v. Chico Healthcare & Wellness Centre, No. B310232 (2/5 4/28/22) (affirming order denying motion to compel arbitration); Leshane v. Tracy VW, Inc. No. C093881 (3rd Dist. 4/29/22) (affirming trial court court's denial of defendants’ petition to compel arbitration).
We are waiting to learn what SCOTUS will decide about the rule in Iskanian. The court has already heard argument in Viking Cruises, Inc. v. Moriana, and a majority of the justices seem likely to reject the Iskanian rule in cases where the Federal Arbitration Act governs. See my post dated 1/7/22.
COMMENT: If SCOTUS rejects the rule in Iskanian, it does not follow that the California courts must follow SCOTUS in those cases where the parties are not engaged in interstate commerce, and therefore the Federal Arbitration Act does not apply.
Arbitration, FAA, Transportation Workers: SCOTUS Holds FAA Transportation Worker Exemption Applies To Airline Workers Who Load Cargo
The FAA Exempts Interstate-Transportation Workers And Others Like Them From Arbitration.
On June 6, 2022, in an 8-0 opinion authored by Justice Clarence Thomas, SCOTUS held that Latrice Saxon, a ramp supervisor for Southwest Airlines, was exempted by the Federal Arbitration Act from having to arbitrate. Southwest Airlines v. Saxon, No. 21-309 (S. Ct. 6/6/22). A catchall-phrase in the FAA, exempting from arbitration "any other class of workers engaged in foreign or interstate commerce” covered Saxon.
COMMENT: Saxon brought a putative class action for wage and hour violations. How helpful the ruling will be for class actions involving workers engaged in foreign or interstate commerce is uncertain, because SCOTUS did not accept Saxon's argument that the exemption applied broadly to all airline workers. At the same time, SCOTUS did not accept Southwest Airlines' argument that the exemption applied narrowly to workers who actually transported goods across state lines. In future cases, the courts will have to look closely at the specific facts to determine the scope of the exemption.
Arbitration, Waiver: US Supreme Court Holds Prejudice Is Not Required To Find Waiver Of Right To Arbitrate
Arbitration Agreements Must Be Placed On Equal Footing With Other Contracts — So Courts Can't Make Up Special Procedural Rules That Apply Only To Arbitration.
In a unanimous opinion penned by Justice Elena Kagan, the Supreme Court holds that courts cannot create arbitration-specific federal procedural rules, such as the rule that prejudice is necessary to find a waiver of the right to arbitrate, based on the Federal Arbitration Act policy favoring arbitration. Morgan v. Sundance, No. 31-328 (US S.Ct. 5/23/22).
Petitioner Morgan, an employee, sued respondent Sundance, which owned the Taco Bell franchise where Morgan worked, alleging Sundance fudged time-keeping records so as to avoid paying overtime to employees. Her contract with her employer included a mandatory arbitration agreement. Sundance filed a motion to dismiss, answered, and mediated, before deciding after eight months to arbitrate. The District Court, finding prejudice to Morgan by the conduct of Sundance, and waiver of the right to arbitrate, denied the motion to arbitrate. The Eighth Circuit Court of Appeals disagreed, finding no prejudice, and thus no waiver of the right to arbitrate.
A common definition of waiver is that it involves the intentional relinquishment of a known right. Applying that definition, a party that knows of its right to arbitrate and acts inconsistently with that right, can be found to have waived the right to arbitrate. But many courts have added the additional element of prejudice before they will find waiver of the right to arbitrate. Applying a definition of waiver that includes the element of prejudice has enabled defendants to test the waters in litigation, and then decide later to arbitrate, arguing that there has been no prejudice to plaintiff.
The Morgan v. Sundance case is interesting because it requires consideration of two conflicting policies: The FAA favors arbitration, and the FAA also requires that arbitration agreements be treated on equal footing with other contracts. Here, the two policies came into conflict. In Morgan v. Sundance, the "equal footing" argument wins out. Arbitration does not get special treatment — in this case, special treatment that would have favored the employer. Thus, in evaluating whether there has been a waiver, it is improper to add an additional element, prejudice, that would not typically be found in other instances where courts ask whether there has been an intentional relinquishment of a known right.
How this case will be handled on remand is somewhat muddied: "The parties have also quarreled about whether to understand that inquiry as involving rules of waiver, forfeiture, estoppel, laches, or procedural timeliness. We do not address those issues." So on remand, the court could choose a different procedural framework. But the waiver framework seems like it would offer a pretty clean approach: the respondent knew of its right to arbitrate, chose to litigate, inconsistent with its right to arbitrate, and thus intentionally relinquished a known right.
COMMENT: Several years ago, my colleague Mike Hensley and I had a case before the Ninth Circuit, in which we argued that our defendant client, a cosmetology school, had not waived its right to arbitrate because the plaintiff had not been prejudiced by our client's conduct. The Ninth Circuit panel disagreed with our position and found a waiver had occurred. Martin v. Yasuda, 829 F.3d 1118 (2016). Later, in the district court once again, our client's motion for summary judgment on the underlying merits was granted. Procedural battles over the right to arbitrate are important, but do not necessarily govern the outcome.
Arbitration, Delegation, Unconscionability: CCA 4/3 Affirms Order Denying Motion To Compel Arbitration Because Of Flawed Delegation And Unconscionability
Substantive Unconscionability To Trip Over.
This is a tragic case involving the death of a recently graduated UCLA engineering student in the throes of an acute psychotic episode. He was briefly in a care facility where the precariousness of his condition was recognized. Allegedly he required constant supervision, which was not provided, and he killed himself. When the young man's parents sued, the facility moved to compel arbitration. The trial court denied the request, and the Court of Appeal affirmed. Brandon Nelson, et al. v. Dual Diagnosis Treatment Center, No. G059565 (4/3 4/19/22) (Goethals, O'Leary, Moore).
Defendants argued that a broad arbitration clause had delegated the issue of arbitrability to the arbitrator. The court disagreed, finding the language of delegation less than "clear and unmistakable." (Note: because the presumption is that this threshold issue will be decided by a judge, the "clear and unmistakable" standard must be overcome to undo the presumption.) Furthermore, there was contradictory language in the contract leaving areas of review to a court, and this undermined the argument that delegation of issues to the arbitrator was effective.
On the issue of procedural unconscionability, the Court of Appeal concluded, "the adhesive nature of the alleged contract, failing to provide Brandon with the AAA arbitrability terms on which Sovereign now relies while providing contrary terms in the emollment [?] agreement it drafted, and Brandon's impaired mental state all combine to result in a high level of procedural unonscionability." The court noted that during intake, Brandon could not focus and concentrate for more than 10 to 20 seconds at a time. Indeed, the court wondered, "how a 26-year-old man in the throes of an acute psychotic episode could be legally competent but, due to our dispositional analysis, we need not resolve that issue here."
As to substantive unconscionability, the court observed: "Here, the contract imposed on Brandon not just a damages cap, but required a unilateral release of almost any conceivable claim he could assert against Sovereign."
Best Line: The best line in the opinion was borrowed from the late Justice David G. Sills, who often had the best line: sometimes "substantive unconscionability was 'so present that it [was] almost impossible to keep from tripping' over it."