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."
Arbitration, Unconscionability: CCA 2/2 Agrees Adhesive Contract Allowing Unfair Fee Shifting And Drastically Limiting Discovery Is Unconscionable
Joseph Merced Nunez v. Cycad Management LLC, B306986 (2/2 3/18/22) (Lui, Ashmann-Gerst, Chavez).
Nunez, a gardener, sued Cycad for employment-related claims. Cycad moved, unsuccessfully, to compel arbitration. The Court of Appeal now holds: "Substantial evidence supports factual findings that the Agreement is adhesive because it was presented to Nunez as a nonnegotiable condition of his employment. It is procedurally unconscionable because it was given to Nunez in English, which he cannot read, without adequate explanation or a fee schedule. It is substantively unconscionable because it allows the arbitrator to shift attorney fees and costs onto Nunez and drastically limits his ability to conduct discovery."
COMMENT: We have posted a number of times on cases in which the court finds that the inability of an employee to read the language in which a contract is written is a factor to be considered in a procedural unconscionability analysis. "Procedural unconscionability arises when an arbitration agreement 'was neither provided in a Spanish-language copy nor explained to respondents who did not understand written English.'" Penilla v. Westmont Corp., 3 Cal.App.5th 205, 209 (2016). Here are some things an employer could have considered doing: (1) provide a translation of the contract; (2) provide an oral explanation of the contract and arbitration provision in the language spoken by the employee; (3) obtain a receipt in the language spoken by the employee acknowledging receipt of the translation; (4) provide several days for the employee to review the contract before signing it. Perhaps the employer did consider taking those steps and simply viewed those steps as impracticable. I note that Nunez was hired before AB 51 went into effect, legislation aimed at preventing employers from requiring employees to enter into mandatory pre-dispute arbitration provisions. There are questions as to how effective this legislation is likely to be, and I refer readers to the article authored by Paul Dubow and me on AB 51, aimed at preventing employers from requiring employees to enter into mandatory pre-dispute arbitration agreements.
Why is the shifting of attorney fees and costs onto Nunez a problem? Armendariz holds that the employee cannot be forced to pay costs that would not be incurred if the case were litigated in court rather than arbitrated.
Miscellaneous: Podcast Interview Of Marc Alexander And Mike Hensley On Subject Of California Attorney’s Fees
California Appellate Law Podcast.
My colleague Mike Hensley and I have published the California Attorney's Fees Blog since 2008. Tim Kowal and Jeff Lewis, the creators of the California Appellate Law Podcast, recently interviewed us on their podcast. Here's a link to the interview on Tim and Jeff's podcast. Thanks, Tim and Jeff, for the opportunity to participate on your excellent podcast. Our interview is the 28th episode on the podcast.
Arbitration, Waiver: Second District, Div. 8 Refuses To Collapse Test For Waiver Of Right To Arbitrate Into A Single “Prejudice” Test
Suggestion: Don't Wait Two Years To Bring A Motion To Compel Arbitration.
The Court of Appeal affirmed the trial court's order denying Appellants' motion to compel arbitration. Akira Kokubu, Plaintiff, Cross-defendant and Respondent, v. Takashi Sudo et al, Defendants, Cross-defendants and Respondents; Park Rolling Hills, LLC, et al., Defendants, Cross-complainants and Appellants, No. B310220 (2/8 3/30/22) (Harutunian, Grimes, Stratton).
The leading case for determining whether a party has waived the right to arbitrate is St. Agnes Medical Center v. PacifiCare of California, 31 Cal. 4th 1187 (2003). St. Agnes (the case, that is), sets forth a six-factor test for determining whether a party has waived its right to arbitrate, and also explains that no single test delineates the conduct that will constitute a waiver of the right to arbitrate.
Appellants seemed to be urging that the Court of Appeal collapse the St. Agnes factors into a single "prejudice" test, but the Court of Appeal was having none of that. St. Agnes is a California Supreme Court case. And in any case, the court had no trouble finding prejudice as a result of appellants' conduct.
Appellants took actions inconsistent with seeking the right to arbitrate. The lawsuit was filed in November 2018. The demand to arbitrate was first made in July 2019, at which time appellants also filed a cross-complaint without seeking a stay. Then they withdrew their demand to arbitrate. Not until December 2020 did they file a motion to compel arbitration. And they participated in the litigation process, including a case management conference, motion procedure, seeking ex parte relief, and participating in discovery. While there is no single test for waiver, "you snooze, you lose," might be a good place to begin.
Arbitration, Internet Commerce: Fourth District, Div. 1 Enforces Arbitration Provision In Sign-In Wrap Contract
Sign-In Wrap Contracts Are Hybrids Of Browserwrap (Hard To Enforce) And Clickwrap (Easier To Enforce) Contracts.
B.D., a minor, and his father sued the videogame company Blizzard, contending that the game Overwatch encouraged gambling. Specifically, they alleged Overwatch used “real money” to make in-game purchases of “Loot Boxes”—items that offer “randomized chances . . . to obtain desirable or helpful ‘loot’ in the game.” The trial court denied Blizzard's motion to compel arbitration. The Court of Appeal reversed, applying the test in Sellers that the existence of a contract turns “on whether a reasonably prudent offeree would be on inquiry notice of the terms at issue.” The Court of Appeal also held that whether the contract made public injunctive relief unavailable, such that the arbitration provision could not be enforced under the McGill rule, was a gateway issue that had been clearly and unmistakably delegated to the arbitrator to decide. B.D. v. Blizzard Entertainment, Inc., D078506 (4/1 3/29/22) (Haller, Huffman, Irion).
The decision is very fact specific. It seems to this reader that a little confusion was introduced by a screenshot of a pop-up that required clicking on a "CONTINUE" button to proceed. The visible part of the screenshot refers to a Dispute Resolution provision "below". However, because the screenshot in the opinion is static, one does not see the Dispute Resolution provision "below". And presumably B.D. and his father, looking at the pop-up, would not have seen the entire license agreement unless they scrolled through the pop-up. But the pop-up allows scrolling to the end, in which case one can read the entire Blizzard license, which contains a blue hyperlink to the terms of the dispute resolution provision. The Court of Appeal believed there was a clear and unmistakable incorporation by reference of the dispute resolution provisions. The Court also observed that Sellers and other decisions take context into account, and are more likely to enforce a sign-in wrap agreement when the commercial transaction involves a "continuing, forward-looking relationship," as was the case here with a minor who continued to play the game during several updates of the agreement with Blizzard.
COMMENTS: The plaintiff was a minor, and it is hard to believe that he was capable of giving consent. However, B.D. acknowledged that a parent or guardian had reviewed and agreed to the license agreement. Of course, it is a central principle that arbitration is contractual, voluntary, and requires agreement. And that principle requires assuming responsibility for reading a contract, understanding it, following an incorporation by reference, and reading and understanding the terms of the dispute resolution provision. Like the law of contract in general, the law governing enforceability of arbitration provisions relies on legal fictions. Justices of the Court of Appeal, after proper briefing, read the contract, understand it, follow the incorporation by reference, and read and understand the terms of the dispute resolution provision. Are you a gamer and do you do that? Are you a lawyer and a gamer, and do you do that? Are you a judge and a gamer, and do you do that at home, outside the courtroom?
On April 5, 2022, we posted about the 9th Circuit decision holding a sign-in wrap agreement did not result in binding arbitration, Berman v. Freedom Financial Network. Because these cases concerning wrap contracts are fact-specific, we can expect to see more of them unless and until commerce uses standardized clauses that pass muster with the courts.