Employment, Unconscionability: Arbitration Clause Used To Bypass Berman Hearing, Without Providing Low Cost Alternative, Supports Finding Of Unconscionability
First District, Division Two Affirms Trial Court's Order Denying Petition To Compel Arbitration And Stay Proceedings.
In many ways, the next case fits the template of a typical case in which unconscionability is found to be a defense to enforcement of an arbitration clause. The Court of Appeal noted that the parties agreed, for purposes of appeal, that the arbitration clause was procedurally unconscionable. And several factors resulted in substantive unconscionability: the parties were required to share costs, posing a barrier to the individual wage earner, who could not take advantage of a relatively inexpensive remedy of a hearing before the Labor Commissioner, and the arbitration clause barred representative and PAGA claims. The agreement also barred recovery of punitive damages, statutory penalties, equitable relief, and attorney's fees. The trial court denied the petition to compel arbitration, and the Court of Appeal affirmed. Subcontracting Concepts (CT), LLC, et al., Plaintiffs and Appellants v. De Melo, Defendant and Respondent, and Department of Industrial Relations, Intervener and Respondent, A152205 (1/2 4/10/19) (Kline, Richman, Stewart).
So why did the Court bother to publish? We hazard two guesses.
First, we note that the matter began as a Berman hearing, allowing for the administrative resolution of wage claims. The corporation filed the court proceeding to petition for arbitration, explaining why the corporation is a plaintiff and appellant. And the California Supreme Court has held that an otherwise valid arbitration agreement may not be deemed substantively unconscionable merely merely because it requires waiver of the right to a Berman hearing — the relatively inexpensive process available to resolve wage claims. Here, however, the employer did not provide the wage earner with an affordable arbitral forum, and that lack of access factored into the Court's analysis as an element of substantive unconscionability.
Second, the appellant argued that a true employer-employee relationship did not exist, because the agreement stated that respondent was an independent contractor, though appellant did dispute that he was an independent contractor. In the absence of an employment relationship, the appellant argued that California law regarding unconscionability did not apply. Not so, said the Court of Appeal, because the key to California unconscionability analysis is not the employer-employee relationship, but rather the disparity in power between the parties.
COMMENT: This is also one of those cases in which someone with limited English skills (his native language was Portuguese) is asked to sign a contract on the spot, pointing to power imbalance. The employer (or contractor's) ability to preclude the worker's access to an inexpensive forum also points to power imbalance. The language problem might be addressed by translating documents into a foreign language or having someone who is bilingual explain the documents, admittedly something that may be more difficult when the foreign language is Portuguese. And an employer willing to assume the costs of arbitration is going to find it easier to enforce an arbitration provision.
Arbitration, Employment, Standard Of Review: Employee Who Explicitly Rejects Arbitration Agreement Is Bound By It By Continuing To Work
Justice Segal Dissents.
An employee can impliedly accept an arbitration agreement by continuing to work for his or her employer. But what happens when the employee explicitly rejects the arbitration agreement yet continues to work, after the employer has said that continuing to work will bind the employee to arbitration? The trial court said that there was no meeting of the minds in Diaz v. Sohnen Enterprises (Los Angeles County Super. Ct. No. BC644622). The Court of Appeal reversed, saying the facts were undisputed, and the employee had impliedly agreed to arbitrate by continuing to work. Diaz v. Sohnen Enterprises, No. B283077 (2/7 4/10/19) (Zelon, author, Feuer, conc., Segal, dsst.).
Justice Segal, dissenting, took issue with the de novo standard of review applied by the majority. As Justice Segal explained, the trial court found the employer had failed to meet its burden of proving the existence of an implied arbitration contract: "In this situation, we do not review the record to determine whether substantial evidence supports the trial court's finding, but whether the evidence compels the opposite finding as a matter of law." This standard applies when the appeals turns on a failure of proof.
And Justice Segal did not believe the evidence compelled a finding the parties agreed to arbitrate. The employee explicitly rejected an agreement to arbitrate and stated an intention to continue to work. While the employee's continued employment may be viewed as an implied agreement to arbitrate from the perspective of the employer, the trial judge, and Justice Segal, did not see a clear meeting of the minds. And there was some ambiguous evidence in the record. The arbitration agreement stated it had to be accepted in writing, but the employer's Chief Operating Officer stated she told employees they could accept the agreement even if they did not sign it.
It will be interesting to see whether, in light of the split opinion, this appeal has a further life.
Arbitration, Employment, Choice Of Law: California Choice Of Law Provision Does Not Mean Employee Gets To Avoid Arbitration
Choice-Of-Law Provision Is Interpreted To Exclude Special Rules Limiting The Authority Of Arbitrators Where The Federal Arbitration Act Governed The Agreement.
California Labor Code section 229 provides that wage disputes "may be maintained without regard to the existence of any private agreement to arbitrate." In Bravo v. RADC Enterprises, Inc., B289506 (2/8 3/29/19) (Wiley, Grimes, Adams), the trial court had interpreted a California choice-of-law provision to mean that a store manager could avoid arbitrating his wage dispute with his employer. On appeal, the Court reversed the part of the order denying arbitration of claims (except for a PAGA claim that did not need to be arbitrated).
As the Court of Appeal noted, the "first textual clue" that the parties intended to arbitrate was in the title of the parties' agreement: "'ARBITRATION AGREEMENT.' This agreement is for arbitration and not against it."
So how was California law to be applied? The Court interpreted the California choice-of-law provision to mean that California substantive law principles were to be applied, but that "special rules limiting the authority of arbitrators" were to be excluded.
Arbitration, PAGA: Second Dist., Div. 2 Sides With Courts Holding PAGA Claim Cannot Be Split
The Splitting Issue Is Also Pending Before The California Supreme Court.
Splitting log, tie-cutting camp, Pie Town, New Mexico. Russell Lee, photographer. June 1940. Library of Congress.
There are still Private Attorneys General Act of 2004 (PAGA) issues that need to be definitively resolved. One such issue is the subject of Zakaryan v. The Men's Wearhouse, Inc., B2891912 (2/2 3/28/19) (Hoffstadt, Ashmann-Gerst, Chavez):
If an employee brings a solitary PAGA claim, may a trial court split that claim — that is, may the court send the employee to arbitration (when he has agreed to it) to recover his underpaid wages but retain jurisdiction to award the additional statutorily prescribed amounts?
No, holds the Court in Zakaryan, the claim may not be split. This holding is in accord with Lawson v. ZB, N.A., 18 Cal.App.5th (2017), a case currently pending before the California Supreme Court. However, the holding is in disagreement with Esparza v. KS Indus., L.P., 13 Cal.App.5th 1228 (2017), which allowed the wage claim to go to arbitration, while retaining jurisdiction over the statutory penalties.
So why did the Court publish in Zakaryan? Perhaps because it is not in agreement with Esparza, and disagrees too with a "subsidiary holding" on which Esparza and Lawson were united. As the Court explains, "Larson . . . agreed with Esparza's subsidiary holding that the individual PAGA plaintiff (and, presumably, his coworkers) are entitled to 100 percent of the underpaid wages. . . . We . . . disagree with its subsidiary holding regarding the allocation of the 'civil penalties' recovered." PAGA is in the nature of a qui tam action, in which the private party acts as a proxy for the state's labor law enforcement agencies. PAGA offers "a singular penalty" allowing the state agency to get 75% of both the underpaid wages and the penalties. That's how the Zakaryan Court sees it, relying on the wording of the PAGA statute. Section 2699, subd. (i).
Arbitration, Gateway Issues, Delegation, Severability, FAA: Court Had Authority To Adjudicate Enforceability Of Arbitration Agreement, Where Party Specifically Challenged The Arbitration Agreement
Opinion Explains How Contract And Arbitration Agreement Are Treated As Separate Agreements.
Jackpot Harvesting, Inc. v. Applied Underwriters, H044953 (6th Dist. 3/28/19) (Danner, Greenwood, Grover), provides a detailed discussion of whether the court or the arbitrator has authority to enforce an arbitration agreement, and how the concept of "severability" helps the analysis.
Applied Underwriters offered workers' compensation insurance to Jackpot Harvesting, Inc. and related companies through a number of agreements, one of which was entitled "Request to Bind" and which contained an arbitration agreement. Jackpot sued Applied, believing Applied mishandled claims and failed to disclose how premiums were calculated. Applied moved to compel arbitration, the trial court denied the motion, and Applied appealed. The important threshold question was whether the trial judge had the authority to decide the gateway issue of arbitrability, or whether that issue was one for the arbitrator to resolve.
The parties agreed that the Federal Arbitration Act supplied the governing law, and the FAA carries with it a strong policy in favor of enforcing arbitration provisions. Of course, the parties could have included a "delegation clause" specifying who had authority to decide gateway issues. But the arbitration provision did not include a delegation clause.
In such a situation, SCOTUS applies "the severability principle." The challenge to the validity of an arbitration agreement or delegation clause is treated separately from a challenge to the validity of the entire contract. In effect, the contract between the parties, and the arbitration provision, are analyzed as two separate contracts. "Unless a party specifically challenges the validity of the agreement to arbitrate, both sides may be required to take all their disputes — including disputes about the validity of their broader contract — to arbitration." New Prime Inc. v. Oliveira, 139 S.Ct. 532, 539 (2019).
Applied argued that the New Prime approach required an "analytically distinct" attack on the arbitration provision — in other words, an attack distinct from the attack on the contract as a whole. While conceding that there is "some support" for that position, the Court of Appeal says that it hasn't been shown a SCOTUS case requiring that the "substance of the challenge to the arbitration agreement must differ in all respects from the challenge to the underlying agreement." But this is dictum, because the Court of Appeal then found a distinct challenge to the arbitration provision in the Request to Bind: the Request to Bind was "a collateral agreement" triggering statutory filing and regulatory approval requirements under the Insurance Code and regulations, and "a contract made in violation of a regulatory statute is void."
So the arbitration provision is specifically challenged. Found to be made in violation of a regulatory statute, the arbitration provision crashes and burns, leaving the trial judge with the authority to adjudicate the enforceability of the arbitration agreement. The denial of the motion to compel arbitration is AFFIRMED.
Arbitration, Construction Of Agreement, Employment, Enforceability: Court of Appeal Remands Case To Determine If Plaintiff Was Represented By Counsel When She Signed Arbitration Agreement
Language Of Arbitration Agreement Was Sufficient To Require Arbitration, But . . . .
In Salgado v. Carrows Restaurants, Inc., B285756 (2/6 2/26/19) (Gilbert, Yegan, Tangeman), the trial court denied employer's motion to compel arbitration, on the grounds that "Defendants have failed to demonstrate that the arbitration agreement applies to a suit that was filed prior to its signature." However, the Court of Appeal reversed, concluding the language of the arbitration agreement, which covered claims "related in any way to my application for employment and/or employment" was broad enough to cover the prior dispute.
However, the Court also remanded, to determine if the employer knew when the employee signed the arbitration agreement, that she was represented by counsel. Plaintiff's attorney stated his client was "forced to sign" at a time the lawsuit had already been filed, the employer's restaurant manager had been served with the lawsuit, and the attorney was representing his client in the lawsuit.
COMMENT. We will be interested to learn if, on remand, the facts provide a basis for making the arbitration agreement unenforceable. Unconscionability? Duress? And if Defendant's counsel knew of the lawsuit, we could see a problem if an end-run was done around Plaintiff's counsel, though ordinarily the parties can deal directly.
In the first paragraph, the opinion states, "[W]e remand to determine a factual issue where time is not relative, but relevant." That, plus knowing the opinion issued from the Ventura County Court of Appeal, was all the information I needed to know that the opinion was penned by Justice Gilbert, who knows how to turn a phrase.